Paul Tucker is a 33-year veteran of the Bank of England, where among other positions, he served as both a member and deputy governor of the Monetary Policy Committee. Currently, Paul is a research fellow at the Mossavar-Rahmani Center for Business and Government at Harvard. He is also a returning guest to the podcast, and rejoins Macro Musings to talk about his new book, *Global Discord: Values and Power in a Fractured World.* Specifically, David and Paul also discuss China’s push for reserve currency status, how to sell international legitimacy to the general public, the geopolitical advantage of trade deals, and much more.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Paul, welcome back to the show.
Paul Tucker: Thanks very much for having me again, David.
Beckworth: Well, it's a delight to have you on, to have a prominent central banker, from a prominent central bank. We had a great time last time we were on the show, and previously we discussed your book that was titled Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. And that was a great book because it really underpinned the philosophy, or a philosophy, behind central banking, one that I've taken to heart when I think about issues the Fed has been wrestling with and other central banks. And Paul, one question I got to ask is, you like to write big books, right? These are both large books, impressive books, very scholarly. And I just went and looked at the page count. So this current one is 552 pages, and the previous one was 656 pages.
Tucker: Take a hundred off those in terms of text. Strip out the bibliography and index. This one's 450 and the previous one was 500.
Tucker: That's still long.
Beckworth: Yeah, but they're great books and very scholarly, and you learn a lot reading them. I'm just impressed that you can produce such big tomes. So I want to get into your book Global Discord, because it's very timely in the environment we're living in. But before we do that, one quick mention of your previous book, Unelected Power. Just yesterday, Chair Powell gave a speech at the Riksbank Bank in Sweden, where he actually cited your book. And the speech had to deal with, what was the goal of the Federal Reserve, and one of the things he mentioned is that the Fed is not responsible for climate change. That's something that Congress, some other federal agencies, should do. And I just found it interesting, he stressed the importance of the independence of the Fed, made that point about climate change and he cited your book. Any thoughts on his speech?
Tucker: I liked the speech. I thought it was short, it read as though he'd written it himself. I think that would be a good lesson for some of the economic speeches he gives. This isn't only this chair, the previous chairs, too many of their speeches from the Fed read like staffer speeches rather than like policymaker speeches. But I liked the content, I agreed with the content, and it was crisply conveyed. And I think he's very conscious of being an unelected official, with a mandate from Congress, and that's important.
Beckworth: So let me summarize a key takeaway I got from that first book, and that is, Congress in the case of the US, Parliament in the UK, they should only delegate authority or powers to agencies for which there is a broad consensus. Is that right?
Beckworth: So for example then, price stability. A majority of Americans agree that we need price stability, therefore we delegate that responsibility to the Fed. Climate change, in the context of this Powell speech, is more contentious. And moreover, the Fed doesn't have the tools to deal with it. And so that's something you wouldn't delegate to the Fed. Is that a summary of the...
Tucker: Well, it's not just that I wouldn't delegate it to the Fed. In the United States, there's a question about whether one could delegate it to any arm's length agency...
Tucker: ... insulated from day-to-day politics. I think one could in Europe, on that.
Beckworth: More consensus there.
Tucker: I think there's much closer to a consensus in Europe, including my own country, than there probably is in the United States. That's an enormous issue, given that climate change is probably going to require action from all the big states. But I certainly wouldn't give it to the Federal Reserve, even if there were a consensus, because one wants to keep focus in these very powerful independent agencies. And I think monetary systems stability, meaning both price stability and stability in the banking sector, is enough. As we have repeatedly seen over recent decades, sadly.
Beckworth: Okay. So we want to jump into your new book, Global Discord: Values and Power in a Fractured World Order, and we'll provide links to both of your books in the show notes. But I would be remiss, Paul, if I did not ask you about central banking today. Again, it's an opportunity, a real treat to have you on the show again. And in particular, where we are at this stage in the history of advanced economy central banks. We can focus in on the Fed, but the argument has been they fell behind the curve when it came to inflation over these past few years. And just what is your take on what's happened, and where we are with the Fed? And if you want to go to the ECB that's fine as well, but let's at least cover the Fed.
Recapping the Fed’s Inflationary Mistakes
Tucker: I'll focus on the Fed. I think the ECB is a lot more complicated.
Tucker: I think they have a much more difficult job than the Fed. So the Fed, I think essentially, there were three mistakes. The one is in 2020, in the face of the economy closing down and being closed down, continuing to add to monetary stimulus. So you're trying to stimulate aggregate demand, as aggregate supply is shrinking. This was a strange thing to do. I don't quarrel at all, on the contrary, there was a plain need to act as a kind of dealer of last resort in the spring of 2020, when the markets completely fell apart, when people finally realized that COVID was serious. So I think that was one mistake. I think that's a mistake that's shared amongst all the big central banks. And I think not all purchases of government bonds need to be quantitative easing. I think that's the lesson. And I think a previous generation, not necessarily mine, but a previous generation knew that.
I think not all purchases of government bonds need to be quantitative easing. I think that's the lesson. And I think a previous generation, not necessarily mine, but a previous generation knew that.
