Soumaya Keynes on Trade, Dollar Dominance, and the Highlights of Jackson Hole

David Beckworth: Our guest today is Soumaya Keynes. Soumaya is the U.S. economics editor for The Economist magazine. She's also the co-host of Trade Talks, a podcast in all things trade, including trade policy, trade wars, and the future of trade. Soumaya joins us today to talk about trade, but also some recent economic developments. Soumaya, welcome to the show.

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Soumaya Keynes: Thanks for having me.

Beckworth: I should say welcome back to the show, because you were on that special bonus edition, where we looked at the Fed's decision to lower rates for the first time in many years.

Keynes: Yes, we did. That was also my 30th birthday, so I remember it well.

Beckworth: Wow. A belated happy birthday.

Keynes: Thank you.

Beckworth: We're glad you could celebrate in so many ways. Celebrate with the interest rate cut, that's fantastic. Now, you are the U.S. economics editor for the Economist magazine, and you've been doing this work for some time. Tell us how you got into this profession. How did you get into economics, and into journalism?

Keynes: Sure. So, obviously you can hear from my accent that I was... I'm British. I grew up in London, and in the British education system, you have to specialize much, much more early than you do in the US, so essentially when I was 16, I had to pick the three or four subjects I was going to do for my A levels, and I picked maths, further maths, physics, and economics, and so I was basically a maths nerd, and then in the process of doing my A levels, I basically realized that the economics was my favorite. I didn't quite want to do something that was so abstract as just pure maths. That would have been my second choice, really. And so economics it was, but looking back at it, I basically am a bit ashamed of the reasons I went into economics.

Beckworth: Why is that?

Keynes: Because I think it really was the elegance of the maths, like, "Oh, isn't it wonderful to describe people with all of these wonderful equations?" And it was only in the process of studying it that I came to love it for the reasons I love it today, which is it's a way to think about policy, it's a way to think about the real world, its application to the real world, and all of its complexities was the thing I've come to love, whereas I think at the beginning, I thought, "Oh, what a neat and elegant way of applying all the maths that I love," which is kind of the... Yeah, I regret that slightly, but it's all ended up okay.

So then, so that's how I started studying economics, and then... So, I was at Cambridge, and they do this thing where this research institute called the Institute for Fiscal Studies runs this lecture series for the undergraduates at Cambridge, and it's great. It's such a great way of indoctrinating the students into thinking that the Institute for Fiscal Studies is the best place on Earth, and I was completely taken by this, and essentially decided that that was where I wanted to work, and I ended up there. So, it was basically a research institute. It's closely associated to University College London, so I was doing academic research, I was doing policy-relevant research on health, the relationship between health and socioeconomic status. I did more policy-relevant stuff on the British public finances and the state pension system.

And so, that was me being a professional economist, really. What I wanted to do was be an economist, right? Being a journalist was never something that I had planned to do at all, really. And then one day I got an email from the economics editor at The Economist, saying, "Would you consider applying for this job as the economics correspondent?”

Beckworth: Really?

Keynes: And my original reaction was, "No way."

Beckworth: That's amazing.

Keynes: And then I thought about it, and there was this column in The Economist that I really loved, called the “Free Exchange Column.”

Beckworth: Yep.

Keynes: And if you know The Economist well, it's basically, or it used to be almost a lit review, right? So, it would be a roundup of some really interesting economic papers as they related to some sort of pertinent issue of the day, or some fun puzzle that these economists had shed light on, and when I applied for the job, my understanding was that I would be able to write these columns, right?

Beckworth: Oh, nice.

Keynes: So, I was like, "Great. I could basically every week do a kind of a lit review, and communicate all this fun economics to the outside world." And so that was how they enticed me in, and I did a trial, got the job. So, I got this job as the economics correspondent. After a while, they said, "Soumaya, your beat's a bit broad, why don't you hone in, focus on something? Take trade. Nothing ever happens on trade. It'll be very sleepy, but you'll get a chance to really specialize," because that's what I really love doing. And I said, "Great."

And then trade got quite interesting, so some things started happening. I don't cover Brexit, but I cover basically everything else, and there's enough going on in trade without Brexit. So, I was covering trade, and then they said, "Why don't you move to the US, and cover the US economy, too?" So, now I do the US economy, so I do the Fed, I do labor markets, and I also do Donald Trump's trade policy.

Beckworth: So, you're juggling a lot. You have a full plate of many topics, and you have the podcast on top of your regular day job, and I encourage our listeners to check it out. Trade Talks. I listen to it myself.

Keynes: Great.

Beckworth: To get to speed on the latest trade developments. But you're specialty is trade, and you're really... You're good at that, you focus in on that, and you're going to move into a position related to that. Is that what I understand?

