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The US Dollar And International Economics With Harvard’s Kenneth Rogoff · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> Jon Hartley: The the Capitalism and Freedom in the 21st Century podcast,
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an official podcast of the Hoover Institution Economic Policy Working Group
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where we talk about economics, markets, and public policy.
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I'm Jon Hartley, your host today.
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My guest is Ken Rogoff, who is an economics professor at Harvard University,
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one of the great international economists of our time.
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He's also a former IMF chief economist and a chess grand master.
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Welcome, Ken.
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>> Kenneth Rogoff: Thank you for having me.
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Jon, congratulations on the success of this podcast.
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>> Jon Hartley: Well, it's a real honor to have you on.
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As someone who does international economics in my own work,
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it's a huge honor and just so excited to have you on and to have this conversation.
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1. I just want to start with your early life.
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And I know you were born in Rochester.
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You're an undergrad at Yale.
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You're a chess prodigy and chess grandmaster.
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I think a lot of people know this.
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How did you come to find economics?
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Make your way to grad school doing a PhD in economics at MIT,
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where you studied under Rudy Dornbush.
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I know your first job was at the Fed board.
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What was the path from there to Harvard?
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I'm curious.
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How did this sort of pivot happen from chess grand master to grand economist?
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>> Kenneth Rogoff: Well, short version, I decided to go to college,
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which was unusual.
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I had more or less dropped out of high school and was living on my own in Europe.
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I was doing very well as a chess player.
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I was rising fast.
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I was earning plenty of money.
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I actually earned more as a chess player in real terms than I did
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as an economist till quite a bit later in life.
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Although, of course, I think, as you probably know,
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that says something about the pay of academic economists as much as chessworse.
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And it was much worse when I was starting out.
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So I just decided to go.
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I just decided not to be a chessworth.
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Very unusual decision.
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I am still quite famous in chess for having stopped playing chess and
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better known for that than you might imagine.
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How I fell into economics was.
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I just didn't know what I wanted to do.
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I don't know how to.
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So how did you fall into economics?
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>> Jon Hartley: I took a high school class, and that sort of did it for me.
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And that was kind of.
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>> Kenneth Rogoff: So you were a prodigy.
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You. You were inspired in high school and
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knew you wanted to do economics and in college already when you arrived?
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>> Jon Hartley: Well, it took.
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I always knew I wanted to do it, but for me, it took a long time, I guess, just
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in the sense that I knew I always wanted to do it, to get a PhD and so forth.
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But you know, I spent five years working at Goldman Sachs.
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I did a couple master's degrees as well.
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So it took some time to get there.
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But yeah, for me, I also wanted to spend some time sort of in the private sector
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seeing how things in the real world worked.
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And it's worked out great in the sense that it's informed some research well.
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But I take it it's a slightly different path for you.
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>> Kenneth Rogoff: Yeah.
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So when I went to college, I had missed quite a bit, frankly.
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My high school was very weak academically.
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It's since go into receivership and don't go into there.
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But I mean, I'm not sure what I would have learned at my high school either.
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But I lagged a lot at Yale and I was doing Russian studies.
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That, and I was thinking about the environment was an idea.
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This was in, gosh, you know, the early 70s that I was an undergraduate at Yale.
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But I had a friend, Jeremy Bulow, he's actually, I think you know him,
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he's at Stanford.
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Who, who he, like you knew, he wanted to do economics from high school.
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I think he saw Milton Friedman speak when he was 12 years old or something and
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just knew he wanted to be an economist and was making all the right moves.
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And he's a great economist, but he was evangelical and
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he brought myself, John Geanakoplos,
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who's the Kohl's professor at Yale today,
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he just roped us both into economics and said, this is something you should do.
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And I think what I liked about economics was I,
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I felt like it was very flexible in what part of your brain you could use.
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At least in the courses, you know,
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you could have stuff that was very mathematical.
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Not that I consider myself great at stuff that's very mathematical, but, you know,
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I, I was solid and at the same time you could be doing history,
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which I liked a lot, and on and on.
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I mean, one of the wonderful things about economics is you
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can kind of pick what you're interested in.
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So I like that.
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But during the summers I played chess.
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I stopped playing chess, but I had, I didn't play during the school year,
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not at all, but I played during the summers and actually kept getting better.
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But that wasn't helping me as an economist because at some point it's very
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helpful over the summers to do something that relates to what your thesis might be,
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what you're thinking about.
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So I would say I was sort of a mile wide and an inch de deep as an economist.
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I was a very good test taker.
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I don't think I understood anything that I was taking tests on, but
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if I just had to memorize something, I could do it.
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But playing chess in the summers was exciting and fun and
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I was doing well, but it wasn't maturing.
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And then I went to graduate school and
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I didn't even know what being an economist was.
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I knew that if you went to law school, you had to work at a law firm in the summers.
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And I was thinking, I could go to graduate school and
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I could keep playing chess in the summers.
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Boy, was I wrong about that.
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So when I got to MIT, Adam had happened to be in a great class with people
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like Ben Bernanke and Maury Opsfeld and Jeremy Bulow and many others.
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These people were, they lived, you know, their whole 24
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hours doing economics and gave them a depth of understanding.
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And it wasn't just about doing the homework.
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It was about really knowing what you're about.
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I didn't, you know, I, I sort of moved along.
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I actually dropped out of graduate school because I qualified to represent
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the United States in the World Championships,
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which was only every three years.
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That, and I did, I played.
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I didn't do as well as I should have.
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I think I finished 11th, but I hadn't prepared a lot for that.
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I was trying to do graduate school.
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I was trying to chase.
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I sort of, okay, I can't do both.
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So I made a decision.
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I would just do economics.
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But it still took me a long time to sort of mature to really be an economist.
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I had Rudy Dornbush as my advisor, as many people did.
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So inspiring.
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What a larger than life person.
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We compare him to Orson Welles or something.
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His love of pies, you know, his love of thinking, his love of debate.
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And he drew.
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He was very exciting.
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I'd say Larry Summers was very influenced by him.
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Many of the people I named, he, he was, he was amazing.
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Stan Fisher was also his buddy.
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And I think they went running together and did everything together.
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They wrote a textbook together, and he was on my thesis committee too.
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But I still wasn't an economist.
