Inflation, Interest Rates, & Productivity with Kenneth Rogoff of Harvard University
Kenneth Rogoff is Maurits C. Boas Professor at Harvard University and former chief economist at the IMF. His influential 2009 book co-authored with Carmen Reinhart, “This Time Is Different: Eight Centuries of Financial Folly,” shows the quantitative similarities across time and countries in the roots and aftermath of debt and financial crises. His 2016 book “The Curse of Cash” explores the past, present, and future of currency. He has long ranked among the top dozen most cited economists, and is an international grandmaster of chess.
At the 2024 World Economic Forum in Davos, Switzerland, Professor Rogoff joined Circle Co-Founder, Chairman, and CEO Jeremy Allaire for a wide-ranging conversation about the nexus of economics, technology, and policy.
In their Money Movement conversation, Jeremy and Kenneth covered:
- [2:02] – Interest rate trends
- [6:56] – China’s currency
- [10:40] – Modern monetary theory
- [13:11] – Radical tech disruption
- [26:14] – CBDCs and surveillance
Jeremy - 00:00:00: Money is changing. It's evolving. It's innovating. It's getting faster. Safer, more open.
Kenneth - 00:00:15: I think there's been this very wrong view that debt is a free lunch.
Jeremy - 00:00:32: Hi, I'm Jeremy Allaire, and this is The Money Movement. I'm here in Davos, Switzerland at the World Economic Forum, and I'm very privileged today to be joined by Ken Rogoff, renowned economist, tremendous thought leader in so many areas, and professor of public policy and economics at Harvard University. Ken, it's great to have you on the show.
Kenneth - 00:00:54: Thank you, Jeremy. It's a pleasure to speak to you.
Jeremy - 00:00:57: Excellent. Well, there's so many themes that we can talk about. So many topics. This should just be a lot of fun. Maybe we can start with an area that you've been very focused on for some period of time, and then we had a conversation around it, I guess, a couple of years ago, which is this research that you've been doing around long-term interest rates. And I'm going to do a poor job of teeing this up, but the kind of conventional wisdom after the financial crisis. The financial crisis was this sort of zero lower bound, negative interest rates. And you had people, very prominent people, kind of saying, like, this is the new normal. And then obviously, I think you've been working on this research well ahead of the surge of inflation that happened post-COVID as well. And I think in some ways, your research now feels like more of a mainstream economist's view, like if you ask people. Talk to me about the research, the thesis, and at a very high level, what you have found. And then we can talk maybe after that what some of the implications might be for a kind of global political economy as well.
Kenneth - 00:02:15: Yeah, so thank you. So after the financial crisis, interest rates, and in particular, real interest rates, fell off a cliff. Maybe if you look at the 10-year inflation index, US Treasury, it fell by almost 300 basis points. And my brilliant colleague, Larry Summers, started this very influential line of thought called secular stagnation. And he said, you know, they've been falling a long time. That's just how it's going to be due to low productivity, demographics, whatever. And I was always a little skeptical of that. I mean, his ideas are, you know, certainly valid in a lot of ways.
Jeremy - 00:02:53: He's made some good calls.
Kenneth - 00:02:55: He's made one or two good calls, and it's like, that's for darn sure. But I was very skeptical that it would be indefinite because it just fell so rapidly. And, you know, we saw that in the Great Depression and at other times. So it's definitely been a big theme in economic research where people look at the peak of interest rates in the Volcker just before when Volcker did his disinflation in the 80s. I mean, the short-term interest rates shot up to 18 percent and real interest rates were incredibly high. And if you draw a line, it just looks, wow, we're just on this trend. And I had a graduate student, Paul Schmelzing, and another former graduate student, Barbara Rossi, and we decided, well, why don't we look? At a longer time horizon of these things. I don't wanna get into the details, but we look at, based on Paul's historian, his data collection, we look at hundreds of years for lots of countries. There actually is a downward trend, but it's really slight, nothing like the sharp fall. And there have been many times interest rates gone up, they've gone down. And, you know, five or ten year periods where that happens, not unusual. So that's a casual statement looking at the data, and we've, you know, gone into it a lot. And, you know, it certainly looks like interest rates fell way below trend and said, yes, we started this years ago and wrote about how, you know, people may have been misled. Now, you know, that works both ways. So when there was the big jump in interest rates, our thesis is that these things tend to die out after a while, not after a month. I mean, think of the half-lifes being three years or something like that. But I think where we are now is probably in the range of where it's going to be. I'm talking about the real interest rate because the other piece of this is inflation. And, you know, I can give you structural reasons why that's true. That's not really what our research goes into. But some structural reasons would be debt is really high globally. That drives up interest rates. It's populism's redistributing income towards people who are going to spend it more. Green transition, if that ever happens. It's a big thing at Davos, as you know. Defense spending is probably going to have to go way up more than anybody's absorbed. And you can come to a range of things like this. So it is true that if you look at a year-to-year basis, real interest rates are just crazy volatile. But yeah, I think higher for a very long time would be the way to think about it.
Jeremy - 00:05:55: Yeah. So we'll all be excited for the publishing of your research. I hope so. I think it's a fascinating, it intersects with so many policy and political implications. And obviously, I was thinking about the fact that you worked on such a long historical time series or whatever you want to call it with that historical data. And I'm interested to hear your thoughts on, you know, Ray Dalio did his long-running, like, 500 years of these debt cycles.
Kenneth - 00:06:35: Kind of derivative from my work with Carmen Reinhart, extremely derivative.
Jeremy - 00:06:39: It seems like it, yes. And it's more surface narrative as opposed to really any kind of research.
Kenneth - 00:06:46: Yeah.
Jeremy - 00:06:47: But I'm curious about, Do you believe that we're in a secular decline from a debt super cycle that's happening for the dollar? And the charts are really fun to look at because they have these predictable arcs for these empires and the like. Is there a crossover point happening with the Chinese currency in the next 30 years? Or do you think the recent events have changed your view on that? Or is that just impossible to really know?
Kenneth - 00:07:24: I mean, I think the chances that the RMB is going to take over from the dollar in the next 30 years are zero. It's just not happening. But that doesn't say that they couldn't go off on their own. They've been in a big dollar block. And it's another thing I've worked on in papers about, you know, what are the precursors of when you see a currency break off. And, you know, they're looking at what we did to Russia.
