Kenneth Rogoff
Appearances
Planet Money
Do trade deficits matter?
The mirror image of the trade balance is that these countries can take that dollar and they can go in, they can buy stock, they can buy treasury bonds, whatever.
Planet Money
Do trade deficits matter?
The right question is, why is your government running a deficit? Is it doing great investments? Is it building infrastructure? Is it doing schooling? Is it doing things that you want it to do? Are you happy with how you're borrowing?
Planet Money
Do trade deficits matter?
We have just danced over the rest of the world the last 20 years. We had the envy of the world. Our economy is not terrible. It at least wasn't until a couple of days ago. It is fantastic. And part of why we have a trade deficit is everybody wants in. They want to invest in the United States.
Planet Money
Do trade deficits matter?
In fact... We were doing so well. They wanted to have a bit of surplus with us so they could get in on the action. It's a complex system, but it hasn't worked badly for us.
Planet Money
Do trade deficits matter?
We tend to think it doesn't matter a heck of a lot unless it's giant and very big compared to what it was a year ago or two years ago. I have worried when it was really big.
Planet Money
Do trade deficits matter?
And it had gone up very, very sharply. And I thought something was wrong.
Planet Money
Do trade deficits matter?
We had relaxed our regulation too much, our banking regulation, our mortgage regulation, and we're making it too easy for people to borrow. And so that was sucking money in from the rest of the world. And they were investing.
Planet Money
Do trade deficits matter?
Think of your body. OK, you know, something hurts a little one day, doesn't the next day. And, you know, you go along, you get used to it. You don't even think about it. Think of that as a small trade deficit. And then one day, ah, you know, my arm hurts. OK, you want to go, you know, why is it hurting? What changed? What's different?
Planet Money
Do trade deficits matter?
Yeah, Kenneth Rogoff. I'm a professor of economics at Harvard University.
Planet Money
Do trade deficits matter?
No, that's right. And that mere action is you're contributing to the trade deficit when you do that.
Planet Money
Do trade deficits matter?
We just kill it in that stuff. We dominate. On the other hand, if you're looking at bicycles, no, we import them. But, you know, I mean, not everybody's good at everything is sort of the basic idea of trade.
Planet Money
Do trade deficits matter?
We don't have to sell them the same thing. We can sell them tech services. We can sell them banking. We don't have to sell them candy bars back.
Planet Money
Do trade deficits matter?
I'm not somebody who just automatically assumes if Trump did it, it's stupid, or if Trump did it, it's wrong. And actually, if he just put 10% tariffs on everyone, it's a tax. It's bad. Maybe I don't agree with him about who he's taxing and who he's not. If he just put the tariffs on and went home... Not a great idea, but let's not all get worked up about it.
Planet Money
Do trade deficits matter?
They just seem to pull this out of thin air because the boss doesn't like bilateral trade deficits.
Planet Money
Do trade deficits matter?
Just to be a little bit generous, he's concerned that if I just slap tariffs on China, they'll route it through somewhere else. That's been happening through Mexico. So he wants to stop gap that.
Planet Money
Do trade deficits matter?
My heart really bled for Sri Lanka. They've had a horrible financial crisis. It's just a terrible situation there. And we put a big tariff on them? For what? I mean, how are they going to dig their way out of their debt problem if they have those tariffs?
The Ezra Klein Show
Trump vs. the Dollar
it'll eventually, things will push up the price to make it equal. Workers can demand more. It'll still be competitive. The reason China stayed in there so long is... Keeping their currency cheaper than it would have been otherwise. They kept their currency cheaper mainly because they had... a huge number of people earning zero out in the hinterlands.
The Ezra Klein Show
Trump vs. the Dollar
They were bringing 12 to 15 million people a year into their cities to work. And that supply kept wages down. It kept their prices down. We could be on a gold standard. There's no dollar to manipulate. And we would have lost our manufacturing through trade like that. And by the way, most of our manufacturing jobs have been lost to automation, not trade.
The Ezra Klein Show
Trump vs. the Dollar
I mean, you're trying so hard to think about something sensible when I'm hearing polemics from them, like they know what they're supposed to say or finding arguments that can hold up for a second. On immigration, by the way, I favor having a lot of legal immigration. It would be a very good idea. It's certainly the case that when you have...
The Ezra Klein Show
Trump vs. the Dollar
Illegal immigration, it holds down the wages of low-income people. I mean, it's very hard to be competitive as a construction worker, certain parts of construction work, be a housekeeper, be a child care. It absolutely holds down. If we didn't have that, the wages would be higher. I mean, that has an effect.
The Ezra Klein Show
Trump vs. the Dollar
But as far as motivating us to do automation and what industries is he thinking about exactly that, you know, the immigration of the last few years has been an effect on that. I'm sure he can find something, but I think it's a stretch.
The Ezra Klein Show
Trump vs. the Dollar
The fact that the dollar rules allows us to control the global financial system to a remarkable degree. It's not just the dollar rules. It's also that we're the military power. The combination of those two things gives us the ability in global negotiations for How should the IMF vote, the International Monetary Fund? How should the networks of transactions between countries go?
