Hello and welcome to another episode of the OddLots podcast. I'm Joe Wisenthal.

And I'm Tracy Aloway.

Tracy, we're still here at Jackson Hole. It's funny saying things like we're still here because we're recording all these episodes at the same time and we don't really know exactly when you're listening. But this is yet another Jackson Hole episode.

Another special missive from Jackson Hole. So I think there's like an element if uh if I'm being honest a certain surreality of Jackson hold this year because it is an academic conference historically and you know the setting aside the chairman's speech which we'll uh talk about more setting aside that speech you know it's a place for like talking about important issues and yeah academic economics and that's great and I love that stuff and it's super interesting and all that and yet the big story is really the attack on the whole premise on the independent central banks and yet it's sort of like feels like everything but that gets talked about.

I think that's right. And you said setting aside Pal's speech, but it was very very noticeable that in his speech he could have taken it as an opportunity to talk about things like central bank independence or things like data integrity given what's been happening at the Bureau of Labor Statistics, but he chose not to.

Yeah, great point. You're right. Like he could have I because we're wondering like you know this is going to be his last speech last time speaking as the Federal Reserve chairman. So he could have said something really big about reflecting on a career of being a central banker and the importance of all these things and he he gave a uh you know macroeconomic policy speech.

There's also this other layer which is a lot of what he's trying to do now which seems to be to focus on labor market deterioration and maybe look through some of the upside risks to inflation right now. that only happens if you have a credible central bank that can pin longer term expectations for inflation down. Like

yes,

the only reason he's able to do some of this is because of the credibility the social capital that the Fed has built up over decades.

Exactly right. And the reason why we're talking about this, just to be very clear, it's because of the attacks from the Trump administration on Jerome Powell, also other uh Fed governors, also, you know, the whole thing. And this is just part and parcel of one attempt to sort of you know restructure how the US does both domestic and international policy because there's the tariffs obviously and those intersect with monetary policy but then there's just also the sort of changing relationship with other countries that gets into things like you know like let's get like payment for security or something like that like big so many like big hinges and pivots at one point

it's I mean I don't think it's hyperbole to say it's a attempt at restructuring of the global order both in terms of the economy via the international financial system and also in terms of security. I think the confusing part for me is I it is a fact that America has the world's biggest economy. America came through the pandemic a lot better than a lot of other countries. We ended up having lower inflation than a lot of other parts in the world. And yet the Trump administration seems very very convinced that the US is somehow losing out from the current international order or maybe they feel that there's just more that they could get from restructuring it. So I think we should talk about maybe the motivations behind some of this and then what the new world could possibly look like.

Well, we literally have the perfect guest, someone we've had on the someone who we always catch up with in Jackson Hall.

It's becoming a tradition. It's a tradition and he's literally the perfect guest because he used to be on the monetary policy committee at the Bank of England. So he has all the uh monetary policy bonafides. He is currently the president of the Peterson Institute for International Economics and he is the author of a recent article the new geography who profits in a postamerican world that was in foreign affairs and he's not one to like sort of dance around big issues.

He doesn't mince his words.

Yeah. So this is when I say perfect guest to talk about this. Someone that was like, "Okay, if we talk to Adam Posen, we can actually really like talk about all these things that maybe many people are anxious to talk about." So Adam, thank you so much for coming back on OddLots. Great to see you again here at Jackson Hall.

Thank you for having me back and congratulations Tracy and Joe on the upwards profile of OddLots ever higher. So it's very cool.

Very kind of you to say. Are we right that there is a certain surality to the vibes here right now?

Yeah, it is. As you said, there was a lot of deliberate focusing down of chair pal speech and there's been a lot of self-discipline of members of the FOMC and everybody to be quite restrained uh at a time when the attacks on the Fed and the weaponization of government files to attack individual Fed members and so on is going on. I think Tracy's absolutely right and we didn't script this in advance but it is all part of this broader context of do you keep inflation expectations anchored do you have faith in the dollar do you have faith in the credit of the US do you have faith in US foreign policy and those are all things which Fed officials are not supposed to talk about with the exception of the inflation expectations and on the inflation expectations even there they're reluctant to talk about it because it can becomes self-fulfilling. If they talk about worrying about it, then it starts to unravel. But also, to be fair, because the

seeming message of the rapid come down in inflation that we talked about our last two times we were together in Jackson Hall over 2022 was due to having anchored long-term inflation expectations. At least that's one argument. But it is surreal, Joe. I mean, I I've gotten to talk to several of the members of the committee and they are trying to get on with their lives and um it's hard. But I also just want to emphasize it's not that different than their colleagues in Washington at the Treasury or at EPA or at the Bureau of Labor Statistics that they also are under attack. So, we've done an episode on this before, but I would love to get your take. What exactly happens to central banks when their credibility starts to come under attack or even when maybe on the fiscal side you see politicians interfere a little bit more with monetary policy even if that interference is just a truth social post or something like that?

