(audience chattering)
- Hi, good evening.
My name is Cai Wei, and I'm
a proud Booth ’95 graduate.
(audience applauding)
Thank you.
So welcome to the second
annual Economic Outlook event
in Hong Kong at our
wonderful new campus here.
This Economic Outlook event
is a Chicago tradition
first established in
1954, that's 66 years ago.
This is what our website
says about this event,
so I'm reading this.
Drawing on Booth's culture
of unparalleled inquiry,
this annual event provides a forum
for our pathbreaking thought leaders
to confront the future,
evaluating emergent trends
and sharing key insights
that help reframe our
understanding of the world to come.
All very big words, okay.
Also sets a very high bar.
So to keep up this proud tradition,
we have a lot to talk about tonight.
Big tech, trade, central bank,
and global economy in general.
But before that, before we get too deep
into all these big topics,
we have a little commercial.
We have an Asian Forum
event on February 15th
on this campus.
This is a collaboration between
the University of Chicago
and Chicago Booth, and
it's an inaugural event
for the campus.
Space is very limited, so please register
for the Asian Forum event ASAP.
Now, let's get back to
our big topics today.
We have three distinguished speakers,
professor Randy Kroszner,
who is deputy dean
for executive programs, and Norman R. Bobins
Professor of Economics at Chicago Booth.
He was previously a governor
of the Federal Reserve system.
Also with us, professor Brent Neiman,
Edward Eagle Brown Professor of Economics
and previously a staff economist
on the White House Council
of Economic Advisers.
Also with us, professor Richard Wong,
provost, professor of economics,
Philip Wong Kennedy Wong Professor
in Political Economy
at the University of Hong Kong.
And more importantly, he is someone
who has BA, MA, and PhD, all
from University of Chicago.
(audience laughing)
That's a lot of Chicago degrees
we are talking about here.
- Wow.
- And joining those three professors
is our event moderator, Angie Lau,
editor-in-chief, CEO, and
founder of Forkast.News.
So let's have a warm welcome
for Angie and our speakers.
(audience applauding)
- What a wonderful privilege it is
to be returning to this stage
with whom I regard as
some of the top minds
in economics today, not
only in this region,
but around the world.
So I had the privilege
of really moderating
and guiding this conversation last year,
and I'm thrilled to return this year,
because there were a lot
of things said last year
that really set the
foundation of understanding
that really, actually, you guys called,
frankly, with great accuracy.
And as I'm sure, just like all of you,
starting our day off trying to figure out
what this US-China
trade deal and phase one
is going to reveal to
us in the coming hours
and waking up to Randy and
really guiding the thinking.
So let's kick off there.
I think it's the most timely.
It continues to be top
of mind for this region,
top of mind globally,
and so where are we 12 months later?
We're still talking about
US-China trade relations,
except this time, we seem
to have gotten a deal,
a phase one deal of which
86 pages you'll be reading,
a little bit later on, right?
And the significant part
of it, I think we know.
The one thing that really
surprised the market
and what is reflected in
futures tonight, US futures,
is that a significant part of the tariffs
will remain in place
until 10 months from now,
upon review from the US administration,
current, pre, or post November elections.
So I wanna generally
kick things off there.
In your view, where does that set us up?
Is this really a reset of relations?
Are we finding sturdier footing?
How should we be thinking about this?
- So I think it's an
excellent step forward,
but I think it's a small step,
because of exactly the
issues that you mentioned.
The bigger picture issues
about intellectual property rights
about the way that the
regime operates and such,
that's going to be there,
and that's going to still
be very much top of mind.
Also, the way things will likely work
with the agreement is
that there could always be
a return of tariffs, but
even in the beginning,
it's not even a step to
take the tariffs away.
It's just a step, really,
to start negotiations
about other things.
So I think the direct economic impact
is gonna be relatively small.
Even if you did remove
the tariffs initially,
the economic impact on the US
would be relatively small because trade
is a much smaller
percentage of GDP for China
than it is for the, sorry,
much lower percentage of GDP for the US
than it is for China.
And so then you're just
looking at the Chinese fraction
of that, so it's a fraction of a fraction,
and then tariffs that
might be 25% on that,
so it's a fraction of a
fraction of a fraction.
So for certain, particular industries,
it's very important.
And so I don't want to downgrade that,
and I don't want to be misconstrued
as saying it doesn't matter to anyone.
But if you look at the overall US economy,
it's relatively small.
Much bigger impact on China
and I think the lack of,
the unwillingness to
pull those tariffs back
at the beginning is very suggestive of how
the agreements are gonna,
or how the negotiations will continue.
I think there's not a deep level of trust
by the US administration with China.
I think there's some trust
because they're getting to an agreement,
but they really want to, in some sense,
do the trust but verify.
Keep the tariffs in place
until they have proven that
they are going to be working
with the agreement rather than saying,
ah, we got to the agreement,
so we're gonna try it out,
then if something goes
wrong, we can come back.
So I think that's likely how
things will continue to be,
very small step forward, positive
if they can get some sort
of agreement, but I don't see it making,
in and of itself, having
a big economic impact.
- Brent, you did some
really interesting work
taking a look at the short-term
impact of the tariffs
on US retailers and manufacturers.
What did you find?
What, in terms of, as
to follow Randy's point,
the impact, generally
speaking, on US economy
might be fractional, but
specifically on retailers,
that is a different story.
- So I want to take a
step back for a second
and think what it might mean,
what it might look like,
to win a trade war.
So this is a phrase that was used a lot.
And one objective of any country
putting a tariff on its imports
is essentially to get the price charged
by the foreign exporter to go down.
The goal in the extreme, I mean,
the way that you would
really win a trade war
would be if you put a 10% tariff on
and the price charged
by the foreign exporter
goes down by 10%.
The two cancel each other, and
your consumers face no change
in what they pay, and the
only thing that's happened
is that the profits that
the foreign exporter
were earning are shifted to
your government's coffers.
That's called, in terms
of trade improvement,
that in theory, you're trying to induce
when you put tariffs on imported goods.
And so the key question,
one of the first things
that an economist would want to look at
when understanding the
implications of these tariffs,
whether it's working
or not, quote unquote,
would be to look at the price charged
by exporters on those
goods shipped to the US,
in this case where the US put on tariffs.
And so together with some coauthors,
Gita Gopinath, and Alberto
Cavallo, and Jenny Tang,
we got access to very specific microdata
that allowed us to look at goods
as they crossed the US border
that were hit by tariffs
versus not hit by tariffs.
For instance, the equivalent goods sold
by China or not China.
And what we found was that the price paid
by the importer, inclusive of tariffs,
went up almost one to one with the tariff.
So a good that faced a 10% tariff
cost the US, in total,
the importer, 10% more.
So, in no sense
were we moving the terms of trade
in a way that would benefit the US.
That was one of our findings.
The second finding, and there's
really three I'll focus on,
was that when we looked
at the retail price
we actually found much
more muted differences
in the pricing behavior of goods
that were affected by the tariff
versus equivalent goods that were not.
So how can it be that you see a big effect
at the border and almost
no effect in stores?
Well, the answer is,
retailers were absorbing
quite a bit of it in their margins.
One reason I think this is
both important and interesting
is it suggest that the long run response
to these tariffs has yet to be seen.
Even if tariffs sort of
stay exactly how they are
for a while, I would
anticipate more adjustment
where retailers came to terms
with what the long run price
of their imports were gonna be,
and potentially passed a lot more of it
through to their customers,
which certainly could matter
for the political dynamic and support
for import tariffs as well.
The last thing that I'll
focus on that we saw
that I found quite interesting
was we did the exact same analysis
on US exports to countries
that retaliated on the US,
in particular, China, but other
countries also retaliated.