The Ezra Klein Show
Trump vs. the Dollar
Who should see the information? We get such privileged access to information. It just all goes through us. And everyone hates it. Obviously, the Russians and Chinese hate it. But the Europeans hate it. In fact, the Europeans, forget the Chinese, they've been trying to figure out a way to get away from this.
The Ezra Klein Show
Trump vs. the Dollar
Look, to pick an example, in 1956, when the UK still thought it might come back, remember, they had ruled the world. The sun never set on the British Empire. And we were trying to put them down, and there was a crisis in Egypt, the Suez Crisis, and we said, Well, you're not doing what we want you to do. We're going to call in your loan. You know, we do that. I'm exaggerating a bit.
The Ezra Klein Show
Trump vs. the Dollar
But it's incredible power if you control funding. Sanctions is an obvious thing where we've been using that in lieu of military power, which, okay, go for it. We can debate how well that's worked. But believe me, they don't like it. Ten years ago, we were imposing sanctions on Iran. the Europeans didn't agree with us. And we said, okay, you don't agree with us.
The Ezra Klein Show
Trump vs. the Dollar
Forget about using our banking system, which just destroys them. Everyone has to use the U.S. banking system. And you go on and on. So they don't like the power that it gives us in these subtle ways. And again, as an American, you don't see it. Oh, I'm making the rules of the game. The game is great. I love everything about it. But if you're elsewhere, you feel it.
The Ezra Klein Show
Trump vs. the Dollar
So, Asia is a big part of the dollar block. They hold tons of reserves. Trillions and trillions of dollars of reserves are lent to us by Asia. They're very important to us. China is at the center of that. China's the most important trading country, even more important than the United States for many countries. China had been using the dollar for
The Ezra Klein Show
Trump vs. the Dollar
The technocrats had been telling them for a long time, this is dumb. You shouldn't be using the dollar. And the leaders were like, no, they don't want to change it. But when the full-scale invasion of Ukraine happened and they saw what we did to Russia, We didn't just sanction them. We took their central bank's money. I mean, we're not calling it a default, but of course it is.
The Ezra Klein Show
Trump vs. the Dollar
We froze over $300 billion. Well, the Chinese are looking at that, and they're also looking at the Russians having difficulty using Visa, MasterCard, the credit system, everything, using dollars. And they saw that, and you can't change it overnight, but they've been taking one step after another.
The Ezra Klein Show
Trump vs. the Dollar
And they've also, they used to peg their exchange rate and just basically try to make the renminbi, that's their currency, fixed against the dollar. Well, that's gone. And that's also moving people away from holding dollar reserves as much because part of why you're holding them was to protect against China. But where I saw the biggest problem was not the other countries wanting to change things.
The Ezra Klein Show
Trump vs. the Dollar
Where I saw the biggest problem was inside ourselves, Federal Reserve independence, which is the core of stabilizing the dollar and our inflation rate. debt, the view that it's a free lunch. These, I think, ultimately were going to come to bite us anyway. Save a couple words about why Federal Reserve independence is important here. okay, I mentioned that it used to be as good as gold.
The Ezra Klein Show
Trump vs. the Dollar
You didn't care if the Federal Reserve was independent. You didn't like what the Federal Reserve was doing, and you're Japan. You just take your money and you get gold. You're happy. Nowadays, there's nothing standing behind the dollar in its value. I mean, that's what you ultimately care about. That was the gold standard. What's standing behind the dollar is the Fed,
The Ezra Klein Show
Trump vs. the Dollar
that's our central bank, is promising not to intentionally inflate too fast and actually to try to average around 2%. I just have to mention, I wrote the first paper on central bank independence 45 years ago when nobody had independent central banks. So I'm biased of thinking it's a great idea. It's a relatively modern invention and, uh, It has worked.
The Ezra Klein Show
Trump vs. the Dollar
If you get rid of it, there's always a temptation. Any president, again, Trump is the world's, the recent history's crudest president. But what he's saying, he really wants the interest rate to be lower. That's what he wants. Believe me, Joe Biden wanted the interest rate to be lower. Obama did. And for your younger listeners, probably most of them younger than me, Nixon was brutal about this.
The Ezra Klein Show
Trump vs. the Dollar
You can actually listen to the Watergate tapes. And he's cursing the head of the Fed. And that led to the biggest inflation we ever had. I mean, that was a real example of losing Federal Reserve independence.
The Ezra Klein Show
Trump vs. the Dollar
I mean, it's still unfolding, but a short thing is the things I was predicting are happening on steroids. Much higher risk of inflation, undermining Federal Reserve independence, having a decline of the dollar. I think that would have happened under a Harris presidency, but it wouldn't have happened in three months. It would have happened, you know, unfolded over a longer period.
The Ezra Klein Show
Trump vs. the Dollar
There were larger forces. Another way of putting it is Trump didn't have a strong hand as he thought he had. He thought we were in just great shape. I can do anything, and we didn't.