Yeah, I think Tracy the emphasis is should be on the latter part of what you said. When elected officials who are superior to central banks in any power struggle, when fiscal policy, which if it gets really out of whack, has what's called dominance, fiscal dominance, can overpower whatever monetary policy is. When the context for central banking changes, then it's not so much necessarily the credibility of the central bank per se. It's the credibility of the central bank will be allowed to deliver what it's supposed to deliver. And I'm not saying that to make excuses for the central bank. There are instances like Arthur Burns in the 70s where the central bank itself is compromised and fails to deliver. But I think that's the way to see it. And where you see it is where we're already seeing it in the US, which is you see it in a slightly higher risk premium on long-term government bonds. You see it in weakening of the currency. And you know, some of this I think can be tied to the broader, again, I'm sorry to keep coming back to that, but to the broader Trump economic agenda. As both of you said, it is a real regime change, but we're seeing it already. And so there's a chart in this foreign affairs article, the new economic geography I put out. Thank you again. That does a simple version of something a lot of economists, academics have done, more sophisticated versions, which is basically the correlations on the dollar have reversed,

right?

That with a couple interruptions in 2008, in the late '7s, early 80s, the dollar has the quality that when it gets into trouble, more money flows into it. And even if the US is causing a problem in the world, people believe they're safer in the US than

2008 was the ultimate example.

2008 was the ultimate example. Dollar adjust down. But basically, Treasury bond rates and dollar move in lock step, which is another way of saying they don't have to put up the rates to defend the dollar.

And it also means that most of the movement in the dollar daytoday is just macro news, just day-to-day news. And so putting it simple-mindedly, there's a correlation very strongly positive in intraday intrae data between the dollar and the 10-year Treasury rate until April 1. April 1 of this year that correlation shifts from plus 0.8 to minus0.4.

It reverses sign. And what happens is when something screwy happens in the US, like we decide unilaterally to bomb Iran, like when we do crazy stuff on one big beautiful bill that's fiscally irresponsible, like when Powell is attacked in vicious terms by the president. Gee, interest rates go up, dollar goes down. That looks like an emerging market. Anyway, this is this is not just a data mining. You can do it in very fancy econometric ways. You get the same result. the correlation of safety on the dollar has reversed and that would be a sign of what you're talking about Tracy.

Our friend Carrick Sankeran who's been on the podcast always talks about sort of the definition of an emerging market is if your rates at the long end go up in the recession, right? Because you know in times of crisis in the US historically you're like oh things are really bad in the US. I'm going to pile into dollars at treasuries. This is what you're talking about which is that that reflex has not kicked in exactly this time since we've got four and a half months of very clear data. it's going the other way. A lot of the things the Trump administration is doing are going to reinforce that because they've talked about taxing foreign investors differently in the US than domestic investors. They've talked about punishing people who try to switch out of the dollar. Steven Moran, who's been nominated to be Federal Reserve Board Governor, you know, has talked about a Mara Lago accord and re putting the dollar down. There's real reason for it to behave this way. Now talk to us about like your your foreign affairs piece like the sort of you know this idea of like the restructuring of the global and who profits from it because you also talk about this idea of like the US is like sort of the global insurer of last resort but talk to us a little bit about what this whole piece was about.

Thank you Joe and and this goes to what Tracy was saying at the start about how what you think you're achieving with this world change. So what I'm trying to argue is that the Trump administration decided that the world economy is playing the US for a sucker and that very harsh direct bilateral measures starting with tariffs but also with other threats, demands for investment, demands for military assaults on social media, all these things, threats to withhold military assistance in the case of Ukraine and others that this will be a rebalancing that this will get more money from these countries into the US and thereby make our fiscal situation better, be fairer and somehow do great things for the US economy.

This is wrong on every level. But the fundamental point going to the insurer is I build a mental model, not a mathematical model, but a mental model that I think most people have found quite apt that for the last 80 years since World War II, the US's main role in the world economy has been to be the insurance provider. We made sure that you could ship things through with through different oceans and get there safely. That there was basically respect for property rights, respect for intellectual property rights. There were some standards, particularly technical standards, some brands. There was a dollar that you could get in and out of and park money in. And it was deep enough markets and treasuries that you could get in and out that nobody cared and it didn't affect prices. There was stability to US currency into the treasuries that let you do that. Just a whole host of things. Plus military and alliance as well, obviously for NATO allies, for Japan, for Korea and others. And we charged premiums for that. We did get premiums. We had much lower interest rates. People would put a lot of money into US government debt and that made the whole economy go off better. We had basically obedience from all these countries and military alliances that they would do sanctions for the most part. If we wanted to do sanctions, they would in Okinawa in in Rinmine Air Base, they would take our troops and support them and have them garrisoned in their country. to have our troops forward and doing this whole host of things. And on the economic front, it gave us disproportionate shares not just of the stable investment in treasuries, but things like our standards for technology, our standards for legal matters, our our financial system were the default. Anyways, this had lots of benefits, lots of benefits for them, lots of benefits for us. It was a good business.