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And I think I was only in graduate school basically three years,
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and I just wanted to leave.
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And I remember Stan Fisher looking at my thesis and saying, chin,
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do you really want me to sign this?
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And I said, yeah, I want to leave.
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And he did.
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And I left and I got to the Federal Reserve,
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which back then was a bit of a backwater compared to what it is today now.
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The Federal Reserve research department's just amazing.
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I mean, you know, particularly in macroeconomics, but
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also in many other things.
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But back then, it's not something people wanted to do.
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And actually Bob Solow and Paul Samuelson both said,
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what are you doing doing going to the Federal Reserve?
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I had some pretty good academic offers, not that I had a thing to offer, but
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they knew I was a really good chess player, and
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they were sort of willing to make me an offer because of that.
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So I got to the Federal Reserve and I was at sea.
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I frankly would.
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They give you a lot of time to do your research when you're a new staff member.
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And I would like lie on the floor in my office.
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And I had no idea what to do.
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It's very hard as a young researcher to figure out what to do.
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And it took a while, I think.
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I wrote one paper that was clearly a huge hit about why it was difficult to
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understand exchange rates.
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That surprised people a lot with Richard Macy that I would say stood up for
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many, many decades and even to today.
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But the paper that really changed my life was people were
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worried about inflation in the 70s and what to do about it.
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Kidland and Prescott had written this very influential paper that
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Baron Gordon extended, which was trying to explain it as a game theory problem,
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saying that you'd always be tempted to inflate.
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And since the central bank moves second, they're always going to inflate and
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try to fool people.
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And the general conclusion was that the only solution,
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that's what Catalyn Prescott said, was to have a rule.
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But that really begs the question of if you have a powerful,
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not just Trump, but a Nixon, Reagan, Lyndon Johnson,
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you think that's going to stop them if the Federal Reserve has a rule?
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No, they have a lot of say.
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And so because I was in the Fed and I didn't go to the university,
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I think I got an idea I don't think I ever would have got at a university
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which was creating an institution that was independent.
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That was a radical thought at the time.
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It became.
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I think it's still my most famous paper.
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I couldn't get it published.
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I sent it to the JP for example, and Barrow said, well, nice math, interesting.
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But the Fed would just be a veil.
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If the government wants to take it over, who cares?
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This is meaningless.
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And I got different levels of reactions at different places it got rejected
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at the aer, it got rejected at the qje.
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And to make a long this is already a long story shorter.
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Larry Summers heard of the paper and he loved it and he had become an editor
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at the QJ and he said I know we rejected this, but please resubmit it.
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And so but that paper I worked on really hard.
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I'd be up in the middle of the night working on it, you know, thinking about
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things and on chess I did that a lot, but I hadn't done that as an economist.
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And I mean I think since then I've been like that.
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That was, you know, I think that's the moment it was about three years in
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that I be that I really became an economist.
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>> Jon Hartley: That's amazing.
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And central bank independence especially I guess newly relevant with I guess
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the question about how whether or not Humphreys executor will be overturned or
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not and the implications for the Federal Reserve being in an independent agency.
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It's an amazing just a career path and
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clearly that that work propelled you to Harvard where
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you are now and where you've been for some time.
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I want to start going through some of your I think key results and
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big pieces of work.
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A lot of these sort of encapsulated in various books.
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And I want to start with talking about public debt,
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given that public debt is certainly topical right now.
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In your 2009 book you cover public debt a lot.
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This time is different.
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With Carmen Reinhart, you also wrote a related sequence of papers,
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the American and the American Economic Review papers and
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proceedings, the Growth in a Time of Debt.
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And there's a related JEP article as well with Vincent Reinhart.
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And you sort of argue that there's a cutoff for public debt to GDP that's maybe
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around 90 to 100% or so, after which once a country sort of goes beyond
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that level of debt as a fraction of gdp, economic growth gets really bad.
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And you do this with lots of history.
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Many countries now, today, many governments around the world,
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including the US are passing that threshold of 100% of debt to GDP.
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How do you think about those results in light of ever increasing
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public debt today and what's your outlook for the US and global fiscal situation?
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>> Kenneth Rogoff: So first of all,
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our 2009 book really didn't have anything about that.
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What it did have was the first historical data set on public debt.
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It was a archival discovery that you could do it there since
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been we we gave all our data sources and the IMF cloned it pretty quickly and
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some others have so that was something just new.
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Nobody had longer term data that,
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that might make your head explode to think that's true.
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But it was.
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The IMF didn't keep it.
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They didn't.
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And even, even having OECD countries, those are the richer countries,
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they didn't keep it going back very far.
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Long story.
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So the 2010 paper, which, the first one was just a short weekend conference note,
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that was what the AEA papers and proceedings were back then.
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We, we looked, we didn't say that when debt hits 90%, your growth suddenly slows.
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We didn't have any statistical test.
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We just divided debt into buckets over 20 countries and
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just said the periods where your debt's really low,
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growth is on average higher than when your growth is.
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Debt is really high and between 90% and below 90%.
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It's about a 1% difference.
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But the stupid interpretation of that, which some people did, and
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I would say particularly people like Paul Krugman who would use it as a character,
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made it sound like when you go from 89 to 90, your growth drops by 1%.
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And we actually very quickly wrote things.
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No, that doesn't mean when you go driving at 55 miles an hour and
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you go from 56 miles an hour, you're going to crash.
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But, but cars going really fast on average have more things.
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We use the example of cholesterol.
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When Your cholesterol is 199 and goes to 201, it doesn't mean anything.
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But on average, if you take everybody with high cholesterol and everybody
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with low cholesterol, and so I think that result has held up very, very well.
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There's 15 years of research on it, but there was this whole people just felt,
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well that you must be in favor of austerity if you think debt is a problem.
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And, of course, I should think it's a book by Ezra Klein,
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I don't know if you've seen it abundance or read it where he's progressive,
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but kind of comes to the realization that progressives don't understand trade offs.
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If you want to protect some little dart fish, but it means Los Angeles is going
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to burn down because you don't get water there, you might think about it and
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that actually this whole austerity narrative, stimulus good.
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We say that very clearly, owing a lot of debt bad.
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But they couldn't accept the trade off.
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And so the argument was there is no trade off.