The Ezra Klein Show
Trump vs. the Dollar
There's this thing called the Mar-a-Lago Accord, goes back to the Plaza Accord of the 1980s, trying to do a parallel. It actually tells China, okay, we're going to give you 100-year bonds, and I guess we're going to pick the interest rate on them, and you're not going to be able to sell them to anyone, and you're going to love us. And by the way, that's what you have to do.
The Ezra Klein Show
Trump vs. the Dollar
We're going to do that to our friends, our enemies, to everyone. We want the dollar to be dominant. We want you to supplicate. I mean, needless to say, That's a recipe for blowing up the global financial system, not for having stability. I'm just giving their contradictions.
The Ezra Klein Show
Trump vs. the Dollar
They say they want to be the reserve currency, but we're willing to be the reserve currency if we don't have to pay any interest, you can't do anything with the money, and we're basically defaulting. It is a partial default. It is a spectacular default.
The Ezra Klein Show
Trump vs. the Dollar
That's what everybody's doing. That's what he's catalyzing. Like I said, I thought this would happen over a long period, and he's making it happen on steroids. So yeah, he's undermining the rule of law. Trade, by the way, free trade is one of the core things. Just think about a world where we have 100% tariffs and you can't get your stuff in or out.
The Ezra Klein Show
Trump vs. the Dollar
Well, you're not going to invest in the United States then. That turns out to be true with a 10% tariff to a lesser degree. The fact our financial system's open. What about our university system, you know, sucking people in, helping integrate them into our culture, our openness to immigration? All of these things, you know, are being undermined that are our soft power. What about soft power?
The Ezra Klein Show
Trump vs. the Dollar
All these things are being undermined that are at the core of the dollar's strength.
The Ezra Klein Show
Trump vs. the Dollar
There are a lot of little pieces that remain to be seen, like the universities. But the tariffs were just the dumbest thing, the most incompetent thing. If he had just put on tariffs that were 10% on every one, we'd all get hysterical because it's bad for globalization. It would just not have been a big deal. It's a tax. Taxes are bad. It raises revenue. You could cut another tax.
The Ezra Klein Show
Trump vs. the Dollar
The problem is this let's make a deal, totally unpredictable. I have a friend who has a little business importing Italian wines, and she doesn't have a lot of capital. She needs to charge people in advance. What price is she going to charge them? The boat takes two months to come. She doesn't know what's going to happen. Look at bigger corporations. No one knows what's going on.
The Ezra Klein Show
Trump vs. the Dollar
Investments freezing up. It's the whole chaos, which I think you rightly described, you know, is just something he plans. I mean, he wants to make himself, everyone have to supplicate to him, and he's very good at that. But he can't do that to the markets. The only reason, and the only reason the markets haven't fallen more is this belief that
The Ezra Klein Show
Trump vs. the Dollar
Other things, he's historically often been pragmatic, and when he's screwed up, he declares, you know, that wasn't my opinion ever, and just changes his mind. And he seems to have a deeper-seated view about this. And the tariffs and the way he's doing it is such a disaster, because historically, the president is the person who's kept this in check. Actually, tariffs are very popular.
The Ezra Klein Show
Trump vs. the Dollar
My mother liked tariffs. I would explain, I mean, she knew I was a PhD economist. I'd say, yeah, but it makes the price of everything more expensive. She'd say, yeah, but I want to protect jobs for American workers. And I think when Trump came in, and I say this confidently, having talked to high-level people around him, he thought everyone loved tariffs.
The Ezra Klein Show
Trump vs. the Dollar
He looked at Bernie Sanders, which, by the way, was pretty similar, a lot nicer person, you know. But when it comes to trade, he saw himself as mimicking Bernie Sanders. I don't buy that. Oh, the whole NAFTA thing?
The Ezra Klein Show
Trump vs. the Dollar
I'll back off of that because I don't want to go there. But it's popular. It's not unpopular. And historically, Congress has pushed for tariffs. And I've met Congress people and senators over there. They all wanted tariffs. They'd ask me about tariffs. Can we have a tariff to protect our local firm? Wouldn't that be a good idea? We'd have local jobs.
The Ezra Klein Show
Trump vs. the Dollar
So there are all these different Congress people. They have their own districts, their own pressures, their own donations. And the president stood in the way. And here we have a president leading the way. So that's the big story that's happened. And it isn't over yet. Again, if he sticks to this, we have a lot longer down to go.
The Ezra Klein Show
Trump vs. the Dollar
So the most important thing is the English analogy. It's something everyone understands. Partly they know what it is, and partly they like it. It's something they know and trust. There are, I think, 150-plus currencies in the world, and just imagine two people trying to communicate with two currencies they never saw. Let's just deal in dollars. So that's a big part of it.
The Ezra Klein Show
Trump vs. the Dollar
It's the stability. It's not just the lower. It's what are they? They can do business if they know what it is. But if they don't know what it's going to be, and it depends on, you know, which side of bed Donald Trump wakes up on, and he's... Yeah, that's the problem, the total unpredictability of it.