And interestingly enough,
there we did see that US exporters
were cutting their
prices before paying the,
well, before including the tariff
that would be put in
by the other countries.
So in some sense, on the imports side,
there's no evidence that
the US moved the terms
of trade in a way that helped it.
On the export side, there is evidence
that US exporters were
quite significantly bearing
the cost of retaliatory tariffs.
So in that setting, Randy's right.
This is not an absolutely gigantic share
of the economy or anything like that,
but I don't think there
have been real damages
on the economy from the trade war,
and even as importantly, I
think we haven't yet seen
how it will actually settle,
in terms of the distribution
of those damages
to consumers versus firms.
- How do you think, overall,
that's going to shift business behavior
and decision making?
- Sure.
Well, one thing we've already
seen is trade diversion,
quite obviously would be accelerated
by a policy like this.
And you can actually see very clearly
the volume of imports from China
have fallen quite substantially
in response to these price effects.
The US, just the
estimates, are not very low
in studies that have
looked at the response.
And so yes, you could see
a permanent reorganization
of certain supply chains,
which could have very much lasting effects
even if tariff rates were to revert
to the levels that they were
at before 2017, let's say.
- Richard, being based here in Hong Kong,
you've observed, we've all felt the impact
of the US-China trade tensions,
and observing that here in Hong Kong
and also across the region,
how do you follow up
on Brent's observation
that yeah, that is shifting the dynamic
of business decision making
and impacting us right here in Asia?
- I think the impact is significant.
And we haven't seen the tail end of it.
I think there are several factors,
and unlike Brent, I haven't
done empirical work,
so it's more conjectural in perspective.
Unlike traditional trade,
this is a global supply
chain reconfiguration,
because much of the
growth in trade in Asia
is actually interregional trade,
transshipment, re-exports.
So all of this reflects, basically,
a product moves across several borders
within Asia before they end
up, say, in the United States
or in Europe.
Now, when you impose tariff on China
and when China responds with tariff,
the global supply chain reconfigures.
The reconfiguration depends on how long
you anticipate this animosity
between the two countries will last.
Now, this has gone on for some time,
so I think the perspective
is that it will probably
be quite, it has set in,
people are more determined
to reconfigure supply chain.
This has already happened
and you will notice that some of them
have been reconfigured
towards other Asian countries.
- [Angie] Who are the big winners?
- Vietnam would certainly
be a significant big winner,
but so are others in the Southeast Asia
and in Northeast Asia, well,
Northeast Asia would just be Korea,
and given the recent elections in Taiwan,
prior to that, there has been policies
to attract industries back to Taiwan.
So it's big.
But the other thing is,
some of it would have
been reconfigured anyway.
Because China's labor costs are rising.
- Right, that's a great point.
- That's one of the reasons.
So it would have been reconfigured.
Teasing that out would be important
and finally, is that until the future
becomes more settled down, I think
there will be just more
incentive to reconfigure.
And then, it will also
depend on monitoring
and enforcement and
verification mechanisms
about origin, value of contents.
So it's a pretty complex
process, this reconfiguration.
It's not something that
you can easily see,
but I think the process, as I observe it
by talking to people,
looking at some data,
but not doing the kind of estimation
that Brent has, is it is going on
and it is going on at a
reasonably rapid pace.
So this is the permanent change.
It affects Hong Kong, definitely,
because the chain is reconfigured.
- It's very interesting,
'cause I was just in Shanghai
and talking with both
people on the finance side
as well as the real economy side,
and you definitely heard
exactly this sort of thing,
that they're moving out of China.
Now, and exactly as Richard had said,
that was gradually happening anyway,
partially because of the higher wages,
and so 20 years ago, China
used to be extraordinarily,
an extraordinarily great
place to do manufacturing,
because you had very inexpensive labor
and relatively high productivity labor,
but now that the labor costs have gone up
but the productivity
costs have not gone up
commensurate with that,
and so there's been a move
to Vietnam, Malaysia, Indonesia,
and so in talking with
people, what you hear,
and it's consistent with
broadly what we observe,
is that this had been gradually going on,
but the additional uncertainty
of whether tariffs could come back
and the actual direct
effects of making things
more expensive is accelerating that trend.
So no one's opening a new
manufacturing plant in China now.
They're opening them elsewhere.
No one from the outside is doing that.
But there's also an interesting piece
that doesn't get much attention
about the consequences of this for China
is that they have now become worried
that they might not have access
to certain types of technology.
And so it's led them to think about
trying to invest in national champions,
for semiconductors, for other things.
So there's another type of response
that doesn't get as much attention,
but that was also a lot of the discussions
with the people that I had there
about how the Chinese government,
which directs a lot of the investment
in the Chinese economy, and China has one
of the highest investment
rates around the world,
that's been redirected
towards trying to build up
some of these domestic
strategic industries
that they worry could be
excluded from US technology
or Western technology.
So you've got an interesting
combination of things
that are happening both on
the foreign manufacturing
moving out, part of a
trend that it was before,
but now investment in some
more of the tech sectors
by the Chinese government,
and in some tense, that's broadly
where they wanted to go anyway,
because they faced the
classic middle income trap.
They've grown super rapidly
from being very poor
to being solid middle income,
but very few countries make it
from middle income to the high income.
They've been wanting to do that
through having more high
value added types of firms
rather than just a piece
of a transshipment puzzle,
and so this is actually
accelerating that trend.
So it's a very, it's a fascinating
combination of factors.
- Before we potentially
head away from trade,
I did wanna just build on,
Randy used the word uncertainty,
and I think there's one
really beautiful study
that explains, that sort of identifies,
to me, at least, why trade
uncertainty can be so powerful.
And that's thinking about
China's WTO accession,
so there's a famous study that notes
that in the late '90s, early 2000s,
before China's WTO accession,
China actually faced the same tariffs
placed by the US on its imports
from China as afterwards.
It's not as if when China entered the WTO
it reduced the tariff that it faced
when it sold into the US.
Instead, what it did, the
consequence of that accession,
was that it meant that
the US government didn't,
every year, have to revote to reauthorize
that low tariff rate.
And so, before the WTO regime,
there was a lot of uncertainty.
Would this be the year that
those tariff rates hiked up?
And after the WTO accession,
those low rates were guaranteed,
but that was the only change.
The actual rates themselves didn't move.
And yet, studies have
shown that industries
that faced this change in uncertainty
had a big expansion of
their exports to the US
as a consequence of entry.
And the reason I bring this uncertainty up
is I do think that one of
the major repercussions
of this recent trade war
has been the elevation
of uncertainty, and we
can actually measure it.
My colleague at Chicago
Booth, Steve Davis,
for example, puts out an
index of economic uncertainty
that's at very, very
high levels historically,
and if tomorrow, and we know that this
is not gonna happen with
the phase one truce,
but even if the phase one truce did revert
all tariff rates to their
pre-trade war levels,
I still think there would be a drag
on the global economy,
certainly a drag on trade
coming from what I think is gonna be
a persistently high level of uncertainty.
I assume none of us thinks that this issue
immediately goes away and
has any great confidence
on which direction it will
go over the next 12 months,
let's say, so I do think
thinking about uncertainty
is also quite important.
- I just want to add a very short point.
I think measuring the cost
of uncertainty on trade
and the disruption of the trade policy,
uncertainty environment,
one must be very careful not to use
old style trade war models that I learned
when I was a student, because
the old style trade models
suggest that you produce
everything in your home country
and you ship it.
Now you have a global supply chain.
So the uncertainty and the disruption,
and therefore, the costly consequences
are much more likely, likely
to be much more significant.