Tucker: The second mistake was in 2021, when the fiscal stimulus came along. I think here was the really big mistake of analysis at that time, which is that even if it was reasonable to hold, the central expectation was that the inflationary hit would be transitory for various reasons. Given the fiscal stimulus, the risks were plainly to the upside. I really don't see how any reasonable monetary policymaker could have concluded both that inflation was most likely to be transitory, and that the risks were also completely symmetric. It won't do in my view, to blame this on models. The models implicitly assume kind of gravitational pull back to the back to the target. But the real anchor is the committee itself, and so the committee needs to make judgments outside the model. It needs to make judgments about when it needs to be preemptive, in order to underline its credibility. But put more colloquially, why if you've got a load of fiscal stimulus, do you need to also add to the monetary stimulus?
Tucker: Now the tragedy during this period, 2020 and '21, is that quite apart from all those macroeconomic policy arguments, this was the best opportunity in generations for government to fund itself long, in the bond markets, because bond yields were so low. And instead government has effectively funded itself at a short rate, floating rate of interest. That's really bad. That's a really bad debt management decision. So I'm arguing both that it wasn't necessary, and in some respects it was a bad idea in monetary policy terms, and that it was certainly a bad idea in public finance terms. And why were those mistakes? I think that part of it was the period of moderately below target inflation maybe kind of screwed up people's minds, but also a kind of distraction, talking about running the economy hops in terms of inclusive growth. I mean, inclusive growth is a really important thing. I think it's possible to argue that inequality, climate change, social justice, are all more important than the things that the Fed's responsible for. But the Fed's responsible for the things that it's responsible for, price stability and banking stability, and the rest should be left to Congress and the US Treasury.
Beckworth: So let me piggyback on one of those points you made, and that's the public finance angle and you said the US effectively financed its operations via short term floating rate, which in other words, the Fed issuing lots of liabilities, buying up government debt. And I bring that up because our friends Andrew Levin and Bill Nelson have a paper they put out for Hoover, they also did a policy brief for us at Mercatus where they highlight the huge cost that is now going to be imposed on taxpayers. And I know there's a counter-argument, you got to look at the net effect, there was the benefit as well as there's the cost. But Andy and Bill are focusing on the cost, and they estimate close to a trillion dollars in terms of cost to taxpayers, going forward, given we have higher rates, there's losses on the Fed's balance sheet. And I bring that up because you had a note that you wrote, or a policy paper, that I was really interested in.
I think it's possible to argue that inequality, climate change, social justice, are all more important than the things that the Fed's responsible for. But the Fed's responsible for the things that it's responsible for, price stability and banking stability, and the rest should be left to Congress and the US Treasury.
Beckworth: I don't want to spend a lot of time on this, but I do want to mention it, and we'll provide a link to that. And you wrote a paper for the Institute of Fiscal Studies that was titled, *Quantitative Easing, Monetary Policy Implementation, and the Public Finances.* And the Bank of England is also wrestling with this issue now. I believe they had an arrangement, though, going into this with the finance ministry, that they would be taken care of, recapitalized, if needed. But you outline a proposal for a tiered operating system, which would be one way to minimize the cost from having these balance sheets. And I'm just wondering, do you see any momentum or interest for such approaches in other parts of the world, including the US?
Prospects for Tiered Operating Systems
Tucker: No. So far. Which I think is really interesting. The detailed mechanics, the detailed differences between the Fed and the Bank of England in this respect, are just optics. In the UK system. It just transfers the cost directly to the Treasury, and so makes it clear that the Treasury is borrowing a floating rate. In the US, the Federal Reserve will run losses, and therefore will pay over less seigniorage to the Treasury. But it amounts to the same thing. In order to get one's head around this in terms of the public finances, you have to consolidate the central bank and the Treasury, and therefore net about the obligations and transfers between them. I think the big issue is this: if any central banker were to suggest, "No, we can't operate a monetary policy with a tiered reserve system, or it would mess up the transmission mechanism," they are just wrong. I mean, I am absolutely sure they are just mistaken in that.
Tucker: There is a big issue, which is this: so in moving to something like a tiered system, where you only remunerate at the policy rate, the marginal dollar of reserves, which you can do via our corridor system, for the technicians listening to your podcast. The rest of it you wouldn't remunerate at all. Now if you move to that, that could look like a tax. I'll come back to that. And so then there's a trade-off between, you are introducing a distortionary tax, which is a microeconomic issue, in order to solve a fairly major problem in the public finances. That's a trade-off for the Treasury to make. And then, in a sense, the Federal Reserve or the Bank of England would have a veto, in terms of their view of central banking. It's obvious what my view of central banking is, but I think they could do it. I think the really big trade-off is for the finance ministry, the Treasury.
Tucker: I think the uncertain question is whether stopping paying interest, the policy rate of interest, on infra marginal reserves is a tax or not. It depends really on whether higher fed funds rates are getting passed on by banks to borrowers, in terms of lower borrowing rates, and to depositors in terms of higher savings rates. If hypothetically, it's not passed on to customers at all, but goes straight into the bottom line, and bonuses, and dividends. Well then, actually, stopping paying interest on reserves, [inaudible] reserves, will be removing a subsidy. So I think the question of whether the banks pass on the interest on reserves matters a lot to the finance ministry, micro versus macro trade-off. And what I did in the paper for the IFS is try and set out all of those issues clearly, because I think the debate around this has being muddled. And I think it will come back, because I think the numbers are going to get really big.
