"China is digging out of a crisis. And America’s luck is wearing thin." — Ken Rogoff

1. 0:00 – 25:46

   China is stagnating

   1. DPDwarkesh Patel0:00

      Today, I'm speaking with Ken Rogoff, who is a professor at Harvard, author recently of Our Dollar, Your Problem, former Chief Economist at the IMF. Ken, thanks so much for coming on the podcast.

   2. KRKen Rogoff0:11

      Uh, thanks so much for having me. Uh, welcome to Harvard, which is where we're-

   3. DPDwarkesh Patel0:16

      (laughs)

   4. KRKen Rogoff0:16

      ... filming this.

   5. DPDwarkesh Patel0:17

      In your book, you have a lot of anecdotes of meeting different Chinese leaders, especially when you were Chief Economist to the IMF, and it seems like you had positive experiences. They would listen. You met the Premier with your family and he would, like, listen to your advice. So one, how does that inform your view about how competent their leadership is? And two, how do you think they got into this mess with their big stimulus, or whatever else you think went wrong? To the extent that when you were talking to them in the early 2000s, it seemed like, you know, you, you were kind of seeing eye to eye, or they would understand your perspective. Do you think something changed in the meantime?

   6. KRKen Rogoff0:49

      Well, I first want to be careful to say they listened to everybody. I mean, the Chinese are way better than we are-

   7. DPDwarkesh Patel0:53

      Mm-hmm.

   8. KRKen Rogoff0:54

      ... uh, of sort of hearing, um, 100 different views. Uh, mine would be one of many, many, many, you know, that they heard. So I was very impressed by the competence-

   9. DPDwarkesh Patel1:04

      Mm-hmm.

   10. KRKen Rogoff1:04

       ... of the Chinese leaders. So I actually gave a, a lecture in their party training school, where if you're a mayor, you're a, a provincial governor, you're any bureaucrat-

   11. DPDwarkesh Patel1:18

       Mm-hmm.

   12. KRKen Rogoff1:19

       ... on your way up, you go to this thing, which for them is like Harvard Business School. They really looked for competence. So of course, there were, um, various loyalty things, but there, you, you meet the leaders, and I met a lot of them. And when I was at the school, I met a whole bunch of people. Uh, they actually asked really raw questions too. They said things I, I couldn't believe it-

   13. DPDwarkesh Patel1:41

       Hm.

   14. KRKen Rogoff1:42

       ... that they were asking, and I was told, you know, "Within the school, you're allowed to say anything." So they had this system for a long time.

   15. DPDwarkesh Patel1:50

       Mm-hmm.

   16. KRKen Rogoff1:50

       And when you met Chinese technocrats or, or even, you know, so the Mayor of Shanghai or... They were impressive. I'm not saying ours aren't, but it's a mix. I mean, I think you know that. Uh, and then Xi Jinping has really changed that. So he's been the president since 2013, and he's, over time, pushed out this system and gone more to loyalists and people who are less technocratic. I actually... Probably the most important talk I ever did in China was to the, what's called the China Development Forum in 2016. It's this, you know, giant hall that had most of the top leaders in the party, a lot of the elite of the tech world, Mark Zuckerberg and, you know, many others-

   17. DPDwarkesh Patel2:38

       Mm-hmm.

   18. KRKen Rogoff2:39

       ... like that were there. I said, "I'm looking at your housing. I'm looking at your infrastructure. It looks to me like you're going in a classical housing crisis problem. Your catch-up is over. Uh, your demographics don't look good." I gave a list of things. "And by the way, it looks like power's becoming very centralized in the economy. I'm, I'm a Western economist. Y- you're doing an amazing job. What do I know? But I don't think that would be good for growth." And I, I have to say, after I gave the talk, I, I just figured, you know, you only live once. You, you just have to say what you have to say. They, uh... A couple top leaders came up to me and said, "Professor Rogoff, we very much appreciated your remarks." And I was thinking, you know, "Oh, no," you know, "They're going to put me in jail or something-"

   19. DPDwarkesh Patel3:33

       (laughs)

   20. KRKen Rogoff3:33

       "... at the end of this." But, um, yeah, no, I'm less impressed by them now, and I'm worried that, let's say we got into a tangle with the... L- let me back up. They get in a crisis, which they're in now. I think they're in a deep crisis still. Or somehow, uh, hotter heads prevail between the United States and China, and we get in some kind of entanglement nobody wants. I worry that we're not as competent. I'm not just thinking about right now. We have some very good people, but the average quality at the very top I think has gone down. And China's not as competent. That's a recipe for having bad things happen.