The Ezra Klein Show
Trump vs. the Dollar
So I think it's a question of competency. People are saying if he's this bullheaded about this mistake, is this Trump... Many, many years later, older, is he the same pragmatist that we thought was there before? What if he isn't? If you look closely at his tax bill, it's Trump won plus a lot of nutty ideas.
The Ezra Klein Show
Trump vs. the Dollar
And people thought he wouldn't really do them, make Social Security not taxed, tips not taxed, changes in state and local, all these different things. Maybe he's serious. The crypto, maybe he's serious about it with if you deregulate too much as a problem. Maybe he's not competent. And the British used to have this thing with Liz Truss. You know, she was the prime minister for like a...
The Ezra Klein Show
Trump vs. the Dollar
you know, a nanosecond, and she came out with this policy she hadn't really sold, and everybody sold the pound, the interest rates went up, it collapsed, and they called it the moron premium because she just didn't understand. And people were talking in similar terms about what was going on here. I don't think it's just about the tariffs. The tariffs are terrible.
The Ezra Klein Show
Trump vs. the Dollar
That's a deeper loss of trust in the governance, the institutions.
The Ezra Klein Show
Trump vs. the Dollar
So the thing which was just a incredible moment for everybody was when the dollar was going down in value, but long-term interest rates were going up within a couple days after his announcement. The 10-year interest rate, which most people don't think about, but it is the bellwether of global financial markets. It's the most important market. It's the deepest market.
The Ezra Klein Show
Trump vs. the Dollar
Car loan, your student loan, everything gets referenced off the 10-year rate. Not what the Fed does. Everybody talks about this overnight rate the Fed sets. That's not it. It's the 10-year rate. Everyone looks at that. It's been going up. And suddenly, it jumped half a percent within a very short period. And usually the dollar goes up. The interest rates are higher.
The Ezra Klein Show
Trump vs. the Dollar
I'm going to put more of my money in the U.S. But no, the interest rate was going higher and the exchange rate was going down. That happens when people are selling. When whoever it was, the Chinese, everyone, there was people pulling out of dollar assets that we were, you know, it's sell America first. Is that dangerous? Did that reverse itself?
The Ezra Klein Show
Trump vs. the Dollar
It's stabilized for the moment because Trump has retreated partly. But what I thought might have taken 10 or 15 years to happen took place within a week. And we're never going back. So our exorbitant privilege, our lower borrowing, it's never going back to what it was. We may have lost a quarter percent, a half a percent, just permanently higher. We can have a recession to bring them down.
The Ezra Klein Show
Trump vs. the Dollar
It's like a common language. How did we build that trust? Part of how we built the trust early was the dollar was good as gold. And used to be your dollar bill that you have in your pocket actually said how much it was worth in gold. And you could take it to banks and get gold for it. And that actually continued for countries until just over 50 years ago.
The Ezra Klein Show
Trump vs. the Dollar
I don't want to get into that. But I don't think that bell will ever get unrung.
The Ezra Klein Show
Trump vs. the Dollar
We said the 10-year rate is the bellwether. I didn't say the four-year rate. It's the 10-year rate. And so what happens in the next election? What happens in the election after that? And it's possible we've shown we're willing to put a gun to everyone's head. And many of the things Trump does— other presidents have thought.
The Ezra Klein Show
Trump vs. the Dollar
Go back to the Watergate tapes and Nixon, where he recorded all his conversations. He's younger, he's very smart, but he's devious. And he's throwing those sharp elbows. He says somewhere, I don't give a damn about the Italian lira, you know, or something when the Italians were having a problem. So they're looking, peeking behind the curtain of what's going on.
The Ezra Klein Show
Trump vs. the Dollar
It's Trump's mind, and it's particularly unpredictable, but it's deeper in our DNA, the way social media is, the siloing of what everyone reads and watches and listens to. They're going to worry. It happened once. Why wouldn't it happen again? Twice. It happened twice. So yes, it's hard to understand what the plan is.
The Ezra Klein Show
Trump vs. the Dollar
It's definitely, I think we have lost trust in a way we're never going to get it back.
The Ezra Klein Show
Trump vs. the Dollar
I'm actually not someone who thinks Trump's 100% wrong about everything he says, but in this area, I'm struggling to think of what the logic would be. Let's go back to the economy is terrible. I mean, even the person in the low 20 percentile from the bottoms, very well off, even compared to probably near the middle of the Italian income distribution, or much less the world distribution.
The Ezra Klein Show
Trump vs. the Dollar
We have just taken flight during the 21st century. Europe, the economy, was the same size as the United States in the mid-90s, even into 2000. And their stock market was worth the same. We have had a period where the world has just looked at us in awe. And to come to the end of that period, everything's terrible. I mean, it's very hard to understand. It's like, there are things I need to fix.