Keynes: Yeah, so within The Economist, there was an expectation that the trade stuff might die down a bit. For a while, it looked like maybe Donald Trump would just do a deal, he'd be bought off by some soybean purchases, and maybe this would be the great war of 2018. I think now, The Economist is reacting as the rest of the world is reacting, and kind of essentially realizing that this isn't going to go away. This is a big, structural, systemic story, that isn't going anywhere, and I think it represents a much bigger shift in the direction of globalization, which obviously didn't change with this trade war. There have been big shifts going on for years, but there was an internal understanding that we needed more on that, and so essentially I'm going to be diverted away from the U.S. economy, to focus on trade, also do globalization. I'll be covering the IMF, the World Bank, and I will have... A colleague of mine is going to come in and be more focused on the Fed.

Beckworth: Yeah. No, that's a nice trajectory, because The Economist magazine, for listeners who don't know, goes way back. When did it start? 18-

Keynes: 1843.

Beckworth: Okay, and I remember reading some quotes from The Economist that have often been repeated about views of globalization in the late 1800s, like the first wave of globalization, so this has been a topic covered well by The Economist. It's a global magazine. It's a great magazine to read. Has a rich history, and you're kind of like carrying the tradition forward.

Keynes: Yeah. It's funny covering trade for a publication that cares so much about trade, but also has quite strong editorial views on trade. I think if I'd come in and decided that actually I thought protectionism was amazing. That would have been-

Beckworth: We wouldn't be having this conversation.

Keynes: Well, that would have been... Yeah, it would have been a problem. But you know, that said, I think it's... The Economist is evolving, as the rest of the world is. I think we've written much more on the challenges posed by globalization in the past few years, and I think it's probably easier to be... It's probably easier to take a kind of more nuanced approach in the past few years than it perhaps was in the past.

Beckworth: Well, you almost have to with the rise of populism, kind of the backlash against globalization, so there's... Just to do your job, you have to look at why these people are doing the things they are. But let me switch gears a little bit, so you're a great journalist, great podcast, but you're also, for folks who follow macroeconomics closely, you have a very special name. Your surname, Keynes, right? So, I know this will embarrass you a little bit, but you're kind of like economics royalty in macroeconomics. So, tell our listeners, how are you related to the famous John Maynard Keynes, who many would consider a seminal figure in the making of macroeconomics, and I know macro precedes him, but he is the person who really brought macroeconomics into what it is today during the Great Depression.

So, what is your relationship to him?

Keynes: Sure. So, he's my great-great-uncle.

Beckworth: Okay.

Keynes: He died in 1946, so I'm afraid I never met him. I always said that I should just change my surname, and then I got married and didn't, so I suppose it's kind of my fault now, if people-

Beckworth: Like me ask this obnoxious question.

Keynes: Yeah, I mean you know, so the way I think about this is that... So, he's obviously an amazing figure. He's an amazing economist. My family, my whole family tree is essentially completely ridiculous. And so, it just becomes so overwhelming, that it's just... There's just kind of... Ha, ha, ha. Isn't it funny? Because obviously, in my job I meet a lot of people for the first time. I meet a lot of economists for the first time, and obviously a lot of people are very excited about it, and there's actually something funny in that I think it probably, perhaps, helps me to understand the impact of implicit bias a bit better, because I had this kind of treatment control, right? I have people talking to me before they know my surname, and then they find out my surname, and they're so interested-

Beckworth: Suddenly, you're very special to them.

Keynes: Suddenly, I'm very, very special. Right, but it's clearly irrelevant to me.

Beckworth: As your work shows. I mean, you've proved yourself independent of that name.

Keynes: I would hope so, right?

Beckworth: Absolutely.

Keynes: And it's kind of funny how much more interested people are after they know all sorts of other information about me, that is much more relevant to whether I should be of interest to them to talk to. I'm not saying I'm the most interesting person in the world, but I just think it's really funny when people are suddenly... They suddenly light up when they hear my surname, given it's so silly, but yeah, I think in some cases, it probably means that expectations are a little bit too high, that I'm going to... Perhaps that I'm Keynes reincarnate, that I-

Beckworth: You're going to write General Theory 2.0.

Keynes: ... have his collected works in my head, for example, and so actually, this did... This has actually influenced the way I went into economics, so I, funnily enough, given that I currently cover the US economy, I always actually avoided macro-

Beckworth: For this reason. For the namesake.

Keynes: Slightly because.... I mean, it's hard to know, but I was always a very much applied micro, public kind of person. I did the public finances at the Institute for Fiscal Studies, but it wasn't really from a macro growth perspective. It was sort of from a fairly narrow, borrowing, debt accounting perspective. And so partly... Obviously I chose completely the wrong profession if I wanted people not to draw the connection, but where I had the choice, at least, I did try to veer away from his area, which is quite a big area, as you said.

