Chances of a nor­mal re­ces­sion is higher than an­other deep sys­temic cri­sis: Ken­neth Ro­goff

Mint ST - - LONG STORY -

When it comes to risk man­age­ment and I would like to high­light how the US is man­ag­ing its fed­eral debt.

It is very short, it is maybe the short­est du­ra­tion that is a tech­ni­cal term for mea­sur­ing the av­er­age line.

That it has been since the high in­fla­tion 70s so that is a very cheap rate to bor­row but if in­ter­est rates go up, it is very risky.

So I wouldn’t say so much that in­ter­est rates are def­i­nitely go­ing to go up.

I would say the bet­ting is clear that they are not and they might go down but I think, in terms of macroe­co­nomic risk man­age­ment, one needs to take ac­count of the fact that could un­wind, it could go the other way.

I think the US is do­ing re­ally well. US is boom­ing, pro­duc­tiv­ity I think will pick up, in­vest­ment is not as good as we would like to see but peo­ple are just pour­ing into the jobs mar­ket.

The un­em­ploy­ment rates have not been fall­ing, it has been ris­ing be­cause so many peo­ple who were pulled out of the job mar­ket, they thought it was hope­less

But if you look at the world, as I said, China re­ally does seem to be slow­ing down more than the of­fi­cial num­ber—the of­fi­cial num­bers at 6.5 in­stead of 6.6, you have to be kid­ding, that is that is sta­tis­ti­cal er­ror.

It has prob­a­bly slowed down a lot. In Europe, that is what Ger­many is feel­ing, that is what a lot of Asia is feel­ing.

So, look­ing more broadly glob­ally that is much slower and the whole world af­fects in­ter­est rates, it is not just the US.

I think that is the thing we see and I would say it is more acute than the con­ven­tional wis­dom.

When I talked to peo­ple at the World Eco­nomic Fo­rum, they say the Chi­nese will just do stim­u­lus, it is no prob­lem, they are just be­ing a lit­tle care­ful.

They have al­ready done some but it hasn’t been as ef­fec­tive as it was in the past be­cause a big part of their stim­u­lus was through con­struc­tion, a big part of con­struc­tion was hous­ing and it is start­ing to reach the end of the line.

You are a poor coun­try - it is still very poor com­pared to Europe and they have the same hous­ing per capita at the same square me­tres, and there is re­ally some down­ward pres­sure on hous­ing prices.

Now they can do things to push it up but that could make it just worse later.

No, it is not. It will tell you that we have in­vented these new tools. So they have room to cut in­ter­est rates 2.5% but in a typ­i­cal re­ces­sion, they cut them 5 or 6%.

Quan­ti­ta­tive eas­ing is smoke and mir­rors, I think a lot of re­search - my book sum­marises a lot of it—it has shown that quan­ti­ta­tive eas­ing in US is one branch of the gov­ern­ment buy­ing the data of an­other branch of the gov­ern­ment.

The Fed­eral Re­serve is nom­i­nally in­de­pen­dent but it is owned lock, stock and bar­rel by the trea­sury and the trea­sury owns its prof­its.

It is dif­fer­ent in Europe where Ger­mans maybe buy­ing Ital­ian data.

So I think the only view that quan­ti­ta­tive eas­ing, pure quan­ti­ta­tive eas­ing did some­thing peo­ple that have con­fi­dence—the Fed says that is okay, we have other tricks. We will con­vince you that if there is a re­ces­sion and the in­fla­tion rate gets to zero, we are go­ing to con­vince you that later we will al­low in­fla­tion to rise above 2% but what just hap­pened.

As soon as the in­fla­tion rate started reach­ing 2 %, they started rais­ing in­ter­est rates so I don’t think that con­vinces any­one.

Ab­so­lutely. If it hap­pens. The ques­tion is how much will it blow up be­cause if you look at nor­mal re­ces­sions, there are also a lot of cor­po­rate de­faults.

If you go back to 1983, 1991, cor­po­rate de­faults are com­mon, there have been pe­ri­ods when 10 per­cent of the value of cor­po­rate debt has de­faulted.

If it is in some pen­sion plans, wealthy in­di­vid­u­als, health in­ter­na­tion­ally—it is very painful, it makes it hard to raise money but it doesn’t blow up the sys­tem.

The ques­tion is how much of it might come back to the bank­ing sys­tem and that need to get bailed out by the tax­payer and then a big de­bate about what we should do and shouldn’t do.

Of­fi­cially, it is not that much but I think no one knows whether some of these loans which is called the shadow bank­ing sec­tor go­ing to the cor­po­rate debt—will that boomerang into banks’ bal­ance sheets. I have asked reg­u­la­tors about that and they as­sured me not, I have asked an aca­demic at Stan­ford whose work I ad­mire very much and she is not so sure.

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