Here is the audio, video, and transcript. Here is part of the episode summary:
Ken and Tyler tackle international economic dynamics, unresolved macro puzzles, the state of chess, and more, including whether trade deficits are truly unsustainable, why China’s investment-heavy growth model has reached its limits, how currency depreciation neutralizes tariff effects, Pakistan’s IMF bailouts, whether more Latin American countries should dollarize, Japan’s deceptively peaceful economic decline, Europe’s coming fiscal reckoning, how the US will eventually confront its ballooning debt, the puzzling absence of a recession during our recent disinflation, the potential of phasing out large denomination currency notes, the future relevance of stablecoins, whether America should start a CBDC, Argentina’s chances under Milei, who will be the next dominant player in chess, hanging out with Bobby Fischer, drawing out against Magnus Carlsen, and how to save classical chess from excessive computer preparation.
Here is an excerpt:
COWEN: Just predictively, what do you think the United States will do with its fiscal position?
ROGOFF: That is a darn good question. Looking way forward, I would just say we’re on an unsustainable path. We will continue to have our debt balloon. Eventually — not necessarily in a planned or coherent way — I think we’re going to have another big inflation soon, next five to seven years, maybe sooner with what’s going on, and that’s going to bring it down just like it did under Biden. It brought the debt down. Then the markets are, fool me once, shame on you. Fool me twice, no, we’re raising the interest rate, and then we’ll have to make choices.
I think in the United States, a lot of the choices, I’m sorry to say, probably point towards higher taxation because we’re hardly running a welfare state. All due respects — and I’m not sure I have any due respects to DOGE — there’re not that many things to cut in the United States compared to many other countries. I don’t know what the choice will be. I probably won’t be here, and you might not be either, when we’re making the choices, but if actually we’ll —
COWEN: Oh, I think we’ll both be here.
ROGOFF: It could happen much sooner. On the other hand, it’s hard to know what’s going through Trump’s head. I presumed he was going to blow up the deficit, like everybody else. We’ll see.
COWEN: When you say big inflation, how big is big?
ROGOFF: Last time we probably had a bonus 10 percent inflation over the 2 percent target cumulatively, maybe 12 percent. I think this time, it’ll be more on the order of cumulatively over the 2 percent target, 20 percent, 25 percent. There’s going to be an adjustment. I don’t think the debt is going to be the sole contribution to that. There are many factors. You have to impinge on Federal Reserve independence. Probably, there’ll be some shock, which will justify it. I don’t know how it’s going to play out.
I know that for years, people have said the US debt is unsustainable, but it hasn’t come to roost because we’ve lived through this post-financial crisis, post-pandemic era of very, very low and negative real interest rates. That is not the norm. There’s regression to mean.
You know what? It’s happened. Suddenly, the interest payments start piling up. I think they’ve at least doubled over the last few years. They’re quickly on their way to tripling, of going up to $1 trillion. Suddenly, it’s more than our defense spending. That’s the most important macro change in the world, that real interest rates appear to have regressed more towards long-term trend.
COWEN: What’s the most plausible scenario you can imagine where the US does not have to make any major adjustment? I’m not saying you’re predicting it. I’m not saying you think it’s very plausible, but you have to come up with something. What is it?
Recommended. And I am happy to also recommend Ken’s new book Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead.
The post My Conversation with the excellent Ken Rogoff appeared first on Marginal REVOLUTION.