Beckworth: Yes. I want to talk about a few of these other areas you've delved into, but your story kind of reminds me of Milton Friedman's son. I had a conversation with him over email, but Milton Friedman obviously is a big figure in macroeconomics, as well, and his son ended up getting a PhD in physics, I believe. But now, he's back in economics, and so I asked him. I said, "Why did you get a PhD in physics, is it because you wanted to just get out of the shadows of your father?" He goes, "Yes, I just... I don't want to have to live up to those expectations," but now he's well known for teaching. He has a book, Price Theory, I think. He's kind of come back in.

But I want to just... Before we move on to the economics, and some of your work, one last thing about you, the person, is you're also a singer, and formerly an actress, and so you don't see many economists who have that part of their life, so tell us about your singing career, and what you do with that hobby and talent.

Keynes: Yeah, so yeah, I was a child actress, but that was quite a while ago now, but yes, I'm a singer. I'm in a choir called the 18th Street Singers, that you will hear occasionally if you listen to Trade Talks podcast. We've actually just recorded a jingle.

Beckworth: Oh, nice.

Keynes: Yeah, it's pretty lame, actually.

Beckworth: We'll have to get you guys to record one for Macro Musings, maybe at some point in the future.

Keynes: We are open for requests, so you know-

Beckworth: Okay. Okay.

Keynes: ... just need to tell the choir.

Beckworth: You've done backup singing for some famous people, right?

Keynes: Right, right. Yeah, so I'm in these choirs. They're pretty good choirs, somehow they let me in, and so it's... We did backup singing for Hugh Jackman a few months ago, which was good fun. But yeah, I kind of think of it as sort of meditative, right? It's the thing that keeps me sane. It's-

Beckworth: It's your therapy.

Keynes: Two and a half hours a week where I just have to focus on the music, and not check my phone, and that's really great.

Beckworth: Yeah. That is hard as an economist, to break away from doing economics. Well, let's move on to some economic issues. It just so happens that both of us were recently at a conference, the Kansas City Fed's Economic Symposium in Jackson Hole, Wyoming, which is arguably one of the preeminent, probably most important conferences for central bankers, and the community that follows them, the academics, the journalists. You were there. You've been there before. This was my first time there. I was delighted to be there. Got to chat and visit with many people. Heard some interesting papers.

But it's also kind of a momentous event, because often there's big speeches that are done there. Bernanke had some important announcements through speeches, and Jay Powell's speech was obviously much anticipated, and so I want to just maybe spend some time today talking about that event. What were some of the highlights, the themes, the big moments you saw there, and I'll maybe share what I saw there, as well, but anything you want to start off with? What takeaways, what exciting things did you see happen there?

Keynes: Yeah, I think first of all, as you say, it was very, very highly anticipated. Everyone was watching out for the Jay Powell speech, right? And everyone, the minute it was released, all the real journalists were outside, writing their quick takes. I was inside chatting to some people, but everyone was scouring that speech for hints about whether the Fed was going to... how much the Fed was going to cut rates, is it going to be dovish, hawkish? And so there was this flurry, and this focus on this one speech right at the beginning, and it was funny to me, because obviously the conference wasn't really about that.

That's why the rest of the world seemed to care about this conference, to kind of read in the tea leaves of what the Fed was going to do, but it just seemed so minor as a share of the discussions at the conference. And so, given the amount of attention that was paid to that moment, those... half an hour when he was speaking, it was not at all dominant. So, the other thing to say is that my job while I was there is to try and write the Free Exchange column, just sort of try and tie everything together, but that gets published the week afterwards, so my take can't be about whether this sentence indicated that they-

Beckworth: Okay, real time analysis. Yeah.

Keynes: ... were going to cut, right? Because it's just going to be late, so my... But also just because it just didn't... It's not as interesting. So, the job, I think, is to draw out precisely these big themes.

Beckworth: Yeah, well on that point of Jay Powell's speech, what I recall about that speech is we're looking at, it's true, there's real time analysis, but I also saw a lot of people looking at Twitter. Is it the speech we're concerned about, or is it Twitter, and so tell us, why were people looking at Twitter when Jay Powell was giving this important speech?

Keynes: Yeah, so actually my take opened with two of the participants at Jackson Hole making a bet on how long it would take the president to tweet after the speech was released, and so I suspect people were checking their Twitter feed to see whether the president was going to react, and react he did, and I think there were two things there. So, first of all, he kind of juiced up the rhetoric, implied that Jay Powell was an enemy. There was some kind of joke, I think this was on Twitter, someone suggested maybe he hadn't realized that it wasn't actually a meeting of the FOMC, it was just a speech, but that's pure speculation.

