Special Edition: A Conversation with Lawrence H. Summers

Jeremy Allaire: Hello. I'm Jeremy Allaire. Welcome to The Money Movement, a show where we explore the issues and ideas driving this brave new world of digital currency and blockchains. Digital currency as an idea has captured the imagination of so many people. It's really been over the last 10 years. It's captured the imagination of students, of engineers, of financial professionals. It's also captured the imagination of economic leaders and increasingly global economic leaders who are grappling with what global digital currency means for the future of the international monetary system and how really economic systems work in general.

I think when people begin learning about digital currency, they can intuitively grasp that it is going to have a profound impact. It's going to lead to a different world, exactly how people have different opinions, but it seems to be something that really captures people's imagination, and intuitively, they see those changes. We saw a glimpse of that last week when on The Money Movement, we did a tour de force of showing stablecoins like USDC, traveling at the speed of the Internet, from Boston to London to Korea to Buenos Aires to Jakarta to Mumbai and moving between people and businesses and marketplaces all at the speed of the Internet and really trying to give people some insight into how this technology is changing what becomes possible in the world.

Today, we want to explore the future implications of digital currency with someone who has an incredibly profound and deep understanding of the global economic and monetary system. This is a person who has helped to steer the US and global economy across multiple White House administrations and who's been involved with a number of very important companies and projects that have defined the first wave of FinTech innovation. It's a great pleasure to welcome to the show, Lawrence H. Summers, the Charles W. Eliot University Professor, and Professor Emeritus at Harvard University, the US Secretary of Treasury for President Clinton, the Director of the National Economic Council for President Obama. Welcome, Larry. It's really great to see you.

Lawrence H. Summers: I am very glad to be here.

Jeremy: Thank you. I think the first time we chatted about the idea of global digital currency was literally about seven years ago. A lot has changed since then on many fronts, including in the realm of digital currency. I think there's increasingly a lot more to talk about than there was seven years ago.

Lawrence: I think that's certainly right. Certainly, those like you who have been pushing this movement forward in various ways I think have made substantial progress. I don't think we're anything like in the eighth inning yet, but perhaps we're out of the first inning. Maybe I should move from baseball to history and-

Jeremy: Can't get the season started yet, so it's a--

Lawrence: -paraphrase Churchill by saying that we're not at the end and we're not at the beginning of the end, but maybe we've gotten to the end of the beginning as there's a flourishing ecology in this area of payments and monetary innovation.

Jeremy: Very much so. I agree with you. It does feel like the end of the beginning. When we got started, we thought this will take 5 to 10 years to get to the place where you can actually do a lot of things that we imagined were possible. Then probably another 10 years before, it really has a big impact in the world. We're right on schedule, but maybe we can start-- I want to step away from digital currency first and focus in a little bit on the global economic crisis that's happening right now in front of us because I feel like the macro context is really important ultimately to the subject matter of the future of the international monetary system.

We heard obviously from the IMF yesterday or today their new forecast for the world economy declining 5% this year. The US economy down 8% this year. That actually even has some assumptions in it around, some return of economic activity. Maybe just to start, you got the US and then you've got the rest of the world, this economic crisis. Where do you think we are in this and maybe share a little bit of your outlook?

Lawrence: I think it's useful to distinguish between three phases. Collapse, bounce back, and slog forward. I think in the United States, at least for the moment, we are post-collapse. You saw that and the fact that unemployment came down from April to May, there were reasons to doubt those figures. You also saw a big increase in retail sales from April to May. I went for the first time in three months to a restaurant and sat indoors last night. I think you're seeing a bounce back from a collapse. That's the good news. I think the bad news is that it's far from clear how sustainable and continuing that bounce back is going to be.

We have pretty much opened up enough and have generated enough interaction that on a nationwide basis, we no longer really have the level of COVID or over time, the level of COVID death under control, and shrinking. Right now, it looks to me like we're going to be playing whack a mole with outbreaks for really quite some time to come. I doubt we're going to have another New York because I think there's more awareness of all of this, so we won't let things go as far as they did in New York before shutting down. I also don't think we're going to put this securely in the rearview mirror.