- I guess that's where the
political tensions lie,
because it seems that
current US administration
is very, still, playing
by that playbook there
in terms of returning manufacturing
base to the heartland.
- Absolutely.
I would certainly think so.
But the key there is to a large degree,
see, there are two issues.
It is easier to know they
will hurt pretty much everyone
to some degree or an unknown
degree, but they will.
It's much more difficult to
say who will specifically
be benefited as a consequence,
because very often, it
requires a level of information
that is very micro and
probably not easily collected,
and that is what I think they foresaw.
So bringing jobs back,
who knows what does that,
what does that really mean?
If you were to bring the industry back,
does that mean the job comes back?
That's another thing.
You need not be hiring more workers
in that same industry, in the same region
that was doing the same
thing before it moved out.
So I think those consequences
are much more difficult to estimate.
- Randy, what's your perspective,
the observation to follow this.
We have the strongest jobs
rate in 50 years in the US.
We have, Peter Navarro, White
House trade advisor saying
that the economists, the
traditional economists
have gotten it wrong, that
there are actually benefits
to the US economy.
Having said that, what are they?
And in fairness to what we're seeing
in the jobs rate, it is
the strongest we've seen
in half a century.
- For sure.
And so, I think, I would agree
that I think overall, at
least in the short run,
it is not helpful to have tariffs on,
as it's held us back a little bit.
But as you can see, it's
not an enormous drag
on the US, at least right now.
The longer run consequences, I think,
the ones that are really quite interesting
to try to work through.
So there's the uncertainty issue
that Brent was emphasizing,
and that's been part of a broader issue
that one of the puzzles,
post-financial crisis,
has been how little investment we've seen,
not only in the US, but in
countries around the world.
You would think, with
extremely low interest rates,
both real and nominal,
and commitments by center banks
to keep interest rates
low, and they have done so,
that you would see, well, gosh.
Look at it, so much of the world
has negative interest rates.
It's pretty easy to come up with projects
that lose a little bit of money,
and so you would think that
if you can get financed
for projects that lose
a little bit of money
because they got negative interest rate,
you'd find a lot of people
taking chances on things
and doing a lot more investment.
But we haven't seen that,
and that's not unique to the US.
It's true in the UK, it's
true in continental Europe,
it's true in emerging markets.
It's not true in China, where, as I said,
it's sort of state-directed investment,
so that has, but that's,
obviously is not a
market-driven phenomenon.
And so additional uncertainty
may make businesses
continue to be very wary of investing.
We've had this astonishing recovery
with relatively low investment,
but for it to sustain itself,
at some point you're gonna
have to have some investment,
and so it may weigh on that.
Now, on the other side,
someone like Peter Navarro
and people in the
administration would argue
that this is a much bigger issue
than just something about
soybeans and cars, right now.
It's a geopolitical, geostrategic
and potentially military might one.
And also an intellectual
property theft one,
that's what they would argue.
And so taking those actions now
will help to reduce some of
those costs in the longer run
of trying to be able to,
or anyone else be able to become stronger
by not enforcing
intellectual property rights,
by taking away innovations that are done
in the US or elsewhere,
that, of course, would
reduce the incentives
for those innovations
to occur going forward,
and so that could have a negative impact.
It could also be used to strengthen
the geopolitical power of China
in a way that potentially,
in the long run, could be harmful.
Do we have answers to these?
No.
It's very difficult, even
Brent's unbelievable brilliance
in finding data for things,
I don't think there are enough
observations historically
for us to be able to look at this.
But my guess is, if there's anyone
who's gonna figure it
out, it's gonna be Brent
to be able to do it.
(Angie laughing)
And so this just gets into the realm
of much more punditry and speculation.
It's not unreasonable to
think about those trade-offs,
but it's very, very difficult
to be concrete about.
But I think that's the
bigger picture issue
that is raised, and so it
makes me more concerned
about sustaining the recovery
for sustaining growth
over a longer period of time.
- That is a very interesting dynamic
that you've observed
with when the job market
is that strong, and yet,
we are not seeing return
to business investment
in the United States.
That should reflect and
mimic that characteristic.
Brent, in your view, in your work,
as you take a look at
the behavioral aspect
of the labor market,
what should we be seeing,
and your perspective on this
against the global backdrop?
- I mean, I think,
I guess the set up to the question
that you discussed with Randy was
that labor markets are exceedingly strong
in the US right now, and they are.
I think it's important to ask,
I guess, a couple questions.
One is, is this a trend?
Is it a deviation from trend?
When did it start?
My sense is that the
effects of the trade war
and the labor market shouldn't
be so obviously connected,
certainly at high frequencies.
If you look at the
slow, steady improvement
in the US labor market, it's not obvious
that we wanna think of it
in terms of a year or two
as opposed to a much
longer, steady improvement.
So in the short run, when
I think about the effects
of trade or barriers to trade,
I think about issues like how productively
are we producing our goods?
Are we sourcing them from
the most effective producers
of those goods globally?
And the world is a
machine for making output
that we all consume.
And if that machine uses its inputs
as efficiently as possible,
we all get to consume more of it then.
It's a very common reaction, I think,
for the world to associate
trade with labor markets
and certainly, politically,
when NAFTA was sold in the US,
it was sold as all
about jobs, for example.
But I think trade economists
are much more likely
to connect the effects of trade
with wages, with productivity,
than with something
like the number of jobs.
And when we talk about the labor market
being so strong, it's really by count.
- It's the numbers.
- It's the unemployment
being so low, not that
wage growth is taking off
or inflation is spiraling
up out of control.
It's just that employment is rising,
participation rates are coming back,
so I would be hesitant to learn much
about the implications of these tariffs
from the recent job market in the US,
which absolutely looks pretty good.
- And that's why the audience is here,
because how do we think about it
beyond the numbers, beyond the headlines?
As you've said very critically,
what are the wages?
Is their wage growth?
Is their actual inflation?
The fact that the Federal Reserve
has kept it traditionally low levels
and unable to sustain a 2% inflation rate,
that is also reflective of
this broader conversation.
- Well, I think, I'd like
to comment a bit about
the issue of policy and certainty.
Because it's not just trade policy
that has become uncertain
and because US-China trade
wars is part of that,
and there's also geopolitical uncertainty,
but there are many, ignoring all that,
you look at most mature economies,
including that of Hong Kong.
We have a fundamental loss
of trust in government.
It has declined over time.
Now that is, sort of, in my view,
it looks like a mirror
image of policy uncertainty.
Maybe the government is
doing exactly the same thing
but we just don't trust it,
that is actually uncertainty
at the other side of the equation.
And I think that is growing
in many parts of the world.
Certainly, I think, including Hong Kong,
as you all, I'm sure, agree.
Now, all this makes it
that even though unemployment
in many parts of the world
are pretty low, Hong Kong has been 3%
for a very, very long time,
and US has recovered
remarkably from historical,
based on historical record.
And yet, I think, I wanna
reemphasize what Brent say,
wages for most people
does not grow very much.
And that is something that
has fundamentally changed
in terms of the shape and the composition
and the structure of the industry,
and that leads back to, I think,
to technology and maybe
a host of other factors
that we can all think about.
And the correct understanding of that
is not actually abundantly
clear to many people,
and I think that has fueled
and what government has promised to fix
is very limited and very
often fails to deliver,
or doesn't have the funding to do it.
Hong Kong may be the only exception,
they have their reserves,
so they are throwing
a couple billion away very quickly.
But for most society, you
don't have that option.
And I think this, too,
actually, in my view,
this general malaise, lack
of trust, uncertainty,
because we don't really understand
exactly what is happening
to the economic structure and therefore,
don't trust government who
has promised many things
and fails to deliver.