Essentially, what's happened is you have a beach house in Malibu which you had insured and you weren't going to build the beach house unless it was insured. Fine. You're paying insurance. You're getting something for it. Now there's global warming. Hurricanes are more likely. There's erosion in the beach. You're prepared to pay a bit more for your insurance. But instead, you find your insurer has decided, "Nope, we're going to deny your claims or you have to slip something under the table to get your claim adjusted. Nope, we're tripling your premium and if you don't like it, we're going to leave the state and you're not going to have insurance anymore. That's what the Trump administration is doing.

I mean, the role of insurance also acts as a sort of like umbrella for economic development, right? Because if you have insurance on the beach in Malibu, other people can build houses and you can have shops and things and maybe your house price starts to rise and you benefit from that. So, this is a slightly unfair question because I'm going to ask you to channel someone else's thinking, but what exactly is the argument from the Trump administration here as to why they are losing out from the current international economic or financial order which very much seems to have been built by the US and as you pointed out has a lot of tangible and intangible benefits for America. Well, this is something I and colleagues of the Peterson Institute have been struggling against for several years now. Uh, not just Trump. There are people on the Democratic side who've had this view as well. So, in the same issue of foreign affairs, Wally Adamo, who you know, who was deputy treasury secretary in the Biden administration, has an article, yes, the trade system was broken. During the Biden presidency, the US trade representative gave a speech in which she said she basically agreed with everything her predecessor, Robert Lighheiser, had said during the Trump adation. So, this has been out there a long time.

Yeah,

I know you want me to answer a question, but I'm I'm not going to try to rationalize it. I think there are three or four things going on. One is there is an excessive sense that China has been unfair, but even more so that China got away with being unfair and is dangerous because of things we did on the economic side.

And I don't think this is justified. Not that I have any love for the Chinese Communist Party. I'm on record calling she an autocrat, but just that Tom Brady and Bill Bich didn't win Super Bowls because they cheated in a little ways. China did not become China because it cheated a little bit here and there. The second thing is there was a legitimate concern which the Biden people cared about and the Trump people say they care about but don't seem to care about that if we're too dependent on concentrated single sources for things like the semiconductors in Taiwan that puts us at a national security risk. That puts us at an economic risk. The reason I say the Trump people don't seem to genuinely care about that is because being totally concentrated in the US in one spot isn't any good either because then you're subject still to natural disasters, to terrorism, to political problems, to corruption. You can care about this and say we got to make sure it's diversified.

Third thing that's going on is there's a perception fed by the so-called China shock literature that US manufacturing was devastated and this led to particular small cities and towns in the US being devastated.

There's a lot of exaggerations and problems with this literature and it doesn't square well with the reality including the reality that most of the places that are cited as having had problems had problems in the 70s and that there's plenty of places like Pittsburgh and Raleigh, North Carolina that got back. But anyway, there's that sense and I think you've had on my colleague Robert Lawrence from Peterson and Harvard who talks about the limits of a manufacturing strategy. And then finally, and this is my own interpretation. People get mad at me when I say this. I think there's a lot of displaced anger. I think there are people who were relatively privileged. They weren't necessarily rich, but relatively privileged in older society in the way the US society used to be that have been disrupted and offended by change and by

forces towards equality. I also think there's a bunch of people who are understandably very angry and disappointed with elites after the 2008 financial crisis after co been perceptions of mishandling after the Iraq Afghanistan invasions and occupations for 20 years that didn't produce anything. So there's a lot of anger that's discredited that of discredited elites who are associated with being globalists, right? But I don't think that anger is well placed. And and I'm not trying to be patronizing. I mean, we've seen this in the US history and other history. you know, people will stir up anger against immigrants or stir up anger against Native Americans or people of color or refugees or com mythical communists in the government in the 50s because they're angry about something else or they're scared of something else, but it gets blamed on that. So, that's where I think it comes from. But I just want to emphasize what you've said at the start and that's part of the point my article is trying to make is there's a very clear list of benefits the US had by running the system and by had a good business model was a profitable business model providing insurance and like you said if you're providing insurance for some people that lets commerce expand and it lets other people free ride and that's a good thing that they free ride and because then then you get more commerce and more taxes and more livelihood and better off people. And additionally, one thing where the analogy breaks down, it's even more favorable for the US because, you know, if you're Chub or Liberty Mutual or or State Farm Insurance, you don't really have a big effect on the extent of risks out there by how much insurance you give. But if you're the US and you say, "I'm going to guarantee your security," you actually do reduce the risks that are out there. And that means you're collecting the same premiums and paying out less

at the risk of uh carrying the insurance analogy too far. I mean, it is true that we have insurers pulling out of areas like Florida because they say it's no longer economic to insure these areas. It's just too risky. It's going to cost too much to rebuild. Is there a case to be made at all here that maybe maybe the Trump administration is looking around the world and saying, "Well, it's riskier now than it was before and we don't want to be on the hook to put out a billion fires." I think there is a case to be made in the national security sphere more narrowly defined that the US may have overextended or needs to prioritize and there is a set of foreign policy thinkers out there talking about this issue. I still don't think that's quite right because actually deterrence and protection kind of like you said before there's an umbrella effect. But let's say that the national security part you can set aside and say there is an argument to be had. The rest of it doesn't make any sense because you're giving up strength of the dollar and lower interest rates. You're giving up disproportionate compared to your size in the world foreign direct investment. You're giving up disproportionate compared to your size in the world, influence over technical standards, love for your brands, spread of your services. You're giving up disproportionate amounts of influence on other populations. Again, it's just like looking at foreign students coming here, which I know you've talked about on some of your episodes, that unless you come up with some absolutely mythical number of how many of them are not only spies for the Chinese, but successfully pull it off, are undetected, and take the Chinese information that they couldn't possibly have gotten through cyber attacks and other means. Unless you come up with an absolutely absurd number like that, all the benefits come to us from having foreign students here. And that's what's can be said about all these things on the economic side.