Jeremy - 00:07:51: Yeah, weaponization of the dollar.
Kenneth - 00:07:53: Weaponization of the dollar. And, you know, even before that. The US controls a lot of the information flow. You know that very well in what you do. They don't like it. They don't want us being able to know everything they're doing. Now, we don't. But if it goes through the dollar, it's very hard for them to escape that. So they'd like to create other alternative pipelines and such to do that. And Asia is a huge part of the dollar block. So if China becomes more floating, which is something my classes at Harvard have had to debate on for years. And I think it's made sense for them to do that for a long time. But if that happens, it certainly will make the dollar the king of a smaller hill. But we're not going to be using the RMB here in Switzerland.
Jeremy - 00:08:49: Right, right. So you could imagine a more diverse currency basket, so to speak, that's operational in the world for more bilateral other types of things.
Kenneth - 00:09:01: More diverse, but maybe. And maybe, you know, more balkanized, too.
Jeremy - 00:09:05: More balkanized.
Kenneth - 00:09:06: Because part of the reason they're doing this is they have their designs on Taiwan. And who knows what that's going to lead to, you know, in the next phase of deglobalization. So, you know, it's a lot of volatility around that issue.
Jeremy - 00:09:22: Yeah, yeah. I guess the other dimension of that, and it ties into the, you know, the... Some of the fundamental central bank themes as well, which is sort of the the incredibly high cost of America's debt. And, you know, if we do have real interest rates that are more sustained and higher. There's kind of a physics issue there, and who's financing that? And if you have this balkanization, could you have a kind of fall-off-the-cliff scenario? Or as Larry's talked about in a different context, a wily coyote moment where you're like, wait a minute, and then just your ability to finance. The government just disappears.
Kenneth - 00:10:09: So I don't think anything that dramatic could happen unless we just hold our breath and say we're not going to pay our debt, which we periodically do. Well, that happened last year.
Jeremy - 00:10:19: No, I'm aware of that. We actually had to roll all of our bonds out of short-term treasuries because we were like, they might not. A lot of people do. Well, you want the liquidity.
Kenneth - 00:10:30: Yeah. I mean, it would have been an event. I don't think it's the same thing as a real giant default. It would have been a technical default. I mean, of course, we can inflate, and that's the solution. That's what we just did. But the trouble is when you keep doing that, people lose any belief that you're going to keep inflation low. So I think there's been this very wrong view that debt is a free lunch that both everyone's had. I mean, an extreme point of view would be what's called modern monetary.
Jeremy - 00:11:06: Exactly.
Kenneth - 00:11:06: Which is you can just do whatever you want as long as it's for the greater good.
Jeremy - 00:11:13: Politicians love it.
Kenneth - 00:11:14: The politicians, it's become the, you know, in Washington, just you can't crack. Yeah, absolutely. But in this world of interest rates being higher, not sky high, but not zero, more real interest rates, more in the one and a half percent range, suddenly when your debt's that big, it quickly gets out of hand if you don't do something about it. And we're running a $7 trillion deficit this year. You know, frankly, the paralysis in Congress is terrible in a lot of ways, but might provide short-term relief from that. But in the long run, it's, you know, they have not adjusted. And there'll need to be an adjustment unless interest rates come down. Now, that is contentious. I mean, that's my view. When real interest rates are zero. Debt is a free lunch, or it seems to be a free lunch. It's not if they turn out to be higher later, and that's what everyone believed. I think we're not going to be in that situation on a regular basis going forward. I mean, maybe we'll have a recession and interest rates will come down. But I think the typical 10-year rate over the next many years is going to be more in the 4% to 4.5% than the 2% to 2.5% range that people have gotten used to and correspondingly the real interest rate. And you can live with that. We did for centuries. But the current mentality is not to adjust. And what will happen eventually is inflation will sort that out. Very painful. You say, well, the Fed won't allow inflation. There's a lot of political pressures at some point, and they have to yield. I think we, I talked about real interest rates being higher. I think we also face a world. Over the next decade where inflation is not going to be 10%, but it's going to be more on the high side of 2 than on the low side of 2, and again, for these pressures.
Jeremy - 00:13:15: So there's so many places we can go with this. I'm not going to personally take the contrarian view, but I'll channel some people who take the contrarian view. I'll give two voices for a moment. One is Cathie Wood, who I think is, you know, a kind of a technology innovation maximalist and has sort of argued that, you know, we're on the cusp of just radical levels of productivity and that that's actually going to cause disinflation. Like we're going to continue to see disinflation. So put that in one bucket. The other is related, which was I watched an interview recently with Sam Altman. And, you know, he was making the argument that. Over the next five to seven years that we'll achieve AGI, that we will have a kind of radical compounding of certain technologies, AI being one of the predominant ones, and that it will cause an increase in essentially prosperity that is sort of unsurpassed in an incredible period. A little bit of Alvin Toffler coming through there in terms of the end of work or some of that kind of mentality. But there is sort of this thesis of radical technology disruption really changing the fundamental macroeconomic picture. And there's a linear version of where we are, and then there's this sort of nonlinear version. And are there any X factors like that that you think about that could cause a more disruptive change to the nature of pricing and everything else?
Kenneth - 00:15:06: Well, I've certainly spoken about that one for a long time. I've been a believer that we aren't in secular stagnation because of this and saying it forever. As you know, I had been a chess player in my youth, and I follow this very closely. It's stunning, and so it doesn't surprise me. That said, I think there's a lot of challenges ahead. How quickly this will unfold, what direction it's going to unfold. And if I could steer it away from the inflation for a second, I think there's a big issue about regulation. I sort of see two sides in the AI camp. One side's, you know, you don't regulate us quickly, we're going to destroy the world. And the other side is, you know, Well, I say it in a facetious way, but silicon intelligence is going to take over from human carbon-based intelligence, and that's fine. We should just roll into it. And I think, in fact, we need to do something. If you look at what happened with social media, I think that was handled really badly. That's an area where I agree with the progressives a lot, that we didn't regulate it enough. This is... Times 10, times 100. And so, unfortunately, you know, there's a lot of bad that comes with the good. We have elections coming up. And I noticed the number one concern at Davos was exactly AI interference. Yeah, it was Ian Bremmer's top risk. But there are many other variants of this. Not to mention, I heard the late Henry Kissinger speak on this, you know, not so long before he passed away. He was very concerned about what AI was going to do with warfare and stuff. So, although, you know, there's certainly great potential, it's, you know. Very difficult and we're in a situation of global geopolitical economic instability.