I think that is, I am not a forecaster,
but what I try to do is I
look out my window every day
and I see, what do I notice?
And I see a lot of people
feeling rather uncertain
about the future.
And when I look at the world,
the world didn't change very much,
it's just that graduates
today cannot look forward
to the future in the same way
that my generation could
look forward to the future.
Now, that discourages everyone, I think.
And I think that feeling
is around in many societies
that are mature, and I think
that is the mirror image
of Steve Davis' view,
which I really admire,
I mean, his index of
uncertainty is very important
it's one of the real contributors
for our understanding
what's happening, or a tool for helping us
to understand the world.
- Well, policy uncertainty,
political uncertainty,
economic uncertainty, and
then there is one function
that central banks around the world
try to stabilize is the monetary,
at least, in economic instability
and try to absorb the shock of it
to the best of its ability.
And the ability of that seems to be,
in terms of firepower, waning.
We take a look across
global central bank action,
and you have the Federal Reserve
in the United States
forecast, or pretty much,
we expect to see no,
according to the dot plots,
the no rate hikes in 2020,
to be debated, of course,
here amongst the panelists.
But we also have negative
rates around the world,
including, of course,
ECB and Bank of Japan
continuing negative interest rates.
In this scenario, what is
the role of central banks
to try to absorb and to
stoke the kind of growth
that we should be seeing?
Inflation often is a bad word,
depending on how you look at it,
but it is, it's something that is part
of a healthy global economic backdrop.
It's not something that we're seeing.
- This is an incredibly
challenging time for central banks.
At least for most countries right now,
the challenge is not inflation
but very low inflation or deflation.
So that's a dramatic change from,
if we had had this 15 years ago,
the idea that everyone would be worried
about low inflation and
deflation from central banks,
that would have just been
seen as preposterous.
You all would have been
about trying to rein in
central bankers who are
getting political pressure
to inflate or to, I'm
thinking just sort of,
yeah, kind of go crazy in that direction.
And now it's exactly the opposite.
And part of it is the DNA of central banks
is not well-suited for that.
So their very natural, very
cautious way of speaking
and acting, at least pre-crisis,
has in some sense made some
number of central banks
perhaps less effective.
So like Bank of Japan, let's
take that as an example
since we're here in Asia.
You have Abe become elected,
and so he makes this salient for everyone,
so it's not just an aficionados thing,
or people who are in the markets,
since three arrows in Abenomics,
and one of those is fighting deflation.
He then puts in Kuroda-san as
the head of the central bank.
Kuroda has a very well-known reputation
for saying the Bank of Japan
has not been doing enough
to fight the low inflation
and the deflation.
It should be doing much, much more.
He gets in and he has his moment
full of, like, when Mario Draghi says,
"We'll do whatever it takes,
"and believe you me, it'll be enough,"
and the markets believed him.
So Kuroda-san gets in, says,
"I see that there's no limit
to quantitative easing,
"to asset purchases to be
able to fight the deflation."
Unfortunately, he does
not have the same impact
on the markets and on
inflation expectations
that Mario Draghi did,
particularly on expectations
about what would happen within Europe,
because you see with Draghi's statement,
just a real collapse of interest rates,
the risk spreads, for a lot of,
especially the peripheral countries,
Portugal, Spain, and others.
And the Bank of Japan has been struggling.
Despite Kuroda trying incredibly hard.
I mean the balance sheet
of the Bank of Japan
is now more than GDP.
At the peak in the US,
it was about 25% of GDP.
The ECB is a little bit larger than that
and is now gonna be on
another growth path.
He's just completely off scale,
he's doing exactly what
he said he would do
and can't seem to get inflation
to be close to the target.
And so I think central
bankers have to sit back
and think much more carefully
about whether that's a useful tool or not.
And this gets back to
the uncertainty issue.
Committing to negative interest rates
for a long period of time, like in Japan,
does it increase or decrease uncertainty?
So from the Bank of Japan's perspective,
and I think from traditional
so-called inflation targeting
perspectives, that should
prod a lot of uncertainty,
because the Bank of Japan didn't have
a particular inflation target
before Kuroda gets out
there and says that,
really trying hard.
He's not saying one thing
and doing something else.
He's saying one thing and
literally putting his money
where his mouth is, or putting
all of the taxpayers' money
of Japan where the mouth is.
And he can't succeed in
getting that forward.
And so, I think, we could talk about this
a little bit later.
In order to generate greater certainty,
what do they need to do?
And I think they actually need
to speak in a different way.
What traditionally central
banks have done is,
they think about in this inflation target.
They say, we have a 2% goal,
and because everyone listens
and respects the central bank,
if they announce it, everyone believes it,
and they change their behavior.
Well, we've seen that
globally that's not the case.
DCB has a 2% inflation target,
the Fed announced one in 2012,
has not met it once since 2012.
Obviously, Bank of Japan has
had this enormous challenge.
And so often the response is,
we need to improve financial literacy
or just speak a little bit more clearly.
But I think that the better approach
would be to get out and try to understand
how people are thinking and
then work back from that.
So in your packets there's
a lunch with the FT
with Richard Thaler, our
most recent Nobel Laureate
who focuses on behavioral economics.
And actually, when he was here last year
at the grand opening of this spectacular,
spectacular campus here, he mentioned,
and I also talked to him
about this privately,
when he came to Chicago 25 years ago,
he thought the big success
of behavioral economics
was gonna be in macroeconomics
because there was so much
about inflation illusion
and so much about these
kind of behavioral things,
he thought that that's
where it would be natural.
But of course, it wasn't there.
It was in finance where
it sort of took off,
and I think central bankers need
to become much more behavioral economists.
Go out and work from, what do people hear
or think about when you ask
them about price changes
or inflation and then work back from that
rather than just trying
to say more loudly,
well, this is 2%, and it's
really 2%, and believe us.
Well, clearly, just by repeating it,
they haven't believed them.
So I think you need to
do it in a different way
and I think starting from
what people understand
and how they think about,
and this is all amenable
to field experiments
and a lot of stuff of
what we do at Chicago now
that Richard has been so
important in generating.
When he got there 25 years ago
and when I got to Chicago 30 years ago,
there was nothing about
that kind of stuff.
Field experiments were not
something that economists did.
Now, I would say a near
majority of the junior faculty
on both economics and finance
do that kind of thing.
But I think we need to
do it on these issues,
and so far, central banks have not done it
and none of the faculty have done it yet.
- In journalism we call it go
talk to the man on the street.
You gotta do more man on
the street conversations.
But Richard, what does
the man on the street,
woman on the street, really think?
- Well, this is, take me
as a man on the street.
- Okay.
(audience laughing)
- Oh, come on, Richard.
- So I studied economics at Chicago
in an era when inflation
and hyperinflation
was the concern and was the worry.
We learned from Friedman and many others
that this was a problem, and
the issue was to get it down
you need a monetary rule
and then you need to stick
to that rule to reduce policy uncertainty.
That's what we learned.
That was the holy canon,
right, I mean, that was it.
And I had been to Peru when
they had hyperinflation,
so I really witnessed hyperinflation.
It was, and that taught me something
which the textbooks didn't,
because the textbooks were
formulas and concepts,
and that was really physical.
So I really had a personal
experience during that time.
And then many of you
here probably have been
through the period from after
the Asian financial crisis,
1997 to 2003, and did you believe it?
We experienced deflation,
cumulative deflation
over a six year period, was 13%.
Now that is very serious.
But the only time it was more serious
was the Great Depression.
Now, going through deflation,
now, a 1% inflation is basically,
taking into account, it
is basically no inflation.
It's very close to no inflation.
Now, when you don't have,
this is my man in the street.
If you don't have inflation,
I think it's just bad for business.
