Former IMF Chief Economist and Harvard Professor Ken Rogoff talks the global economy and the geopolitical situation with Bloomberg's Jonathan Ferro and Annmarie Hordern at the World Economic Forum in Davos.
Let's talk about what's happening in the global economy. You write a fantastic peace in The Guardian just before Christmas. You followed up with a piece in Project Syndicate about the global economy not being out of the woods. Can you just tease some of that out for us just to begin.
Well, there seems to be this consensus here in Davos, but i'd also say, more broadly in the States that you know, it's not going to be as good as twenty twenty three, which was surprisingly good, but it's not going to be bad. Inflation is going to come down soft landing, and there seems to be very little understanding that.
There's a lot of volatility around that.
And if you look at the geopolitical situation, forget about Trump, which we were talking about, but the geopolitical situations like nothing I've seen in my professional lifetime. I mean, we've gone exactly where we are in Cold War two, but we're in Cold War two. Could get to be a hotter Cold War two than it was, and that's very destabilizing.
We think what the seventies were like.
I mean, part of that, of course was the break up of bread and Woods, but it was also, you know, around geopolitical instability and so that you know, I think there's a lot of volatility.
It's not all bad.
I mean, we could have a good year, but that's really hanging over our head as.
A market participant.
What do you do with you don't know? What you don't know? You don't know about the volatility.
What do you do with, hey, a President Trump coming in two point zero?
Okay, well they're two suffering. What One's a lot of volatility. You know, there's extreme volatility.
So I don't know.
But no, I mean I think volatility probably is not good for you know, risky assets in general. That's what we teach in economics anyway. If there's a chance that the Red Sea gets closed down for six months and it adds to inflation and the prices of everything, even if you believe at the other side it might be smooth, AI kicks in early and growth is good, our models say the prices should be lower in that case than that. You know, But I mean, I have no idea how to interpret the market. It seems very sanguine, even when I say, look at things like oil prices, I don't get it. I mean, why isn't there more of a premium built in? They, you know, just think this is going to be over in a week, because at least the political scientists I talk to, you know, say, if you look at Ukraine, if you look at what's going in the Middle East, if it's the same next year, that's.
Like the good outcome. You know that it's very risky.
Well, so far oil vessels have been able to get through the red seat. A lot of it has been consumer goods those vessels. Is it hitting someone's bottom line at this point and that can increase inflation?
Well, I mean the questions what's next if it picks up? Where's it going? They're certainly I think shipping rates have gone way up, right. I mean that eventually hits something that's you know, only a component of what you pay. But we're sort of in a volatile stage. It's not that what's happening is going to make inflation and blow through the roof.
It's sort of what happens. You say the same thing about Russia and Ukraine.
I mean, I you know, I support Ukraine. I've worked with the Ukrainians, but it's not been a good year. I don't know what else to say about it, Well, and you know the air risks of something getting worse and how that feeds into markets, and how that feeds into prices and everything.
So you don't buy that the sort of lull of thirteen million plus barrels of oil per day of the US that are being pumped can really offset all of that geopolitical risk.
Well it has, I mean it's been a factor, but up to a point, right, I mean, you know, it depends on it doesn't upset all the geopolitical risk because it's not just about oil prices, it's about other commodities, it's about investment, it's about many many global supply chains.
Many many thanks.
We started the program this morning this afternoon by talking about what was about to happen in the United States and how Europe as a consonant would respond to it. What strikes me early on the World Economic Forum is the absence of a conversation out what an earth Europe is doing for itself, How broken the German growth model is, how it's been totally exposed over the last let's say two years, energy with Russia, the fractures with China, and where the United States stands on that, and maybe the ability or willingness of the United States to provide defense support if we do get the former president back in the White House. What is the European growth model going to be and what does that discussion sound like to you?
So, I mean, that's a really good question.
So a conversation I've had with many Europeans here is are you planning to do anything for your own defense? Do you realize that even if Biden wins, it's not clear we're going to be able to project defense spending at the same level. If there's two theaters, much less three theaters, you aren't. As far as I understand that Europe has depleted its stocks of munitions, Russia has built up its war machine, Europe not really.
That's just one example.
And I think you're asking about the European growth mod especially Germany, And you know, maybe my perception of watching this for a long time is that Germany was the sick man of Europe when I was at the IMF, that was the line, that was the headline of the economist. That was the two thousand, the early two thousands, and then they reinvented themselves with the reforms that they did that were made a little bit more easier to fireworkers and things like that, and then they've undone everything with pensions and everything. I mean, they've gone to a much more French style model, and they're getting French style you know, growth rates. And at the same time, China may not be the export destination that it was. The electric vehicles are coming from China instead of the other ways around. So I mean, I'm a believer in Germany that they the East Germany was successful under the they were the most successful of the Soviet Block. They will reinvent themselves, but it's not happening in the current administration. And so more broadly in Europe, you know, there's definitely a question of what their growth model is, and they a little bit like a deer caught in the headlights here of the Russia on one side, the US probably in retreat from Europe. If it's Trump because he's retreating from everything. If it's Biden because he's trying to spread himself too thin one way or the other, you know less in.
Europe, what are you doing about it? And I just get blank stares. So they don't have an answer yet. What about the US growth model.
And the deficit in the United States that they're running. In the next ten years or so, we'll be paying more on interest payments than our defense bills.
So I believe, and I said this last year when I visit you, that the era where interest rates through zero and everything's free is over. We never should have thought everything was free. Interest rates fell off a cliff after the financial crisis. If you look at the long history of interest rates and real interest rates is I have We've had periods where it's been low before, but they end.
We've had periods worth high before, but they end.
And I think we're much more on trend now in where interest rates are. If that's the case, then there's a lot more adjusting to do. And there seems to be zero political appetite in Washington. The only time they can kind of get things under control is when there's a divided government and.
They can't agree on anything. And they can't.
But I mean, certainly, if you get the Democrats sweeping into office in a bigger way than last time, you know what's going to happen.
And Trump will run deficits too.
I mean, I hate to predict anything he's going to do because the whole problems he's completely unpredictable. But there's no appetite for that, and I think, what is the endgame to that? The end games we're going to get these bounts of inflation like we had, and that's not an end in itself because then the bouts of inflation eventually feed into interest rates, and we don't believe that inflation's going back to two percent, and it's a bad cycle. We've seen this movie before.
Based on that.
Given the fact that everyone's expecting the FED to cut rates, possibly if you leave the market six times this year, what do you think is sort of the end place for this rate cutting cycle?
I mean, I think we end up at three and a half percent at the very end of this rate cutting cycle, something like that, and you know long term rates at four to four or five, you know, something like that in the very long run. But you know, we're I think, what happens in the next year, the sixth rate cuts, that's a pipe dream. If we have a soft landing, that's not happening. We'll get two or three. But there is a chance. I've said, the one thing we can probably be sure of is that whatever the consensus is here and not just here, it's going to be wrong. And if we get a deep recession, and definitely it could happen. How is it going to happen. I don't know, but twenty five percent chance it happens. Well, they will cut rates a lot, not six times. They could cut rates, you know, fifteen times I'm doing the math right, but a lot of.
Times you know too.
If that happens, they're going to drive interest rates to one percent, So that could be built into that sixth rate cuts possibly