Catching up with Ken Rogoff
I found this excellent piece of interview with Ken
Rogoff, originally published in the Swiss Business newspaper Finanz und
Wirtschaft by editor Christoph Gisiger interesting. Of course, I do not agree
with every point in the article which has been shortened slightly for easy
reading. Rogoff is the Thomas D. Cabot Professor of
Public Policy and Professor of Economics at Harvard University.
He served as Chief Economist at the International Monetary Fund. He is a
senior fellow at the Council on Foreign Relations, and serves on the Economic
Advisory Panel of the New York Federal Reserve.
Does that mean we do not have to worry
anymore of another financial crisis?
Of course, there are still issues with the Eurozone. But the only country which is sort of in a different place in the cycle and which is important is China. China is probably the place most at risk of having a significant downturn in the near term. It is certainly the leading candidate for being at the center of the next big financial crisis.
Of course, there are still issues with the Eurozone. But the only country which is sort of in a different place in the cycle and which is important is China. China is probably the place most at risk of having a significant downturn in the near term. It is certainly the leading candidate for being at the center of the next big financial crisis.
Why does China concern you so much?
I still think that is the most fragile large region in the world at the moment. The big problem is that the Chinese economy is still very imbalanced, relying much too heavily on investment and exports. In addition to that, China is very credit dependent. So if China were to run into financial difficulties or just experience a slowdown in the rate of credit growth that could produce a lot of problems. If China were to run into its own kind of financial crisis it would probably produce a growth crisis which could produce a political crisis.
I still think that is the most fragile large region in the world at the moment. The big problem is that the Chinese economy is still very imbalanced, relying much too heavily on investment and exports. In addition to that, China is very credit dependent. So if China were to run into financial difficulties or just experience a slowdown in the rate of credit growth that could produce a lot of problems. If China were to run into its own kind of financial crisis it would probably produce a growth crisis which could produce a political crisis.
Why are interest rates still so low?
Economists do not fully understand why interest rates have fallen as far as they have. We have lots of papers, lots of studies on it. There is a large part we do not know. For example, let us suppose the United States and Europe, meaning Germany, France and northern Europe, started growing much faster. That could raise global interest rates. In this case, what could happen to countries like Italy if they did not grow as fast as the rest of the world? In such an environment we could certainly see big debt problems in countries like Italy. That is a classic debt crisis pattern like in the 1980s when Latin America ran into trouble. It happened because the rich world was growing very fast and the highly indebted Latin American countries suddenly could not meet their payments. At the moment, Italy does not have such problems because interest rates are so low. So no one cares.
Economists do not fully understand why interest rates have fallen as far as they have. We have lots of papers, lots of studies on it. There is a large part we do not know. For example, let us suppose the United States and Europe, meaning Germany, France and northern Europe, started growing much faster. That could raise global interest rates. In this case, what could happen to countries like Italy if they did not grow as fast as the rest of the world? In such an environment we could certainly see big debt problems in countries like Italy. That is a classic debt crisis pattern like in the 1980s when Latin America ran into trouble. It happened because the rich world was growing very fast and the highly indebted Latin American countries suddenly could not meet their payments. At the moment, Italy does not have such problems because interest rates are so low. So no one cares.
Also, in many parts of Europe
interest rates are still negative. Will that leave permanent damages to the
economy?
I think that is nonsense. There isn’t any particular evidence that negative interest rates are leading to permanent damages or that the risk of a crisis are higher. Eventually, we are going to have another deep recession or financial crisis. Not tomorrow, not soon I hope, but it is going to happen.
I think that is nonsense. There isn’t any particular evidence that negative interest rates are leading to permanent damages or that the risk of a crisis are higher. Eventually, we are going to have another deep recession or financial crisis. Not tomorrow, not soon I hope, but it is going to happen.
There is also a lot of complacency among
investors at the stock market. How imminent is the risk of a correction with
equity valuations as rich as they are today?
Most of it is interest rates being so low. You can do some simple calculations that suggest the low level of interest rates explains a large part of the high stock market valuation. The stock market is vulnerable to having real interest rates go up. I do not think it is an exceptionally high risk right now. The stock market is high for the same reason debt is high which is that interest rates in many ways are at record lows compared to free market areas.
Most of it is interest rates being so low. You can do some simple calculations that suggest the low level of interest rates explains a large part of the high stock market valuation. The stock market is vulnerable to having real interest rates go up. I do not think it is an exceptionally high risk right now. The stock market is high for the same reason debt is high which is that interest rates in many ways are at record lows compared to free market areas.
What do you expect from incoming Fed chief
Jerome Powell?
I would not expect any major changes at the Federal Reserve. Janet Yellen would have done what Jay Powell will try to do. I talked to him many times over the years and even though he’s a lawyer he really has excellent command of economic and regulatory issues. I think he is a perfectly fine appointment, especially given that there are so many economists already on the board of the Fed. It is also a fact that President Trump would like to keep interest rates very low. He does not want anyone to ruin his “beautiful” stock market.
I would not expect any major changes at the Federal Reserve. Janet Yellen would have done what Jay Powell will try to do. I talked to him many times over the years and even though he’s a lawyer he really has excellent command of economic and regulatory issues. I think he is a perfectly fine appointment, especially given that there are so many economists already on the board of the Fed. It is also a fact that President Trump would like to keep interest rates very low. He does not want anyone to ruin his “beautiful” stock market.
What about monetary policy in Europe?
The biggest challenge facing the ECB is that quantitative easing in the Eurozone is not the same as in the United States. It’s basically a subsidy from the northern countries to the southern countries. Places like Spain, Portugal and Italy have received massive loans from Germany and France under the table through the ECB. If the ECB changes its quantitative easing, Europe is going to need some vehicle to substitute QE and support these countries, maybe some form of an Eurobond or something. So it is going to be quite a challenge if quantitative easing stops in the Eurozone.
The biggest challenge facing the ECB is that quantitative easing in the Eurozone is not the same as in the United States. It’s basically a subsidy from the northern countries to the southern countries. Places like Spain, Portugal and Italy have received massive loans from Germany and France under the table through the ECB. If the ECB changes its quantitative easing, Europe is going to need some vehicle to substitute QE and support these countries, maybe some form of an Eurobond or something. So it is going to be quite a challenge if quantitative easing stops in the Eurozone.
So what is going to happen with Bitcoin?
Bitcoin is a classic bubble. There are things in the technology that are valuable. Bitcoin is more likely to be worth $10 than $10,000 in a decade. It is very likely that it will get regulated and regulations will eventually undercut it. You can have blockchain currencies that are not anonymous. That is a different matter. They will live forever. Those are not the cryptocurrencies where all the speculation is taking place.
Bitcoin is a classic bubble. There are things in the technology that are valuable. Bitcoin is more likely to be worth $10 than $10,000 in a decade. It is very likely that it will get regulated and regulations will eventually undercut it. You can have blockchain currencies that are not anonymous. That is a different matter. They will live forever. Those are not the cryptocurrencies where all the speculation is taking place.