   21. DPDwarkesh Patel4:15

       By the way, on that talk. So you mentioned in the book that before, they've got to clear your talk, and so you gave them a sort of, like, watered-down version of what you would say. Um, I have to say that that, that would take gusto to go up to the f- uh, top party leaders. I- were you nervous while you were giving the talk and, uh, you're like, "Oh, it's too centralized," and, um...

   22. KRKen Rogoff4:33

       I mean, I was pretty experienced by that time-

   23. DPDwarkesh Patel4:36

       Mm-hmm.

   24. KRKen Rogoff4:36

       ... and, uh, I frankly never use notes. So the idea I was going to read my speech didn't come to me.

   25. DPDwarkesh Patel4:43

       Yeah.

   26. KRKen Rogoff4:43

       And maybe it was a little bit spontaneous. But, uh, yeah, I mean, I think I c- certainly felt at that moment, you know, "What am I here for?"

   27. DPDwarkesh Patel4:51

       Right.

   28. KRKen Rogoff4:51

       "What's the point of coming to this?"

   29. DPDwarkesh Patel4:54

       That's right.

   30. KRKen Rogoff4:54

       "Why don't I talk about the elephant in the room? Everybody knows this." I don't know if everybody knew it, but it was clear to me.
2. 25:46 – 37:06

   How the US broke Japan's economy

   1. DPDwarkesh Patel25:46

      Okay. So let's talk about Japan, which you also cover in, uh, the book where, their crisis. And you blame the US's pressure in advance with their crisis on, uh, on the Japanese to raise the value of their currency, um, the actions by the Bank of Japan. Zooming out, how much of the crisis is not caused by things like that, but just the fact that high-tech manufacturing as a share of world output was becoming less important? There's demographic factors as well. And so something like this was sort of bound to happen to Japan, uh, even if there wasn't some big crisis that preceded it. South Korea's GDP per capita isn't that high either. So at least in comparison to the US. So yeah, how much of this is like actions taken by specific actors versus-

   2. KRKen Rogoff26:30

      I mean South Korea's had a crisis in 1983-

   3. DPDwarkesh Patel26:32

      Yeah.

   4. KRKen Rogoff26:32

      ... and 1997. I mean they haven't been crisis-free-

   5. DPDwarkesh Patel26:35

      Right.

   6. KRKen Rogoff26:35

      ... by the way that they're... Well, there are a lot of factors. The demographics would be the most obvious one. The rise of China.

   7. DPDwarkesh Patel26:42

      Yeah.

   8. KRKen Rogoff26:43

      The rise of not just China, Korea, other competitors. So Japan invented this business model that I think a lot of countries have duplicated. The business model was export-led growth, and the thing that maybe most people wouldn't think about in that is it creates competition. Most countries aren't as big as the United States and there aren't as many different firms trying to do the same-

   9. DPDwarkesh Patel27:08

      Yeah.

   10. KRKen Rogoff27:08

       ... thing. And of course, we have trouble with competition here. I mean sort of famously in Mexico sometime there were, you know, two or one telephone companies, two bread companies, two taco companies. It's very hard not to let monopolies sit, use their political power. So how do you get around that? And the thing that Japan did that was really pretty innovative, and Germany did it, I think, to some extent also, was in the export sector. You are competing with the world, not just with other companies. And that creates this, uh, innovation, this creativity, and Japan did really well with that, but over time others imitated it and, you know, sort of took, were building some of the things that they were building. So that's part of it. The aging is part of it, but I think the financial crisis is a very big part of it. Uh-

   11. DPDwarkesh Patel28:01

       And what is the counterfactual? So suppose that crisis hadn't happened. How much wealthier is Japan today than it might have been?