Jeremy - 00:17:09: Yeah, yeah. It's mind-numbing, sometimes it's incredible. You know, kind of coming back to some of the other dialogue and thinking about the kind of global outlook a little bit. I think, and this sort of balkanization and this concept of basically nation-states and blocks of nation-states. You know, trying to build out their own independent infrastructure. And you're seeing that obviously in terms of the, you know, kind of economic nationalism, technology, economic nationalism, all these things. But in the financial sphere, you know, you know, the, how do you think? A country like the United States. Where the dollar is such a significant advantage for it in many respects. How do you think the United States can continue to promulgate? The dollar technologically and you know kind of counter this around the world?
Kenneth - 00:18:20: I mean, it's a little bit of a tricky thing for the United States because the current regime favors the United States incredibly in so many ways. So I remember, you know, when I was growing up, the Swiss invented the electronic watch and that didn't turn out to be so good. You know, I grew up in Rochester, New York. They started digital cameras. Kodak made all its money from film. The United States is really not wanting to be the change agent here. And I think there's also a good reason for some innate conservatism. But obviously, and, you know, you're in the center of this, change is going to come. It's happening. And the question, you know, is how to play it. How should you go forward? Now, you mentioned there's a lot of countries trying to form their own rails. This is a winner-takes-all thing. There's room for a few.
Jeremy - 00:19:14: Power law curves.
Kenneth - 00:19:15: Yeah. There's. There's room for a few winners here. There's not room, any more room for 100 digital currencies than there is room for 100 fiat currencies. I mean, we have 100 fiat currencies. But if you look at any of the statistics, it's very much, like you said, a power curve. So I think the United States is probably, for many good reasons, going to hold back. But on the other hand, everyone has to consider that when the United States does move, it has a huge legacy advantages. That sort of weighs over. The FTA is going to have to go for everyone. So I mean, there are, you know, a lot of decisions to be made here between how much do we have publicly provided digital currencies? How much do we leverage privately digital currencies? How do we play this? And that feeds back into the regulation theme.
Jeremy - 00:20:06: Absolutely.
Kenneth - 00:20:06: Where they're, I have to say, still kind of clueless about what they're doing. I mean, I think FTX was a wake up call, you know, and I think you said a good way. And. I think that's why it's a good call. That's right. They're starting to realize, oh my gosh, this is happening and we need to do something. But they're still way behind the curve.
Jeremy - 00:20:24: Yeah, I think there certainly are major efforts to try and address it, but it has not landed yet in the United States. Although I remain cautiously optimistic about the payment stablecoin bill, which seems to have Fed, Treasury, you know, kind of bipartisan support. And they're sort of, you know, getting it right, making sure the Fed has the right role in it. And so that's moving. It's fascinating to see, you know, in almost every other major financial market center, you know, Japan, Hong Kong, Singapore, London, the entire EU, UAE, they all have stablecoin laws that are either on the books or going to be on the books this year. And all of those regimes have laws to regulate how basically digital dollar stablecoins will work in their markets. So the rest of the world is regulating the dollar on the internet before the United States, which says a little something about the effectiveness of American policymaking right now.
Kenneth - 00:21:25: You know, but when the euro markets developed in the 60s, way before we deregulated our markets, and we kind of watched it happen and then realized we needed to deregulate our markets.
Jeremy - 00:21:39: Right.
Kenneth - 00:21:40: So, I mean, it's that pattern where we're king of the hill and kind of watching what goes on.
Jeremy - 00:21:47: But then eventually when it moves.
Kenneth - 00:21:49: Yeah, I mean, I think so. But of course, we also have our... Forget about the currency. Political juncture, which is horrible, and the division. But even aside from that, just the way we're set up with so many state laws and so many regulators, even in normal times, if we had more political cohesion, it'd still be difficult. But I think it's something American authorities have to wake up to.
Jeremy - 00:22:18: They do. They do. And I think there hasn't been as much dialogue around the kind of national security, national competitiveness. I mean, I think everyone understands the fundamental kind of currency payment system competition. But there's sort of this building out of these alternative infrastructures, and that goes to the heart of the issue. And I think there are leaders in the national security, national economic apparatus that do understand that. But... Yeah. You know, it's still, it's not a top of mind.
Kenneth - 00:22:52: How do you think it interacts with cyber risks, if I can ask you a question?
Jeremy - 00:22:57: Yeah. I think significantly. You know, I am. You know. I have a view actually that the internet as it was designed, you know, was designed around this whole idea of kind of information wants to be free, open networks, and everyone kind of saw the benefits of that, right? You connect to a global network and it's this incredible, the network effects, right, of everything in society and the economy. It arguably helped fuel globalization. It's sort of all these things. But it also meant that, you know, everything was connected. And so you created these incredible new cyber risks, right? And so there's always this tension between, like, do you want to be part of the global system, and the Internet is itself a global system, or do you want to sort of have your own kind of hardened thing that's over here on the other side? And, you know, cryptography itself. Has been how we've addressed that. I mean, all of every, you know, whether it be a firewall or the connection between my computer and the website I'm visiting, it's all cryptography that has dealt with that. And so crypto, the concept is really about how do you use cryptography to prove data or prove transactions or prove computation or prove things on the internet. And so my own view has been that the next generation of the internet needs, it's sort of, the first generation did not have at its core this deep notion of security. And so blockchain technology is sort of this expression of actually if you want to have interoperable interactions economically over the internet, you really need like a new infrastructure layer that is made for that but also gets the benefits of that kind of public internet. Interactions on these networks. And so I think it's a critical piece of it and how those kind of come together. And a lot of times people hear the word crypto and they just think speculative trading of this, that or the other. But I think at a technology level, it's sort of really trying to solve some of these problems. And it actually ties to another theme I wanted to talk to you about, which was the whole premise of digital cash. And, you know, obviously you wrote a great book, The Curse of Cash, which I read recently. And I think we're in this space now where digital currency, you know, there's a lot of conceptions, right? And one conception is a government, kind of the state surveillance model where everything is known about everything that people do. And then there's, you know, the other, which is sort of privacy coins that are completely anonymous and have nothing to do with the government. And then there's sort of, is there a middle ground for digital cash? Different from kind of digital e-money, which is kind of what we know of today, like a PayPal balance or, you know, the kind of e-money we have or using a digital payment rail, but to actually have. These sort of electronic monetary instruments and how the benefits are significant, clearly. But this trade-off of security, privacy, financial integrity, and all that's very complicated. And you've thought a lot about that.