By the way, when you were talking about the um you know what we had going, you know, it's like that Breaking Bad speech that I've seen is we had a good thing going.

Yeah. Yeah.

You know, one of the reasons I like talking to you, I do feel like it's refreshing, frankly,

the sort of unreformed liberal cuz everyone is like post, you know, everyone's sort of post liberal now and everyone. So, I appreciate that. Also, two years ago when we first had you on the podcast and you recommended Ezra Vogel's biography of uh Deng Xiao Pang to me and I then I read it the next month and I read so I appreciate the book recommend that led me down.

I think that's I was going to say that's the thing that

led me down the whole rabbit hole. I read like 50 books about 20th century Chinese all thanks to you. But I want to talk about China a little bit more because I take all your points about about everything. However, and you know, you've been sort of like refreshingly skeptical of a lot of these ideas that it's particularly important to have more manufacturing in the United States, etc. But there is this very real concern that without robust manufacturing, you actually can't have a worldclass military. And if you're just thinking about like okay we provide this insurance role in some ways very literally say with our navy through various straits around the world and setting aside whether China cheated or not. Should we be anxious if pure like manufacturing capacity and the technological frontier in building things including weapons is in China?

Anxious is not the right word.

Okay.

And I appreciate you're saying about the liberal and that's the part I didn't say. I mean, I think a lot of people are making the case that you I'm pushing back against the tracing you asked about because it's seems to be politically advancable to to say that old-fashioned liberal values are bad. In the case of China, again, there's a difference between arguing in a frankly not just liberal but neoliberal, if I can use that word, way that there is a specific market failure to make sure we have adequate minimum sourcing and diversified sourcing of key national security inputs, right?

Yeah.

and actually had a ongoing commission and had a list and had expert advice and decided, excuse me, in a nonpartisan way how to do that and then actually marshaled specific money and measures to do that.

And if you could do that, and you should, that would affect, you know, some tiny percentage of the US economy, it might be incredibly important for having drones or aircraft carriers or whatever the right technology is. And I'm not going to pretend I know what it is,

okay?

To to keep the straits of Malaa open or to keep the Taiwan straight open, but you could do that. And when I was fighting against the Biden administration on some of their national security excuses for economics interventions and their industrial policy a few years ago, I actually had a meeting with a senior person in the White House, not somebody that senior, but senior enough. And I said, you know, you guys have to have a list. You have to do this. And this person laughed and said, you got to be kidding me because no one wants to write down a list because once you write down a list, then you're annoying certain people and excluding others. And if you're the defense department, you want to include as many things as possible. And you know the general dynamic of how these things go. So I don't think the right response is anxiety. I think the right response is yeah, let's take this seriously. Let's act like bloody grown-ups and actually set up a policy process that deals with this and let's do the spending. And even to go back to the international side, go to our specific allies and say again, it's like raising taxes on a specific thing where you're tying it to a user fee or on in the insurance. I'm raising your premiums not threefold and threatening to leave. I'm raising your premiums for 25%.

And if you put a fire detector in your house, I will only raise it 20%. go to Germany, go to Japan, go to Korea, go to the Netherlands and say in the effect I'm raising your premium, I want you to spend this much more on defense, but if you chip in specifically on this list of military sensitive equipment, I won't ask for as much.

Yeah, the carrots are kind of missing. There's a lot of sticks and not that many carrots. You touched on this just now, but I'm basically going to ask Joe's question in a slightly different way, but are tariffs the right way to bring manufacturing back to the US?

No. Sorry. You want more? Um, I mean, look, again, because of the nature of tariffs, which are a tax, which are a distortion tax on a narrow part of the tax base that has bad distributional effects. They're regressive. They primarily either hurt small business on the corporate side or they hurt lower income people on the household side and they tend to lead to corruption even if not literal bribes but distortions of hey Apple showed up in the president's office with a gold phone and what do you know they got an exception to the tariff you know it tend to lead to stuff like that in a way that most things do tariffs are good for two things right if there is a very specific specific industry and a very specific bargaining situation not against the whole world in general all at the same time one specific country with whom you can bargain and you can get other people to join you in the tariffs so it's effectively a form of economic sanction that can work the other thing is if you are an underdeveloped country with no state capacity

like the US in 1820 or a number of South Asian and subsaran African and Central American countries today even there not that many tariffs are a way to collect necessary revenues because you can literally set up guards at the border and make sure somebody gets the money whereas other more less intrusive less regressive more efficient forms of taxation are harder to collect if you don't have a good state capacity those are the only two things tariffs are

this is a good point because I' you know you see people like oh back in the old days the golden manage tariffs. Well, it's like we, you know, we didn't have like W2 forms and stuff like that. There was So, yeah, of course, you just have to do it at the ports. Let's go back to like, okay, setting aside the sort of structural issues with tariffs and the bad distribution effects, etc. Like just right now in August 2025 and we look at the state of the US economy and people like how do you perceive the interaction of tariffs with everything else that are going on right now?