Anybody who thought it was going to get put securely in the rearview mirror without a vaccine just needs to contemplate what we've seen in the last 10 days in both Beijing and in Germany. I don't think that bounce back is going to be to anywhere anything like the previous levels that we'd reached. Then I think we're going to be slogging forward until we get to a vaccine. I hope that you and I and your listeners will all have been vaccinated a year from now. To be honest, that's not something I expect. I think the lag from the time that a drug company or a set of scientists announced a breakthrough, we have a vaccine.

Till it's been accepted, tested, practically implemented everywhere, I think those are rather long lags. My expectation would be that it will be quite some time. I don't think we're going to enjoy as rapid a recovery as people expected. I think something broadly parallel to that is true with respect to the rest of the world where you're going to always have a spots of maximum concern. My guess is that because the vaccine's likely to be available fairly pervasively here before it's available fairly pervasively globally, my guess would be that the rest of the world will trail the United States somewhat in terms of recovery.

Jeremy: That sounds pretty consistent with what I'm seeing as well. I guess connecting into the financial system a little bit here, first, obviously, this fundamental difference, the US economy, US recovery, US vaccination, et cetera, and then the rest of the world, obviously, sharply different abilities to execute fiscal policy, execute monetary policy, let alone public health responses. You have this and you have a knock-on effect of that, obviously, in terms of international economic activity and market activity, and so on. I guess one of the questions that we raised here on the show as well and I'd love to talk with you about is, are there scenarios where we really do see banking system risks, deeper solvency risks at the corporate and household level?

We can obviously distinguish between emerging markets and developed markets in the United States. Even here, obviously, in the United States, we know, fundamentally, it looks like the kind of reserve ratios have been strong, but there's also massive exposures in the form of these collateralized loan obligations, these so-called variable interest entities, subprime corporate debt and these commercial real estate bonds, a lot of these not even clearly on balance sheets. If we do see structural unemployment and whack a mole kind of situation economically, do we start to see more turnover in defaults, whether it's in the corporate debt or broader sectors? Does that create deeper system-wide risks?

Lawrence: Jeremy, there are a lot of aspects of that very thoughtful question. I guess I would say this. Historically, we've had two patterns of economic downturn. We've had the economic downturns that we had mostly between 1955 and the 1980s, in which inflation became a problem. The Federal Reserve hit the brakes hard. It wasn't able to fully control how I hit the brakes and so the economy skidded into recession. Once the Fed took its foot off the brakes, then the economy tended to restore itself. That's been one pattern.

A second pattern is the pattern we saw most dramatically in 2008, but to some extent, we saw in 2000 and in 1990, which is there was a period of substantial financial excess. The bubble started bursting, deleveraging started happening and you saw a bit of an economic implosion. More than a bit of an economic implosion in the case of 2008. In both those scenarios, you would expect the financial distress to lead the economic distress. Here, we're seeing something rather different. A substantial non-financial inhibition to economic activity, and so you'd expect the economic distress in some ways to lead the financial distress.

It can come from a number of forms, it can come from firms that are doing badly, losing the ability to meet their debt obligations. It can come from those with mortgage obligations stopping paying their mortgages. It can come from tenants not making their payments, knowing that their landlords don't really have a viable option of evicting them, either because of the law or because if they did evict them, how would they get a new tenant in their place? Or it can come because of international cross-border issues, where developing countries have difficulty repaying their debts.

Jeremy: All those together.

Lawrence: Come from all those together. I think there are a variety of potential sources of financial concern. Frankly, I think that the markets would have imploded completely. We likely would not have a solvent banking system today, if the fed had not acted to signal its commitment to backstop on a large scale. I think as long as the government is prepared to stand by the financial system, it's pretty unlikely that you're going to have spiraling bank runs and the like. I think we are moving to a substantially government-dependent financial system, which I think is likely to be what we're dealing with for quite some time to come. That is close to being without precedent.

Jeremy: Yes, I see that. Again, not to overfocus on the United States, as we look around the world, obviously, so many countries do not have the capacity that the Federal Reserve has. The Federal Reserve cannot be the lender of last resort to every emerging market in the world, every economy in the world. The fiscal and monetary tools are challenging. They're not going to allow total dollarization to overrun them. This cascades from non-economic to social and political upheaval and the cascading effects of that on markets and other things, too.

Lawrence: I think it's going to be very difficult and I think you're likely over time to get more and more financial distress in many emerging markets who are likely to have more trouble having the government stand behind their currencies. I think that's right.