Beckworth: Yeah. So maybe in the US there'll be more interested in this topic the farther we go along, and the greater the costs become in terms of apparency to the public. Again, we're here to discuss your book Global Discord, but I have to ask one more question Paul, since I have you. And that is the Fed's expanded use of its liquidity facilities during the pandemic, in particular during that period where it was a market maker or backstop, and it expanded the number of countries that had currency swap lines. It also introduced some bond facilities. Oh, and it also introduced a foreign institutional monetary repo line. So foreign governments, finance ministries... Which opened the door for China. China did not have a currency swap line, but it opened the door for places like China and lots of treasuries to get dollars, if they needed them.
Beckworth: But the growing reach, I guess, of the Fed, and backstopping the global dollar funding market, or if you want to call it shadow banking system, fine. But it definitely had this international reach. And in your previous book we talked about the political legitimacy issues facing the Fed, we've already touched on climate change. And this might be a nice transition into your current book, because in this situation we have the Fed kind of making these decisions which reach beyond domestic US mandates. How do we think about that, in terms of the way you look at this issue?
The International Reach of the Fed
Tucker: Two quick comments and then I'll come to the point about the international part of this. So I think using the central bank to steer credit to particular sectors, or away from a particular sector, is problematic. And people spotted in the last crisis, politicians spotted, "Hey, central banks can blatantly do this kind of thing, let's get them to do more of this." I think that's really pretty problematic. The second is, the Federal Reserve, the Bank of England, the ECB, going to be a market maker of last resort, a lender of last resort, to not only the banking system but to the shadow banking system? Yes, it is. And it's better to recognize that upfront. And, it would take us too long today, but I've set out proposals for doing that, that I think would address that the law has a problem.
Tucker: I think the neglect of shadow banking is quite shocking, given that shadow banking is part of what caused the 2007-08 crisis. That too can bridge to the discussion of Global Discord, David, and we'll come back to it later. Because in a headline, the West cannot afford another financial crisis. Everybody who lobbies Congress to stop making shadow banking safe is endangering national security. I'm going to defend that proposition later on. The international thing, in terms of other central banks, I frankly think the Fed have done a better job this time than during 2008-09. Global Discord begins with the story of somebody coming into my then office in the Bank of England. This is probably 2009, can't honestly remember now, and saying, "The Fed has just refused India a swap line," which is a secured line of credit. And my response was something like, "Don't they realize India's going to be a power?"
I think the neglect of shadow banking is quite shocking, given that shadow banking is part of what caused the 2007-08 crisis...The West cannot afford another financial crisis. Everybody who lobbies Congress to stop making shadow banking safe is endangering national security.
Tucker: I thought saying no to India was above the Fed's pay grade. Now that of course can seem to be intention, with my views that central banks should stick to the knitting. But I think the question really was whether the US Treasury wanted to give. If the Fed didn't want to give the Reserve Bank of India a swap line, then I think the White House should have decided whether the US Treasury was going to do so, possibly funded directly by the Federal Reserve. There's no problem in that. You just offset the monetary increase for your open market operations. That's not hard.
Tucker: But the underlying theme was, I was thinking, "Oh my goodness, no, no. We're going into a century where India's going to be a power, it's going to be a player. Like all rising powers, it's kind of touchy. Don't alienate them unnecessarily. They are in a very, very special part of the world, and they have a vast population. So if they grow, they're going to be important." All that said, I think that the way the Fed approached it during the pandemic, basically offering repo facilities for people that hold their treasuries with the Fed as a custodian, that was an eminently sensible thing to do. I mean, why on earth should any sovereign country hold their treasuries with the Fed, if they can't get a repo line? I mean, I'm going to have some quite tough things to say about China, but that includes China, because otherwise China should just go to J.P. Morgan or somewhere, and get some kind of repo line.
Tucker: So I thought that the Powell Fed handled that pretty well, actually. One of the themes of the book, is that US leadership in the world, US security leadership in the world, the security umbrella that you provide to where I live in Europe, when you provide to parts of East Asia and elsewhere in the world, this both fosters use of the dollar, but also depends on the wide use of the dollar, because it makes it cheaper for you. That carries risks for you, because things can go wrong in dollar markets around the world. And in a sense, the Federal Reserve's international lender of last resort role is umbilically tied to your role as the benign, I hope benign, global hegemon. I say somewhere in the book if the US hegemon has an unknowing headquarters, it's the Federal Reserve Building. It's also the Pentagon, of course, as well. But it is the Federal Reserve Building.
Tucker: And my old institution, I left it a long time ago now, my old institution absolutely understood this during the 19th century, and the first part of the 20th century. I mean, they were internationalists in a way that the Federal Reserve has kind of struggled to get its head around. And I think that's because the Federal Reserve doesn't really understand its place in the world, and the dollar's place in the world, as well as my 19th century predecessors did.
Beckworth: All right, well let's use that then, as a segue into your book. Again, the title is Global Discord: Values and Power in a Fractured World Order. So let's begin with maybe a summary of the book, if you can provide one, and then we'll get into some of the specifics.