It's a fair question. We've done a lot of work at the Peterson Institute, colleagues of mine that we've published and others have done slightly different work and we all come out roughly the same place. This is the way the Trump administration is doing it in terms of the short-term economic outlook is it's a tax hike. It's stagflationary, meaning it's raising inflation at the same time as slowing growth. It's collecting a sizable chunk of revenue on the order of 2002 250 billion a year at an annual rate at this very high level of taxes. That will probably diminish over time because people get around that kind of tax and people choose to produce things elsewhere and people evade it. But for the moment, it's a significant tax increase that would have been better done through more efficient means. It also is going to do nothing for manufacturing because what it does on net is well there are certain industries that are being helped as I know you've covered in your supply chain stories you know there are a lot of small businesses or even big businesses

that have imported inputs whether from China or elsewhere and it costs them and it's going to be very hard to replace that and it's very expensive and then you've got the issue again which I know you've covered, but has to be said that there aren't American workers for good reason. There aren't American workers who want to be sitting there screwing screws into the back of iPhones. I don't mean to keep picking on Apple, but it's just it's a it's a clear example. So, you either have to pay them an incredible amount for that or you have to let somebody else do it. So in the short term, getting back to the monetary policy since we're in Jackson Hole,

I think it's not a surprise that we haven't had huge inflation yet from the tariffs because there were a number of things that mainstream people like us expected. People were going to be in denial about whether the tariffs would stay and how big they would be. People were going to have to take time to figure out if you're a business whether you can find a substitute source, whether that substitute source is domestic. If you move it to Vietnam, does that really get you out of the tariffs? Do you have a good relationship? I mean, it takes, as you've discussed in detail, these supply chains emerge organically and they're not top down. Somebody makes one decision. So, it takes time to re reformulate the supply chains if you're signing the tariffs. Third, you've got a bunch of companies that were called out by name by President Trump, like GM or Walmart, that were told, "Don't raise prices because of the tariffs." And so, of course, they're going to hold off as long as they can. And then eventually, when everybody's raising prices at ex roughly the same time, they'll raise prices. And then finally, a lot of these companies and a lot of the consumer goods companies had inventories and they built up inventories in the first quarter of imported goods. and they weren't going to raise the prices until passed through the tariff costs until they got burnt through the inventories. So you had four very solid reasons why it would take at least a few months for the tariffs to really start showing up in prices. So if I'm sitting at the Fed right now,

So you had four very solid reasons why it would take at least a few months for the tariffs to really start showing up in prices. So if I'm sitting at the Fed right now,

in my view, the tariff inflation just goes up from here.

first round effects probably will peak in second quarter of 2026

and then the debate is and I my estimate is higher than most people's a lot of people think it'll peak around four on CPI I think it's going to peak closer to a five or a little more

wow

and then the discussion which Governor Wallers put out there which the chair talked about today talked about in the speech is how much do you think this translates into a second round inflation effects how persistent is this inflation. And that's the interesting debate and that's a good faith debate you can have. But the tariff inflation is coming.

It's on its way. It's not surprisingly low. It's not surprisingly slow. It's a tiny bit slower than I expected, but not really. And we're here.

Well, I'm going to take you up on the debate tease, but where do you fall on the side of uh the second order effects debate? Because you can make it feels a convincing argument for either side. You could say that, well, tariffs are attacks and so they destroy demand and maybe lead to deflation. Or you could argue that tariffs perhaps give companies an excuse to all start raising their prices together and so you don't get that competitive activity that would normally keep prices in check.

I think you can make a plausible serious debate on both sides, but I think the arguments are very clearly on the side that the second round effects are going to be large and persistent. There's several reasons which is why I think it's pretty clear. The first one is we know from what happened with the tariffs under Trump one under Biden from other countries in recent times that the pass through what generally you end up being if you're the company that ultimately buys the imported input or the household that buys it the pass through the final purchaser is usually 85 to 90% of the tariff. It's already very clear from the data that the foreign companies are not paying for any of this. So the question is how much are the importers eating it versus passing it on and it takes a little time for you to get to that but generally it's a very robust result. So even if you get less than that you get 65 70% on average that's still a lot.

The second is implicit in what you said and then sometimes in things uh some of the people on the other side of this argument say is essentially the demand destruction is either symmetric to the price increase or is larger than the price increase and there's no particularly good reason to assume that. So you have to look at what actually is going on.