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It's a free lunch.
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And that's been made by the modern monetary theory people that you probably
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mocked on your podcast at one time another.
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But it's not that far from secular summer secular stagnation.
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Certainly not that far from what Blanchard said in his presidential address and
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many others where they were sort of arguing interest rates are just going
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to drop and drop.
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So why are we worrying about this if you never have have to pay the piper,
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you don't care about debt.
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But of course, if you look at a longer history of interest rates, and
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that's a major theme of my book and my I have an AER paper from August and
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2024, Barbara Rossi and Paul Schmeltzing.
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If you look at a long period, you have these periods where the rates are high,
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you have these periods where the rates are low.
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But there's quite a bit of reversion to mean you always should have expected that.
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And if you don't mind my just going off on this a second lot longer,
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this whole notion stimulus is wonderful.
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We have to have more and more.
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Anytime you're not doing stimulus as austerity and debt,
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you shouldn't care if it's high or low.
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And it's like I've said to some of them, okay,
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let's say you think that it's stimulus.
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They think it's fantastic that you know, the Keynesian multipliers too.
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I mean, depending on when you use it.
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And I understand, you know, use it, you need to use it at the right times.
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Unlike when Biden used a lot of stimulus during a boom.
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But on average it's high.
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It's very good to have ammunition.
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So I said, well, okay, suppose there's a debt fairy and
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they wave a magic wand and our debt in the United States,
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instead of being 121% of GDP, is 60% of GDP.
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Just suppose, and the debt fairy says for the next 30 years, knock yourself out,
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you can do stimulus, an extra 2% a year for the next 30 years.
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And of course their progressive heads explode because it's so
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wonderful to be able to do the stimulus.
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And of course, you know, if they step back a second,
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what it is is they think it doesn't matter if the debt was 500% or 1000%.
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But I mean I think a lot of research shows that's wrong,
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that the debt interest rate does rise as your debt goes up.
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So I, I think this sort of perverse era where everybody
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thought it was a free lunch has now passed.
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At least you were Goldman on Wall Street.
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I don't know about in academics.
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It's still, there are a lot of people who think this is an aberration,
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it's going to go back down.
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But I mean I think that's, that's sort of the central question around US debt today.
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If you believe that this is an aberration that real interest rates are high and
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you're not persuaded by the argument that as debt grows the interest
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rate goes up as the world needs, it's an unfortunate position of
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needing to remilitarize the interest rate goes up.
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Populism makes the interest rate go up a lot of factors.
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If you're not persuaded by that and
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you think demographics is destiny, although Ross C Schmaltzy and
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I look at demographics over longer periods and it just doesn't work for
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explaining the real interest rate, then you shouldn't care.
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But I think we've arrived at this moment where the interest rate has
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normalized after a long period of a radically declining post Volcker,
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I mean, the Reagan Volcker period had this huge interest rate rise.
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So I see the US fiscal situation as very precarious at the moment.
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Even if we had a normal deficit of 2% of GDP instead of 7 or
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8% wherever we're headed.
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>> Jon Hartley: I want to talk a little bit more about interest rates and
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monetary policy.
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So maybe a little bit more about short term interest rates for a moment.
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You wrote a book in 2016, the Curse of Cash.
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You advocated for abolishing paper currency in part.
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One of the reasons you gave is that it tended to be used in criminal activity or
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at least higher denominations of banknotes.
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And you sort of argued that,
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you know, it also makes sense in terms of implementing negative interest rates.
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It makes that easier to do because if there's always this option that you
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can put money in cash, you can lock in a 0% interest rate.
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And so I think, I know Sweden sort of largely abandoned paper currency, but
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I think that's one of the few cases.
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I'm just curious, does the recent also maybe the recent backlash against central
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bank digital currencies not sort of cut against the idea that paper currency maybe
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should be banned?
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One of the reasons why I think central bank digital currencies are generally very
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unpopular.
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If you look at some of these surveys,
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people don't want this idea that there's some digital currency.
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That's the only option that can sort of be maybe taken away from them.
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If you had some sort of a malevolent government or dictatorial government.
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What about, you know, the, I guess, you know, to just sort of make the counter
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argument in favor of maybe, you know, keeping cash legal?
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What about the people who say, you know, the ability to have cash on hand,
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whether it's under a mattress or whatever,
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sort of a fundamental freedom meant to sort of check the power of governments.
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I'm curious what you say to sort of those, some of those counterarguments to those
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that are sort of in favor of getting rid of cash.
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>> Kenneth Rogoff: Well, so my book's a little more subtle than abolishing cash.
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It is phasing out large notes and then, and
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over a long, long period and seeing where you stand then.
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And you know, a huge percentage of all cash is held in large denomination notes.
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In the case of the United States, about 80%.
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It's $100 bills.
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And of course that's compared to when I wrote the bill.
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The hundred dollar bills is like a $75 bill now thanks to all the inflation.
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So that's good.
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I argue that a huge percentage of this is used to evade taxes.
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And I think that's true.
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And a lot of the people that are really angry about it want to evade taxes.
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They think they shouldn't have to pay.
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And okay, I don't want to have, you know,
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infinitely high taxes, but when some people aren't paying taxes,
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people with the same income who don't have a cash business do have to pay taxes.
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I, I think that, you know, we, we absolutely,
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the privacy issue is absolutely an issue.
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But I think into the foreseeable future, if you had tens and twenties,
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like, what are you planning on doing that requires you to have $100,000 in cash?
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And I think we can debate that, but it's like,
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you know, there's, there's again a trade off in the privacy question.
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I was criticizing progressives before.
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I think I'm criticizing conservatives now.
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Privacy is a right up to what point?
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Like Is it your right not to pay taxes?
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Is it your right to do major, you know, violations of the law and
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a few thousand dollars, who cares?
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And you know, I think, I think it is a question of whether we arrive at some
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kind of digital currency that people can use that provides some privacy.
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And crypto is definitely expensive for the government to trace.
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And crypto competes heavily in the underground economy.
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Now I have papers on this and I talk about it a lot in my book.
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In fact, you know, the dollar,
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the underground economy is probably 20% of global GDP.
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Again I have another paper on that and again do surveys of it.
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And the do that's a big part of the dollar.