Jeremy: It's actually a good segue into the topic of global digital currency and the backdrop. As we all know, Bitcoin itself was born out of the last financial crisis. It has a philosophy behind it, et cetera, which I think everyone's familiar with. Fundamentally, though, this technology rose out of the ashes of the last financial crisis. We don't need to get into all the details of Bitcoin and its role, but I think the idea that there's a fundamental technology and economic innovation, one that in this case, actually has been very grassroots. It's being built out of the image of the Internet, built out by a lot of smart technologists, computer scientists, economists, others.

Versus I think, historically, a lot of the economic system innovation was very top-down planned, as it were. We're now in another global economic situation. Unpredictable, as we've just discussed, exactly how that plays out. The role of global currencies, reserve currencies, how nations around the world manage their own fiscal policies in the face of some of the stresses that are now happening, it creates this environment where it's possible to start imagining new possibilities in the international monetary system around digital currency. Maybe before we go deep into any given theme, I'd love to have you share your high-level perspective on digital currency, on these public networks, Blockchain networks, and the use of digital currency in that context.

Lawrence: I've got a view which I think probably puts me intermediate between the Bitcoin evangelists and the high traditionalists who see no reason for it. Seems to me that the case for crypto historically rests on three pillars, of which I think one has a quite substantial chance of being valid and important and sufficient to support a very big table. I don't particularly believe the other two.

One case is a case that governments are going to debauch all the traditional currencies. The pressures of rising debt, dealing with crises, standing behind banking systems, all of that is going to lead to hyperinflation, and then people aren't going to want to be putting their money in currencies. They're going to be wanting to be putting their money in gold, but there are a variety of problems with gold, and so Internet exchangeable gold, in some proper form, is going to become immensely valuable. That's possible.

I don't read existing currencies as being on their way to being debauched. Seems to me that while certain monetary aggregate says measures have risen, there are good technical ways to understand that. You look ahead at market expectations from index bonds, people think that the real problem is that central banks in Japan, Europe, and the United States won't be able to meet their inflation targets of 2%. Won't be able to get inflation up to 2%, even over the next generation.

That might be a wrong bet, but I think the odds that traditional currencies are going to become so inflationary and it's going to be so difficult when they become inflationary to earn an interest rate on them that people are going to be seeking some separate, really scarce, hard asset. I just don't think that that's going to drive a major crypto industry. The second thing I think is that I don't think crypto is going to be accepted as some libertarian paradise. I know that there are people who believe that financial privacy in terms of the ability to transfer money is a fundamental human right and that without it, there will be a substantial infringement on freedom.

I understand those arguments, but I guess my attitude is more captured by the fact that the €500 gold is always referred to as the bin Laden, and that suggests something about what, when you have super privacy, tends to be a lot the result. I don't think governments will permit tax surveyors, money launderers, privacy cravers, and zealots to use this technology to advance their privacy relative to what they have now. I think if anything, around concerns about regulation, corruption, tax evasion, governments will want less financial privacy over time, and they will succeed in getting what they want.

I think the case for all of this innovation will lie in the fact that there's a ridiculous degree of friction in today's world around doing quite complex things. Whether it's the 8% in two days that it can cost me to send money to my kid when my kid is in a study abroad program. Whether it's the two and a half plus percent that it costs me every time I use a visa card in a department store. Whether it is the $3 I have to pay for the routine act of getting cash out. I could go on with examples of this kind. I think the friction both in terms of monetary payment and friction in terms of the effort that's involved in the exchange is excessive.

I think that the friction isn't just coming from the greed of the middlemen, middle people, although there is the greed of the middle people, it's coming from the various difficulties and challenges associated with mutual trust. As you know better than I, the computer science theory on which a lot of this is based was referred to as the Byzantine Generals Problem. How do you get a group of people who don't trust each other to nonetheless be able to do business together?

Innovation in institutional form that permits interaction where it otherwise wasn't possible, that's what the common law corporation was. That's what the contract was. I think the innovation that's coming out of the crypto community is very fundamental and we tend to associate the idea of innovation with new machines and new medicines, but it's also new ways of doing things

Jeremy: Yes, this is like social and institutional--

Lawrence: Right. I think it's a very, very important kind of innovation. My own view is that that's where the future lies, and I think it could be a very large and substantial future, but I'm not going to go with the arguments about the, all the other currencies are going to be debauched or the arguments about the centrality of privacy.