We have a pretty robust economy pretty close to full employment. We are about to get, though it hasn't shown up yet. This to me is the big surprise, but we're about to get more damage in a stagflationary way from migration restrictions, deportations, sudden stop of growth in the labor force. That's going to give American workers more bargaining power in the short term. That's going to create labor shortages, which put upward pressure on wages. That's going to decrease productivity and and capacity. So on balance you may get some recessionary forces out of both that and the tariff increase but I strongly doubt they will outweigh the inflationary impulses that there will be room for price setting price increases excuse me and wage increases. Third, going back to where one of the things you said at the start, anchoring inflation expectations is the game. That ultimately is what allows a central bank to say, as Bernanki, Labbach, Michigan, and I argued 25 years ago in the inflation targeting book, you're allowed to look through the first round effect of supply shocks if it's clear what the supply shock is and you have anchored expectations.

I think the Fed, whether they admit it or to themselves or not, is publicly underestimating how much the 2020 to 2022 experience deankored inflation expectations. It didn't take us to Argentina in 1980, but anybody who says that they're the same as they were before 2020, I think is deluding themselves. And then additionally, going back to what Joe was saying about the surreal aspect of this time, if the Trump administration has been, as they have,

hugely attacking the independence of the Fed in multiple ways, and this is showing up in a less strong dollar, then that's another reason to think that the expectations aren't going to be anchored, and you're not going to get an offset from the currency.

to the tariff inflation. So bing bing bing, that's four reasons why I think the argument is clear that we're going to get more inflation, more persistence of inflation, more second round effects than some people are saying. I have a question. I've been asking this to a bunch of people. I'm not totally satisfied with any of the answers I've gotten. So I'm going to try again. Even before the tariffs, even before Trump, it appeared that from the perspective of the market that long-term rates were going to be durably higher than they had been in the decade prior to yco. How come? What changed?

So, isn't there a place where I'm there's a legitimate real discussion and I'm very strongly on one side of it.

Okay. So I think the useful discussion all credit goes to Larry Summers roughly was it 2019 2018 he gave the speech about secular stagnation

reviving the concept from Alvin Hansen and oh sorry that was much earlier he gave that speech then he gave the speech in 2019 in which he said secular stagnation may be ending and he made a number of points but the biggest one was if you're in an environment where you're going to have sustained expansionary fiscal policy pushing up demand and meeting shortfalls of demand then the rstar the neutral interest rate is higher and that's that's pretty clear economics and then the reasons which he said and others of us have developed I think are right that going back to the insurance metaphor the risks are higher now there's climate change China is no matter whose fault it is or whether it was inevitable or not China is more of a security threat than it was Russia is more belligerent than it was people have to spend more on that our societies are aging at least our almost all the large societies with the exception of India are aging and you have to spend more on healthcare and more on social security all of these things are going to lead to sustained increases in government spending irrespective of whatever else you do and they are unlikely as we've already seen to be fully tax financed so that is a fundamental the second fundamental I would argue that's pushing up our star is that we don't know when AI is going to kick in. We don't know how big an effect. We don't know how many jobs. You guys again have had many good guests talking about this, but I think we can all agree that sometime between 2 and 10 years from now there will be a meaningful increase in the productivity growth trend. There are a few smart people like Osmoglu and Johnson who say no. But most of us think

interesting

that there will be an increase of some sort. Now I don't have to go all the way to Mackenzie Global Institute and believe you know it's some enormous number but whatever it is that number an improvement in productivity growth trend is generally one for one should be thought of as raising the equilibrium interest rate because you're raising the average return on capital essentially.

That's totally counterintuitive to me. I would have thought that a big productivity increase would be all things equal disinflationary and rates lower and It's it's disinflationary but it remember inflation we should think about as a short-term phenomenon a cyclical phenomenon not as a structural phenomenon. So it's disinflationary in the sense that in any gi for while the productivity gain is ongoing you're getting more stuff for less but as a structural matter you are raising the average returns on capital in the society and so all capital that's competing has to compete with a higher return and so therefore our star is up

interesting

so now that we are deep in ourstar territory I'm going to ask a central banking question with your central bank hat on So you mentioned stagflation. He actually has visitors at home. His central bank hat is a Boston Red Sox cat for those who those aren't in the room.

That's right. All right. So you mentioned stagflation earlier. What exactly are central banks supposed to do when they're faced with a stagflationary scenario? Because we just listened to pal talk about downside risks to employment and upside risks to inflation. He clearly seemed to choose the labor market over the inflationary risk at this moment in time. But there's clearly a trade-off. You have to make a choice here.

Yes. And this is why you try to avoid bad policies such as the ones the Trump administration are doing which get you into a stagflationary situation if you can. Essentially, it's a contingent choice. And this is why the Fed is right to be putting so much emphasis on debating over second round effects of inflationary shocks and things like you were saying how much pricing power there is. How much recessionary effect do you get from these station? It's essentially a balance issue. If you're forced to choose between the two goals, the two halves of the Fed's mandate, but the two goals for any central bank, essentially you have to go after the one that's more likely to spiral out of control.

Ah, so this is their argument that labor market deterioration can be very nonid linear, right? It can kind of explode.