Yeah, and so he was very cross with... that Jay Powell had not signaled a much more dovish stance, but also he announced tariffs, or he announced that there would be further action on China, and that sent the markets into a tailspin, and so it wasn't so much his reacting to Jay. His kind of separate announcement, I think, that was driving the news-

Beckworth: Okay, but it was a whole new level of-

Keynes: Yeah, I mean a theme of the conference is-

Beckworth: ... mean. I mean-

Keynes: ... was challenges for monetary policy, and I don't think the president's Twitter feed has posed challenge in the same way as it did this year.

Beckworth: Yeah, I mean that tweet, so he had several tweets, but the one that you're referencing, he compared... I think he said, "Who is the worse enemy for America, Jay Powell or Xi Jinping," right? So, he was comparing Jay Powell to this existential Chinese threat, and implying that Jay Powell may be the worse threat America faces, which is just shocking, to see a president say something like that.

Keynes: Yeah, he's not happy. I mean, I was not that surprised. And I actually think... Maybe I've just spent too much time in the DC news cycle, but the stuff that he tweets, in the general context of the things he has ever said and tweeted, this is not the most shocking to me. I mean, but I actually thought there was an interesting difference in the Fed response, so there was the tweet, in which he attacked the Fed, and then a few days later, Bill Dudley-

Beckworth: Oh, yes.

Keynes: ... who you know was president of the Federal Reserve Bank of New York, he wrote this op-ed saying Fed policymakers should consider the impact of their policies on the next election, essentially, and the contrast was between the Fed's response to the Trump tweets, where it basically said nothing. The conference continued pretty much serenely after that original outburst on Twitter, and then the response to the Bill Dudley op-ed, where they actually did release a statement. They did say something to the FT, right? So, they had to react to the Bill Dudley op-ed, whereas they didn't really react in public to the Trump tweets.

Beckworth: Yeah, so it kind of bounced off of them, but the Bill Dudley op-ed was very poorly timed, and not really a great way to promote the independence of the Fed, so the Bill Dudley op-ed basically said maybe the Fed should go after Trump and his reelection chances, which is not a very constructive way to, again, promote Fed independence.

Well, let's go back to some of the ideas, the themes discussed at the conference. Let's set Trump and Jay Powell aside for the time being. What were some of the interesting discussions you saw, or papers? Any takeaways you liked?

Keynes: Yeah, I think there were three big themes of the conference, so the first one was the theme that everyone's been talking about for a while now, which is low interest rates around the world, constraints on monetary policy when you're very close to zero. How much autonomy, or how much power or control do central bankers really have, given the global challenges?

The second one was essentially the challenges posed by the Trump Administration's trade policy, related to the first, how much power do central bankers really have to offset those sort of supply side shocks, essentially? But also demand side. Sorry.

And then third, which was much more closely related to the papers presented, were basically this kind of cry of anguish about the dominance of the dollar. Now again, not a new thing, that suddenly academics uncovered at this conference. It's a fairly old theme. But I think the timing was related to the fact that after the financial crisis, the dollar's importance has strengthened. We've had these cycles of, "Oh, maybe the Euro's going to overtake the dollar as the new reserve currency. Oh no, maybe it's the RNB," right? And now it's like, "Nope, it's really looking like the dollar."

Beckworth: Good old dollar. Yeah.

Keynes: And that poses challenges to the rest of the world, so those... I think those are the three big ones, and so I guess just to kind of go through systematically some of the papers. Paper number one, so after Jay Powell's speech, which was about... really on that first theme, so really kind of looking at the challenges for monetary policymaking. You have this paper by Alan Taylor and Oscar Jorda, which was looking at r-star, the neutral rate of interest, around the world. So, asking this question, how much can one large economy diverge from the rest of the world? When everyone else is cutting, how much can they deviate?

And so, what they did is they decomposed the variance of interest rates into a global component, and a local component, and essentially argued that there was this big global component, and it... Essentially, rich economies had to be increasingly synchronized. Kristin Forbes was a discussant. She's at MIT. She's great.

Beckworth: Yeah, she was really impressive in that presentation... I thought... I was like, "Wow, she's on fire up there."

Keynes: Yeah, well so, as a journalist coming to these conferences can sometimes be a bit of a nightmare, because you come, the theme is very broad. Challenges for monetary policy. That covers a lot of ground, and somehow you've got to tie everything together, so you have to tie together the tweets, and all the research, and trying to come up with some kind of consistent theme. And the thing that makes your job really hard is when there's a paper that gets presented, and you're like, "Yeah, okay, I get that," and then the discussant comes up and is just like... Or like, "You haven't included this," and you're like, "Oh God, well I don't know what to think now," right?

Beckworth: Right, right.

Keynes: And it meant that it's a great discussion for everyone, but essentially Kristin stood up and said she had some questions about how this global interest rate was measured, so they had essentially focused on some of the world's richest economies, but if you included emerging markets, then the decline in interest rates didn't look nearly so extreme.