Jeremy: I think that our focus as we built this standard USD Coin, USDC. How do you take the leading reserve currency and make it available as a digital currency and get those trustless transactions, the speed of the Internet, the cost efficiency and the programmability, the composability, all these things you could do with it? I think that's very, very exciting. We're seeing that grow very fast and it's leading into a number of interesting questions, which do relate to the question of how governments are going to respond. I would say there's two areas to talk through.

One is really in some ways the threat that things like stablecoins might pose to governments around the world, where effectively you have digital currencies that can be accessed with any digital wallet on any smartphone, by anyone anywhere. As I like to say, people in pick your Latin American country, or maybe a South Asian country, or what have you, can vote with their smartphones. In the same way that they said, "Hey, I want to go over the top of the Internet and have a free communications platform like WhatsApp. I don't care about my local telephone company or my government-regulated communications system. I'm just using the Internet."

These kinds of digital currency innovations allow people to have an economic system that goes over the top of the Internet, and then people can choose to participate in that. Will governments allow that? Will they have a choice? It's a very interesting question. Then the other is sort of ultimately the relationship to central banks, but I want to maybe start with first and hear your thoughts on this can happen very fast. You talk about Libra and the rising growth of global stablecoins. The G20 and FSB is now coming up with policies on this to say, "Hey, what are the rules of the road for these?" but very quickly we could have people everywhere choosing which currency system they want to participate in a lot more easily than they can today.

Lawrence: I think it's a very hard thing to know. The metric system really is better than the English system. It's simpler, any calculation is easier, it's internally coherent between weights and volumes. It's just better, but the inertia of the network turns out to cause things to carry on for a very long time. I don't think we know how much inertia surrounds private behavior around a national currency. There is a phenomenon that has been observed at various junctures in Argentina, has been observed at various other junctures of dollarization.

When a national currency is sufficiently chaotic, incoherent, and uncertain, people start holding $100 bills and start holding $50 bills. There are US banks that are happy to ship them there. People start quoting prices in dollars because who knows what a price in pesos will mean, and economies become gradually dollarized, and then the dollar is their de facto currency. The fact that you don't have to hold paper wads, and you can do it with your cell phone and all of that-

Jeremy: Everyone is very comfortable with that in these places.

Lawrence: -probably operates in the direction of reducing the threshold of getting out of the local currency system. On the other hand, when people were getting into dollars, it was like the dollar with George Washington and 250 years of US tradition and all that. It's not that there haven't been incidents in the cryptocurrency community such as to cause alarm. I think it's going to be a source of pressure and there may be economies where there's a conversion. I suspect the general law about technology that things take longer to happen than you think they will and then they happen faster than you thought they could. I suspect that's going to be operative here.

Jeremy: Pick your time frame. We're seeing interesting indications of that. We all remember the Arab Spring, when all of a sudden people had the freedom to communicate with each other, and all of a sudden they were able to overthrow regimes. With the amount of fiscal and monetary stress that exists in a number of markets and that's sharpening obviously, and then this technology becoming effectively, widely available, scalable, et cetera, it's possible we could see some of that accelerate.

It does tie to I think a larger question, which is the advent of global digital currencies. The fact that a liability of the Federal Reserve, a dollar liability of the Federal Reserve can exist as a digital asset that can effectively exist anywhere the Internet exists. The fact that a liability of the People's Bank of China can exist as a digital currency, where effectively any Internet computer in the world can now settle directly with the People's Bank of China. That hasn't been anticipated.

We had a super structure, the [unintelligible 00:31:24] structure, Swift structure. We had the super structure now. These transactions and currencies can just happen directly over the Internet. I wonder if some of this leads us into re-thinking ideas of global currencies. The idea of synthetic global digital currencies that are composed of say a Chinese Yuan, a digital euro, a digital dollar and if that becomes more palpable over--

Lawrence: I think this can be a long time. I think this does have what I might call the Esperanto problem. Esperanto might have been a better language than any of the other languages. It might well be that everybody learning Esperanto really was a better thing, but people were pretty attached to what they were attached to. It was never quite able to get off the ground and get to a critical mass. I'm sure there'll be a variety of kinds of innovation, but I'd be surprised. I've been surprised many times before. If we got to some global digital currency that was what people thought in terms of in my life-time. I could be wrong.