   12. KRKen Rogoff28:08

       Oh, I think 50% wealthier-

   13. DPDwarkesh Patel28:09

       Wow.

   14. KRKen Rogoff28:09

       ... per person. I think way wealthier.

   15. DPDwarkesh Patel28:11

       And so-

   16. KRKen Rogoff28:12

       That's where they started.

   17. DPDwarkesh Patel28:13

       Mm-hmm.

   18. KRKen Rogoff28:13

       I mean it depends on which measure you use. By the market exchange rates, they were richer-

   19. DPDwarkesh Patel28:19

       Right.

   20. KRKen Rogoff28:19

       ... than the United States ar- you know, late 1980s. And even if you use the more complicated measure, they were richer than any European country-

   21. DPDwarkesh Patel28:29

       Right.

   22. KRKen Rogoff28:29

       ... than Germany, than France, uh, than Italy. They've moved to the bottom of the rung now.

   23. DPDwarkesh Patel28:34

       Yeah.

   24. KRKen Rogoff28:35

       And I, I, I think the financial crisis and w- okay, it wasn't the only thing, but we, uh, you know, it's a long story, but I think we effectively forced them to move faster, to open up and deregulate than culturally and politically they were ready to. And I, I give that as an example of something in the book where I changed my mind-

   25. DPDwarkesh Patel29:00

       Mm-hmm.

   26. KRKen Rogoff29:00

       ... where I had looked at that for a long time afterwards 'cause, you know, going back to 2005, that's long after the Japanese crisis, I would hear from, uh, uh, Jiang Zhao Min, who was the President of China that I met, "We're not going to let this happen to us. There's no way." You know, uh, we were discussing, I thought, maybe they shouldn't have such a fixed exchange rate. And he said, "Well, that's what the United States, you know, said to Japan, and look what happened to Japan." And I, you know, I didn't push back that much to someone like that. You talk to other people, but I, I heard that from many people. And, um, I used to think, you know, well, how can that be? Because all of these things, there's this thing called the Plaza Accord in September 1985, where we pushed them to make their exchange rate-

   27. DPDwarkesh Patel29:51

       Right.

   28. KRKen Rogoff29:51

       ... more. And I used to say, "Well, you did that in 1985." I mean the crisis happened, Reinhart and I, Carmen Reinhart, my co-author on man- uh, many things, we date the crisis in 1992. It's seven years later. And I think I continued to think that and, but, you know, I would say over the years and particularly in recent years, I'm thinking, "I was wrong." You know, these things unfold slowly. Crises don't happen overnight. They deregulated and it worked, but they didn't know what they were doing. And I, I think this was a huge mistake by Japan to agree, and I actually, um, uh, someone who was at a, uh, tenth anniversary of the Plaza Accord held in Tokyo, I-... uh, had the, uh, ha-, uh, who the person was the head of the Bank of Japan, and I apologize, I'm 72 years old and I'm forgetting the name exactly of... So the head in 1985, and he gave this speech to officials and he went like this... And apologized, you know, very symbolically, "I have ruined our country. I did this. I take responsibility." And again, I thought, you know, I... I mean he told that too when he, he read my book and, um, yeah, I, I, you know, you... Financial repression's bad, but financial re- liber- liberalization needs to be done gradually. And if you do it too quickly, you get a crisis. That's many crises caused by that.

   29. DPDwarkesh Patel31:25

       A- asking somebody who, um, uh, obviously doesn't know the details, at like a high level, how would you explain to an office like basically... How could a country be 50% less wealthy than it otherwise might have been s- simply from financial crises? Because if whatever they could have otherwise produced, why can they s- still not produce it or w- you know, like a country's like... they're producing a bunch of things, why are they not, why are they producing 50% less things because of, um, a financial crisis a couple decades ago?

   30. KRKen Rogoff31:57

       Well, their case is very unusual.
3. 37:06 – 1:02:20

   America's inflation crisis is coming

   1. DPDwarkesh Patel37:06

      So you say in the book that you expect there to be another spike in inflation within the next decade, um, and also, the fiscal position in the United States doesn't seem sustainable. If you go forward 10 years, 20 years, when we do hit this, um, when the piper comes calling, what- what- what- what actually happens? Is there going to be some acute crisis, like happened in Greece? Is it, are we going to have some sort of lost decade kind of thing, like Japan? What- what- what will happen?