Beckworth: There was a striking graph she showed. I tweeted it. That graph that showed the short-term real interest rate for advanced economies, which you do see this downward trend, and then emerging economies, it's just fine. Which is... It was shocking... I hadn't thought about that or seen that before. It was a really striking point she made. Yeah.

Keynes: Yeah, and so that was kind of a bit of a nightmare for me, because it just makes it very difficult to have a very clear takeaway, because it's essentially, if the finding isn't robust to the way that you're measuring it, then it's just very difficult to write about.

Beckworth: Yeah, and that's the key contribution of that paper. One of the key contributions was to measure, estimate this global r-star, this global neutral rate, and then how far can we deviate from it, given the global capital markets. So, here's my push back on that paper, and that is what really drives this, this kind of core global r-star? And I guess my question is, maybe the Fed has some role to play in it, given that the third point of this conference that you highlighted, the dollar's dominance... Fed, when it sets monetary policy, it reverberates around the world, and it just... maybe an indirect feedback loop, where the Fed does things, it effects the rest of the global economy, effects global capital markets, and what they're measuring is that kind of global response, but I wonder if they're missing how influential the Fed is, maybe in initiating shocks.

So, the global financial cycle, Helene Rey, and then also one of the papers presented, I think you're getting to, by Arvind Krishnamurthy and his co-author, about the... They call it the global dollar cycle. That speaks to the influence of policy choices made here in the United States, so that's just one observation I had, is well, who's really driving, beyond the fundamentals, who really drives maybe the cyclical movements in that global r-star?

Keynes: Yeah, I think this relates to the other papers presented. There was one... There was a paper by Sebnem Kalemli-Ozcan. I'm so sorry, Sebnem, for mis... for butchering your surname. So, she's at Maryland, and she had this paper looking at essentially the spillovers from Fed policy, and what happens when the Fed tightens, and the cost to emerging markets, and she was arguing, essentially, that when the Fed tightens, that increases the risk premium that investors place on emerging market debt. So, you might think that the Fed tightening... You might worry that that is going to create balance sheet mismatch problems in emerging markets, so you might think that they're more risky, and so you maybe want to move all your money out.

And so, you have a capital flight problem, and that can become a self-fulfilling crisis, and so she said... She essentially said that there's this channel whereby the Fed imposes these costs on emerging markets, who were just kind of doing their own thing, and that there's no fundamental reason why they should be seen as more risky, apart from the Fed. And she argued that their domestic monetary policymakers couldn't completely offset that shock, so it had a choice between raising domestic interest rates to try and stop that capital from flowing out, but if it did that, then it might just hammer the domestic economy, and so she essentially argued that you should let your exchange rate try to absorb some of the shock, but it wasn't going to do everything. And so, she was saying that when the Fed tightens, then that's going to cause pain through this channel that these economies cannot offset.

And bigger picture, if you think that that channel is in operation, and you think that these emerging economies are growing bigger and bigger as a share of global GDP, then you might worry that if that generates some kind of slowdown in their economies, and then perhaps that could end up spilling back to the U.S. economy. Now, that's me, that's not what was in her paper, although others did mention those kind of spill back effect.

Beckworth: Yeah, lots of spillover stories being told.

Keynes: Yeah, and that... So, Mark Carney's speech, the governor of the Bank of England, his was also striking, in that he emphasized the costs of having this dollar-denominated system, because it meant that you have this very integrated world, but one that was also quite fragile, and so you had emerging markets essentially trying to horde dollar assets, to protect themselves against that fragility that was pushing down interest rates in the U.S. and in the world, and that was making life harder for monetary policymakers who wanted room to cut interest rates in case something went wrong domestically.

We also heard from the governor of the Bank of Israel, who pointed to his own experience, so only up until December of last year, the Fed was raising interest rates as the rest of the world was looking kind of wobbly, and so he was talking about how this was difficult for the Israeli central bank to deal with, because they were seen as a safe haven, an emerging market safe haven. Money was rushing in, kind of not appropriately for the domestic economy, and so they were only able to partially offset that. Right?

So, this was a recurring theme that people brought up again and again. Of all these mechanisms, all these linkages from the Fed tightening, from the dominance of the dollar, to the rest of the world, and you really don't have to take many more steps to think that that would spill back into the U.S. Obviously, if you look at Jay Powell's speeches, his press conferences, the justification for the cut in interest rates recently was... There were a few different factors justifying that. One was low inflation, one was trade policy uncertainty, but a third was concerns about the health of the global economy, right? So, you maybe think that actually the Fed is taking these spill back effects into account.

Beckworth: After the fact.

Keynes: Right, after the fact-

Beckworth: After they tighten.

Keynes: But-

Beckworth: They're like, "Oopsy."

Keynes: Oopsy. Yeah, I mean... and it's tough, because obviously if they start saying, "Oh, we can't tighten, because India's looking-"

Beckworth: The global economy. Right.