I think we will see a ton of innovation that will work through stable coins, and it will permit cross-border exchange with more ease. At the end of the day, I think the power of the nation-state is pretty strong, and finance is pretty fundamental. I wouldn't expect it all to be swept away. I think the model is you had all these phone companies and they were really powerful and they were central, and then you had Skype and they didn't have a business anymore, and nobody could mess with people's ability to communicate. I'd be surprised if that was the story of the next 10 or 20 years in financial innovation with that degree of starkness, but I wouldn't be shocked.

Jeremy: I think one of the things that we've tracked really closely, and I've spent a lot of time both in China and know the folks who are building their digital currency. I think there is this desire for China to play a much larger role in the world economy. They obviously are. There has been a desire to have the Yuan play out a larger role in trade and settlement. I think there's also been a desire to have effectively a financial system that's not entirely controlled by the West and Swift.

With the development of the Chinese digital currency, effectively, they've created a model where a household, a firm, a nation state can directly transact and settle with China over the Internet. You don't need Swift. You don't need any of the regulations that control that. You can just bilaterally over the Internet start to achieve that. Obviously there's the infrastructure overlay of the Belt and Road and the growth aspirations there. I wonder whether we do see a digital currency native monetary systems that start to compete.

Lawrence: We might and you might be right. It's certainly a possibility. I think that all the things you said about China were true. I think the more fundamental thing is that they want to control the lives of their citizens, including the financial lives of their citizens, including the ability of their citizens to do what their citizens want to do, which is to take their cash out of the country. I think a system that freely enables moving wealth and resources out of a country is going to be a system that makes them deeply nervous. Then I think a system that is so restricted that it isn't possible to do that, isn't going to be much of a global digital currency. I'm not seeing this with nearly the [unintelligible 00:36:33] that the crypto community is. I have to confess.

Jeremy: I think that that's right. Not opening the capital account and not allowing RMB to trade freely, and liquid and so on is major gating piece here. The mechanism to allow RMB to have global reach is they built it, and all they needed was the Internet. Even within the intense constraints that they put around it and the control structure that they put around it. It does at least create a way to build an RMB denominated set of economic activity, that does not depend on a dollar-settled Swift system.

Lawrence: There may be some of that. In a different context, it's been my view that the US needs to scale back its abuse of the Swift system, to pursue its more parochial foreign policy objectives. I think if you want to operate a trusted public utility, you can derive some private benefit from the fact that you're operating a public utility. If you try to derive too much, people will no longer trust you to operate the public utility. I think the US has been pushing that margin in the way it's made use of the Swift system. If you ask me, is that going to play out? That we're going to keep pushing it and not take feedback from bad responses, to the point where things are likely to tip towards a Chinese digital currency, taking on a large part of global commerce. I wouldn't say impossible, but that wouldn't be where I'd be [unintelligible 00:38:22].

Jeremy: The whole bypass Swift thing is obviously not just China. It's even things like USDC, the stable coin. People can transact it directly. There's no Swift messages, there's no Swift transactions.

Lawrence: I think it's a hugely important issue. It's one that I've been wanting to study the relationship between this innovation and the power of the Swift system.

Jeremy: Absolutely. This has been a really wonderful conversation, covered a lot of ground. Deeply a appreciate it, Larry.

Lawrence: I've really enjoyed the chance to be with you, and I've admired your various innovative activities and those of circle over the years. Thank you very much.

Jeremy: Thank you. Have a great day.

Lawrence: Bye-Bye.

Jeremy: Bye, bye. Some really tremendous thinking and perspective from the secretary. Really, really pleased to have him sharing perspective here today. The tail end of that conversation actually really leads us into a topic which is actually going to be the topic of the next episode of The Money Movement, which will be in two weeks. We're going to be having a session on the implications of global digital currency from a governance perspective. How can global digital currencies function? How should they be governed? How should central banks interact with them, the private sector? What's the interaction of those? We're going to have two fantastic guests joining us. One is Sheila Warren who leads blockchain efforts for the World Economic Forum and in particular, has put together the digital currency global governance consortium, which is a consortium of central bankers, major financial institutions, leading crypto, market participants that are trying to drive towards policy and technology standards around global digital currency, and Dante Disparte who's vice chairman of the Libra Association, which itself is creating a form of governance around its new global digital currency project as well. It should be an excellent discussion in a couple of weeks. Hope you enjoyed today, and until next time, stay well, stay safe, and stay informed. Thank you.

[music]

[00:41:14] [END OF AUDIO]