Kenneth - 00:26:27: Yeah. So I think where we'd like to be, if I might venture this, is to allow complete privacy for relatively modest transactions. I'm going to call it a few thousand dollars. But if somebody's doing a transaction of $50 million or even $5 million, no, it has to go through regulated authorities. Now, all the CBDCs have been trying to figure this out. I was a judge at a CBDC Hackathon Singapore held a couple of years ago for their own digital currency. It was interesting. It was interesting how a lot of places were trying to do this. And I think the typical idea was, well, we'll heavily gate past a certain size. We won't heavily gate the other size. But I think that's still kind of an unsolved problem. It is, yeah. Because you have to have the two pools talk to each other at the end of the day. And that provides a weakness. And I think that's where we want to be. We definitely don't want to be in a situation of total state surveillance. And I would just pick an example. For example, you could say, well, most people are sort of comfortable having some financial services entity know the transaction. But they don't want the government to know.
Jeremy - 00:27:55: Right. Air gap, which is the private sector air gap.
Kenneth - 00:27:56: They don't want their friends to know. The trouble is the legal system is not up to that. You're not protected, for example, if the government's arresting you. You're not protected in a divorce case. In that it can be problematic. You're not protected in a divorce case. You're not protected in a divorce case. And, of course, if you paid in cash, it wouldn't happen. And so how do you sort that out? And the legal systems weigh behind things in general with these things.
Jeremy - 00:28:25: And we're now talking about this is inherently global, right? I mean, the notion of territorial currency and the like. I mean, we had the phenomenon in media and communications on the Internet, which was sort of everything went over the top, right? I could just have a peer-to-peer video call with someone. Directly with someone. And there's no software. And there's no telecom, right? It's just – or email is this sort of thing. And information publishing crosses boundaries. Like there's no cross-border email or cross-border web browsing. It's just boom. And so certainly cryptocurrency as a technology has sort of promulgated all of a sudden. Like, hey, you have a piece of software and you're now in an economic system, whether it's a good one or a bad one, whatever. But it's sort of the sort of international dimension of this. It's moving at a very fast pace. And so it's, you know, there's sort of the how do you design something as a government? And then there's sort of what's happening in the world. And it's creating a lot of tough questions.
Kenneth - 00:29:26: So it gets back to the US Question that you asked. It does. I mean, at the end of the day, there has to be a home regulator.
Jeremy - 00:29:33: Yes.
Kenneth - 00:29:34: Because stateless currency eventually is going to get banned in big places like the United States and China because they have lots of reasons. They don't want to allow something that's not regulated. And You know, you could say, well, why don't we have the BIS regulator? Some international agency in the United States doesn't want that. And that's sort of a tension, you know, at the end of the day. I mean, there's always this idea, if you look at, you go back to my book, at the history of currency, private sector is actually always inventing clever stuff. And the government's always slow to catch up, but it does. And I think that's eventually going to happen here, that we aren't going to have a stateless currency that's significant in the legal economy. Now, a qualifier is the world underground economies. Huge. Maybe 20% of global GDP. At least those are my estimates. And you can't, you don't control that as much. And so there is always going to be a market for Bitcoin and things which are stable. Stateless currencies there. And I'm not saying that's not valid. I'm not. But we have to, you know, look at that separately. That market's not going away. And even if, you know, the United States tries to regulate it into oblivion, it's still going to thrive in some areas that are significant.
Jeremy - 00:31:00: Yeah, yeah, for sure. Another related theme just to touch on, and I know you spent time at the IMF. Shortly after the financial crisis, the IMF, a number of the IMF itself, I think it was at the time under Christine Lagarde, and a number of central banks were interested in, you know, wow, because the US Was the epicenter of the financial crisis and everything. Sort of asking questions about. Evolving international currency models. And there was a minor push, not a major push, a minor push around, could you commercialize the SDR and all these things. And it ties together with some of these things thematically, which is that in a world of like internet-based currency competition, where, you know, kind of you have this ability to create kind of global network effect scale on the internet very quickly. And in a world where, you know, for the participants in those economies, if I'm in Nigeria or Turkey or India or wherever, and I have a mobile device and I'm sort of accessing these things, it's harder for governments to kind of, they can have a lot of power, don't get me wrong. But the sort of monetary sovereignty questions get more complicated. You know, Is there an end state a long way from now? I'm not suggesting anytime soon. But is the result of that technological evolution and the sort of shifts in what happens, is the result that we're back at asking those questions? Maybe it takes some really bad things happening in the world to bring people back to the table on something like that. But is there a point where, you know, the sovereigns, as it were, sort of say, you know what, we're better off with some adaptation that becomes a more global unit of account? Is that a scenario that could play out?
Kenneth - 00:32:56: Well, it's a very deep and interesting question. You know, there's a lot of the world, the vast majority of the world would like something like that to happen. On the other hand, you need a unit of account.
Jeremy - 00:33:10: Yeah.
Kenneth - 00:33:11: And it's hard to see it moving away from the dollar in the foreseeable future. And if the unit of account is the dollar, it just gives the US this huge advantage. It's hard to have a clearinghouse in Europe per dollars on scale with a clearinghouse in the United States. Because if there's a crisis, the Fed can back the one in the United States, doesn't have to back the one in Europe. That creates a premium in Europe and gives an advantage. That's sort of at the core of the US's advantage. Now, I don't see the digital world as getting around that conundrum. You need a unit account. Now, We could go to gold or something like that. I mean, so somebody may come up with something where there's an accepted unit of account. But, you know, there were problems with the gold standard when we had debt crises and financial crises.
Jeremy - 00:34:10: Right.
Kenneth - 00:34:10: We talked before about the US If we were on a gold standard, man, would we be in trouble with our debt trajectory.