You don't need to,
that's not what Chicago taught me, right,
but that's what the man
in the street taught me.
Inflation is always good for business,
because there are always sleepy guys.
Nobody sees the future perfectly.
That's the micro businessman's view.
Now if all of them think this way,
it has at least a short term
self-fulfilling prophecy,
if not in the long run.
Now, this is the problem.
They say, going through deflation
is really very destructive.
It creates huge inequality,
loss of faith in government,
and worse, a whole
generation of young people
become extremely risk averse.
So risk averse they are not willing
to become entrepreneurial.
This is the man in the
street as a teacher now.
I've seen my student during,
who lived through that period,
became extremely risk averse.
By the time the economy recovered,
they were still not convinced.
By the time they were
convinced, they were too old
(audience laughing)
to take risks and they
were already burned.
Now, I see that in a generation of,
I've taught in Hong Kong,
I mentioned, over 43 years.
So I can really testify that that,
people who were late
20s during that period
basically gave up their
entrepreneurial future,
for those who are aware of my students.
I could witness them.
Now, so deflation is really a very,
now even low inflation
is just a moderate way
of thinking through that idea,
and I think not being able
to get prices to go up,
the golden rule, at least
in Chicago during Friedman
was at least 2%, right,
but probably not more.
But we are so far from 2%
in many parts of the world,
so far from 2%, so this is very,
I think there is something,
I don't know how to fix it.
Randy, you are the governor of,
former governor--
- Former, yeah.
- Getting inflation up--
- It's not my fault now.
(audience laughing)
- Getting inflation up at least 1 or 2%
is really a very important objective,
and I think somehow we
have failed to do that,
and I think, from the man in the street
and businessman, why would I,
I mean, sometimes, wrong micro decisions
can be saved by good macro policy, right,
not in the long run, but
at least in the short run.
And taking risks, this is
back to behavioral economics.
Maybe that kind of
psyche might be relevant.
- So, I mean, we're seeing that.
Central banks are trying that.
Federal Reserve is doing that
with trying to stoke risk,
even costing you, if you save money,
it's gonna cost you, so please spend it.
I mean, that is the kind
of behavioral outcome
that central banks are trying to stoke.
On the other side of it is
is a real huge global
growing concern about debt.
And growing debt bubbles,
as you said, Bank of
Japan carries more debt
than its GDP, we're seeing
that increasingly in China,
obviously, with concern there.
Where does that leave us?
For those who are watching
this debt pile grow
and still seeing lack of inflation,
so what's not happening?
What needs to trigger,
and are central banks
the ones to do it?
- Well, this is one of
the potential worries.
So when interest rates
are extraordinarily low,
debt service costs are much lower
than they otherwise would be,
so people can afford
more debt than otherwise.
But that's an extraordinarily
important qualification
that when interest rates are low,
if interest rates suddenly rise up
because people lose faith
in the central bank,
now it seems like inflation
is completely off the table,
no one thinks that there's any possibility
of an inflation spike,
but we know that inflation
could still occur.
I mean, look what's happened in China.
You've got relatively
easy monetary policy,
and then you have a
particular shock in a sector,
and so measured inflation has gone up
quite significantly in China.
If you look at the core,
not nearly as much,
but there still has been movement up.
And so inflation can occur,
and so if there is a
significant movement up
in interest rates, this
could be devastating,
because the larger debt
burden couldn't be repaid
and so that has become an increasing risk.
Not that I think that that's
likely in the next year,
but at some point, the bondage vigilantes
will come back from the grave and say,
can they really pay all this stuff off?
I'm not so sure, and then
as interest rates rise,
it becomes more and more likely
that they can't pay it off
and becomes self-fulfilling,
and you can get something
that is quite devastating.
I don't think that's
in the very near term,
but that's, I think, a longer term worry
of these very low interest rate
and negative interest rate policies.
- Brent, in your work, are you finding
that behavior, I guess, on the US side,
does the strength of the
US dollar almost make this,
make America immune to this behavior?
- Yes.
So the United States, both
government debt situation,
but the country's net credit position
or excuse me, net debt position,
vis a vis the rest of the world
has been quite puzzling for awhile.
And the United States
runs trade deficits now
for decades, for example.
And interest rates are quite low
despite relatively high debt levels,
and one potential explanation,
one key factor appears to be the role
of the dollar at the center of
the global financial system.
The dollar is the preeminent,
dominant global currency.
What do I mean by global currency?
100 years ago, we probably would talk
almost entirely about the
share of that currency
in central bank reserves,
but nowadays we would take a broader,
I'd argue a more modern approach,
thinking about the share of, for example,
corporate bonds denominated
in that currency,
the share of bank deposits
and cross-border bank loans
denominated in that currency,
the share of trade, import
and export manifests,
denominated in that currency.
And you might think that the dollar
has been the strongest global
currency for a long time,
and sure enough, it has been.
But it has changed quite recently
in a way I found quite surprising.
In 2008, one might argue, I would argue,
that the United States was probably
where the global financial
crisis emanated from.
It was geographically, at least,
the provenance of the crisis.
More recently, the United
States has been the country
that presumably would be credited
with initiating some of these trade wars
with changing its fiscal stance,
and yet, since 2008, the use of the dollar
in this international currency
role has, if anything, grown.
My colleagues and I, my coauthors and I,
Maggiori, Schreger, and I, for example,
show that if you look at the share
of global corporate debt that is written
in dollar terms versus euro terms,
it was quite stable from about 1999, 2000,
until really, a little later,
2003, 2004, until about 2008.
And then after the crisis, actually,
the dollar's share has surged.
It went from about 40% to about 70%
at the cost of the euro.
And you see a similar pattern
if you look at international lending.
A lot of other uses of
the global currency.
So there is an argument,
I think an empirically backed argument,
that the dollar in terms of its use
as a global currency, is stronger now
than, essentially, it has been
in decades, in many decades.
And I view this as
having two repercussions
for the question at hand.
On the one hand, it might
explain, in some sense,
why the US has had such
low borrowing costs
despite relatively high debt loads.
If there really is, for whatever reason,
this global demand for the dollar
as the unique safe asset,
well then it might make sense
that the US borrowing cost appears
to be deviating from what you'd think of
as a historical norm, in
terms of its relationship
with the amount of debt.
But the other thing is it presents a risk
should that demand for the dollar
as the safe asset change.
It means that yes, its
position is quite strong,
but almost by definition,
there's more to lose.
It's more vulnerable.
And there's actually some evidence
that a little bit of that
is happening quite recently.
So in another paper with
those same coauthors,
but also Andrew Lilley, we actually show
that the dynamic properties
of the dollar's value,
so now I'm talking
about the exchange rate,
changed with the crisis.
Before the global financial crisis,
if you looked at how the dollar moved
with risk measures like
corporate bond spreads,
like the return on the S&P, like the VIX,
you actually didn't see
much of a relationship.
This was something known as
exchange rate disconnect.
Academics would talk about
how the exchange rate
didn't seem connected with
otherwise important variables.
Since 2008, you actually see
a pretty strong connection
between the dollar and
these risk measures.
When measures of global
risk appetite go up,
the dollar is weaker, and vice versa.
Month to month fluctuations
have moved in lock step
until about three, four years ago,
when that relationship has begun to wane.
So all these kind of facts
paint a bit of a hazy picture,
admittedly, but one where
the global role of the dollar
may very well have changed structurally
around the time of the
global financial crisis,
potentially reflecting this global demand
for it as the unique safe asset.
And to the extent that erodes
or even more quickly evaporates,
it certainly could cause
big problems for the US,
which does now have a
pretty big debt load.
- Richard, from your
perspective, man on the street
here in Asia, especially
after America pulled
the currency manipulator
label off of China for now,
what about the China dynamic?
