Adam Posen Talks 'Credible' Dollar Threat

0:00For Begrim, one of Thailand's oldest established companies, growth does not begin with the deal. It begins with trust. Later in this podcast, here how that approach has taken the company from Thailand to South Korea and the United States. Bloomberg Audio Studios Podcasts, Radio, News Let's think a little bit more about what the latest spike in oil prices means for central banks and economies more broadly. Joining us now in the London studio is Adam Posen, President of the Peterson Institute for International Economics. Adam Posen, great to have you with us on Bloomberg Radio this morning. We're looking at another threshold being passed for oil and indication of how markets are perceiving the developments in the Middle East, but how important is a hundred dollars of barrel oil from a broader scale of things? It is more than just a psychological thresholds. Stephen, thanks for having me. I actually don't think it's that big a deal. In a sense, the more oil keeps spiking up or gas keeps spiking up, the more you start seeing

1:06changes in demand, the more you start seeing rerouting. I mean, the scary thing about the Houthis attacking in Saudis, the Saudis had managed to start rerouting a lot of their shipments and that's getting broken down and that has to be dealt with. But essentially, I think we're past the peak of oil impact on the major economies. It'll still be hard. It'll still be inflationary. But the longer this goes on, the less impact it has. Okay, the other thing happening in markets is the rise in yields in bond yields in Europe, in the US, particularly at the longer end of bond yields. Is this add, I mean, surely adds more pressure to that? Yes, Carolyn, I do believe that. I think we've got a lot of reasons why long bonds are going up in the US and most of the G7 economies and has to do with larger issuance in the face of defense, spending demographics, green outside of the US. It has to do with diminished savings falling from China and elsewhere into

2:10Western treasuries and guilds and so on. It has to do with the political situation that we cannot see the kind of resolution putting the track partially back on the rail that trained back on the rails the way we used to see recurrently every 10 years or so. In most democracies, we haven't seen that now for a while. So, there are a bunch of things pushing up rates and then the US treasury posturing about selling off US dollars to support the yen doesn't help either. Well, I want to ask you a little bit more about what we heard from Scott Bassant on his interventions on markets in terms of the yen. I mean, is there a warning, do you think, from the treasury secretary about what he could do in the future, or is it just a defense of what he's done so far? That's a fair question. I'm not sure. I know what I do know is if he chooses to degrade the dollar and let's be very clear that's what we're talking about, he can do so. I mean, it's hard for the Japanese to defend

3:15the yen. It's hard to defend a currency under attack. It's always easy for a finance minister, a treasury secretary to weaken a currency. So, it's a credible threat in that sense. It's very short-sighted because weakening the dollar isn't going to help anything, but it's a credible threat. Yeah, so a credible threat. But my main question is, why? Why do it? I think that's entirely fair and obviously Scott was saying the same thing. I think it's some weird combination of the president want something and the cabinet snaps to attention says, yes, or will get it done. I think it's an attempt to set things up ahead of the Xi Trump summit so they can ask China to do some things to strengthen its currency because they're saying, well, look, the yen is moving up, the Korean want is moving up and so on. And I think it's frankly just bad judgment on the part of U.S.

4:19Treasury in this administration that they think they're going to suit their goals by pushing down on the dollar and it's going to backfire. What are the goals that we should be understanding behind all of this? Is it about boosting trade from a weaker dollar or more? I mean, there is this school of thought that Vice President Vance has spoken of, Secretary Besent has spoken of, people associated with the administration have spoken of that. It's kind of like some things said about the pound in the city of London that by having the dollar be overvalued, by be a place where capital is attracted to it, distorts the economy, makes trade, in terms of net exports harder, it distorts against manufacturing. All of this is either exaggerated. U.S. manufacturing actually has been going up the value chain consistently for a couple decades now, so that's not the issue. Or it's mistaken because on net, the virtues of having lower inflation

5:24and lower capital costs for the economy as a whole and a lower interest bill for the U.S. government outweigh these issues. But that's the kind of thinking behind it is this mercantilist, while we got to get the trade deficit down. Yeah. In one of your pieces that you've written recently, you said this, the judicial and congressional branches in the U.S. have accepted overtly corrupt self-dealing and threatening extortion as the Trump administration's practice at home and abroad. One could argue that that view is clearly visible sitting here in Europe. Is it a view widely accepted within the U.S.? Thank you for reading. I'm sad to say Europe's right to accept the view. And there's a lot of denial in the U.S. I was at an event recently where I was on a Panos Luigi's in Golis, a very famous economist at UChicago Business School. And he is very big on