Jeremy - 00:34:17: So the need for society to have some stability combined with the desirability of universal units of account and the like. Well, these are big, big topics.
Kenneth - 00:34:30: Indeed.
Jeremy - 00:34:31: Interesting to play out. Well, Ken, this has been a wonderful conversation.
Kenneth - 00:34:35: Always great speaking with you, Jeremy.
Jeremy - 00:34:37: Great to have you and have a great forum.
Kenneth - 00:34:40: You too.
Jeremy - 00:34:42: Thank you.
Kenneth - 00:00:15: I think there's been this very wrong view that debt is a free lunch.
Jeremy - 00:00:32: Hi, I'm Jeremy Allaire, and this is The Money Movement. I'm here in Davos, Switzerland at the World Economic Forum, and I'm very privileged today to be joined by Ken Rogoff, renowned economist, tremendous thought leader in so many areas, and professor of public policy and economics at Harvard University. Ken, it's great to have you on the show.
Kenneth - 00:00:54: Thank you, Jeremy. It's a pleasure to speak to you.
Jeremy - 00:00:57: Excellent. Well, there's so many themes that we can talk about. So many topics. This should just be a lot of fun. Maybe we can start with an area that you've been very focused on for some period of time, and then we had a conversation around it, I guess, a couple of years ago, which is this research that you've been doing around long-term interest rates. And I'm going to do a poor job of teeing this up, but the kind of conventional wisdom after the financial crisis. The financial crisis was this sort of zero lower bound, negative interest rates. And you had people, very prominent people, kind of saying, like, this is the new normal. And then obviously, I think you've been working on this research well ahead of the surge of inflation that happened post-COVID as well. And I think in some ways, your research now feels like more of a mainstream economist's view, like if you ask people. Talk to me about the research, the thesis, and at a very high level, what you have found. And then we can talk maybe after that what some of the implications might be for a kind of global political economy as well.
Kenneth - 00:02:15: Yeah, so thank you. So after the financial crisis, interest rates, and in particular, real interest rates, fell off a cliff. Maybe if you look at the 10-year inflation index, US Treasury, it fell by almost 300 basis points. And my brilliant colleague, Larry Summers, started this very influential line of thought called secular stagnation. And he said, you know, they've been falling a long time. That's just how it's going to be due to low productivity, demographics, whatever. And I was always a little skeptical of that. I mean, his ideas are, you know, certainly valid in a lot of ways.
Jeremy - 00:02:53: He's made some good calls.
Kenneth - 00:02:55: He's made one or two good calls, and it's like, that's for darn sure. But I was very skeptical that it would be indefinite because it just fell so rapidly. And, you know, we saw that in the Great Depression and at other times. So it's definitely been a big theme in economic research where people look at the peak of interest rates in the Volcker just before when Volcker did his disinflation in the 80s. I mean, the short-term interest rates shot up to 18 percent and real interest rates were incredibly high. And if you draw a line, it just looks, wow, we're just on this trend. And I had a graduate student, Paul Schmelzing, and another former graduate student, Barbara Rossi, and we decided, well, why don't we look? At a longer time horizon of these things. I don't wanna get into the details, but we look at, based on Paul's historian, his data collection, we look at hundreds of years for lots of countries. There actually is a downward trend, but it's really slight, nothing like the sharp fall. And there have been many times interest rates gone up, they've gone down. And, you know, five or ten year periods where that happens, not unusual. So that's a casual statement looking at the data, and we've, you know, gone into it a lot. And, you know, it certainly looks like interest rates fell way below trend and said, yes, we started this years ago and wrote about how, you know, people may have been misled. Now, you know, that works both ways. So when there was the big jump in interest rates, our thesis is that these things tend to die out after a while, not after a month. I mean, think of the half-lifes being three years or something like that. But I think where we are now is probably in the range of where it's going to be. I'm talking about the real interest rate because the other piece of this is inflation. And, you know, I can give you structural reasons why that's true. That's not really what our research goes into. But some structural reasons would be debt is really high globally. That drives up interest rates. It's populism's redistributing income towards people who are going to spend it more. Green transition, if that ever happens. It's a big thing at Davos, as you know. Defense spending is probably going to have to go way up more than anybody's absorbed. And you can come to a range of things like this. So it is true that if you look at a year-to-year basis, real interest rates are just crazy volatile. But yeah, I think higher for a very long time would be the way to think about it.
Jeremy - 00:05:55: Yeah. So we'll all be excited for the publishing of your research. I hope so. I think it's a fascinating, it intersects with so many policy and political implications. And obviously, I was thinking about the fact that you worked on such a long historical time series or whatever you want to call it with that historical data. And I'm interested to hear your thoughts on, you know, Ray Dalio did his long-running, like, 500 years of these debt cycles.
Kenneth - 00:06:35: Kind of derivative from my work with Carmen Reinhart, extremely derivative.
Jeremy - 00:06:39: It seems like it, yes. And it's more surface narrative as opposed to really any kind of research.
Kenneth - 00:06:46: Yeah.
Jeremy - 00:06:47: But I'm curious about, Do you believe that we're in a secular decline from a debt super cycle that's happening for the dollar? And the charts are really fun to look at because they have these predictable arcs for these empires and the like. Is there a crossover point happening with the Chinese currency in the next 30 years? Or do you think the recent events have changed your view on that? Or is that just impossible to really know?
Kenneth - 00:07:24: I mean, I think the chances that the RMB is going to take over from the dollar in the next 30 years are zero. It's just not happening. But that doesn't say that they couldn't go off on their own. They've been in a big dollar block. And it's another thing I've worked on in papers about, you know, what are the precursors of when you see a currency break off. And, you know, they're looking at what we did to Russia.
Jeremy - 00:07:51: Yeah, weaponization of the dollar.
Kenneth - 00:07:53: Weaponization of the dollar. And, you know, even before that. The US controls a lot of the information flow. You know that very well in what you do. They don't like it. They don't want us being able to know everything they're doing. Now, we don't. But if it goes through the dollar, it's very hard for them to escape that. So they'd like to create other alternative pipelines and such to do that. And Asia is a huge part of the dollar block. So if China becomes more floating, which is something my classes at Harvard have had to debate on for years. And I think it's made sense for them to do that for a long time. But if that happens, it certainly will make the dollar the king of a smaller hill. But we're not going to be using the RMB here in Switzerland.