Keynes: "... a bit wobbly," congress is going to be like, "Uh-"

Beckworth: That's not their mandate. Right, right.

Keynes: Right, so it's difficult, but I don't think it's the case that the Fed is suddenly waking up to the fact that the rest of the world matters, right? But perhaps they are responding to the rest of the world more than in the past.

Beckworth: Yeah, and again, that was, to me, if I had to pick one theme that I heard more often than not, at papers, hallway conversations, it was this dollar dominance theme, and the challenges it presents to policymakers around the world, including the U.S. I guess that's... maybe that's the difference. You mentioned this is really not a new problem, right? It was I think Richard Nixon's secretary of the treasury who said, "The dollar is our currency but your problem," to foreign finance ministers in the 1970s, and now I guess you would say it's our currency and our problem. The world and our problem back home.

And Mark Carney's talk was really interesting. I found that really fascinating. He goes through and kind of details all the problems the global financial cycle, and how it affects everyone. The weak emerging markets, and then the strong ones, like Israel. You can't win. No matter what role you play, and it was really, really fascinating, and I found... Yeah.

Keynes: So, I had a question for you.

Beckworth: Okay.

Keynes: So, he had this proposal at the end of his speech, which is to think about creating a new technology backed... I think he called it a synthetic reserve currency, so use technology to create a kind of new safe asset for the world. Not Libra, because of regulatory problems, but something kind of like it. What did you think about that?

Beckworth: I think the idea was a really fascinating one. It's well intentioned, but it won't see the light of day for economic reasons and political reasons. So, one of these points we've been stressing is the reach of the dollar, so I was talking to some people there, and did my own checking on numbers, but the BIS, you know this well, too. The BIS reports the amount of dollar-denominated debt that's issued outside the U.S., and that's a little over $11 trillion. Then you look at the number of dollar-denominated assets that we've sent to the world, foreigners' holds that are liquid and could be traded, about 16. They hold more. They hold equity and FD on the U.S., but look at just total debt outside, that's relatively tradable, we're getting close to $28 trillion. That's a huge number.

For this synthetic currency that Mark Carney's proposing to compete with the dollar, you'd have to have it scale up to $20 trillion some dollars, and the problem is this... That's huge, and whose balance sheet's going to expand that big, to displace the dollar? So, I think his idea was the central banks of the world would back it up, but can you imagine central banks expanding their balance sheets enough to kind of provide the assets to compete with the dollar? I don't think economically it can break, at least currently, the network, the size, the reach of the dollar. Just too big.

But secondly, the political blowback I think would be huge. If you came back to the U.S. and said, "Hey, we're going to try to find a competitor for the dollar, that's going to take its place, and secondly, it's going to take away all the seigniorage that the U.S. is getting from the currency to the world, now maybe that argument would fly over most peoples' heads, but there's be a loss of seigniorage to the U.S. government, to the U.S. financial system in general, because we'd get all this demand for our dollar assets, so I think it's a great idea, and is motivated in part by the Libra. Great thinking, but I just... I see a huge hurdle for it to ever become a reality, so I think my conclusion is good luck, but we need to keep thinking about other solutions.

Keynes: Okay.

Beckworth: Sorry to be pessimistic on that note. I mean look, on one hand, the dollar's been great for the world. Could globalization, international trade have been as robust without a global medium of exchange like the dollar? Maybe, but maybe not. Maybe the dollar is the price we pay for lifting billions out of poverty. I don't know. There's benefits to the dollar being dominant, but there's... I think what we're seeing is the increasing recognition of the cost to having this dominant currency. But you know, along those lines, I'll just throw this in, as well. There's been a proposal, a bipartisan proposal here in the U.S. to tax foreign purchases of U.S. dollar assets, whether it's treasuries, or U.S. commercial paper, anything foreigners can get their hands on when they get times of panic, right?

And I also have reservations about that proposal, so these are... All these proposals try to get at this problem, dollar dominance, but all of them, in my view, fall short, and I'm wrong, and I'm willing to be convinced that I'm wrong, but on the second proposal, the concern I see is that what it wants to do is effectively reduce the supply of dollar safe assets. You tax it, you're shifting that supply curve back, effectively, and I think that would only make the problem worse. You can reduce the supply of safe assets, but you haven't reduced the demand for them, and I think... What would it look like? In my mind, if we looked at 2008, we saw something like this when the collapse of triple A mortgage-backed securities happened, we thought they were safe assets, suddenly they weren't, so the supply of safe assets suddenly went poof.

What happened? Well, we raced to the rest of the safe assets that were left, so treasury prices went up, interest rates went down, the dollar strengthened, kind of the complete opposite of what the bill's proponents want to have happen, so it's... I don't think there's an easy fix. I think there's all these attempts, but they're not going to get past the strength, the reach of the dollar.