Global Discord: Values and Power in a Fractured World Order
Tucker: Oh, let me do it in just a few sentences. We are in a period which I think will go on for a long century, where there is some kind of contest between Washington with its western allies and eastern allies and Beijing, for the terms of world order and the terms of international cooperation. I think that that will eventually be colored by the rise of other states such as India, conceivably Indonesia, some others, who knows. But basically countries with large populations that have the possibility of growing rapidly for a long, long time. I think this will place great pressure on international cooperation, in formal organizations, and in other ways too. And I think we need to kind of think through, almost from first principles, dare I put it like that, how to approach this. That it's not a set of tactics, it's a set of strategies, and being clear that our objectives should be to hang on to the liberal, democratic, constitutional republican way of life that we have somehow managed to forge over the past 250 years, and which I think is kind of miraculously wonderful.
Beckworth: And the example you gave a few minutes ago about the dollar swap line not being given to India as an example of not thinking strategically, thinking tactically in this emerging world. So it was a great read and again, kind of the takeaway, how can we in the West and other constitutional democracies maintain our liberal traditions or values, while staying engaged with rising authoritarian states, particularly China? And I guess the difference between now and maybe the previous period with Soviet Union is, we're much more interdependent with China than we were with the Soviet Union. So that raises the stakes. And you also really bring out this great illustration from the Bretton Woods system. You noted when it began to break down, it was a system where trade, monetary affairs, geopolitics, they were all interlinked and it was very clear. And people like me, we tend to get in silos, think about monetary policy by itself. Maybe speak to that point that, when you talk about the strategy, it really does require putting all the pieces of the puzzle together and looking them collectively.
We are in a period which I think will go on for a long century, where there is some kind of contest between Washington with its western allies and eastern allies and Beijing, for the terms of world order and the terms of international cooperation.
Tucker: Well, you've summed it up perfectly, David, first of all. Two points. Some people compare the rise of China and the challenge to the West, if you like, with the second German Reich and Britain at the end of the 19th century, beginning of the 20th century. I think there's something in that, of course, but I don't think it's the best example, and nor is the Cold War a very good parallel, or certainly not a perfect parallel, for exactly the reasons you give. Which is that during that period, and the book describes this, I think in chapter three, the world economy was essentially bifurcated into a Soviet bloc and the rest.
Tucker: But I think the nearest parallel, other than for nuclear weapons, which is quite a big, not a small, qualification. The nearest parallel is the long struggle between Britain and France, from the end of the 17th century to the beginning of the 19th century, 120 years or so. It was everywhere, and in everything. You can see the War of Independence, or the Revolutionary War, however you want to describe it, in the States as part of it. It was contested on the coasts of India, Southeast Asia, Africa, parts of Latin America. It was everywhere, as well as of course on the continent of Europe. And it was in commerce, as much as it was in military stuff. And it went over so long that there were periods of accommodation. There was, what I'm approximately going to say was a free trade deal between France and Britain in the middle of the 18th century, and then that fell apart. And we don't get back to that until the 1860s or something.
Tucker: And it was partly about ideology, the ideology of governing. That somewhere or other, Burke says of France, this is a revolutionary France. "The problem isn't France's power, it's that it's the wrong kind of power." Well, at the end of the 18th century, Britain's problem with France was that it was a revolutionary universalist power. At the beginning of the 18th century, it was that it was a monarchical universalist power, but it was certainly the wrong kind of power. And it was a very different kind… it thought about domestic governance and international governance completely differently from Britain. And that's the case now, and we'll come onto this, but China thinks about decent ways of governing a country, the world, in completely different ways from us.
Tucker: The silos thing, I think, is tremendously important. Implicit in what I've just been saying, and actually however good or bad the parallel with France and Britain is, this is a world in which silos won't do. I worked, as you were kind enough to say, for 30-odd years in central banking. You could do that without knowing much about trade policy. You needed to know about trade economics, but you didn't need to know about trade policy and trade negotiations. And actually to the extent that one knew about monetary and fiscal and trade policy, you didn't need to know about security policy, or environmental policy. Whereas these things are all going to be joined up, because everything is going to be potentially a move in the greater game.
Tucker: So turning down India a swap line, the significance is, do you irritate somebody in Delhi who is going to be sitting at the table, or their protégé is going to be sitting at the top table, in 20 years time? Do you tilt them away from us? It's not that we should try and dominate India. I think we've been lucky on that. I don't think, actually, the significance of the Fed's decision was completely overshadowed by what I think was the most important historic event to 2020, which was not the pandemic, it was China renewing the border skirmishes with India. And the effect of that was that Prime Minister Modi then wanted to revive the Quad, the Pacific Quad. India, Japan, Australia, and the United States, which was initially an initiative of Prime Minister Abe of Japan in his first term of office, which is quite a long time ago. And had fallen into an abeyance, partly because India weren't that interested, but they decided that they were quite interested after all.
Beckworth: So going forward, to be a good policymaker, you really need to be a Renaissance man. You need to be widely read, not just focused in on your specialty. So even a good central banker needs to have a broad command of history, trade policy, international relations. So the challenge has been put forward by Sir Paul Tucker, and we need to respond.
Tucker: Let me just say about that, not so that coming across what we were really saying about the Fed, so that the Fed or whoever, can go around making foreign policy. But so they're alert to, "Oh, I better go and talk to so-and-so."
