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