How should we regard the role of the yuan
against the backdrop
of how a global economy
has a relationship with the US dollar
and how that relationship
might be shifting
or how China wants to shift
even that relationship.
- I think as the global economy,
as US-China decouples, which certainly,
most people that I know, that
I've talked to in Hong Kong,
thinks this is happening, and
this is not easily reversed,
would be reversed.
It's probably decouple, it's a question
of whether this is happening very slowly
or it will suddenly accelerate
or there will be many attempts
to slow it down sufficiently.
But most people I've talked to feels
that decoupling is pretty
much the name of the game.
Now, if we take that perspective,
which is really a pretty negative,
I think, for the long term
future of the whole world,
the willingness and ability of China
to make their currency more convertible,
their capital economy to
be a little more open,
less restricted, will
probably not grow as,
the trajectory will be much longer.
And in that sense, I
think whether you call it
currency manipulation or not,
whether the exchange rate between the two
is really an unimportant issue,
because as decoupling occurs,
there are much larger concerns
that will be looming on the horizon.
The unfinished agenda
of the US trade talks.
Those will be very slow.
And the longer it takes to achieve
any significant progress in second phase
will certainly encourage
China to go alone.
Because, if there is
no future, why engage?
Now, of course, that creates
a completely different
policy environment for China.
They have to, I would
think they would have
to think very seriously about at least
sustaining reforms within
their domestic economy
to sustain domestic demand
for their own growth,
which would be very top
of the agenda, right,
because the external side
becomes less reliable
and you must rely on internal,
what I would call market
or reforms to drive that.
So I think moving forward,
you have to be very cautious
about how US-China relations move forward.
Now, phase one is done.
Will there be phase two?
When, what is in it?
And what if sustaining
interest in continuing it
will be very significant for everyone,
I would think, because it
will go beyond trade issues,
widely beyond trade issues,
that would be my view.
And of course, Hong Kong,
being in the middle of this relationship,
well, Milton Friedman said,
"This is always a
difficult situation for us.
"You try to keep your
anchor with someone."
So that's why the exchange
rate is fixed with the US,
but we are in China, so that
is a very tough situation.
- I think just based on everything
that we've talked about thus far,
we're starting to see so many layers
of embed and the matrix
upon which central banks
need to consider political uncertainty,
US trade, geopolitical situations,
not just with the US and China,
and all of those aspects really combine
into this matrix of which we try
to talk about it in terms
of economic outlook,
and then on top of that matrix now,
let's talk about big tech.
When we talk about even just this dynamic
of a strong US dollar, the
currency manipulator label
that China has been sensitive about,
and really monitoring the situation,
now, amidst all of this,
we have potentially
a private sector led global currency,
Facebook announced Libra,
followed by Mark Carney,
the outgoing Bank of England governor
basically saying that
there needs to be a global,
digital currency, a synthetic hegemony
that he characterized it as,
and then, of course, PBOC,
with word that for the
past couple of years,
and that certainly has, the
pace of that has increased
after the announcement of Libra,
working on a central
bank-backed digital currency.
So let's talk about all of that.
I think Chicago Booth certainly
has this thought leadership
with Gita Gopinath in a recent op-ed,
in fact, kicking off 2020 this year
talking about potentially the need
for a global digital currency
from his now role at the IMF.
How do you regard it, as former
Federal Reserve governor,
once upon a time, this was
the stuff of science fiction.
And now it's here.
- Yes.
Yeah, you would sort
of talk into your watch
and people would be able to,
everything would be in
your watch or on a phone
or something like that.
Now that it's actually here.
And yeah, it's very interesting that Gita
has just written about this.
Not only is she Brent's coauthor,
but she started her
career at Chicago Booth,
and now she's the chief
economist at the IMF.
And interestingly, she was very critical
of the approach that Mark Carney has taken
saying that central banks
should be doing this.
They need to have more
efficient payment systems,
they should be getting ahead of the curve
and do this, and this would also provide
an alternative for the dollar.
But she said she really
doesn't think this is something
that's very sensible to do.
We don't need to have a digital currency,
we need to get the basics of
central banking right first
and then worry about
efficiencies of payment systems
and other issues like that.
So when I left the Fed
just after the, in 2009,
just after the global financial crisis,
that was soon after bitcoin was created,
and there was a lot of
discussion about it at the Fed.
We weren't quite sure what to make of it,
and actually, one of the funny things
about my having been there
and then come back to teach
is that I had been teaching about that
in my money and banking class
since I started teaching again in 2009.
So now, everyone knows what bitcoin is,
but back, it's hard to believe,
but back in 2009, '10, '11, '12,
no one had really heard of this.
It was something completely new,
or just a few aficionados knew about.
In principle, as you said,
it's like science fiction.
It's fantastic for a money
and banking professor,
because you can come up with
all of these crazy examples
that you wanna test
students' ability to think
in a new context, but
this was a real context
rather than a sort of a
totally made-up context,
even though it sounded like one.
And so, I think central
banks are trying to promote
more efficient payment
systems, super important.
There's a lot of money that is spent
on cross-border transactions
that are slow, expensive.
Actually, bitcoin does not do
a very good job of doing that.
In the Economic Outlook in Chicago
that we just did last week,
Austin and I were talking about this,
and Austin related a story about
how there's a Bitcoin conference
that found it so frustrating
that it was so expensive
and slow to use bitcoin,
that they refused to accept it.
So they have a Bitcoin conference
and they didn't even believe in it
because it just, it hasn't
really fulfilled its promise.
Now that doesn't mean that it can't,
and so that's why, potentially,
something like Facebook
with Libra, they have an installed base
of two billion people globally.
They have a lot of people whose families
are disbursed around the world,
like many people from
Latin America and the US,
who then send remittances
back to their family members
in their home countries, they
connect through Facebook,
so it'd be natural to use that.
And it's interesting, that's
when all the regulators,
everyone has gotten very,
it's now a big thing
and a very dangerous thing,
because there's potentially
more competition there,
because bitcoin has proved to
be really kind of something
that's more for aficionados,
but if you have a two billion
people installed base,
and a very clever
organization like Facebook
that potentially could be much,
much, much more challenging.
You've seen such a strong regulatory
and political reaction that I think
it's not going to be Facebook,
I think it's gonna be very
difficult for Facebook
to be able to go ahead as they wanted,
but it does suggest that
I think there's a lot
of potential that's there.
All the emphasis has been on the risks
and the downsides, but
there is a good use case
for global payments that
are cheap and efficient.
So far, these structures
haven't achieved that.
Should that be done by the government,
or should that be done
by the private sector,
people are gonna debate that.
My preference would be to have things more
in the private sector side
and have different models to
try to get to that solution.
But I think that's gonna be
one of the really big issues
over the next decade that central banks
are gonna be facing, and particularly,
if the People's Bank of China
moves in that direction.
'Cause unlike most other countries,
the People's Bank and the
Chinese government say,
we want to eliminate
currency, they can do so.
And can enforce that.
It would be virtually
impossible to do that
in the United States or in Western Europe.
So we may well get a very
interesting experiment
about how valuable that efficiency is.
We won't get a test of
the willingness of people
to give up currency and
give up that anonymity,
because that's something
that the Chinese government
can basically enforce, oh
no, there's no anonymity,
you're all in the system that
the People's Bank observes
of every single transaction you do.
- Well, what do you think
the reaction would be,
and I wanna hear from all of you,
what would your reaction be,
what do you think the reaction would be
if PBOC does launch the world's
first central bank-backed
digital currency,
does it shift trade dynamics?
- I mean,
I can't directly answer that question,
I won't directly answer that question.