Jeremy - 00:08:49: Right, right. So you could imagine a more diverse currency basket, so to speak, that's operational in the world for more bilateral other types of things.
Kenneth - 00:09:01: More diverse, but maybe. And maybe, you know, more balkanized, too.
Jeremy - 00:09:05: More balkanized.
Kenneth - 00:09:06: Because part of the reason they're doing this is they have their designs on Taiwan. And who knows what that's going to lead to, you know, in the next phase of deglobalization. So, you know, it's a lot of volatility around that issue.
Jeremy - 00:09:22: Yeah, yeah. I guess the other dimension of that, and it ties into the, you know, the... Some of the fundamental central bank themes as well, which is sort of the the incredibly high cost of America's debt. And, you know, if we do have real interest rates that are more sustained and higher. There's kind of a physics issue there, and who's financing that? And if you have this balkanization, could you have a kind of fall-off-the-cliff scenario? Or as Larry's talked about in a different context, a wily coyote moment where you're like, wait a minute, and then just your ability to finance. The government just disappears.
Kenneth - 00:10:09: So I don't think anything that dramatic could happen unless we just hold our breath and say we're not going to pay our debt, which we periodically do. Well, that happened last year.
Jeremy - 00:10:19: No, I'm aware of that. We actually had to roll all of our bonds out of short-term treasuries because we were like, they might not. A lot of people do. Well, you want the liquidity.
Kenneth - 00:10:30: Yeah. I mean, it would have been an event. I don't think it's the same thing as a real giant default. It would have been a technical default. I mean, of course, we can inflate, and that's the solution. That's what we just did. But the trouble is when you keep doing that, people lose any belief that you're going to keep inflation low. So I think there's been this very wrong view that debt is a free lunch that both everyone's had. I mean, an extreme point of view would be what's called modern monetary.
Jeremy - 00:11:06: Exactly.
Kenneth - 00:11:06: Which is you can just do whatever you want as long as it's for the greater good.
Jeremy - 00:11:13: Politicians love it.
Kenneth - 00:11:14: The politicians, it's become the, you know, in Washington, just you can't crack. Yeah, absolutely. But in this world of interest rates being higher, not sky high, but not zero, more real interest rates, more in the one and a half percent range, suddenly when your debt's that big, it quickly gets out of hand if you don't do something about it. And we're running a $7 trillion deficit this year. You know, frankly, the paralysis in Congress is terrible in a lot of ways, but might provide short-term relief from that. But in the long run, it's, you know, they have not adjusted. And there'll need to be an adjustment unless interest rates come down. Now, that is contentious. I mean, that's my view. When real interest rates are zero. Debt is a free lunch, or it seems to be a free lunch. It's not if they turn out to be higher later, and that's what everyone believed. I think we're not going to be in that situation on a regular basis going forward. I mean, maybe we'll have a recession and interest rates will come down. But I think the typical 10-year rate over the next many years is going to be more in the 4% to 4.5% than the 2% to 2.5% range that people have gotten used to and correspondingly the real interest rate. And you can live with that. We did for centuries. But the current mentality is not to adjust. And what will happen eventually is inflation will sort that out. Very painful. You say, well, the Fed won't allow inflation. There's a lot of political pressures at some point, and they have to yield. I think we, I talked about real interest rates being higher. I think we also face a world. Over the next decade where inflation is not going to be 10%, but it's going to be more on the high side of 2 than on the low side of 2, and again, for these pressures.
Jeremy - 00:13:15: So there's so many places we can go with this. I'm not going to personally take the contrarian view, but I'll channel some people who take the contrarian view. I'll give two voices for a moment. One is Cathie Wood, who I think is, you know, a kind of a technology innovation maximalist and has sort of argued that, you know, we're on the cusp of just radical levels of productivity and that that's actually going to cause disinflation. Like we're going to continue to see disinflation. So put that in one bucket. The other is related, which was I watched an interview recently with Sam Altman. And, you know, he was making the argument that. Over the next five to seven years that we'll achieve AGI, that we will have a kind of radical compounding of certain technologies, AI being one of the predominant ones, and that it will cause an increase in essentially prosperity that is sort of unsurpassed in an incredible period. A little bit of Alvin Toffler coming through there in terms of the end of work or some of that kind of mentality. But there is sort of this thesis of radical technology disruption really changing the fundamental macroeconomic picture. And there's a linear version of where we are, and then there's this sort of nonlinear version. And are there any X factors like that that you think about that could cause a more disruptive change to the nature of pricing and everything else?
Kenneth - 00:15:06: Well, I've certainly spoken about that one for a long time. I've been a believer that we aren't in secular stagnation because of this and saying it forever. As you know, I had been a chess player in my youth, and I follow this very closely. It's stunning, and so it doesn't surprise me. That said, I think there's a lot of challenges ahead. How quickly this will unfold, what direction it's going to unfold. And if I could steer it away from the inflation for a second, I think there's a big issue about regulation. I sort of see two sides in the AI camp. One side's, you know, you don't regulate us quickly, we're going to destroy the world. And the other side is, you know, Well, I say it in a facetious way, but silicon intelligence is going to take over from human carbon-based intelligence, and that's fine. We should just roll into it. And I think, in fact, we need to do something. If you look at what happened with social media, I think that was handled really badly. That's an area where I agree with the progressives a lot, that we didn't regulate it enough. This is... Times 10, times 100. And so, unfortunately, you know, there's a lot of bad that comes with the good. We have elections coming up. And I noticed the number one concern at Davos was exactly AI interference. Yeah, it was Ian Bremmer's top risk. But there are many other variants of this. Not to mention, I heard the late Henry Kissinger speak on this, you know, not so long before he passed away. He was very concerned about what AI was going to do with warfare and stuff. So, although, you know, there's certainly great potential, it's, you know. Very difficult and we're in a situation of global geopolitical economic instability.