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The, the paper currency dollars market is the underground economy.
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And the dollar is losing in that already, that there ways crypto is more efficient.
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So you know the privacy issue, it's a question of balance.
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Where do you want to strike things?
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So on the negative interest rates is a different topic.
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You actually don't need to abolish cash.
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You don't even need to change anything to have net negative interest rates.
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And the Europeans and the Swedes didn't go this route.
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They didn't, they didn't do it the right way.
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And you can have very negative interest rates by having an exchange rate between
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cash and bank money and having the exchange rate depreciate over time.
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So if you're holding cash, the value of it when you take to the bank, the bank,
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meaning the Federal Reserve goes down over time whereas your bank money where
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you're getting a negative interest rate doesn't go down.
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So that idea has actually been around since the 1930s.
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I discuss it in the book.
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But in general, if interest rates we are getting at the zero bound and
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we were to get in another situation where we really wanted
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to use monetary policy to stimulate the economy.
26:10
But I think negative interest rates have just not been tried.
26:14
You have to have the legal changes.
26:19
But we have very negative real interest rates obviously.
26:22
I mean that happens all the time.
26:25
German bonds have had negative interest rates more from the market
26:30
than ECB policy.
26:32
So I think it's an open question.
26:33
In fact we have a review coming up now of the Federal Reserve.
26:38
After every five years it does a monetary strategy review.
26:42
I don't know if you're, are you following that by the way?
26:45
>> Jon Hartley: So absolutely, absolutely.
26:46
It's talking about at length at the Hoover Monetary Policy Conference just last week.
26:51
>> Kenneth Rogoff: And so what do you think about what they did in 2020,
26:55
the asymmetric policy?
26:57
>> Jon Hartley: Yeah, the flexible average inflation targeting thing is, in my mind
27:02
it was built for the prior 10 years, in the era of being at the zero lower bound.
27:08
And the biggest struggle in the minds of I think some central bankers was trying to
27:12
get inflation above 2%.
27:15
And at the time that was seen as a huge issue.
27:18
Now with sort of a few years of way higher than 2% inflation,
27:22
I feel like maybe there's going to be some calibration away from that.
27:26
And it was asymmetric, and
27:28
there's Bernanke's sort of temporary price level targeting idea.
27:34
Yeah, I mean all, all very interesting questions, but yeah, I think,
27:38
I guess there's a good question about,
27:40
I mean it's very interesting that the Fed never went negative.
27:44
And my understanding is that Bernanke did so
27:47
not to disrupt money market in general money market funds,
27:51
but the ECB did go very negative and I mean to a point in the sense that
27:56
they were constrained by I guess this fact that there's still.
28:01
>> Kenneth Rogoff: They hadn't dealt with cash,
28:03
they hadn't dealt with preventing from people from hoarding cash,
28:07
which the ideas I have and the other ideas I talk about would.
28:10
So they never.
28:12
And because they hadn't dealt with it, it made the negative interest rates less
28:15
effective because everybody knew they couldn't.
28:18
There still was a lower bound.
28:19
It just wasn't the same.
28:22
Well, I mean, I think, I think if we run in that situation again and
28:26
at least a lot of people your age doing research don't agree with me and
28:31
think interest rates are just going to go down and down and down and
28:36
we haven't seen anything yet.
28:40
I mean, I think you have to think about negative interest rates and
28:43
we have to rethink that.
28:44
It would involve making some,
28:46
I think fairly minor institutional changes to be able to accommodate it.
28:52
So if they don't do that, if you don't do that, it causes all kinds of distortions.
28:57
But if you do that, it's seamless at least.
29:00
I mean, I, in my, and so I was a discussant at the 2020 and
29:04
they didn't, I actually spoke at your Hoover Monetary Conference and they let,
29:09
they welcomed having me talk about negative rates.
29:12
But the Fed was like, please don't, you know, like.
29:17
But what the policy they came up with was a disaster in the end.
29:23
And I think they were influenced by it because they didn't feel they had a tool
29:28
for what happens if interest rates fell low.
29:31
So we can come back to that.
29:32
But I, I regard that As a very live issue, not near term.
29:37
Because I agree the inflation we've had the last few years has sort
29:42
of disabused anybody of the idea that inflation's always zero.
29:48
But it certainly could come back.
29:52
>> Jon Hartley: I agree.
29:53
I mean, I do think that there's a lot of controversy and, and need for
29:57
retrospection when it comes to flexible average inflation targeting or, or
30:01
even forward guidance.
30:03
I mean, how useful is forward guidance now when you know,
30:06
we're no longer at the zero lower bound?
30:09
And so it's at least for now.
30:12
>> Kenneth Rogoff: But I thought everything they did at the Fed was kind of
30:16
meaningless.
30:18
So first of all, forward guidance.
30:20
And Larry Summers has said that, I've said it too, but Larry Summers has said,
30:24
I say in my book, but Larry Summers said it very eloquently,
30:26
that the only people who are listening to the forward guidance is the Fed.
30:30
And it ties their hands.
30:32
The market pays zero attention.
30:34
And the flat and the thing of average price level targeting, well,
30:39
okay, but when the Fed overshoots with high inflation,
30:43
where's the low inflation that makes up for it?
30:46
I mean they forgot about it the second it happened.
30:49
It's not credible.
30:53
Political economy matters at the Fed and it's not credible.
30:58
I thought while we're at it, I thought quantitative easing after the financial,
31:04
initial wave of the financial crisis ended was absolutely a bad idea.
31:09
Like it's just smoke and mirrors because the treasury owns the Fed.
31:14
The Fed is buying the Treasury's debt with the one hand,
31:18
it's issuing short term debt with the other hand, which the treasury owns.
31:25
And it just gets really nonsense, and
31:27
I think led just to some distortions in markets.
31:31
But in some sense there was, you know,
31:33
this feeling that they wanted to do something.
31:35
And the Fed's still paying the price for that today.
31:39
>> Jon Hartley: Yeah, I mean, I guess there's some argument, you know,
31:42
I've done some work a number of years ago just like an event study looking at, you
31:46
know, the announcement effects at least of quantitative easing, announcements of
31:51
regular, you know, Treasury MBS purchases and so forth and in across countries when
31:56
emerging market central banks aren't doing this during COVID too.