I don't think, actually, the significance of the Fed's decision was completely overshadowed by what I think was the most important historic event to 2020, which was not the pandemic, it was China renewing the border skirmishes with India.
Tucker: "Something's happening on my patch that, I can see that it may be relevant for their patch, and I want them to understand this a bit." And if I may say so, you are kind enough to say, the book is quite long. The historical chapters, two and three, are partly there because I think they're important in various respects to understanding where we are. But actually, I think that current policymakers, economic policymakers, need to know the history of international cooperation and organizations and ideas, and where they came from.
Beckworth: No, absolutely. And this is a great time for me to throw in an idea I've been mulling over, and several pieces to it. But first, going back to our discussion earlier about the Fed stepping in, providing liquidity to the world through the currency swap lines, through the new repo facility. One way to look at that is that the Fed backstopped the global dollar system, added elasticity to it, and in turn this is going to increase the demand to hold dollars by foreign investors around the world, which is great for the US government because it implies a future increased flow of seigniorage, which if you increase the marginal demand for dollar assets, it's good for the US financial system including the US government. And in turn, that's good for helping finance the Pentagon. As you mentioned, the Fed keeping the dollar safe and sound around the world is good for the reach of the Pentagon. And it's kind of a big story to connect all those dots, but I think it's an important one.
Tucker: Yeah, no. That's exactly right. And part of what that part of the book is doing is trying to connect those dots, in I hope a compelling way. And part of the connection is exactly what you described, cheaper financing, but it's also something else. Think back to 2007, 2008. I'm going to exaggerate a bit, for effect. So the United States manages to blow up the world's financial system through mendacity and incompetence, and everything else. And if that was any other country in the world, at the moment, you would expect their currency to fall and their bond yields to rise. In fact, there was a run, not a run away from short-term treasuries. There was a run into short-term treasuries, because when the world is at its most dangerous, what do you want to hold, wherever you are on the planet? You want to hold the world's safest and most liquid asset, which is a short term Treasury bond or Treasury bill.
Tucker: So that provides a cushion, it's a form of insurance. So there's what you described, which I think is of major importance, but it's also, in bad states of the world, this helps you out. And it also means, by the way, and I don't think we should be at all critical of this. It also means, of course Beijing will want the renminbi to be the major world reserve currency eventually. I mean, it would be kind of peculiar if they didn't, for the reasons that you've set out and the reasons that I've set out. And this makes things like invoicing of energy, so now we bring in the Middle East, and India's purchases from Russia and all of that. It makes all of the relevant. So we've got back from the dollar to geopolitics in another way.
When the world is at its most dangerous, what do you want to hold, wherever you are on the planet? You want to hold the world's safest and most liquid asset, which is a short term Treasury bond or Treasury bill. So that provides a cushion, it's a form of insurance.
Beckworth: Yeah. So let me throw out my skepticism about the Chinese yuan ever becoming a meaningfully important international currency. And you can push back and tell me why I'm wrong, but in order for the renminbi to become this great international reserve currency, I see three barriers ahead of it. Number one, China would need to fully open its capital account, let those funds flow across borders unimpeded. And number two, it would have to run sustained trade deficits. In order to let the world accumulate yuan denominated assets, it has to run current account deficits. And that just goes against the grain of what the Chinese growth model has been. It goes against the grain of keeping the capital markets somewhat closed. And then finally, just having trust and rule of law issues in China. I mean Xi Jinping has been back and forth, a rollercoaster ride. Going after big tech, going after real estate, zero-COVID, now open COVID. There just seems to be a lot of hurdles that China would have to clear before we'd even get close to a debate about whether the yuan be could become a currency like that.
Evaluating China’s Push for a Reserve Currency
Tucker: So, this line of argument, and each point is well made, suffers from the fallacy of good arguments. A fallacy I've just made up. And it's this. So if one believed not only what you've just said, in its entirety, and also the tone with which you understandably said it. One would say, "Oh well, nothing to worry about, then. It’ll be fine. Let's do nothing. Let's be completely relaxed about it." And one of the policy themes of the book, it comes about halfway through, is that policy should be robust. It should be thinking about how to minimize the maximum costs in bad states of the world. And the silliest thing over the last few years, spending part of my time in Harvard and in Washington as well. So you say, "Well actually, this is all going to be fine. The US can see off China, we're the most dynamic economy in the world. Actually, we're not even going to need Europe in doing that." And I think, "Well actually, that could be true, but you wouldn't want to put all your chips on it."
Beckworth: That's fair.
Tucker: You really wouldn't put all your chips on it. And let me pick off one thing. So first of all, the point about current account deficits, I think that's true in a world with capital controls. But in a world without capital controls, the supply of a currency can be provided endogenously by the banking system, rather than via the networks of trade. More importantly, I would put some weight, not very much, but importantly non-zero, on the possibility of the renminbi becoming sufficiently used outside China. That there is eventually a massive offshore renminbi market, with for sure a little funnel through into China, in the domestic market but without full capital currency convertibility. Now some people are going to pop up and say, "Well, that's just wrong." And I'm just going to say to them, "Well, if you bet on you being completely right, that's foolish, given the stakes. And the stakes are, our way of life.” Now what does this mean? It doesn't mean we should get out of bed, so how do we stop them? It's different kinds of things. As I've said, the West can't afford another financial crisis, and therefore allowing all the weaknesses, excess leverage, excess liquidity mismatches in the shadow banking system, is a bit crazy. But more topically, the thing going on in Congress at the moment with the debt ceiling...