The Ezra Klein Show
Trump vs. the Dollar
Income inequality, try to bring back meaningful jobs, and those are fine. But I think most of the solutions to those are domestic policy and things you could do differently and not kill the goose that lays the golden eggs.
The Ezra Klein Show
Trump vs. the Dollar
Their stock market was worth more. Actually, their housing stock was worth more. Japan's about the size of California, and it's hard to get your head wrapped around this, but its housing stock was worth more than the United States at one point. They just seemed like the coming thing, and that's what everybody thought. I don't think people anticipated what problems it would have.
The Ezra Klein Show
Trump vs. the Dollar
And I think had they not made some blunders, which we were lucky they did, and we threw some sharp elbows at Japan. I mean, that's a case, and maybe that's why the Mar-a-Lago Accord harkens back to when we beat up on Japan. We beat up on them. They gave into it. They made a mistake. They appreciated their currency by a lot more than they intended to.
The Ezra Klein Show
Trump vs. the Dollar
Well, we did. But we didn't tell anyone we were going to do that, and they weren't very happy about it. I mean, they were holding dollars because they were good as gold, and they literally meant gold. And when President Nixon in 1971 decided, hmm, I don't want to do that anymore, it was just a shock. It was actually, I think, the biggest shock until recently.
The Ezra Klein Show
Trump vs. the Dollar
And I'd say that's one of the things where I changed my mind over time about just how bad that was. I was sort of the view, well, you know, they had their own internal problems. They had a two-decade growth crisis starting in the early 90s. And, you know, that happened later. It happened six or seven years later.
The Ezra Klein Show
Trump vs. the Dollar
And I later came around to that's wrong, the view that, for example, the Chinese think That was a disaster. Japan gave in on that. They will never give in on it. And I always thought the Chinese were wrong, others. And I came around to, well, we set in motion changes that their society was not ready to handle. They didn't have a monetary framework. They didn't have a regulatory framework.
The Ezra Klein Show
Trump vs. the Dollar
And for a while, They were doing great, but then they weren't. So it was a surprise how much I felt. I was in Japan as a visiting scholar at the Bank of Japan in the early 1990s. I didn't know what was going on. None of my friends who were economists, nobody knew what was going on. I'd actually left the Federal Reserve and invested my small pension into Japanese stock. Seemed like a great idea.
The Ezra Klein Show
Trump vs. the Dollar
And it was if I had sold then instead of later. You can go back to other occasions where we were, when Europe, nobody knew it would fall as short as it did.
The Ezra Klein Show
Trump vs. the Dollar
We've had a little luck. So I like to quote this chess player I knew, Ben Larson, one of the great chess players. I played him, I knew him, and I was being interviewed, and he was asked, well, would you rather be good or lucky? And he thought for a second, I'd rather be good and lucky. And Americans know they've been good, but they don't know they've been lucky.
The Ezra Klein Show
Trump vs. the Dollar
And fast forward, I mean, our luck may have run out here, you know, that, that we've had a lot of good turns where the other team was making mistakes and we're, I don't even want to call it a known goal. It's like, what do they have those shootouts?
The Ezra Klein Show
Trump vs. the Dollar
This is being not good. Yeah. Yeah. No, but we're unlucky in the policies that the administration.
The Ezra Klein Show
Trump vs. the Dollar
Well, it's true because, you know, I mean, I don't blame everything on Donald Trump. I blame a lot on us. What would we have done otherwise? I mean, I know you've written a wonderful book about a brighter visions for the future, but our political system stuck on a lot of bad ideas on both sides. And this is us. It isn't just one person. Everything would just
The Ezra Klein Show
Trump vs. the Dollar
If we didn't have this one person, it's much deeper in our beliefs about ourselves, where we are, a certain rot in our system. I mean, maybe that's too strong to draw the analogy with Rome, but we can turn it around. We absolutely can. I hope we have great government that does, but we need to turn ourselves around in order to do that.
The Ezra Klein Show
Trump vs. the Dollar
And stepping back, because I think this is a fundamental point, there was this idea, particularly among progressives, but also on the right, that interest rates were just going to keep diving down. So it's never going to be an issue. But actually, the difference between having 60% debt, which is where we were about 2005 of your income, and 121% today, it's a big difference in what you can do.
The Ezra Klein Show
Trump vs. the Dollar
Just if you think stimulus is a good thing, if the debt fairy came along and took the 121% down to 60%, You could knock yourself out doing stimulus in coming years. And Donald Trump is going to hit this because the debt's gotten high. Interest rates have normalized. I think if you look at a long history, you never would have thought they would have stayed so low forever.
The Ezra Klein Show
Trump vs. the Dollar
The dollar's losing some of his exorbitant privilege. He's going to throw around money, and it's going to come to bite us. It's not the end of the world. It's a little bit hard to predict this man's mind. But there are two ways it can end, I think, for the United States. Default's not one of them. We don't need to do that. One would be inflation.
The Ezra Klein Show
Trump vs. the Dollar
I think the chances we get another inflation similar to the Biden era one or worse are very high, very high, 75% or more. In the next how long? The next five to seven years is what I say in my book. I've got to make that a little shorter, thanks to Donald J. Trump.