31:59
And I think there is some case being made that means 20, 30,
32:04
40 basis points of an effect on the 10 year which I guess is simulative and
32:10
I totally agree with you that.
32:13
>> Kenneth Rogoff: So you would get the same effect by having the treasury do
32:17
what the Fed did.
32:19
The treasury could just issue more short term debt and less long term debt,
32:23
it's not really a monetary policy.
32:25
>> Jon Hartley: Absolutely, in fact I have a separate debt management paper
32:30
called Does Government Debt Management Matter?
32:34
And it kind of makes the case that maybe the treasury should be issuing more short
32:38
term debt.
32:39
If there's all this demand for short term safe assets,
32:43
maybe the treasury should be doing that.
32:46
Anyways, separate discussion, but I think the biggest challenge to me just,
32:51
and I think it's maybe more of a political economy challenge which is like
32:55
the quantitative easing.
32:57
It's just something that the Fed can't seem to get rid of in the sense
33:02
that anytime basically potential markets and banks adapt to this new
33:07
environment and then when they try and run down the balance sheet,
33:12
you hit something like the repo crisis of 2019, suddenly they revert back.
33:18
And so maybe if there was the right kind of communication and the right strategy,
33:23
this could be done,
33:24
I mean maybe a Fed chair, Kevin Warsh would do something like that.
33:28
He's been very critical, very consistently very critical of this sort of non
33:32
emergency lender, last resort type of quantitative easing and
33:35
just buying Treasuries and remaining mortgage backed securities as well.
33:39
And so maybe, but I think it would require certainly an incredible
33:44
amount of resolve in the face of, you know, pretty significant,
33:48
you know, market disruptions to see it through.
33:52
And maybe that will happen, but we'll see.
33:55
I want to get to your, I.
33:57
>> Kenneth Rogoff: Just want to say that's an example of where your background at
33:59
Goldman Sachs and I have students who work a couple years ago.
34:02
It's very helpful to understand that kind of issue because you,
34:06
it's really institutional and understanding markets.
34:10
It's not just about, it's hard to express it with just math,
34:14
you really need to have a textured understanding of markets.
34:18
>> Jon Hartley: Absolutely, and this adaptation thing that goes on too,
34:22
it's very complicated in the sense that how markets sort
34:26
of like certain things and latch onto them.
34:29
And it's kind of how I guess some of these markets and the prices reflect that.
34:34
I want to talk a little bit more about your new book that just came out this year
34:38
in 2025 called Our Dollar, Your Problem.
34:40
A lot of it's on- >> Kenneth Rogoff: Came out on May 6.
34:43
>> Jon Hartley: So it just came out and
34:45
a lot of it's on the status of the US Dollars of world reserve currency,
34:49
which it's been since the Second World War.
34:52
And some of it is also a retelling of your own personal experience in international
34:57
economic policy, you're the IMF chief economist.
34:59
You spent a lot of time at places like Jackson Hole and
35:03
many other places around the world.
35:06
I'm curious, what are some highlights of the book in your mind?
35:09
And what are your general thoughts on the dollar reserve currency status?
35:12
Another topic that's very popular right now.
35:15
>> Kenneth Rogoff: Yeah, so I did weave in personal experiences with world leaders,
35:19
policymakers.
35:20
It's not a memoir, it's just a little bit, I think chess is in there quite a bit.
35:26
Just I wanted to give, first of all, put people in the moment,
35:32
I was there, I was a Yale student in the early 70s, and
35:37
we were being taught in our under first year course.
35:42
We were being taught in more advanced courses, I took advanced macro.
35:46
We were being taught that Russia was going to catch up and if they didn't,
35:51
they'd be 80% the size of the US they would occupy a big part of the world.
35:55
I mean, the idea that we were going to be, you know, occupy all those
36:00
countries would become free and Russia wouldn't become an equal power.
36:06
That was not what people were thinking, and I sort of go over that.
36:10
I also mention that my skepticism about it,
36:13
not from any deep understanding of economics, but I had lived in Yugoslavia.
36:19
That's the former Yugoslavia, which has Croatia, Serbia,
36:24
Bosnia, Herzegovia and Montenegro and a couple other countries.
36:30
I lived there and a long time and
36:33
they were supposed to be more successful than the Soviet Union.
36:38
And the chess players were actually worshiped there.
36:42
That was fun for me because that's certainly not the case in
36:45
the United States, and they were privileged.
36:48
And then I go visit their apartment, which they just so
36:51
thrilled, like they won the lottery to get this apartment.
36:55
And it's little bigger than a bathroom, but in a bathroom plus a kitchen maybe.
37:02
Well, they don't have plumbing in a lot of these things and with cement walls,
37:08
colorless, and they think they're at the Ritz Carlton living in it.
37:14
And just I don't think we should ever believe it, but we did.
37:19
And so, and then I get the Japan, goodness, you mention.
37:23
And we talked about Rudi Dornbusch.
37:25
I was working my first job at the Fed and Rudy Dornbusch was so
37:29
engaged about what was going to happen with Japan.
37:32
They were, I mean, he, I'm not saying that he believed this, but he was concerned,
37:37
if they would pass us,
37:38
he would call me all the time to think of what the Fed was thinking.
37:42
And at the Fed, we're in the 80s,
37:45
nobody talked about China, we thought Japan was taking us out,
37:50
Japan had higher, by some measures, per capita gdp.
37:55
Its stock market was worth more than the United States, incredibly, its real estate
37:59
market was worth more than the United States, even though it's a tiny island.
38:04
And I go over these, I worked at the Central bank of Japan for a while and
38:09
go over these moments where we did not know what was going on.
38:13
And I think there are ways we got lucky to rise as far and
38:18
by that I mean to just be so dominant that we ultimately
38:23
became I think the economics of this, of course,
38:27
has only one currency, network effects.
38:31
There's nothing else to say.
38:33
The politics sure as heck doesn't have that, that the Chinese,
38:37
they're going to break away, and when they break away, Asia is going to break away.
38:42
And that's been going on since 2015,
38:45
they're forming their own networks and pipelines and clearing.
38:51
And the Europeans don't like it either, so the it's not that there's
38:56
a Canadian dollar with all due respect to Mark Carney, or
39:00
an Australian dollar, nobody cares about them.