Jeremy - 00:17:09: Yeah, yeah. It's mind-numbing, sometimes it's incredible. You know, kind of coming back to some of the other dialogue and thinking about the kind of global outlook a little bit. I think, and this sort of balkanization and this concept of basically nation-states and blocks of nation-states. You know, trying to build out their own independent infrastructure. And you're seeing that obviously in terms of the, you know, kind of economic nationalism, technology, economic nationalism, all these things. But in the financial sphere, you know, you know, the, how do you think? A country like the United States. Where the dollar is such a significant advantage for it in many respects. How do you think the United States can continue to promulgate? The dollar technologically and you know kind of counter this around the world?
Kenneth - 00:18:20: I mean, it's a little bit of a tricky thing for the United States because the current regime favors the United States incredibly in so many ways. So I remember, you know, when I was growing up, the Swiss invented the electronic watch and that didn't turn out to be so good. You know, I grew up in Rochester, New York. They started digital cameras. Kodak made all its money from film. The United States is really not wanting to be the change agent here. And I think there's also a good reason for some innate conservatism. But obviously, and, you know, you're in the center of this, change is going to come. It's happening. And the question, you know, is how to play it. How should you go forward? Now, you mentioned there's a lot of countries trying to form their own rails. This is a winner-takes-all thing. There's room for a few.
Jeremy - 00:19:14: Power law curves.
Kenneth - 00:19:15: Yeah. There's. There's room for a few winners here. There's not room, any more room for 100 digital currencies than there is room for 100 fiat currencies. I mean, we have 100 fiat currencies. But if you look at any of the statistics, it's very much, like you said, a power curve. So I think the United States is probably, for many good reasons, going to hold back. But on the other hand, everyone has to consider that when the United States does move, it has a huge legacy advantages. That sort of weighs over. The FTA is going to have to go for everyone. So I mean, there are, you know, a lot of decisions to be made here between how much do we have publicly provided digital currencies? How much do we leverage privately digital currencies? How do we play this? And that feeds back into the regulation theme.
Jeremy - 00:20:06: Absolutely.
Kenneth - 00:20:06: Where they're, I have to say, still kind of clueless about what they're doing. I mean, I think FTX was a wake up call, you know, and I think you said a good way. And. I think that's why it's a good call. That's right. They're starting to realize, oh my gosh, this is happening and we need to do something. But they're still way behind the curve.
Jeremy - 00:20:24: Yeah, I think there certainly are major efforts to try and address it, but it has not landed yet in the United States. Although I remain cautiously optimistic about the payment stablecoin bill, which seems to have Fed, Treasury, you know, kind of bipartisan support. And they're sort of, you know, getting it right, making sure the Fed has the right role in it. And so that's moving. It's fascinating to see, you know, in almost every other major financial market center, you know, Japan, Hong Kong, Singapore, London, the entire EU, UAE, they all have stablecoin laws that are either on the books or going to be on the books this year. And all of those regimes have laws to regulate how basically digital dollar stablecoins will work in their markets. So the rest of the world is regulating the dollar on the internet before the United States, which says a little something about the effectiveness of American policymaking right now.
Kenneth - 00:21:25: You know, but when the euro markets developed in the 60s, way before we deregulated our markets, and we kind of watched it happen and then realized we needed to deregulate our markets.
Jeremy - 00:21:39: Right.
Kenneth - 00:21:40: So, I mean, it's that pattern where we're king of the hill and kind of watching what goes on.
Jeremy - 00:21:47: But then eventually when it moves.
Kenneth - 00:21:49: Yeah, I mean, I think so. But of course, we also have our... Forget about the currency. Political juncture, which is horrible, and the division. But even aside from that, just the way we're set up with so many state laws and so many regulators, even in normal times, if we had more political cohesion, it'd still be difficult. But I think it's something American authorities have to wake up to.
Jeremy - 00:22:18: They do. They do. And I think there hasn't been as much dialogue around the kind of national security, national competitiveness. I mean, I think everyone understands the fundamental kind of currency payment system competition. But there's sort of this building out of these alternative infrastructures, and that goes to the heart of the issue. And I think there are leaders in the national security, national economic apparatus that do understand that. But... Yeah. You know, it's still, it's not a top of mind.
Kenneth - 00:22:52: How do you think it interacts with cyber risks, if I can ask you a question?
Jeremy - 00:22:57: Yeah. I think significantly. You know, I am. You know. I have a view actually that the internet as it was designed, you know, was designed around this whole idea of kind of information wants to be free, open networks, and everyone kind of saw the benefits of that, right? You connect to a global network and it's this incredible, the network effects, right, of everything in society and the economy. It arguably helped fuel globalization. It's sort of all these things. But it also meant that, you know, everything was connected. And so you created these incredible new cyber risks, right? And so there's always this tension between, like, do you want to be part of the global system, and the Internet is itself a global system, or do you want to sort of have your own kind of hardened thing that's over here on the other side? And, you know, cryptography itself. Has been how we've addressed that. I mean, all of every, you know, whether it be a firewall or the connection between my computer and the website I'm visiting, it's all cryptography that has dealt with that. And so crypto, the concept is really about how do you use cryptography to prove data or prove transactions or prove computation or prove things on the internet. And so my own view has been that the next generation of the internet needs, it's sort of, the first generation did not have at its core this deep notion of security. And so blockchain technology is sort of this expression of actually if you want to have interoperable interactions economically over the internet, you really need like a new infrastructure layer that is made for that but also gets the benefits of that kind of public internet. Interactions on these networks. And so I think it's a critical piece of it and how those kind of come together. And a lot of times people hear the word crypto and they just think speculative trading of this, that or the other. But I think at a technology level, it's sort of really trying to solve some of these problems. And it actually ties to another theme I wanted to talk to you about, which was the whole premise of digital cash. And, you know, obviously you wrote a great book, The Curse of Cash, which I read recently. And I think we're in this space now where digital currency, you know, there's a lot of conceptions, right? And one conception is a government, kind of the state surveillance model where everything is known about everything that people do. And then there's, you know, the other, which is sort of privacy coins that are completely anonymous and have nothing to do with the government. And then there's sort of, is there a middle ground for digital cash? Different from kind of digital e-money, which is kind of what we know of today, like a PayPal balance or, you know, the kind of e-money we have or using a digital payment rail, but to actually have. These sort of electronic monetary instruments and how the benefits are significant, clearly. But this trade-off of security, privacy, financial integrity, and all that's very complicated. And you've thought a lot about that.