   2. KRKen Rogoff37:32

      Typically, you have a crisis of some sort when your debt is high, your political system, your politics are inflexible. We've checked those boxes.

   3. DPDwarkesh Patel37:44

      (laughs)

   4. KRKen Rogoff37:44

      And you get hit by a shock ...

   5. DPDwarkesh Patel37:46

      Right.

   6. KRKen Rogoff37:46

      ... you weren't ready for. You get caught on your back foot.

   7. DPDwarkesh Patel37:50

      Yeah.

   8. KRKen Rogoff37:50

      It depends on what the shock is. It depends on how we react. Uh, the way Japan reacted was they used what we call financial repression ...

   9. DPDwarkesh Patel37:59

      Yeah.

   10. KRKen Rogoff38:00

       ... which, uh, basically stuffed debt into every insurance company, pension fund, bank. The central bank holds almost 100% of GDP in debt. I mean, we think we have a lot? I don't know what the, actually don't know the number off the top of my head at the Fed, but I want to say 7 trillion? They would have the equivalent of 30 trillion. I mean, so they've done this. It's not been, it's not the only reason they haven't come- grown, not by any means. But it's not good for growth.

   11. DPDwarkesh Patel38:29

       Yeah.

   12. KRKen Rogoff38:29

       It's, uh, it's ... So that's one option. I think for the United States, that's tough. We just are very market-driven. We, if our financial system had that kind of pressure put on it, it would be worse than when they did it for Japan. And a lot of people lend to us. We can't do that to them. We can't force French insurance companies (laughs) to hold US debt.

   13. DPDwarkesh Patel38:53

       Mm-hmm.

   14. KRKen Rogoff38:53

       We can just, uh, force US ones. So I think the most likely thing will be inflation, which only lets off steam, because inflation sort of pulls the, it's like a default. What, and I'm not talking about hyperinflation. I mean, 10, 20% ...

   15. DPDwarkesh Patel39:10

       Yeah.

   16. KRKen Rogoff39:10

       ... inflation, over a period. We just went through that. That actually knocked about 10% of GDP off our debt. We might need more next time. So it lets some steam off, but if you're still spending too much and we haven't fixed anything, you're back in the problem. I'm- that's what's going on now. We- we had some steam let off, but it wasn't enough. But I think when it happens again, markets will be very unforgiving about it.

   17. DPDwarkesh Patel39:36

       Mm-hmm.

   18. KRKen Rogoff39:36

       They will look at us and say, "You are not to be trusted." And so it'll raise the interest rate more. Our debt will build up faster. And I think at that point, you know, there's a saying about Americans that's attributed to Winston Churchill, "We always do the right thing after we try everything else." And I suspect we will try other things.

   19. DPDwarkesh Patel39:56

       Yeah. So just for the audience, there's four ways we could get out of the debt. We could default, which you don't think is likely ...

   20. KRKen Rogoff40:02

       But really good for my book.

   21. DPDwarkesh Patel40:03

       (laughs) Well, I mean, already, you- you timed this one so well.

   22. KRKen Rogoff40:07

       (laughs)

   23. DPDwarkesh Patel40:07

       I mean, (laughs) I'm- I'm going to short you in the market when your next one comes out. (laughs)

   24. KRKen Rogoff40:10

       I've got a new wave, yeah.

   25. DPDwarkesh Patel40:12

       Uh, financial repression. I guess you could actually cut the deficit or, uh, or inflation, and you say, "Well, if there's another round of inflation, then after that ..."

   26. KRKen Rogoff40:21

       There'll be aus- what- what everyone calls austerity, which, by the way, this word austerity, the progressives use whenever you just ignore debt-building up and spend whatever you want. And austerity is when you don't do that.

   27. DPDwarkesh Patel40:36

       Mm-hmm.

   28. KRKen Rogoff40:37

       I mean, I think, uh, I think Ezra Klein's book actually makes the, Abundance, makes the point that there are, uh, benef- you know, costs and benefits to a lot of things. And this austerity language is pretending there are no costs ...