Let me indirectly, though, describe why
I think there are real obstacles
to digital currencies
gaining the kind of share
that we currently see currencies
like the dollar having.
There's a dynamic that
was at the heart of,
for example, the op-ed that
Gita wrote that you described.
Let me kind of walk through this dynamic.
Imagine, for example, you
are a importing country
and the goods that you're importing
just take as given, are denominated
with their prices in dollars,
and it's a sticky price.
Well then, since you care
about your purchasing power,
of those dollar denominated imports,
well, then you probably
want to have a large share,
at least some chunk of your
saving stored in dollars,
invested in dollars, dollar bank accounts,
dollar corporate bonds, et cetera.
Given you've got that added interest,
you want those dollars on your asset side,
you're gonna try to entice
someone to offer them to you.
So your corporations,
knowing that you'll accept
a slightly lower interest
rate on those dollar bonds
might choose to write
their bonds in dollars
and issue them to you.
It's cheaper for them to borrow that way.
But now the corporation has
to pay all these dividends
or interest payments in dollars,
well, they would love to
have a revenue stream, then,
in dollars, so they price
their exports in dollars,
which of course become the imports
that we started this cycle with.
And the only reason I
mention that in this context
is there's some real momentum,
some real coordination from
having such large shares
in these various markets
that causes a feedback
and it makes it hard to
break from that equilibrium.
Certainly not impossible to break
from that equilibrium, and I think Randy
made a really interesting point
about China potentially being
able to create this experiment
in a way where other countries
wouldn't, given the dynamic.
But I'm quite sympathetic to the power
of that dynamic that I just described,
and in that sense, I'm
sympathetic to the op-ed,
which sort of argued we still
might be quite some time away
from mass adoption of such a change.
- Yeah, I think the currency is useful
as a trading tool if someone is willing
and wants to trade with you
and is willing to hold that currency.
Now, willingness to hold that currency is
what Brent talk about.
Whether you want to put
a billion block chain
PBOC electronic currency in
your account on your cellphone.
Do you want to do that?
What happens if the
policy governing the value
of that currency shifts?
So at the end of the day, it will depend
on the credibility of
the issuer at the end,
the credibility assure the willingness
of other people who want
to trade with your country
who issues that currency.
Now, as we have known for
a very long period of time,
a lot of people have been
willing to use the US currency.
So whether it would be globally acceptable
depends ultimately on the behavior
of the PBOC and the attractiveness
of goods and services and investments
and attractiveness of all that.
So that ultimately
depends on whether China
becomes a very attractive economy
for people to want to do business with.
The other thing is, even
if you couldn't do it
on an international scale,
you could probably enforce it
within your own country.
So domestics have to trade
in this digital currency.
Now, they have no choice and no option.
Then, if your domestic economy
is not closed but needs
to trade with someone
outside the world, those individuals
and those firms or
units would have to hold
some foreign currency.
Now, the value of that foreign currency
is that your identity is,
in that sense, unknown.
Right, I mean, what your
PBOC blockchain currency's
great value is that every
transaction is followed,
so there's less fraud, no, you know?
You would not commit a crime paying
with that digital currency, right?
I mean, that's the whole idea.
Then you would do that
with the foreign currency,
and access to foreign currency
will always be available unless
you are a closed economy.
Now, so I think there
are substantial gains
for China to go on to that currency,
but it also depends on
how others view the value
of your currency and how your own people
wish to hide your
transactions from the state.
So within China, there would
be demand for currency,
and outside, not everyone
will want your currency.
So I think it would be,
but still, the benefits within China
for wiping out fraud would
still be very significant
for a big swath of that society.
But then you will be policing very,
you would have to police very carefully,
foreign currency holders.
Now that could be a very,
that could incur enormous
regulatory monitoring costs too.
Now since this is still science fiction,
it's story telling, it's not really there.
We will have to see how it happens.
But I think China is going in
that direction, regardless.
- Let's open it up now to the audience,
your perspectives, your concerns,
economic outlook in 2020,
we have a microphone here.
Just raise your hands.
Thank you.
- And if you could introduce yourself,
that'd be terrific.
- [Daniel] My name is Daniel Lee
and I teach at the university.
Can you comment on the
trends on the equity market?
It seems like no one is
worrying about the risk,
and we've seen the equity market
is going up and up and up.
No matter what happen in the world.
So what's happening there?
- Buy!
That's the trend.
(audience laughing)
When we were together a year ago,
everyone was going, sell!
And so I think there are very
important behavioral elements
that are there, and I think,
when I did the outlook here and both here,
in Chicago, and elsewhere, people thought
I was being sort of
pollyannaish and saying, oh,
because people were certain,
because the stock market had gone down,
that the economy was going off the cliff.
And the stock market goes
up and down quite a bit
without having any impact
on the real economy
or telling you about where
the real economy is going.
Ultimately, if the real
economy is doing badly,
the stock market is not going to do well
in the longer run, but in the shorter run,
there's not this tight month to month
or quarter to quarter correlation.
So clearly, there's a lot
of optimism that's there.
I mean, the stock market is now,
no one would have
predicted the stock market
would have one of its best years ever
in so many countries,
whether it's in China,
they had roughly a 30% increase,
we had a 29% increase in the US.
No one would have thought that
at the beginning of the year.
So one, it's really difficult.
It's even more difficult to
predict the stock market,
I think, in the relatively short run,
than it is to predict the macro outcomes.
But one of the things that
I've become concerned about
is when other people are not concerned.
And so now, people just seem to push off,
well, so there are these trade tensions.
Well, they seem to be resolved,
and they're gonna go in a good direction.
Oh yeah, we'll come down a
little bit because the tariffs
weren't eliminated but, that'll be fine.
You have a lot of geopolitical uncertainty
in the Middle East, for example.
And you get sort of
retrenchment for a day or two
but I hear the pundits on
Bloomberg and CNBC saying,
"These are all buying opportunities.
"So if there's any negative shock,
"and some people becoming negative,
"then you buy, because
we know the stock market
"will come back."
Well, that worries me,
because it reminds me
of a narrative that I heard
when I was back at the Fed
about, you can always buy houses,
'cause housing prices never go down.
(audience chuckling)
So buy on the dip.
Unfortunately, people bought on the dip,
and then things went down.
So I think the key, so I see
a little bit of an exuberance
and a little frothiness that's there
because I think people are so optimistic.
The fundamentals, I think, are still solid
for most of the major
economies of the world,
and even Japan, where I mentioned,
they've not been able
to fight the deflation,
the unemployment rate is still quite low,
the economy, when you
adjust for the reduced size
of the workforce, when you adjust
for the shrinking population,
actually is doing okay.
Not gangbusters, but doing okay.
And so I would just be, I'd be cautious
about thinking that, well,
just because the market
has gone up it should go up more.
I think I hear a lot about that,
and a year ago, when the
market had come down,
it was clear that the
market should go down more,
I'm not that kind of momentum investor.
Maybe in the very short run that happens,
and I know some of my
colleagues do research on that,
but I think it's harder to say
about that for the long run,
and I'm very much a long run investor
rather than a short run investor.
- [Gordon] Now, oh wow, nice.
My name's Gordon Sanders.
We've got a property market that's tied
directly toward the free money in China.
We have a monetary system in Hong Kong
that's tied directly to the US dollar.
There's no benefit to
somebody's flat rising in price
if you only have one flat.
However, we're all concerned
about the flats going up,
because there's no penalty
to buying and holding
and having 10 empty flats.
How are we going to rebalance this
where flats are not 21 times
the mean salary in Hong Kong?
- Richard, I think you should take this.
- Richard.
(all laughing)
- Make it 22.
- Well, seven months of riots
will shake it down a little bit.