Yeah. Nonlinear is the way they think of it. I think again it's another reason I would take the other side because the evidence is yes and there was the discussion about the so-called SOM rule that you can have these very rapid increases in unemployment

but what we've seen is much to people's surprise but has to be taken seriously is both after 2008 and after 2020 so after the financial crisis after COVID unemployment actually came down pretty

And there wasn't evidence of what economists call hysteresus, which is the idea that once you put a lot of people out of work, it's harder for them to get back into work. And so it's taken from engineering. It's a concept that was very true of Europe in the 70s and 80s that every time you got an unemployment rate hike because of a recession, it wouldn't come all the way back down to where it was before the recession because there would be a certain number of people who couldn't get back into work. and ahead of the 2008 crisis and during it including what my time at the Bank of England speeches and then chair pal and others in 2020 during co worried a lot about this potential for permanently having rises in the unemployment rate.

Yeah.

And but the thing is all the evidence from 2008 and all the evidence from 2020 is that didn't happen. And again, it was a surprise, but it's a really important and a really robust result.

You really are an unreformed neoliberal because so many people have accepted the opposite. Everyone almost everyone thinks there's some hysteresis and like I said, I respect it.

Well, it's I'm not in this is not so much I appreciate that joke, but this is not so much being a neoliberal as being an empiricist. So, so I mean on my staff at of a colleague of mine is Olivia Blanchard and he coined the hysteresus concept 40 years ago and he and Larry Summers and a co-author his name of course I forget I apologize did a paper in 2013 it was like the first paper they did for us after I took over at Peterson looking for hysteresus effects in the 2008 to10 data and they couldn't find it and then Powell again I think with a great deal of sympathy from me and others talked a lot about hysteresus for why they were so aggressive in cutting in response to co

but then again we know the unemployment rate came right down so people care about this they're coming from a good place to care about this but it's not neoliberal it's the evidence the evidence isn't there and so the implication is not that you shouldn't care about unemployment you should have temporary measures of fiscal policy like we did during COVID to extend unemployment insurance to extend health insurance to make it less miserable for people who are unemployed, but the inflation is probably the thing that's more likely to get out of control in my view.

Tracy asked you a question putting on your monetary policy hat, but I'm going to ask you a question specifically with your monetary policy committee hat having served at the now the hat backwards. Um, having served at the Bank of England, long-term rates in the UK are higher than the so-called Liz Truss moment. And I asked you a question about this last year and it was very vague at the time. I was like, "What's going on with the UK?" And because it always seems like there's some sort of mess. But now I actually have something specific to ask, which is what's going on with the UK in the sense that it seems bad in terms that rates are very high. What What's going on there?

I think I said to you when you asked about this last year, Joe, that

the single biggest call I got wrong in terms of analysis and forecasting in my career was 2012 at Bank of England.

I and some others on the committee at the time, but I'm responsible for me said,

"Yeah, productivity has been lower the last few years to 2012 because of the financial crisis, but it's going to come back up because it's been the same long-term trend since 1850."

And and there was nothing destroying a trend from

Yeah. I don't remember if it's 1850 or 1860, but there's some incredibly long data series we have for UK productivity growth. And even if you watch it, it's just a straight upward line. And even the Great Depression sort of makes a little blip and World War II makes a little blip and this and then suddenly in 2008 it goes flat

and I and a bunch of other people said, "Well, it's not like the Blitz, right?" And so productivity growth is going to come back up to trend. It never did.

Huh?

The UK is the one rich economy, high-income economy, where productivity growth not just went down for a while, but kept going down. And so now we've had a dozen years of very low productivity growth in the UK and at some point that catches up with you. Um, and I think that's the way to look at it is you throw Brexit in on top of that, which may be one of the reasons why productivity growth hasn't come back. And there's debate about that, but they have been running making less with more rather than more with less for a very long time. And wages and prices and the pound all haven't dropped accordingly. So it's not like unfortunately Greece suffered through say or Portugal during the financial crisis. And so something's out of whack. And this shows up eventually in the fiscal policy, which is what you're talking about, that they have a bunch of really hard choices to make. If the government, the current Labor government doesn't make lots of cuts, the interest rates keep going up.

Yeah.

If they do make lots of cuts, then probably growth doesn't improve. So, they're just in a really, really tough situation. So Joe asked you a question with your BOE hat on and I'm going to ask something similar which is one of the things that makes Jackson Hole such a big deal is that we don't just have the Fed here. We also have other central bankers uh like the ECB, the BOJ and you see them do the classic walk with the Fed chair every year. When it comes to central bank credibility and the independence issue, what do you think those other central bankers are thinking here? And do they possibly use some of Jackson Hole? We're still waiting to hear from them. That usually happens on Saturday morning. We're recording this on Friday afternoon. Do you think they maybe use this as a platform to try to push back against some of it? So, the central bankers, both publicly and in conversations I've had with them from around the world, are shocked and horrified that the Trump administration is doing this to the Fed. Beyond just the obvious, they're sympathetic to their colleagues from the Fed and it's pretty yucky is just the fact that they have taken it for granted. The entire economics profession has taken it for granted for more than 40 years going back to a classic paper by Ken Rogoff in 1986 and then some subsequent work others did that in central bank independence is good. It reduces inflation and reduces the volatility of inflation on average for a country in a large way without reducing the average growth rate. Full stop. And this is lived experience. This is what the European Central Bank was based on. This is why the Bundus Bank and the Germans were willing to give up sovereignty to the European Central Bank. This is the standard practice that dozens of countries have adopted. The Bank of Japan got independence over the last 30 years.