   29. DPDwarkesh Patel40:52

       Right.

   30. KRKen Rogoff40:52

       ... to having your debt be higher. There are only benefits. So yeah, yes, you- you, that's what everyone else has to do, and ...
4. 1:02:20 – 1:07:11

   Will AGI solve the US deficit?

   1. DPDwarkesh Patel1:02:20

      Is it possible to believe both that AGI is near and that America's fiscal position is untenable?

   2. KRKen Rogoff1:02:26

      Like, what- what do you mean by ten AGI is com-

   3. DPDwarkesh Patel1:02:28

      Any- any job that can be done purely through computers is automated, so white-collar work, the work we do even-

   4. KRKen Rogoff1:02:35

      Uh-huh. Uh-huh.

   5. DPDwarkesh Patel1:02:35

      ... uh, is automated within 20 years.

   6. KRKen Rogoff1:02:37

      I mean, any time you get a big productivity boost, it's fantastic.

   7. DPDwarkesh Patel1:02:40

      Right.

   8. KRKen Rogoff1:02:40

      And if it comes quickly, and yes, that can solve problems. I will say that historically, there have been lots of times when countries have had good growth, even higher than their interest rate, and they still get into trouble because fiscal policy is not mechanical, it's political. I mean-

   9. DPDwarkesh Patel1:03:00

      Mm-hmm.

   10. KRKen Rogoff1:03:00

       ... how much do you spend, you know, who wants what. Uh, i- i- it's, it's not an arithmetic question. I- i- uh, let me say this another way. Nobody ever defaulted or had high inflation because of arithmetic, because they couldn't pay, because you couldn't have called in someone to know what-

   11. DPDwarkesh Patel1:03:19

       Mm-hmm.

   12. KRKen Rogoff1:03:19

       ... to do. They do it because of these political pressures. And if... I think if AGI came that fast and that big, it would make the populism phenomenon that we're facing now seem like nothing.

   13. DPDwarkesh Patel1:03:33

       If AI is going to be massively deflationary, if it makes all these goods so much cheaper, um, should we be printing a bunch of money to still stick to 2% inflation, or does that not matter anymore?

   14. KRKen Rogoff1:03:45

       Um, we certainly can run monetary policy the same way. So, you don't automatically get deflation just because some goods are going down. You can do things to increase demand, so that there are upward pressures on the final-

   15. DPDwarkesh Patel1:03:59

       Mm-hmm.

   16. KRKen Rogoff1:03:59

       ... prices. Even if the AI workers are not demanding anything, you can put a lot of demand, so the firms charge a lot. And not- not just for the services that A- AI is replacing, there are raw minerals and all the materials that go in.

   17. DPDwarkesh Patel1:04:14

       Mm-hmm.

   18. KRKen Rogoff1:04:14

       You know, fundamentally, when you have productivity, it makes it easier for m- the monetary authorities, the Federal Reserve, to deliver low inflation and good growth. That- that's what they're trying to do.

   19. DPDwarkesh Patel1:04:28

       Right.

   20. KRKen Rogoff1:04:28

       It makes their job easier, and I think it takes the pressure off them somewhat to inflate, because things are going pretty good. And so there aren't, there aren't the same pressures.

   21. DPDwarkesh Patel1:04:39

       Right. But should they be trying to fight the deflation at all?

   22. KRKen Rogoff1:04:42

       Well-

   23. DPDwarkesh Patel1:04:42

       In that world, because you know, you know, w- we need inflation to, like, uh, root out the rentiers, we gotta- we gotta fight downward, uh, wage rigidity. But now the- the AIs have all the jobs, so you don't need to worry about that. There's a bunch of biases that humans have, which to get rid of, we need inflation. Do we even need that in the world with AI?

   24. KRKen Rogoff1:04:56

       Okay, that- that is a very good point. Um, frankly, uh, Keynes founded modern macroeconomics, and he was an incredible renaissance person, just having sort of both sides of the brain. And one of these insights he had that just transformed things, and before, we just used these what we call general equilibrium models, demand, supply, prices move to keep them into line. And Keynes was looking at the Great Depression and he said, "Prices should be coming down."