The Ezra Klein Show
Trump vs. the Dollar
Yeah, yeah. That's absolutely what I'm saying, because that's where this is going. But you've got to take out Powell.
The Ezra Klein Show
Trump vs. the Dollar
He'd need to commandeer the whole system because he only controls one position and the others could vote against it. So it's pretty stable. There's an incredible culture at the Fed.
The Ezra Klein Show
Trump vs. the Dollar
The Federal Reserve Board and the way- But that's the worry you're getting at here. The worry I'm getting is that he finds a way to corrupt the Federal Reserve. And the idea that he couldn't, of course he could if he needs to. I think a lot of people don't appreciate that the Fed's independence is not in the Constitution. Powell, he's the head of the Federal Reserve. It's not in the Constitution.
The Ezra Klein Show
Trump vs. the Dollar
With Team Congress and Trump acting together, they could bring it back into the Treasury. So you'd have to do that.
The Ezra Klein Show
Trump vs. the Dollar
I think the— Yeah, but depending on who they replace him with. Depending on who they replace him with. They're not going to reappoint Powell. They're not going to reappoint Powell. He would not want to be reappointed, would be my guess. But they're not going to reappoint him. But it's not just that. It's the whole construct. It's relatively new. It's not ancient that we've had that.
The Ezra Klein Show
Trump vs. the Dollar
It is a creature of Congress. It's not in the Constitution. It could get knocked out very quickly. But to have the inflation option requires that. There is another card he can play, and that's basically ramming debt down people's throats. The Japanese have done that. Japan has debt twice our size, but they've used, to use a jargon word, financial repression, repushing debt.
The Ezra Klein Show
Trump vs. the Dollar
The pension funds, the insurance companies, the banks, everybody has to hold government debt. And they've avoided a financial crisis, but there's not enough money to lend around to entrepreneurs, innovators. They've gone from being richer than us at the beginning of this to being below the UK, France, Germany. They've gone from roughly 60% of our income from having been higher.
The Ezra Klein Show
Trump vs. the Dollar
And it's partly this financial repression. So he has a couple of cards he can play. None of them are good.
The Ezra Klein Show
Trump vs. the Dollar
So liquidity is an important word, and it means if you want to sell it, do you have to pay a big discount? You know that if you want to sell your house, you can sell it, but it's not necessarily something you can sell quickly. So you're... I don't know, from India and you bought a treasury bill, you can sell it to anyone in the world. They know what it is.
The Ezra Klein Show
Trump vs. the Dollar
You can lose a lot of altitude. And I think people don't understand, I want to come back to this, is that if you just went back 20 years, nobody thought the dollar would... control so much of the world as it does. And I want to mention that because it's not so crazy that things would converge back to that.
The Ezra Klein Show
Trump vs. the Dollar
If they did, we'd pay a higher interest rate on our debt, not as much as if they didn't use the dollar at all. maybe we'd still be first among equals. It will affect our national security. Our ability to use sanctions is a heck of a lot of less. If you're Visa and you're the only credit card, you can tell people do this or you can't use Visa.
The Ezra Klein Show
Trump vs. the Dollar
But if there's American Express and MasterCard, you can't. It'll affect our information gathering, our intelligence. Modern intelligence is mostly cyber these days. It's not the James Bond, but somebody sitting with a laptop. And a A heck of a lot of that was our financial information. And if our national security is weaker, we have to spend more money in other ways.
The Ezra Klein Show
Trump vs. the Dollar
I mean, we'll regret it, but it's sort of not an overnight, we're talking about an inflation crisis. I think this loss of the dollars, magnitude. It comes down from the altitude. It's sort of a slower burn. We will feel it when that pandemic comes, when that crisis comes. People love us. They don't love us as much.
The Ezra Klein Show
Trump vs. the Dollar
We try to borrow typically two or three times what everyone else is borrowing, and suddenly, you know, the interest rates are moving up faster than they do now.
The Ezra Klein Show
Trump vs. the Dollar
We're not all going to be on Bitcoin. The multipolar is there. We lose market share. There's a natural network of that makes Amazon giant, that made Facebook giant, that makes Google search giant. The same thing's true in currency. And a lot of economists have these theories, well, therefore, the dollar's always gonna be there. But we live in a political world.
The Ezra Klein Show
Trump vs. the Dollar
There's a price, usually not a very big discount from whatever the market price is. Their currency is the rupiah. If you wanted to sell your rupiah abroad, you'd pay a big discount. So deep financial markets, rule of law, There are other things like open to trade because you can get your money in and out. We've had a very open system.
The Ezra Klein Show
Trump vs. the Dollar
It's not in China's, Russia's, it's not in Europe's interest to have us control everything. They are willing to pay a price in order to not have the dollar have as much power. And we're offering them a golden opportunity. I mean, China's already courting Africa, Asia, South Asia, especially Latin America. Europe is remilitarizing.