6:29pointing out how bad the corruption has gotten the U.S. and put in an international context. And meaning that it starts comparing to his native Italy in the past or Turkey today or things like that. And I support those views, unfortunately. But there's a lot of denial. There's denial. Both people just don't want to believe it. And there's denial that people who feel they have no choice but to go long don't want to criticize it. But I think the most important denial is among average voters who feel that everybody's corrupt just the Trumpies are a little more obvious about it. Does the reckoning come for that in the midterms this year? I would like to think so. Again, I'm not partisan, but I don't like seeing my government be corrupt and bullying. So I would like to see that kind of reckoning. A good place to watch for this is the Senate race in Texas where Talleriko, the Democratic nominee, clearly has a clean record, at least as far as anybody knows.

7:37And whereas Paxton, the Republican nominee, clearly has a record of abuse of power and corruption that documented. And we just had a Republican, I think it was a public prosecutor come out and Dorsetaleriko overnight. So, you know, I never know any one election can turn, any one state's election can turn. But I think watching, for example, the Texas Senate rate will let us know how people react. Yeah. We obviously don't have the Trump administration or any representatives of the Republican Party. I am sure that they would rip off allegations as strong as corruption. No doubt. But let's leave that aside. Putting that thought. Let's also think a little bit about Europe. I'm very interested to understand your views about Europe. And again, you know, for an evidence-based conversation, how serious you think that the fiscal

8:38concerns in Europe are? I mean, that is the issue now that is coming to the fore, the French presidential elections coming out. I see even those about this very much. Markets are not disorderly at the moment. Is this something that you think about? That you know, we've got actually quite a lot of an increased number of far right governments or far right political parties gaining some power in different countries. I think Italy, Germany, there's the Fox Party in Spain. And lots of those parties in Europe now. Yes. And Caroline, the important points I would keep in mind are first that somebody was saying over, talk discussing Argentina. You can decide your right wing and you hate the left wing or your left wing or you hate the right wing. But if you look at it econometrically evidence-based, as you say, both kinds of populists are bad for fiscal sustainability. And more

9:41importantly, if you have governments that pendule on swing between extremes, you tend to have less obeisance of rule of law, less obeisance of budgeting process, less compromise. So this is a bad scenario. What's chicken and what's egg that you're running out of fiscal room? And that makes people unhappy versus people's unhappiness causes the fiscal problem. Yeah. It's not clear. I think it's two ways. But the real thing to say is in the US, but in France and UK, even in Spain and Italy, in fact, Italy's been running a primary surplus for a while. There has been this sort of self-regulating mechanism that roughly every 10 years or so. It's in the data. Usually you get some kind of what we call the US bipartisan or another country's coalition. Government kind of move to put things somewhat back on the rails. Wouldn't fundamentally fix fiscal, but would normally get things on a

10:44decent path for several years. It would involve some combination of taxes and spending cuts and so on. And we've just not been seeing that. We didn't see it. We have seen very little of that again. Italy's actually a positive exception, but they had a crisis. But Greece is a positive exception, but they had a crisis. But since 2008, we just haven't seen that dynamic really kick in in any of the G7 democracies except maybe Italy. And so again, the question is, is that circumstance could you have COVID and the financial crisis or is that a political breakdown? And in the UK, it's harder to say a political breakdown, but in France or US, it certainly looks like it. Yeah, that's very interesting. Something that we will be thinking about a lot, I think, in the next few months. I mean, the fallout of Greece, of course, is, you know, wages still very low. The impact on real people's lives as a consequence of that crisis are still just very, very

11:45active. You're absolutely right to raise that. And again, the fact that you don't have an over breakdown disorderly market, as you put it, is not the same as this is costless. I mean, I think that's the key thing people have to understand. Then whether it's France, US, UK, or any of these major economies, you can have an extended period of higher interest rates and higher interest payments. And you crowd out more positive private investment, you crowd out more useful government services to pay interest and pay defense. And people suffer as a result. It doesn't mean that the world breaks down and you can't sell your bonds, but it's like the 70s and early 80s. It's a period where you are putting a burden on average people.

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