   25. DPDwarkesh Patel1:05:28

       Mm-hmm.

   26. KRKen Rogoff1:05:29

       "And they're not. And why aren't they?" And that's really a cornerstone. And at the end of the day, it's mostly human behavior. It's mostly workers. So if you have these docile AI worker... Well, they're not workers, they're just, you know... Uh, fir- if you have firms that are willing to let the prices fall, uh, you certainly can do that. I mean, we're still gonna- we're gonna still have some human workers? I don't know. Um, but, uh, I guess a question on what monetary policy should be is, do you think interest rates are gonna go up or down? When we had deflation last time from this demand inf- deflation, which is what happened after the financial crisis in the pandemic, interest rates went down. I mean, my intuition here is that interest rates would be needing to go up, real interest rates-

   27. DPDwarkesh Patel1:06:17

       Yeah.

   28. KRKen Rogoff1:06:17

       ... real inflation interest rates. And then deflation is not such a problem. You just don't need to let them go up as much. When we were in the... Interest rates went to zero, basically.

   29. DPDwarkesh Patel1:06:29

       Yeah.

   30. KRKen Rogoff1:06:30

       And it's a whole nother line of discussion, but they felt they couldn't lower them into significant negative territory, so they're sort of paralyzed. There's this deflation or too low inflation. Monetary authorities thought they knew how to create inflation. But that's always been by cutting interest rates lower.
5. 1:07:11 – 1:10:55

   Why interest rates will go up

   1. KRKen Rogoff1:07:11

   2. DPDwarkesh Patel1:07:11

      Do you expect interest rates to go up? Because one factor obviously is you want to invest in the future, the future has so much more potential. Another is maybe you want to, uh, consume more now because you know you're going to be wealthy in the future anyways, you might as well start, uh, uh, spending as much as you can right now.

   3. KRKen Rogoff1:07:26

      I think, uh, AGI and AI are upward pressures on interest rates. So lots of crude reasons. The huge energy needs, I should have asked you about that first, uh, you know, having to provide all the energy needs. And also, uh, as you say, it, it, you know, traditionally when you did a lot of investment, it raised wages. But it's possible, and there's economists like Daron Acemoglu who have, you know, shown it can go both ways. It's not-

   4. DPDwarkesh Patel1:07:56

      Mm-hmm.

   5. KRKen Rogoff1:07:56

      ... difficult to show it can go both ways. Uh, if you're, if you're really just substituting for workers, it's making capital more valuable.

   6. DPDwarkesh Patel1:08:04

      Right.

   7. KRKen Rogoff1:08:04

      Like you just even, you know, invest more. So it's, uh, with what the pressures on monetary policy a little bit depend on that. Uh, you know, in principle, it makes life easier. If it did push things down, the interest rate down to zero, there are interesting questions around that, but maybe your audience might not be that fascinated by them as I am.

   8. DPDwarkesh Patel1:08:27

      Well, let, let, let's talk about it a little bit. I mean, if, if we expect, uh, interest rates to go up because of AI, what should the government be doing right now to, uh, be ready for that? Should they, for, uh, I don't know, should they be locking in 100-year bonds at the current interest rates? Because they're, they're only going up from here.

   9. KRKen Rogoff1:08:43

      So I'm gonna get to it, but just where we are, I had been arguing with interest rates today, I mean, I follow this all the time and maybe a lot of people who listen to you don't, but inflation-adjusted interest rates, and I want to pick the ten- there's a, there's a ten-year bond that's indexed to the inflation rate that our-

   10. DPDwarkesh Patel1:09:03

       Mm-hmm.

   11. KRKen Rogoff1:09:03

       ... Treasury issues. Inflation index is only about 10% of our total debt. But, you know, and it, it's not ... There's tax stuff.

   12. DPDwarkesh Patel1:09:10

       Yeah.

   13. KRKen Rogoff1:09:10

       And it's not perfect. But it's like a pretty good measure of what we call the real-

   14. DPDwarkesh Patel1:09:13

       Mm-hmm.