Tucker: ... [inaudible] a technical default. This is an absolute gift to Beijing. It is an absolute gift. I'll enrich this in a second, but even without them doing anything else, if that happens, there'll be some volatility in Treasury yields. Every presentation from people friendly to them, to reserve managers around the world, will point out the event risk in US Treasuries, and say, "Maybe you should just reduce your holdings of US treasuries. Maybe you should hold some more euros. Maybe you should diversify more broadly." They don't have to go around very clearly saying, "Oh, the United States is over, move into renminbi." Now, if you want to ratchet it up a bit, I'm not suggesting do that. But I can imagine, I'd want to think through if I were them, if there's a technical default, do I sell a few hundred billion Treasuries quietly, through people that won't be connected with me, so as to exacerbate that volatility? Because I want the realized volatility to be high so that I can make presentations, or my friends can make presentations, about just diversifying a bit away from the dollar. Because actually what this shows is, the US political system still doesn't work. And if it doesn't work, the dollar is a more risky thing to hold. Which is true. Which is true.
Tucker: And the point of that, not quite a diatribe, but that kind of fantasy football kind of thing, is that rather like shadow banking, the people involved in the debt ceiling debate in Washington, they think they're playing a kind of within the Beltway game, or something about the orientation of domestic policy. And what I'm trying to argue in this book is, no, it's not like that anymore. You are not the unchallenged leader of the world over the next quarter of century. And it's not like the Cold War where one part of the world is completely behind you. This is going to be a contest for loyalties. And you see that in Saudi, you see that to some extent less so, in India. So the real message is that, even if you're right David, I'd say yes. Don't make any mistakes. Please don't make any big mistakes.
Beckworth: No, completely.
Tucker: Because the stakes are now higher.
Beckworth: No, absolutely. And the irony of what you've just said is that many of our Republican friends who maybe have a MAGA flavor, Make America Great Again, following through on a technical debt default would actually go against their desires to make America great again. I mean it's...
Tucker: Marginalize America again.
Beckworth: Yeah, marginalize America. Exactly. That's the irony in this, is that if you want to make America strong and maintain it, you need to actually avoid this technical default coming up.
The people involved in the debt ceiling debate in Washington, they think they're playing a kind of within the Beltway game, or something about the orientation of domestic policy. And what I'm trying to argue in this book is, no, it's not like that anymore. You are not the unchallenged leader of the world over the next quarter of century. And it's not like the Cold War where one part of the world is completely behind you. This is going to be a contest for loyalties.
Tucker: I'm underlining this because I think that the people that are worried about the debt ceiling debate need not just to contest it in terms of domestic politics, but in something bigger. If I may make a comparison with the Trump administration's attitude to Brexit, whatever the merits and demerits of Brexit, the Trump administration was quite keen on Brexit, because it would break up Europe a bit. That is Beijing's script. Beijing's script is divide and rule in Europe, to enter into Belt and Road contracts, pacts with individual states. Hungary, but not only Hungary. Italy, a little bit, Greece a little bit. It's divide and rule in Europe, which has often been attractive to Washington. Now that is Beijing script, and so it should not be yours.
Tucker: And that's the level at which the debate needs to be conducted. One of the things I'm trying to do with this book is, I do not want this book just to be discussed with economic policymakers and commentators. I would like people that are involved in security and foreign policy to be involved, because I bet they don't sit around thinking, "Oh, the debt ceiling thing, that's actually part of our patch." Of course, I say this partly because it's hard for someone like me to get them engaged, because they think, "What on earth can a central banker have to say to us about security affairs?" But that's the silo point.
Beckworth: No, exactly. People in the Pentagon should be concerned about this technical debt default possibility coming up, and they should be using whatever influence they have to make sure that it doesn't happen. You do a great job going through the issues or the challenges that are emerging with this kind of new order, and I want to outline them as you do in the book. And the first one is, what do we do about shared threats? So increased interdependency, we live in a globalized world. So you can think of climate change, nuclear war. I was also thinking about space, exploration of space and satellites. Or pandemics, how do we handle pandemics? So how do we deal with these shared issues that are very consequential?
Beckworth: Secondly, the dislocations caused by rising economic powers, China, eventually India. And then the third point, which I think gets to what we're just talking about is legitimacy of the global order. Some say globalization has gone too far, maybe some of the people in past administrations, no jobs in the economy, some say globalization has not gone far enough, the environment, things like that. And so I do want to come back to this legitimacy question. How do we map on domestic politics into international legitimacy? Do we tell that story we just did, the Pentagon, we care about America's greatness so we want to preserve the dollar, we need to make sure we don't make silly mistakes. How do we sell this or explain this to a broader public?