Kenneth - 00:26:27: Yeah. So I think where we'd like to be, if I might venture this, is to allow complete privacy for relatively modest transactions. I'm going to call it a few thousand dollars. But if somebody's doing a transaction of $50 million or even $5 million, no, it has to go through regulated authorities. Now, all the CBDCs have been trying to figure this out. I was a judge at a CBDC Hackathon Singapore held a couple of years ago for their own digital currency. It was interesting. It was interesting how a lot of places were trying to do this. And I think the typical idea was, well, we'll heavily gate past a certain size. We won't heavily gate the other size. But I think that's still kind of an unsolved problem. It is, yeah. Because you have to have the two pools talk to each other at the end of the day. And that provides a weakness. And I think that's where we want to be. We definitely don't want to be in a situation of total state surveillance. And I would just pick an example. For example, you could say, well, most people are sort of comfortable having some financial services entity know the transaction. But they don't want the government to know.
Jeremy - 00:27:55: Right. Air gap, which is the private sector air gap.
Kenneth - 00:27:56: They don't want their friends to know. The trouble is the legal system is not up to that. You're not protected, for example, if the government's arresting you. You're not protected in a divorce case. In that it can be problematic. You're not protected in a divorce case. You're not protected in a divorce case. And, of course, if you paid in cash, it wouldn't happen. And so how do you sort that out? And the legal systems weigh behind things in general with these things.
Jeremy - 00:28:25: And we're now talking about this is inherently global, right? I mean, the notion of territorial currency and the like. I mean, we had the phenomenon in media and communications on the Internet, which was sort of everything went over the top, right? I could just have a peer-to-peer video call with someone. Directly with someone. And there's no software. And there's no telecom, right? It's just – or email is this sort of thing. And information publishing crosses boundaries. Like there's no cross-border email or cross-border web browsing. It's just boom. And so certainly cryptocurrency as a technology has sort of promulgated all of a sudden. Like, hey, you have a piece of software and you're now in an economic system, whether it's a good one or a bad one, whatever. But it's sort of the sort of international dimension of this. It's moving at a very fast pace. And so it's, you know, there's sort of the how do you design something as a government? And then there's sort of what's happening in the world. And it's creating a lot of tough questions.
Kenneth - 00:29:26: So it gets back to the US Question that you asked. It does. I mean, at the end of the day, there has to be a home regulator.
Jeremy - 00:29:33: Yes.
Kenneth - 00:29:34: Because stateless currency eventually is going to get banned in big places like the United States and China because they have lots of reasons. They don't want to allow something that's not regulated. And You know, you could say, well, why don't we have the BIS regulator? Some international agency in the United States doesn't want that. And that's sort of a tension, you know, at the end of the day. I mean, there's always this idea, if you look at, you go back to my book, at the history of currency, private sector is actually always inventing clever stuff. And the government's always slow to catch up, but it does. And I think that's eventually going to happen here, that we aren't going to have a stateless currency that's significant in the legal economy. Now, a qualifier is the world underground economies. Huge. Maybe 20% of global GDP. At least those are my estimates. And you can't, you don't control that as much. And so there is always going to be a market for Bitcoin and things which are stable. Stateless currencies there. And I'm not saying that's not valid. I'm not. But we have to, you know, look at that separately. That market's not going away. And even if, you know, the United States tries to regulate it into oblivion, it's still going to thrive in some areas that are significant.
Jeremy - 00:31:00: Yeah, yeah, for sure. Another related theme just to touch on, and I know you spent time at the IMF. Shortly after the financial crisis, the IMF, a number of the IMF itself, I think it was at the time under Christine Lagarde, and a number of central banks were interested in, you know, wow, because the US Was the epicenter of the financial crisis and everything. Sort of asking questions about. Evolving international currency models. And there was a minor push, not a major push, a minor push around, could you commercialize the SDR and all these things. And it ties together with some of these things thematically, which is that in a world of like internet-based currency competition, where, you know, kind of you have this ability to create kind of global network effect scale on the internet very quickly. And in a world where, you know, for the participants in those economies, if I'm in Nigeria or Turkey or India or wherever, and I have a mobile device and I'm sort of accessing these things, it's harder for governments to kind of, they can have a lot of power, don't get me wrong. But the sort of monetary sovereignty questions get more complicated. You know, Is there an end state a long way from now? I'm not suggesting anytime soon. But is the result of that technological evolution and the sort of shifts in what happens, is the result that we're back at asking those questions? Maybe it takes some really bad things happening in the world to bring people back to the table on something like that. But is there a point where, you know, the sovereigns, as it were, sort of say, you know what, we're better off with some adaptation that becomes a more global unit of account? Is that a scenario that could play out?
Kenneth - 00:32:56: Well, it's a very deep and interesting question. You know, there's a lot of the world, the vast majority of the world would like something like that to happen. On the other hand, you need a unit of account.
Jeremy - 00:33:10: Yeah.
Kenneth - 00:33:11: And it's hard to see it moving away from the dollar in the foreseeable future. And if the unit of account is the dollar, it just gives the US this huge advantage. It's hard to have a clearinghouse in Europe per dollars on scale with a clearinghouse in the United States. Because if there's a crisis, the Fed can back the one in the United States, doesn't have to back the one in Europe. That creates a premium in Europe and gives an advantage. That's sort of at the core of the US's advantage. Now, I don't see the digital world as getting around that conundrum. You need a unit account. Now, We could go to gold or something like that. I mean, so somebody may come up with something where there's an accepted unit of account. But, you know, there were problems with the gold standard when we had debt crises and financial crises.
Jeremy - 00:34:10: Right.
Kenneth - 00:34:10: We talked before about the US If we were on a gold standard, man, would we be in trouble with our debt trajectory.
Jeremy - 00:34:17: So the need for society to have some stability combined with the desirability of universal units of account and the like. Well, these are big, big topics.
Kenneth - 00:34:30: Indeed.
Jeremy - 00:34:31: Interesting to play out. Well, Ken, this has been a wonderful conversation.
Kenneth - 00:34:35: Always great speaking with you, Jeremy.
Jeremy - 00:34:37: Great to have you and have a great forum.
Kenneth - 00:34:40: You too.
Jeremy - 00:34:42: Thank you.
Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Kenneth Rogoff
Maurits C. Boas Professor, Harvard University