39:04
But there'll be a few tripolar system, which back in 2005
39:09
was the consensus in academics that we were going to have a tripolar system.
39:15
And what happened the last certainly the ten years after that was a shock.
39:20
Well, Europe had the global debt crisis, China didn't move away from its peg.
39:26
And so what I argue in the book, Fast Forwarding a lot is we lose some space
39:31
to crypto and the underground economy, but we're going to lose market
39:37
share to the renminbi for 100% sure, because they can't live with us.
39:43
I mean, even if Trump is enforcing it, where other sanctions and
39:47
the Europeans will also expand.
39:50
So there the yeah, there are these network effects, but
39:53
pushing back against this is these other effects.
39:56
And if you look at what central banks do, which is what my favorite
40:01
measure with Reinhardt and Ilsitsky, it's been in retreat for
40:07
10 years, probably the centrality of the dollar.
40:13
>> Jon Hartley: Well, I'm curious though.
40:15
So I have a paper published in Economics.
40:18
>> Kenneth Rogoff: You kindly said it to me.
40:20
>> Jon Hartley: Yeah, it's titled De Dollarization, not so Fast.
40:23
And it basically just gathers these same measures of the dollar that
40:28
we're used to seeing before.
40:30
And Barry and others have published with older data.
40:34
And so if you look at, you know, these measures of the dollar, you know,
40:39
fraction of dollars in central bank FX reserves, the denomination of bonds,
40:44
FX transactions or trade invoicing, you updated through Covid and
40:49
through the Russian invasion of Ukraine, the $sas hasn't declined
40:53
whatsoever through those sort of pretty big international events.
40:58
And, you know, there's also the freezing of the Russian FX reserves and
41:01
all these things.
41:03
So I guess, you know, like, sure, you know,
41:05
the dollar share of FX reserves is down from the early 2000s.
41:08
A lot of people like to show some of those charts just starting in 2000 to today.
41:13
But it's actually been at lower points, say like in the, in the 90s.
41:17
>> Kenneth Rogoff: But that's because it felt.
41:18
That's because it, it fell after Bretton Woods.
41:21
I mean, the 70s was a big decline in the dollar share of everything,
41:26
which my book discusses why, given our debt situation and
41:31
challenges to Federal Reserve independence, I am sort of expecting
41:36
a 70s light maybe period now, which will also, you know, accelerate this.
41:42
But, you know, it hit it.
41:45
It sort of fell because we were screwing up.
41:48
And then as we became more stable, it arose.
41:53
But I think the rise from the 2000s was very
41:57
surprising given where the trends were.
42:01
That's why people point to that.
42:04
>> Jon Hartley: I guess I'm just curious just to make a counter argument in favor
42:08
of just dollar dominance sticking around for much longer than maybe we think.
42:14
I mean, if you look at like, say that the share of FX reserves in
42:18
the Renminbi that's actually fallen since the coven, Russian invasion, Ukraine,
42:23
but other currencies like, you know, Canadian dollar,
42:26
Australian dollar, New Zealand dollar, those are, are strangely ascendant.
42:31
I mean, I'm just curious, when you think about in the past,
42:35
what's led to the end of a currency as a reserve, as reserve currency,
42:39
as a world reserve currency, it's typically like a land war on home turf.
42:44
Like, you know, the UK and World War II and their experience there.
42:48
I'm just curious, but you.
42:50
>> Kenneth Rogoff: You don't have,
42:51
you don't have to have the end of it to be losing market share.
42:55
You, you Typically almost the norm is there are few currencies that are used.
43:01
I mean, the Spanish peseta was on top, but even after the Florin took over,
43:07
the Spanish peseta was everywhere, even into the, the British pound was,
43:12
even after World War I was still C.O. equal to the dollar.
43:17
There is a political economy.
43:19
If you just do a model, you want to have one currency, it's hard to come out with
43:24
another thing but that such a model has no political economy.
43:28
And the thing that is unacceptable for a lot of the world is the information
43:34
flow that goes through the United States because everything's in dollars.
43:40
A huge percentage of information on transactions of all types we can see.
43:47
And I think a lot of the world objects to that.
43:49
If you, if you didn't have that, maybe.
43:52
But for, you know, for China, it's, it's just unacceptable.
43:55
And they're going to, I don't know what you people say at Hoover, but
43:58
people I talk to in Washington,
44:00
I mean everybody thinks China's going to blockade Taiwan, that that's just coming.
44:05
And of course we're going to have a big trade war and
44:08
of course we're going to do sanctions.
44:10
And in my estimation they have 2 trillion in dollars indirectly and
44:15
they're, they're, you know,
44:17
they're going to want to be bailing out of that and they're looking to.
44:23
And it's not, it's not just about what, how they hold reserves.
44:25
That's by the way, I sometimes compare these things you're doing to like the,
44:30
I know it's politically incorrect, but the blind met nine blind men touching
44:34
an elephant and they each touch different parts and see completely different things.
44:40
They're very small pieces, which is why I like what central banks are doing
44:45
with their exchange rate stabilization as a portmanteau measure.
44:51
Why do central banks need to feel they need to stabilize against the currency?
44:56
Why is it their reference currency?
44:58
They're aware of dollar liabilities, they're aware of, you know,
45:01
how much dollars are used in their economies or other currencies.
45:05
And by that measure it's pretty striking how it's gone down since 2015.
45:12
So we'll see.
45:13
I mean, I, I, you know, I, I don't,
45:17
it's certainly possible that we'll stick around, but
45:21
I would say just easily we could drop down to where we were in 2005.
45:29
>> Jon Hartley: I guess I had just a few sort of lightning round questions here and
45:33
want to talk more about exchange rates specifically.
45:36
I mean, I guess one, on the topic of China, do you think it was a mistake by
45:41
the IMF to add China and other to the SDRs in 2015, knowing what we know now or.
45:47
>> Kenneth Rogoff: Well, I mean, you want to try to bring them in, you know, as
45:51
Lyndon Johnson said, you want them inside the tent, pissing out instead of outside.
45:56
And that has been the effort of policy.
45:59
It has not entirely worked.
46:00
But that was, that was, that was what I did.
46:04
And by the way,
46:05
we wanted their money like the IMF wanted the Chinese to give more money.