Selling International Legitimacy to the General Public
Tucker: So again, you've summed it up really well, David, if I may say so. And of course the issues are tremendously tough. As we can see, cooperating even in a pandemic or over climate change is difficult for all sorts of tactical reasons, but not just tactical. And on nuclear, I'll make one point in passing, which is so far as I know there isn't a de-escalation protocol between Beijing and Washington in the way that interfered for decades. Maybe after the Cuban crisis, I'm not sure. But there existed a de-escalation protocol between Moscow and Washington. This is tremendously important. Putting it in a slightly juvenile way, it amounts to, "Well, if we're going to have a fight… actually we're going to deliberately have a fight, rather than accidentally end up having a fight." I wondered, this is pure speculation, when there was that missile that went into Poland recently, and there was a lot of, for 24 hours, 36 hours, there was a lot of kind of exaggerated claims. Putin's language was very calm during that, and I wondered whether the protocols had been applied then. But anyway, as far as I know, they don't exist between Beijing and Washington. And that makes the world a more dangerous place.
Tucker: This legitimacy thing. Two things. The first thing is going to sound very internationalist, but I do think domestic politicians in the United States, actually for what it's worth, this is true in Europe as well, sometimes need to be just more open with the public, in this case, the American public, that there are certain things that they do internationally because it's just much more effective to do them internationally than to do them on your own. This is true, by the way, of finance. So long as you have free flowing capital, which thank goodness you do, the United States can't guarantee its own financial stability without ensuring that the rest of the developed world has a stable financial system. And yet, one of the great architects in Congress of Dodd-Frank said to me, I'm not going to name the person, he said to me, "Of course, we realize that what we're doing is merely applying the G20 agenda, in large part, not entirely.” But we can't put it like that for domestic consumption. We're going to have overcome that, in order to... That's always the best short term choice, and it's rarely the long term choice.
Domestic politicians in the United States...sometimes need to be just more open with the public, in this case, the American public, that there are certain things that they do internationally because it's just much more effective to do them internationally than to do them on your own.
Tucker: But on the other side is we need to be very careful not to enter into international agreements, any of us, this goes for Britain as well as the United States, where the terms are such that it could end up harming domestic order and domestic legitimacy. And I think that will perhaps come onto the WTO, but I think both the design of the WTO at the beginning, and the terms of entry of China a few years later, were not sufficiently attentive to the risks to the United States. And I was discussing this recently in Arizona with two political philosophers, and Tom Christiano said to me afterwards, he said, "Well actually, but surely the United States could deal with the effects on employment," for the welfare system, distributional things. And I said, "Yeah, that's true, but not if China grows to be three to four times as big." And I think Tom saw the point to be… Professor Christiano, I think, saw the point. That's for him to say, rather than me, but one shouldn't, without very careful thought, enter international agreements that are going to have domestic effects that outstrip one's capacity to offset them in some important way.
Beckworth: Well, let me speak to that issue of China, and how serious is it? So this is one of the premises of the book, and it's a reasonable one, that China… It is a rising power, will continue to be a rising power, and be the issue we contend with. Again, the key tension you bring out in the book is, we want to stay engaged in the world. We have a set of values, the rising counterparty in the world has different values. And, is China going to be a threat as long as you outline in the book? I mean, is this something we need to worry about? If there's talk of China's demographic decline, its economic policies not working, it did great with catch-up growth, kind of the Solow model. But now it's just… it's on the frontier, it's having a hard time innovating. Why are those counter-arguments wrong? Why should we be worried for the next hundred years or so, that China's will be this imminent threat?
Why Should We Be Worried About China?
Tucker: I think that mixes up, when people say that. And there are good reasons for saying that. I could, in a different mode, I could conjure up arguments or advance arguments why China may have a bumpy ride over the next five, 10, 15 years, and why, eventually, its growth trajectory will tail off, and it will end up with lower national income per person than either side of the Atlantic. I think this is largely beside the point. The point is can they become a lot bigger than us? You could imagine a world in which they are bigger than us, but with much lower per capita GDP. And the test is, do they become big enough, and they are big enough already, to build a military and a security apparatus and a series of alliances that will be threatening?
Tucker: Now that would be a world in which, proportionally, they might have to put more into security than we, the Western alliance, do. But you can imagine given their system of government that that might be possible, that people would, well citizens, the subjects of People's Republic would put up with lower consumption, because their leaders had decided that more was going to go into military expenditure and external security. I think they're really big, and that's possible. And my point isn't [that] China will definitely grow to be bigger than the United States or bigger than the United States and Europe. It's that it well might. I think the robust assumption for policymakers in Washington is that China will continue to grow rapidly. I actually think the robust assumption for policymakers in Beijing to make, is that they won't. I would make exactly… if I were planning Beijing's strategy, I would take your scenario. But for us, I would take the scenario where they do well, not as well as us in per capita terms necessarily, but do well enough to be a major, major power with alliances, or certainly commercial relations, across the planet.
Tucker: And then there's a question, "Well, how do they conceive of government?" And I'm trying to find some quotes as we talk, in chapter nine of the book. I'm not sure I'm going to succeed. But there was a period in which people were saying, "Oh, well of course, as part of economic liberalization, China will politically liberalize." And without hindsight, I've always thought the people don't understand the role of the party there. The party stands above the Constitution. But over the past few years, I think not just because of leader Xi, but members of the leadership have made clear in public, that the party does stand above the law. The Constitution sits below the party, the state apparatus sits below the party apparatus. And I think before one gets to hand judgments on that, that's just how things are, and how things have tended to be there for a long time.