So, it's kind of like with trade economists in the past, but even more on questions. It's like, you know, this is like questioning vaccines, which of course nowadays people do, but at one point would have been thought of as what kind of anti-scientific illiterate are you that you would question central bank independence? So, I mean, there's no way to exaggerate. That's the response. At various international versions of central bank summer camp, you know, which is what Jackson Hole is. So, the ECB has their version which is called the CRA conference. And this year at CRA, everybody was rallying around Jay the sheriff pal and there were public statements about central bank independence and support for him at the BIS annual meeting which is a sort of similar thing which this year I got invited to. I don't usually get invited to that. I do get this. Anyway, again, there were public statements, there were private statements. Everyone was rallying around. But as we discussed, the Fed leadership seems to have decided that Chair Pal should not mention a word about central bank independence in his speech this year. And so, this is pure extrapolation. By the time this recording comes out, we'll find out. Yeah. But my expectation is they will have passed a memo to ECB President Lagarde, Bank of England Governor Bailey, Bank of Japan, Governor Auea, who are the three big central bank governors speaking on Saturday. Please don't talk about it. And I think what they've probably decided

is having foreign central bankers talk about this would not play well in Magaland and might just induce more problems with the Trump people. So I think the instinct of the foreign central bankers here would be to talk very loudly about this, but I think they explicitly or implicitly have been told not to. Well, this is exciting because by the time this comes out, this will either have been our listeners will already know.

We'll already you'll either be very wrong or very right. Edison,

always great catching up with you and uh we'll do it again next year.

Thank you for having me. Congrats to both of you. Great substantive discussion.

Thank you so much.

Thank you.

Tracy, I I love our annual catchup with Adam. It really He was like the perfect guest because he'd just say whatever. Just say what's on his mind.

Well, at a time when a lot of people don't want to talk about this stuff, right?

Yeah. When people are like anxious, when people feel like there's like recriminations where people people want to people want to keep low. Yeah. People want to keep their heads low at a time when they don't know if there's going to be some attack on them from the White House or, you know, on Twitter or TR. People want to keep low. And Adam, I appreciate his cander.

Can I just say I'm always really impressed by people who are able to organize their thoughts in real time to be like, well, there are three reasons. Number one, that's right. That's right, Joe.

But that was a fantastic conversation. One thing well I guess the thing that I still don't get and I think it is really hard to make an argument that the US has lost out from an economic and financial and in some respects political system around the world that it has helped to create right like there are tangible instances where you can say like the US benefits in sometimes incredibly weird ways like if you look at the debt crisis in like 2013 or 2011 You know this is a crisis emanating from the US from the United States from US politics and what you saw was investors flock to the security of US treasuries and you know yields actually go down which helps with US debt. So there are these like sometimes perverse benefits that the Trump administration seems to want to throw away. You know, one thing I will say that I was thinking about in your intro is and I go think back to, you know, that book trade wars are class wars, which I think is actually I suspect Adam almost very disagrees with the premise of that book, etc. But regardless of where you stand on some of these questions,

there is that relationship between you can't disrupt the domestic without disrupting the international and or vice versa. Like these are like inextricably linked. if you perceive to be there some sort of inequality in the United States or whatever it is these things like the trading relationship all of these things they are interlin so it's like one thing to say like you know there's this view is like oh knocking over all of these different institutions I think they're they're linked in fundamental ways and there it sort of makes sense that if you you know you go after the Fed because you perceive whatever that that's part and parcel of the whole thing

you can argue they're linked but I would say if you're trying to solve domestic inequality through international means. That doesn't seem that it seems like the emphasis and the focus is wrong. I guess what I'm saying is I'm not surprised that it all goes to because like that was my toy for like like that that the sort of Klein Pettis theory etc that you know there's this inequality in the United States because of these winners and losers from the international trading system right and so we fight these trade wars etc because we are it's about something internal that rectifying some sort of internal imbalance and so I do think like I I get so this just gets to all I'm saying is I'm not surprised at all goes together because then I see I get

as part of like a policy agenda

but it's possible that we should be looking at domestic policy more rather than fighting with trading partners.

That also seems

you're not going to say you're lying low now.

No, I'm just saying I don't have an opinion on the right way to do it. I'm just saying I'm not surprised that this is one way.

Okay. Shall we leave it there?

Let's leave it there.

This has been another episode of the All Thoughts Podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest Adam Posen at Adam Posen. Follow our producers Carmen Rodriguez at Carmen Arman Dashel Bennett at Dashbot and Kalebrooks at Kalebrooks. For more OddLots content, go to bloom.com/odddlots where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/odlotss. And if you enjoy all thoughts, if you like our annual tradition of catching up with Adam Posen at Jackson Hole, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely adree. All you need to do is find the Bloomberg channel on Apple Podcast and follow the instructions there. Thanks for listening.

Yeah.