46:09
The Chinese have not given that much more money, but they're sort of courting
46:14
them and they may need them more given the Trump administration.
46:19
>> Jon Hartley: It's interesting and on the World bank side of things too,
46:23
it's interesting how much they've managed to hold on as a recipient as well,
46:28
which is hard to understand.
46:30
>> Kenneth Rogoff: Yeah. >> Jon Hartley: Given that they're
46:32
much richer than the typical World bank aid receiving country.
46:38
Yes. There's lots of geopolitics there to say
46:40
the least.
46:42
So I guess I just want to get back to, I guess some of the more academic questions
46:46
about exchange rates and really in international economics.
46:50
And really, I guess my question is what kind of progress do you think we've made?
46:55
Made in international economics and especially, you know, with understanding
46:59
exchange rates in the past, say 20 years or so to, you know, 20, 30 years.
47:03
I mean, PPP works over generally long horizons,
47:07
maybe not small over short horizons.
47:10
You've done some work on this.
47:12
It covered interest rate parity.
47:13
It's something that's I think taken the, at least the asset pricing macro
47:17
finance literature by storm in the past 15 years just because it stopped working
47:22
post global after the global financial crisis and all this bank reg.
47:28
That prevented banks from sort of continuing to do this arbitrage.
47:33
But you know, we've got all these other exchange rate puzzles,
47:35
a lot of which you've documented, say with Maurice Amsfeld.
47:38
Things like the consumption correlation puzzle.
47:40
Why is consumption less correlated across countries and output?
47:43
Or there's the back of Smith puzzle why is the correlation between consumption real
47:48
exchange rate zero.
47:49
Have we made any progress in international economics in your mind or
47:54
is it slowed in some way?
47:56
>> Kenneth Rogoff: What's very tempting of someone of my age to say,
47:58
we thought of everything a long time ago and there's nothing, but
48:01
I don't think that's true at all.
48:03
I think we actually live in a golden age of international macroeconomics.
48:07
So, first of all, there is quite a bit of progress in thinking about exchange rates,
48:11
but I'll come back to that.
48:13
But would you judge finance by how well finance economists can explain
48:17
the level of stocks, you know, or what they do?
48:20
No.
48:21
I mean, there's a lot of other topics international.
48:23
So, for example, financial crises.
48:27
No one enclosed economy macro was working on financial crises.
48:32
That was an international topic.
48:35
And people thought, it happens in other countries.
48:38
And when the financial crisis happened, the international economists had way
48:43
more to say the closed economy macro economists didn't have the right forecast.
48:48
They didn't understand things.
48:49
And I'm talking about the Fed.
48:53
Most macro economists, if you went to the big conferences,
48:56
just got it wrong again and again and again.
48:59
I don't want to name names, but I think those of us in international were
49:03
all over this and, you know, we understood that.
49:09
Another topic, sovereign debt.
49:11
It is quite remarkable that we haven't had sovereign debt crises so much recently.
49:18
It's kind of incredible.
49:20
Of course, by saying this, I'll probably make one happen and I think, okay,
49:25
there'll be mistakes.
49:27
I actually think we are about to have financial crises again in the next decade,
49:31
given the higher real interest rates and the greater volatility.
49:36
But I think progress in international economics has actually been a factor
49:41
in why that hasn't happened and how you should denominate your debt,
49:46
particularly how you should regulate your banking system if you want to
49:51
not have debt crises, how you what where the role of reserves is.
49:56
And then on a really deep question, I consider the deepest question in
50:00
international economics is why do countries repay their debt?
50:05
So I've worked on this a lot.
50:06
The late John Eden did a seminal paper with Mark Gursovitz about this.
50:11
And there's actually been a lot of thinking about this and
50:15
progress about how to think about it.
50:18
And I would say my take on it, and there's a nice book by Manuel Amador and
50:24
Mark Aguiar and many, many papers on this, but I get a takeaway.
50:30
And Mark Aguiar, I think Jeremy Bulow and I wrote about this in the early,
50:35
early 90s, but Mark Aguiar sharpened it tremendously.
50:39
The basic idea being that if you're a country and you want to borrow,
50:44
don't let, don't allow them to write contracts in New York courts,
50:49
make them write contracts in their own courts.
50:52
And if you're a lender and you want to lend to Argentina and
50:55
you want to trust the Argentine court, more power to you.
50:58
But then if Argentina wants to default, they can do it in a jiffy.
51:02
I mean they just do whatever they want and that way countries either
51:06
don't get money or which for most of them would have been good.
51:10
Borrow money to use unproductively or they develop the legal infrastructure and such.
51:18
I promise to get back to exchange rates.
51:20
So I mean I think there's much more to be said.
51:25
But first of all, the issue that the exchange rate plays
51:30
a different role than we thought maybe 20 years ago,
51:34
certainly 30 years ago when I had my book with Ozfeld,
51:39
that its main role is between traded and
51:43
non traded goods and there's, we have that in our book but
51:48
there's much less role across traded goods because so
51:52
much is either denominated in euros, dollars or renimbi starting to.
51:59
And not in your own currencies.
52:02
And then of course there's the Clark medal when a couple years ago to Oleg at
52:06
Skokie who has these beautiful papers with Dimitri Mukin and
52:10
I don't know that I agree with everything.
52:13
I don't wanna oversell it, but they try to.
52:16
They, they basically argue that there's a lot of noise in exchange rates.
52:23
There's a lot more noise because of all the post financial crisis regulations,
52:28
which is exactly why covered interest parity doesn't hold anymore.
52:32
The, the banks aren't allowed to arbitrage it away.
52:35
And they argue that in fact having a floating exchange rate
52:40
is not as useful as people thought.
52:44
Fascinating debates here.
52:45
I don't, I have thoughts about that where I think fixed exchange rates
52:50
like Saudi Arabia has or Hong Kong has, very, very dangerous.
52:55
But no, I actually think, I actually think it's been a very exciting period.
52:59
You're at Stanford, the project that Matteo Maggiore,
53:04
Jesse Schrager and Brent Naiman oversee of the Big Data Initiative
53:09
has huge progress on understanding how things are denominated,
53:14
what people are holding the home bias puzzle.