The Ezra Klein Show
Trump vs. the Dollar
They're realizing that, wow, this is a potential moment for the euro. So I think we lose footprint. I do think Bitcoin's in the mix, the cyber, because part of the dollar's footprint is is the non-tax-paying underground economy is very much a dollar economy. Nobody knows for sure how big that is. In my work, my estimate's 20%.
The Ezra Klein Show
Trump vs. the Dollar
Wait, 20% of the global economy is not paying, a lot of it's not paying taxes. And crypto is very useful there. It's been a real alternative. Aside from being electronic, you can do things more conveniently. It's more difficult to trace. So crypto is going to take up part of our market share. It's doing it. The renminbi is going to take up part of our market share. Not in New York, but somewhere.
The Ezra Klein Show
Trump vs. the Dollar
And the euro's going to take some of our market share. And we'll have settled to where we thought we were going to be 20 years ago, before we had this period. I just want to come back to something you said about military, actually. I think that's important. Basically, yes, I think a good system would be if everyone had to write a check to us and didn't build up their military.
The Ezra Klein Show
Trump vs. the Dollar
The trouble is, and I think presidents have faced this over the years, when they do that and it starts to get to be a big check, they want something for it. At the end of the day, we want to control things. We didn't really want NATO to be calling the shots. And when there are NATO missions, The U.S. is controlling them. We are the boss. We tell people what to do. We want it that way.
The Ezra Klein Show
Trump vs. the Dollar
So you wish they would just pay you a check, but then you find out it's sort of golden handcuffs at the end of the day. Of course, if they have their own powerful military, that's a whole other story when we disagree with them.
The Ezra Klein Show
Trump vs. the Dollar
Yeah, I mean, another way of putting it is everyone wishes they were us. I mean, this is the great power turning on itself and pulling into retreat. And I think we're going to wish we hadn't done it. The comedian Dave Chappelle said it very well. I want to wear Nikes. I don't want to make Nikes. And it's going to be a very different world. Always our final question.
The Ezra Klein Show
Trump vs. the Dollar
What are three books you'd recommend to the audience? Okay, well, I have a few books to recommend, but I have to start out with my wife's book, Muppets in Moscow, which I've given you as a present about the making of Sesame Street in the 1990s, which she oversaw hundreds of artists. The making of it in Russia.
The Ezra Klein Show
Trump vs. the Dollar
making of it in Russian, original version in Russian, overseeing directors, puppeteers, writers, and such. And it's in a period of tremendous instability. There was a lot of violence going around. It's an amazing book, and it's going to be a movie, I think, at some point. Another book that I just love and People have seen the series but haven't read the book.
The Ezra Klein Show
Trump vs. the Dollar
I want to be careful, though, about just saying the more we print, the more the demand for it. Nothing could be further from the truth. I mean, actually, as we have more and more debt, the interest rate we pay actually goes up after a while. So there's sort of a tradeoff. But nevertheless, we pay a lower interest rate than we would if we were another country trying to do the same thing.
The Ezra Klein Show
Trump vs. the Dollar
It's The Queen's Gambit by Walter Tevis. It is one of the most perfect books ever written. Kind of asks the question, what if Bobby Fischer, maybe the greatest chess player of all time, was a woman? How would it have played out? And the Netflix series was just majestical. And another book would be Walter Isaacson's Ben Franklin. I just hadn't known everything about him before.
The Ezra Klein Show
Trump vs. the Dollar
And he was the best chess player in the colonies, by the way, which, you know, I was a professional chess player. And he printed money. It was very technical. He figured it out. But, you know, what an amazing person. And I think an amazing book.
The Ezra Klein Show
Trump vs. the Dollar
So this moves us a bit into the question of what we get for this dominance. Why do we want other countries to buy dollars? It's free money to us. So when they literally are buying currency, which are like the dollar bills in your pocket, that doesn't pay any interest. And in a way, they're making an interest-free loan to us.
The Ezra Klein Show
Trump vs. the Dollar
And there's different estimates of how much is abroad, but it's at least a trillion dollars is held abroad, interest-free loan. much more important is that when they make loans to us in dollars, and that's the treasury, could even be your mortgage getting repurchased somehow, because it's in dollars, historically, it's paid a lower interest rate.
The Ezra Klein Show
Trump vs. the Dollar
You get a lower interest rate on your mortgage because someone in China likes dollars.
The Ezra Klein Show
Trump vs. the Dollar
So a short answer is for the government, half a percent to a percent, sort of the range of the estimates. That doesn't mean that we're paying a lower rate than Germany because we borrow so much more than Germany. Be very careful about that. But given how much we're borrowing, think of half a percent to a percent. And I said, what does that matter?
The Ezra Klein Show
Trump vs. the Dollar
When you owe 36 going on $37 trillion, that's real money each percent. But it's not just the government. It's your mortgage, your car loan. It pushes down interest rates all over. Those things like your mortgage and your car loan, They can get repackaged in some complicated way, pushed out to Germany, to Japan, to someone else. So it's affecting everything.