The question is, is how
do we get prices down.
I don't think that would be an objective.
The objective is, how
do you supply housing
to the population?
How do you get people?
Now, there are two issues with housing.
One is for shelter, the
other is for savings
and accumulation.
Now, in Hong Kong, unlike for most periods
of US history, as the
economy got wealthier,
in Hong Kong and in the US,
as the economy got wealthier,
the US homes got bigger houses.
We got more expensive but smaller flats.
This is the Hong Kong.
Now, the whole issue is supply.
The problem with supply,
if you look purely
at the private sector, ignore
the public housing sector
because 55% of people live in
the private housing sector,
for a very simple idea is basically,
I think, we could go back
to a Chicago graduate
called Ed Glaeser, who
unfortunately no longer teaches
at Chicago, has shown that
the most difficult thing
with the supply of housing
is the regulatory cost
of getting virgin land to become land
that has been zoned for planning,
so you gotta get the planning thing done,
then you gotta overcome
the building cost,
then you have to overcome the opposition
for everyone who can oppose you.
By the time you get through all this,
if it normally takes only two years
to build a house, it's already six years.
Now, actually, it's not
the construction cost
because you can now have
MIC Construction in Hangzhou
and ship to Hong Kong
and just assemble it.
It takes three days to assemble a floor.
And it's all prefabricated.
Hangzhou is building houses
that is being shipped to London.
So it's not the construction issue.
It's the regulatory issue.
Now, Hong Kong has incredibly
complex regulatory issues
and despite our freedom
and democracy is good,
our system has actually opened up
compared to what it was, say, 25 years ago
and everyone can object,
and there is no restriction
on what you cannot object against.
They can object against anything,
about my view, I don't like the smell.
So this delays it enormously.
And the great challenge in
Hong Kong is one more thing.
The city is actually very,
very compact already.
The only land is in the New Territories,
significant amounts of land.
Unfortunately, 40% of the
land is zoned as country park.
It cannot be redeveloped
without a change in legislature,
which is extremely difficult,
and the other thing is,
land in the New Territories
is primarily agricultural land
which means the only way
you can develop that land
is to solve all the
planning, zoning, building,
and all the objection,
and most of that land
has scattered ownership.
That means it has to be assembled now.
So what is the solution for all this?
I don't know.
(audience laughing)
I've been taught to analyze the problem.
Now, I can suggest a very small fix,
if I still have one minute--
- Yes, please.
- A small thing.
I mentioned there's not only
the private housing sector,
there is an equally large
public housing sector.
The public housing sector is
dominated by rental housing,
which means if Randy
gets assigned that house
because he is income eligible,
he lives there forever,
and there is no market
in public rental housing,
so he cannot move.
He's stuck there.
This is going back to serfdom, right?
In that structure.
Two, he cannot rent it out,
because he rents it from government,
so he has no transfer of
rental leasing rights.
So he's stuck there.
And if his income rises over time,
you have to pay double rent.
But fortunately, his
income is always quite low,
so it doesn't, but as he gets older,
his children becomes employable,
and when they get job,
it guarantees your income
has broken the eligibility.
So what does that do?
Well, the children move out,
but they have low income, so what happens?
They go in, well, public rental housing
cannot be subdivided.
Public ownership housing
cannot be subdivided.
Private housing that are
owned by an owner-occupier
is unlikely to subdivide.
So only the tiny little
private rental housing market,
which is only 15% of the market share,
has to absorb all the
demand from these people.
So there is also a reform dimension to it.
If we actually sold or give away
all that public rental housing
to the sitting tenant,
that market will emerge
and reallocation will occur,
so you don't need to build,
and as a result, well,
I actually have done
that risk analysis empirically,
with Chicago-taught skill.
Actually, a lot of people will move back
to the public rental
housing if they own it
or if their parents own it.
And subdivide that housing,
demand will come down,
and that will lower the rents, at least
from an investment perspective,
it might slow down, I don't
mean that it will drop it,
this is still a small segment.
Slow down the rise.
So unless we saw regulatory
barriers and policy areas,
I don't see anything will be done.
Yes.
- There's no--
- Let's move on to another,
we've got to move on to
some other questions.
- Right over here.
- Gary Chan, alumni.
- Oh, okay, sorry.
- [Gary] Also portfolio manager.
So there was a lot of talk
about low unemployment rate,
lack of inflation, I think,
in the US, elsewhere,
I think, behaviorally, I think,
also the lack of inflation expectation,
so perhaps a question to Randy,
I know there's a lot of
debate within the Fed
about the Phillips curve being flatter now
than it was before.
What is your thinking
about how they would adapt
or adjust to this reality
and use the Phillips curve,
with the new version of the
Phillips curve going forward?
- So it's interesting.
The Phillips curve is
the supposed trade-off
between a real variable unemployment
and a nominal variable inflation.
And what's interesting
is that Milton Friedman,
many decades ago, actually
now more than 50 years ago,
issued a very fundamental critique
of the Phillips curve, and in some sense,
it's come to be true.
That the basis of the
Phillips curve is that,
well, if you have some inflation,
you kind of trick people,
because they don't know
what the prices are and
so they don't realize
the inflation is coming,
so they accept a wage
that's lower than they otherwise would
if they had all of the information.
So it's actually very much
based on behavioral sorts
of things, and Milton
said, "No, that's nonsense.
"You can fool some of the
people some of the time,
"but you can't fool all
the people all the time."
That is, systematically exploit
this information advantage
that the central bank is
going to raise inflation
above what people expect,
and so people have locked
in at 2% wage increase,
expecting 2% inflation, when
they really should expect four.
But I think one of the
things that has happened
is that that information asymmetry
is much less than it used
to be because of technology.
One of the pieces of
research or data sources
that Brent has worked on is
this billion prices project.
Now, I told you, Brent's
brilliant at finding data,
but if the technology weren't there,
he works really hard, but he
couldn't find a billion prices.
But he can scrape a billion prices, what,
every minute, basically, or every month.
So you know what the prices of
everything are super quickly.
So you have a lot more
information than you used to have,
and I think that's one of the reasons
why we've seen less trade off,
because I think it's harder
for that kind of trickery
to occur that central banks move ahead
of where people's expectations are
'cause it's just too easy.
People are always shopping on the internet
and on many of these sites,
if you're selling something,
even if it's hundreds of dollars,
but you are two cents
lower than someone else,
you get all of the business.
So people are really monitoring for that.
And so I think there's a behavioral change
or at least an information,
ease of getting information
that reduces that asymmetry
that makes it more difficult to exploit
that so-called Phillips curve trade off.
Do central banks fully understand that?
I don't think they fully do,
and this is a hypothesis.
It's difficult to test,
although my guess is
someone sitting next to me
will be able to figure out
how to do that pretty soon.
But I think it's a contributing factor,
and I think central banks know
that that kind of trade off
is not really there anymore
or it doesn't seem to be there.
One of the debates is, would it come back
in certain circumstances?
I don't know.
And I also think that
it's interesting related
to the digital currency debate,
and so if everyone is just plugged in
to the same network on numbers,
that may make it easier,
globally, especially.
- Robust conversations.
I think we've run out of time.
It's 8:30 p.m. now, but let's continue
this conversation amongst
the crowd as you network,
and certainly our panelists,
but what a robust discussion
from last year's 2019 Economic Outlook
to 2020 Economic Outlook.
We're talking about, once again,
US-China trade relations,
how is it going to evolve
over the next 10 months,
will we get to a phase two,
what will the debt piles look like?
Will we get more negative yields
or will we get a rate
hike to be determined
by potentially the impact of big tech?
And to our panelists
tonight, I thank you all,
and thank you as well.
(audience applauding)