Keynes: I think just going back to the papers in Jackson Hole, this relates to Arvind and Hanno's paper, where they essentially look at what happens when the Fed tightens, and they interpret that as essentially a sign that the Fed is reducing the supply of safe assets, and they find that the premium that foreigners pay, the kind of... for the safety of dollar treasuries goes up, right? So, supply stalls, price goes up, and that imposes a kind of cost on the rest of the world. So, in the short term, you would worry that yeah, that that supply restriction would just make life more expensive in the rest of the world, and not really deal with the demand, which is the fundamental issue.

Beckworth: Yeah, and you look at the negative rates we see already, and I think they are creating problems. I think this proposal would just further push us down into negative territory. I mean, if you look into the Eurozone, the ECB has a page they report triple A rated yield curve measures, so they... From short-term to long-term, all the way out to 30 years, it's negative. A yield curve out to 30 years where all the interest rates are negative, and I just think if this bill passed, it would be even more pronounced, and it might even... We might even see a 10 year treasury go negative, so-

Keynes: Okay, so I think I probably... I don't think you should much sleep over this bill. I mean, bills like this have been proposed-

Beckworth: Thank you. Okay.

Keynes: And they-

Beckworth: I'll sleep better tonight.

Keynes: The Brit explaining to the American the political system that you have, the [inaudible 00:38:38] political system that you have. But yeah, there're kind of kooky bills proposed all the time, right?

Beckworth: Yeah. Okay, that's fair.

Keynes: I think the same bill also proposes a change to the Fed's mandate, so that they would actually target the current account.

Beckworth: Yes, that's the other-

Keynes: As well, so-

Beckworth: ... bizarre part of that.

Keynes: Yeah.

Beckworth: Yeah, as a trade economist, you're just like, "What?"

Keynes: I mean, again, it's trying to get at the same problem.

Beckworth: It is. It's well intentioned. To be fair to the proposals, it's well intentioned. It means well, it's just not going to do the right thing.

Keynes: Yeah. I doubt it will.

Beckworth: All right, let's move to the final theme of the conference. Why don't you tell us about that?

Keynes: Yeah, so this was the effect of trade policy uncertainty, and how much monetary policymakers could lean against it. And so, you had Jay Powell saying, "Yes, of course, as central bankers we can effect confidence, and expectations, and demand," but monetary policy is no substitute for a secure global trading system. And I spoke to Jim Bullard, and he was saying that, you know, we're in a kind of regime shift, and people were waking up to that, and then that... The uncertainty was just a new thing, and I think generally there's the feeling from the central bankers that this isn't something they've really had to deal with before, or not in living memory, at least.

There have been bouts of protectionism before, so the 1980s, there were trade restrictions with Japan, but Donald Trump I think poses a more systemic threat, in that you're at the whim of his Twitter feed, essentially. He's essentially shown willing to use whatever law he wants to work up tariffs, in order in some cases to persuade people to do things that are unrelated to trade, so he's shown willingness to use tariffs as a lever against anything, and that is tough for businesses to deal with, but also tough for central bankers to deal with, because they don't know how important that kind of certainty was for global stability. They can lower the cost of capital for businesses, to try and encourage them to invest. They can try and convince businesses that, "Don't worry, demand is going to be awesome, and therefore you should invest," but if businesses are just frozen because they don't know what to do, because they don't know which of their input costs are going to be suddenly tariffed at a moment's notice, then that's... It's difficult for them to make that investment, I think.

Beckworth: So, it's the uncertainty more than the actual trade war itself. It's the how it unfolds, we don't know, versus the actual tariffed dollar amounts?

Keynes: Yeah, if you look at the actual dollar amount of the tariffs, they're just not that big. You compare them to the Tax Cuts and Jobs Act, they're not as big as that. They've been phased in in a very gradual way. They've been phased in in a way that would minimize the impact of consumers, so it's possible that some of the effects that we're seeing so far are not representative of what's going to happen when all of the tariffs are finally rolled out, as of mid-December, but yeah, the tariffs are a selective, discriminatory tax increase on some things, but if they were only that, then they would be fairly manageable. You can argue about whether businesses had enough notice, but I think the bigger thing, and the big unknown is the effects that the uncertainty will have.

And it's not just the uncertainty of will he raise a tariff of 25% next month or not, it's the uncertainty of what else. Could it be any kind of any tariff on anyone? But also, could he start going further? Could he get bored of tariffs? Could he start using other laws to restrict contact with foreign companies? This use of tariffs, it was unthinkable, I think, however many years ago, and he's shown great willing to just completely upset or change that norm, so what other norms could he change? That kind of bigger uncertainty, like we don't know what we don't know, I think that is the bigger weight on the global economy right now.