53:18
There have been a lot of great theses and international, so no,
53:21
it's been, it's been a golden era I think.
53:24
And if you continue in international economics, and I hope you do,
53:28
I, I think you'll find it's, you know,
53:31
continue to find new things that are exciting to work on.
53:34
>> Jon Hartley: Absolutely, I wanna talk about, I guess one other.
53:37
This is the last question, you know, perhaps a new puzzle and
53:41
that is what I'd say is the relationship between tariffs and exchange rates.
53:47
And many have written on this in the past long ago when tariffs I
53:52
guess were a bit higher, Paul Krugman, I think Rudy Doornbush and
53:58
others, obviously President Trump recently enacted some
54:03
universal tariffs on many countries that aren't targeted
54:08
on just a few goods, as many tariffs in the past have been.
54:13
And but, but generally speaking across the board on all goods from, well, it's not.
54:17
>> Kenneth Rogoff: Services, just goods, which is an issue in itself.
54:20
>> Jon Hartley: Right, but to the surprise of many, the US Dollar fell in response to
54:24
the universal tariff announcement on April 2nd, rather than increase,
54:28
which is sort of what would be predicted by theory and
54:31
other past empirical evidence from say maybe smaller tariffs.
54:35
And typically the idea is that exchange rates were kind of this shock absorber and
54:40
that trend is basically continued.
54:42
So when there have been big tariff pauses announced, say I think it was
54:47
April 8th when the deliberation day tariffs were paused for 90 days or
54:52
the China tariffs being paused on May 12th, the US dollar rose significantly.
54:58
And so that's sort of contrary to what theory would predict between tariffs and
55:01
exchange rates.
55:02
How would you sort of explain this in your mind if there's sort of some initial
55:07
thoughts that you have on this sort of imperial.
55:10
>> Kenneth Rogoff: Well, certainly looking at the 2018.
55:14
Well, let me back up.
55:15
So for the recent case, we knew they were coming.
55:19
So to sort of look at what happens when they're announced, you have to separate,
55:24
you know, what was unanticipated.
55:26
But I'm sure you must think this too.
55:28
I mean, the big effect was they seemed really incompetent.
55:32
I mean, I am not somebody who has, has this knee jerk reaction to anytime
55:36
Donald Trump says something or proposes something, it's terrible.
55:41
I think he has, you know, he's very crude and doesn't necessarily
55:46
articulate things in the best way or most like an economist would want.
55:50
But I think he's right about quite a few economic things.
55:54
Let me limit it to that.
55:56
But on tariffs, I mean, a lot of what he said is just illiterate.
56:03
The whole idea that current accounts are terrible for the United States,
56:07
that running a deficit is terrible, as opposed to looking at, as, you know,
56:12
subsidizing us for all this time.
56:15
His idea that we can industrial, we can get great manufacturing jobs back.
56:22
Hello.
56:23
You know, machines may get the jobs, but people sure as heck won't.
56:28
Not many.
56:29
Well, our manufacturing has actually increased in recent years, but
56:32
it's not because of tariffs.
56:34
It's because we've had good robotics and our factories have been able to do that.
56:39
But farming in the 1970s, the farming was fading.
56:46
If you go back, of course, you know, 100 years, everybody was in farming or
56:51
150 years.
56:52
And all the TV ads in the election were saved.
56:56
The farmer.
56:57
They had people, you know, in farming.
56:59
Well, we're, we're a giant in agricultural, but there are no jobs.
57:02
And that's, that's future of manufacturing.
57:05
Okay. There are national security issues, but
57:08
that's got, that's just got nothing to do with, you know, bringing jobs back so
57:12
narrowly.
57:13
On your tariffs question, I think people, I, I mean, I think it was just.
57:18
He was incredibly incompetent.
57:21
I mean, with you, I mean, he just seemed stuck on this terrible idea.
57:27
It's not the tariffs that are terrible.
57:29
If he just, you said, just put in universal.
57:31
He just put in 10% tariffs, we could work around that,
57:35
especially if he cut other taxes.
57:37
And yeah, some.
57:39
I would have preferred a VAT tax to terrorist, but yeah, okay.
57:43
But the problem was all this, you know, art of the deal.
57:47
UK has to have free speech.
57:49
You can go on and on with these crazy demands.
57:52
So that's what happened.
57:55
And so when people see him retreat, they say, we have Trump one,
57:59
who was a pragmatist, and not Trump two, who seemed like an ideologue about this.
58:05
That's what they're looking at is this competence question.
58:09
>> Jon Hartley: You don't think it's maybe like, I guess, a policy uncertainty thing
58:13
or, or just, I guess maybe some reallocation out of the U.S.
58:17
it's a very strange fact that I think that exchange rates are moving
58:22
the way they are and the dollar would rise, I guess, in response.
58:28
>> Kenneth Rogoff: I'm not your basic Trump derangement syndrome person.
58:32
I teach at Harvard, but I'm one of the 3% of faculty who.
58:36
I consider myself a centrist, but I would identify at Harvard as conservative.
58:41
But on this one, just the faster he can retreat on this policy, the better.
58:48
It's, it's not.
58:49
Uncertainty is a very generous way to put it, but it created a lot of uncertainty.
58:54
You don't know what the tariffs are going to be.
58:56
You're sending a ship, you know, from one place to the other.
58:59
You don't know what the tariff is going to be when you get there.
59:02
So if they can settle it, even on 20% tariffs, it'll be a big step forward.
59:08
And I think the markets just encourage when they see Trump the pragmatist,
59:13
which means on this case claiming victory, saying he meant it all along, but
59:18
basically doing course correction, which I think is one of his good qualities,
59:23
is being pragmatic when things don't work, adjusting.
59:27
And I hope that's what we're seeing here.
59:30
>> Jon Hartley: Okay.
59:31
I really want to thank you for coming on.
59:32
This has been an amazing conversation.
59:34
>> Kenneth Rogoff: Thank you. Well, thank you for having me on.
59:36
And again, congratulations on the great success of this podcast.
59:41
Great to be on it.
59:42
>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast,
59:45
an official podcast of the Hoover Economic Policy Working Group where we talk about
59:48
economics, markets and public policy.
59:50
I'm Jon Hartley, your host.
59:51
Thanks so much for joining us.