The Ezra Klein Show
Trump vs. the Dollar
People like to have dollars because it's the best known currency.
The Ezra Klein Show
Trump vs. the Dollar
Well, so the phrase exorbitant privilege was coined by Giscard d'Estaing, and literally, pardon my French, I'm not saying his name correctly, who didn't like the idea that the U.S. seemed to pay a lower interest rate. He didn't like the idea that we seemed to be able to borrow so much in a crisis.
The Ezra Klein Show
Trump vs. the Dollar
And he didn't like the idea that his country needed to hold dollars to fix its exchange rate, which they did. And we were able to take that money and invest it in factories in Europe. So it combined a lot of things. It's used today often just to refer to how cheaply you can borrow. During the pandemic, we borrowed
The Ezra Klein Show
Trump vs. the Dollar
twice as much as most other countries were borrowing, but just everybody else looking at us was still thinking, wow, we wish we could do that. And we were able to do it because, for starters, our debt was very low at the beginning, and also the interest rate just wasn't suddenly going up. So they look at it, and when these crises happen, they're trying, but we're able to do so much. And
The Ezra Klein Show
Trump vs. the Dollar
As you lose your privilege and also your debt gets really high, you find that when you try to do it again, not so much. That's really the risk. So that's definitely one of the benefits of being able to borrow a lot when you really, really need it.
The Ezra Klein Show
Trump vs. the Dollar
I mean, it's purely good for us, but where you have to be careful. For example, in the early 2000s, we made it a little too easy to come in here with your money and invest it in ways that the government was backing. We deregulated too fast. It was sucking money in. So we didn't just have the exorbitant privilege. We had, you know, you come here and not a lot of regulation. It's really cool.
The Ezra Klein Show
Trump vs. the Dollar
And that blew up into the financial crisis. So you want to be careful between everyone loves us because we're just so wonderful and everyone loves us because we're so stupid.
The Ezra Klein Show
Trump vs. the Dollar
You just hear it from the Trump administration, but it's not true. It's just not true. I think they conflate the stock market and houses and things like that, which are sort of investments. with buying a car. Buying cars is cheaper here than in most countries, just because it's more competitive and stuff like that. They're not the same thing.
The Ezra Klein Show
Trump vs. the Dollar
A lot of, even the economists you're talking to are saying that, I think are being a little incautious. So it's really a completely separate issue of what the exchange rate is. There have been times when the dollar is really cheap. Right now, it's really high. I mean, it's gone down, but it's still really high.
The Ezra Klein Show
Trump vs. the Dollar
The forces that affect exchange rates and prices are complex interaction of demand and supply and tastes and stuff like that.
The Ezra Klein Show
Trump vs. the Dollar
It's ridiculous. I mean, so let me just step back a second. You're drilling in on this, but forgive me. There's a certain romanticizing of manufacturing that you hear, that you used to hear about agriculture. I'm quite a bit older than you, but back in the 1970s— You look great, though. Back in the 1970s, you had the same ads where you see the person working on the machine line or something.
The Ezra Klein Show
Trump vs. the Dollar
You saw them about farmers. They were constantly showing the farmers. We had to help the farmers. And you know what? Those jobs went away, even though we're the agricultural powerhouse in the world because everything became mechanized. That's a lot of what's going on in manufacturing. What we blame on China, a lot of it just has to do with the way of the world. These jobs are going away.
The Ezra Klein Show
Trump vs. the Dollar
It doesn't matter if we don't trade with anyone, these jobs aren't going to exist. And that's just like a false sale that's being made about that. It'd be great to have middle-class jobs, but that kind of middle-class job just isn't going to be there anymore. And to blame that on the fact that everybody's using the dollar all over the place, it's silly.
The Ezra Klein Show
Trump vs. the Dollar
He is indeed, and he's very good. First of all, if you're in the Trump administration, you can have an opinion on many things, but you're not allowed to have an opinion on this. I mean, Trump has this as a religious belief, and everyone's dancing around trying to provide a rationale for it.
The Ezra Klein Show
Trump vs. the Dollar
I would say this same phenomenon of we're buying more from China or Germany than they're buying from us is their money's coming in. We're investing it. We're building stuff, not necessarily factories, but our biotech and medicine and services. And we're paying less than we would otherwise. We're getting a lot of benefits from it.
The Ezra Klein Show
Trump vs. the Dollar
And, you know, a lot of this has to do with that incomes are just really low in China and India and many other places. And if you have openness to trade, you can argue about that. But it's not because of the dollar. It's because you have openness to trade.
The Ezra Klein Show
Trump vs. the Dollar
It would affect our prices probably. You know, it would have affected the prices we have. Over time, if you push the exchange rate and make it too cheap, you'll get inflation. Wages would go up faster, and eventually it wouldn't be cheaper. I mean, so the argument you can use your exchange rate to manipulate by making things cheaper fails to see that if your things are cheaper,
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And I expect Asian-Americans particularly, but all of us are going to face a big hit.