Beckworth: He's a credible threat to business planning, business investment. I mean, the Chinese clearly think he's a credible threat. He believes... If there's one thing he believes in, you know, it's his views on trade. I mean, you can say he wavers on some things, but he has a certain view of trade that guides his thinking. Is that fair?

Keynes: Yeah, so I don't know. I've basically given up on trying to develop a framework of how Donald Trump's mind works, and then make predictions based on that, so I have editors come to me and say, "Oh, Soumaya, you don't know. The thing is that he really hates trade. He's been consistent on this for decades," and that is true. He's been consistently hawkish on trade for decades, and then I'll have someone else come up to me and say, "Oh, Soumaya, the thing you need to realize is that Donald Trump really likes trade deals. He just really wants to make that deal and really wants the handshake. He really cares about the stock market, therefore he'll really want to do a deal," right? And so, you've got these two opposing narratives that predict-

Beckworth: That's interesting.

Keynes: ... completely opposite things, and so you can kind of explain anything after the fact, and I just experience he takes it as very risky, for predicting what's going to happen.

Beckworth: It's hard for you, a trade expert to know, then it's even harder for a business, who's trying to plan, build a plant, or make a decision.

Keynes: I'm feeling fairly smug about my prediction before this really got going. I think at first, people were freaking out about NAFTA, about the USMCA, and not so much about China, and my view was always no, you need to worry about China much, much more than USMCA, because just thinking about all the kinds of different pressures, USMCA... Sorry, NAFTA, you don't have bipartisan support on the idea that NAFTA is this huge, huge problem. On China, you do. You also have a lot of people in the business community who are annoyed at how they've been treated by the Chinese government. You have all the national security stuff, right? You have the DOD, who's very upset about a bunch of the stuff that the Chinese are doing.

So, you have much more of coalition on China than you ever had on NAFTA, and when you've got that much political pressure pushing you one way, and pushing the other, there's just very good reason to think that you should have been concerned about China much more so than NAFTA, and I think I was basically right.

Beckworth: Yeah, that's why you're the trade expert here. Let me ask this question, then. So, in the next year we have an election, a presidential election, and I know Trump is mindful of the effect his policies are having on the stock market. In fact, he said recently that stock market would be up 10,000 points if... some big number like that, if it weren't for my trade war. I mean, he took full credit for it. So, he cares about the handshake, he cares about the stock market. I see two tensions here. He wants to hit China hard, and make them come to his terms, but he also wants to win an election. Do you see one giving way to the other as we get closer to the election?

Keynes: Maybe. Again, this... We're veering into really dangerous territory. It's kind of Donald Trump mind reader. I get all the transcripts of his... when he talks to the press, and there was one I think a day or two ago that said, "Even if the American economy wasn't doing well, we'd still need to do the China thing," so he may be setting himself up for continuing that. There's a lot of recession talk around right now. My understanding of how trade policy uncertainty works is not that it, on its own, generates some kind of crisis, it's that it... It's more of a slow squeeze. So, you worry about the productivity sapping effects, of firms holding off of investment, so with the U.K., after the Brexit vote, we didn't see a crash in the economy, it's just everything slowly gets a bit slower than it would have been without it.

Now, there's all sorts of confidence demand effects. Maybe we'll reach this threshold point where actually everyone starts worrying that a recession's coming, and then that becomes self-fulfilling, but if that doesn't happen, if what we see instead is just a kind of... things get a little bit worse, and it's kind of a bit murky, then I just don't know if that will be enough to get him to completely reverse course on China.

Beckworth: Now, this goes back to the point you were making earlier, that the tariffs, that the trade wars, kind of in isolation by themselves, was just a negative supply shock to the economy. I think what... which means we're not as productive as we used to be, end of story, but it's the uncertainty of the trade policy that pushes us closer to a recession territory. I don't think it gets us all the way there. I think it also requires the Federal Reserve failing to respond properly, or overtightening last year. I think there's more to the story than just Trump, but his uncertainty is just kind, in my view at least, pouring a little fuel on the fire.

Keynes: Right, it's really unhelpful, so there's a supply shock that's also demand shock, and there are questions about whether the Fed can offset that, and there was this risk that everyone suddenly decides, "Oh, I'm not happy. I'm going to stop spending," and then that... then everything goes wrong. But again, now we're in even more dangerous territory from trying to read Trump's mind-

Beckworth: We're forecasting.

Keynes: ... to try and forecast whether the U.S. economy is in a recession.

Beckworth: That's what we do on this podcast. We pretend we know everything.

Keynes: Right.

Beckworth: So, it's always good. Always fun. Well, with that prediction in hand, our time is up. Our guest today has been Soumaya Keynes. Soumaya, thank you so much for coming on the show.

Keynes: Thanks for having me.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes, or your favorite podcast app, and while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

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