   15. KRKen Rogoff1:09:14

       ... interest rate. And it had gone to like minus one at one point after the pandemic. It averaged zero for about ten years between 2012 and 2021, and it's higher now. And that is, uh, from a, for a macroeconomist, the biggest question-

   16. DPDwarkesh Patel1:09:34

       Mm-hmm.

   17. KRKen Rogoff1:09:34

       ... in the world because it affects asset prices, it affects risk, it affects volatility. So, um, the question, I, I regard it as just a normalization. I think that's something that was likely to happen. If you were to go around, talk to my younger colleagues or to other places, there's quite a debate about that. There's a lot of people who think, uh, we're getting old, we're not inventing anything. I know you're just debating against that and good for you. But, you know, the, the, but I, I tend to think interest rates are more likely to go up than down going forward.

   18. DPDwarkesh Patel1:10:11

       Mm-hmm.

   19. KRKen Rogoff1:10:11

       And I'm talking about these long-term interest rates, not what the Federal Reserve does. It just sets the overnight interest rate-

   20. DPDwarkesh Patel1:10:17

       Mm-hmm.

   21. KRKen Rogoff1:10:17

       ... but these, the market's setting these long-term interest rates.

   22. DPDwarkesh Patel1:10:20

       Yeah.

   23. KRKen Rogoff1:10:20

       I think they're more likely to go up. But I think AGI is only a piece of it. I think that, uh, the, uh, debts rising everywhere, the remilitarization of a lot of the world, needing to deal with climate change eventually. If we're not dealing with climate change, we're dealing with climate disasters, uh, growing populism, um, uh, uh, geopolitical fracturing, many things. I tend to think interest rates are go- are gonna go up, but not just for the good reason that we've gotten more creative and everything's going to be better.

   24. DPDwarkesh Patel1:10:54

       Mm-hmm.

6. 1:10:55 – 1:22:24

   US equities will underperform

   1. DPDwarkesh Patel1:10:55

      You say in the book that you expect a rebalancing from US equities to, um, to foreign equities. US equities have been outpacing foreign stock for the last couple of decades and you say you expect this to change or there's, there'll be some rebalancing. What is it that causes that?

   2. KRKen Rogoff1:11:12

      So I think I say very concretely is that the do- when the dollar is really high-

   3. DPDwarkesh Patel1:11:16

      Mm-hmm.

   4. KRKen Rogoff1:11:16

      ... you should expect the euro to go up. And I feel strongly about that.

   5. DPDwarkesh Patel1:11:20

      Mm-hmm.

   6. KRKen Rogoff1:11:20

      Like when, uh, my first important paper was about exchange rates. Uh, that's why the book's about exchange rates and when Japan's really weak or when the dollar is really strong, very hard to predict exchange rates, but then it is. So I think, you know, the euro will do well. There's, there's a lot of room to catch up in Europe. So I actually think I'm kind of nuanced in what I say in the book because Trump hadn't been elected yet. But I say if Europe, Europe seems to be under pressure to me- remilitarize, I was aware that Harris was probably going to cut the US defense budget, so that would put pressure on them. Remilitarizing would actually be good for their, for the euro. Uh, it would be good for technology in Europe. It would give them more geopolitical power in the system. But yeah, I do, I do. Now, I ha- I have to say, just so your listeners can calibrate this, I once, uh, you know, my, my, my first book was a very mathematical book called Foundations of International Macroeconomics. And, you know, in theory, you should diversify. You shouldn't put all your money in the United States. And I did a, uh, video with Zbigniew Brzezinski, Mika Brzezinski's father, for people who don't know who he is, but he was Carter's, he was Carter's Kissinger. I did a video with him that Merrill Lynch produced and it was about why international diversification could be good. And I, one thing I'm going to say was very, very like, you know, limited. I feel quite fine about what I said.I wasn't doing any consulting at the time, I just did academic work. I didn't do speeches, I didn't do consulting. I talked to central banks a bit, but I didn't do anything for money. But I did get paid for this. It, it circulated half a million copies of it, of this and a lot of my friends teased me and said, "You would have made a lot more money if you just hadn't followed your own advice."

   7. DPDwarkesh Patel1:13:24

      (laughs)

   8. KRKen Rogoff1:13:25

      So, you know, and I could think of plenty of other examples like that. Uh, but yeah, my instinct is that, uh, you know, this idea that the ex- what is it, our US premium just should get bigger and bigger and bigger. You know, these things have some regression to mean.

   9. DPDwarkesh Patel1:13:42

      Mm.

   10. KRKen Rogoff1:13:43

       Maybe not with AI all being in the US, I don't know.

   11. DPDwarkesh Patel1:13:45

       Is it because you're predicting, like does the S&P keep growing at 8% but foreign equities do even better? Or ...

   12. KRKen Rogoff1:13:50

       Yeah, foreign, I'm just gonna safely say foreign equities doing better than, than dollar equities.

   13. DPDwarkesh Patel1:13:55

       Um, but not because the growth in US equities slows down, it just that they do even better? Or is it that the US equities slow down?

   14. KRKen Rogoff1:14:00

       I mean, I mean look, uh, you know, you, you, you have a lot of friends who spend all their time doing this and I wouldn't pretend to. I hold a very neutral portfolio, because I talk to policy makers and world leaders even on occasion and I don't want to be someone who's, uh, talking about regulating Bitcoin and owning a lot of Bitcoin.

   15. DPDwarkesh Patel1:14:22

       Right.

   16. KRKen Rogoff1:14:22

       Not to pick a random example. Uh, and so I wouldn't regard myself as great at this. I hope, I mean, I just, you know, but yes, I think there's a case for international diversification, particularly into Europe at this point, because they have so much potential catch up. There's some, just as in I think California where you're from, there's a little, a little bit of dim awareness-

   17. DPDwarkesh Patel1:14:46

       Yeah.

   18. KRKen Rogoff1:14:46

       ... that it might be over-regulated and you might do things differently. I think, I feel that's happening in Europe.

   19. DPDwarkesh Patel1:14:52

       I- if you look at internationally, if you had been betting on catch up, how, I wonder if you could back test it? Because there's some intuition, well if you're poorer than the frontier, it makes sense that it would be easier for you to catch up. There's another intuition that if you have been persistently behind the frontier, there must be some deep endogenous reason why you ...

   20. KRKen Rogoff1:15:11

       Yeah, no, you're absolutely right. So for example, Asia has a lot more governance problems-

   21. DPDwarkesh Patel1:15:17

       Right.

   22. KRKen Rogoff1:15:17

       ... I would say on the whole. And there's a reason that their price earnings ratios are lower-

   23. DPDwarkesh Patel1:15:22

       Yeah.

   24. KRKen Rogoff1:15:22

       ... because you don't trust the governance. You're right, you're right. I mean, so that's fair and, uh, I mean, a lot of people are just betting on that. But, um, I, you know, sort of, uh, I think Europe's not so hopeless that it can't pull it together. I make the comparison, I'm a basketball fan. Uh, the Boston Celtics just got crushed by the Knicks, uh, as we, just before we were taping this. You know, part of it is our star, Jayson Tatum, was injured. Well, you may not have gotten any better Europe, but if somebody's hobbling the United States and I do think that's going on to some extent-

   25. DPDwarkesh Patel1:16:03

       Right.

   26. KRKen Rogoff1:16:03

       ... now, you know, you do better.

   27. DPDwarkesh Patel1:16:05

       Yeah. Um, is there some institutional reform we could make that would get us out of this political equilibrium we're stuck in, where both parties when they're in power are incentivized to increase the debt and there's no institutional, um, check on, uh, that, that proclivity?

   28. KRKen Rogoff1:16:26

       There've been a lot of people tried this with, for example, having what are called fiscal councils.

   29. DPDwarkesh Patel1:16:31

       Mm.

   30. KRKen Rogoff1:16:32

       And, uh, I have, uh, did a paper once with, uh, Julia Pollak, who's a brilliant economist, uh, you can look her up, uh, when she was an undergraduate, about fiscal councils. That was quite a while ago and a number of countries experimented with it, but it hasn't worked. The country which has done the most with this is probably the United Kingdom.
7. 1:22:24 – 1:22:24

   The erosion of dollar dominance

   1. KRKen Rogoff1:22:24

Episode duration: 1:36:04