Tucker: And I think this was very instructive. I think in 2011 or '12, I forgot which year, must be '12, leader Xi went to Davos, and was acclaimed. And around the same time, perhaps it was 2013, there was a document leaked from the central committee. It's known as Document Nine, and it contains the seven no’s. I doubt whether many people in Davos that were applauding XI, knew what was in the in document. The seven no’s. Basically the seven no’s are no to democracy, no to free press, no to universal values. No to liberalism, no to the market economy. When I say liberalism, I mean liberalism as a European talks about it, I don't mean anything left in that. That's not what they meant, I didn't think.
My point isn't [that] China will definitely grow to be bigger than the United States or bigger than the United States and Europe. It's that it well might. I think the robust assumption for policymakers in Washington is that China will continue to grow rapidly. I actually think the robust assumption for policymakers in Beijing to make, is that they won't.
Tucker: And that's where they are. I mean, that's again, just scripted. Well that's not like Europe and the United States forging relations, and international organizations, often quite frustrated with each other and irritated. This is no different, people will say, than America succeeding Britain. To which, as a Brit I would say, "Yes, kind of mildly irritating, in a way, but a lot more than that, for goodness' sake.” As the First World War of the Second World War showed, and as Churchill understood really, really well when he gave that speech towards the beginning of the Second World War, standing next to Roosevelt.
Beckworth: So I want to segue into your philosophical approach to this issue, and then apply it to some specific policy. So the last part of your book, you actually get into specific policy areas, and you have some suggestions how to proceed as it relates to trade, financial regulation, monetary order, and we'll come to those. But you provide an approach that's somewhere between… there's extremes. You could have amoral relativism on one hand, and then you could on the other hand, you could try to do universal moralism. And you provide kind of a third way based on norms, surrounding David Hume's thinking, and then political legitimacy based on Bernard Williams' approach. So maybe outline that philosophical approach for us, and then apply it to these areas.
Paul Tucker’s Philosophical Approach and its Application to Policy
Tucker: Okay, thank you. I think you mean amoral realism. So there's this peculiar thing in International Relations, capital I, capital R. There are kind of two or three great traditions. One is cynical realism, it's all about power. Values don't matter. The people in that tradition tend to be most interested in issues of power and security, and so on. There's another tradition in the image of Immanuel Kant that thinks it's all about values, and that we construct the world around us, and they tend to be most interested in human rights. There's a middle ground which people tend to call Grotians, after Hugo Grotius, the 16th century international legal theorist. And they say, "Well actually, there's some interdependence, and we need regimes." The flaw there, which I won't get into now, is it tends to be deductive. It tends to be a bit natural law.
Tucker: But if you ask yourself, "Which of power, values, and interests matter?" [inaudible] says, "Yes." I mean anyone that's done high level policy making knows that. And if you think about just the realist part, "Well, why do we want to defend our state? Well, because we think our way of life is worthwhile." Well, our way of life is all tangled up with norms and values. It's not that we think that the government and the territory of Britain or the United States is worth defending, whatever the nature of that government. We don't think the government of Germany in the 1930s was worth defending, because it was a coherent state. We think quite the opposite, in fact.
Tucker: But also norms help us cooperate. The norm of promise keeping, promise making and promise keeping, matters. That if you and I are in a prisoner's dilemma situation, and we find ourselves in the end of a cooperative cell and then we enter into a promise, "I promise you." And a Hobbesian will say, "Well, it doesn't make any difference. Just break the promise." And Hume wants to say, "No, no, hold on. Other people hanging around, they may have no interest in what Beckworth and Tucker are particularly up to, what they're failing to cooperate under, but they really don't like that Tucker broke his promise. So he broke his promise to Beckworth what kind of guy is he? We don't want to do things with him."
Tucker: So promise making, promise making and keeping, is a kind of higher level game with a wider audience. And one of the things in the book is to kind of move away from a kind of one level game theoretic analysis of international relations, that have games embedded in games, which draws on the mechanism design of people like Roger Myerson at Chicago, with whom I discussed the book. There's something on the Chicago website on that. But it means that, if one accepts this, then it matters whether there are some norms that are shared internationally. And if you put it like that, with everyone, and one of the things I argue in the book, I hope carefully, is, we are going to be able to cooperate more with people who we fear less, and with whom we share more, where that sharing is the norms. And so you can think of a world of concentric circles, which is, of course we need to cooperate with China a bit because wars are incredibly costly. I mean the Ukraine war is in my view, the first kind of more or less proxy war, but it's a proxy war.
Tucker: And it's terrible. But we need peaceful coexistence with China, and that can probably include some trade with China, but that should not include trade with China where we would be overly dependent in vulnerable ways. That's symmetric by the way. It goes for them, too. We can cooperate more with people that sign up for certain norms. I think that some of the most basic, the so-called peremptory norms of human rights are important. This is the bar on, the international law bar, on genocide and slavery and things. I think those particularly matter, because I think we can say, the they here is indeterminate, but fill in your own candidates if you like. "Well, if they treat their own people like that, how would they treat us if they could?" I mean, that's an important practical question. This is the political theory in the book, I think, is realist, but not cynical.
Tucker: You can cooperate more with people that share those basic norms, and then people that share other norms, you can cooperate even more with because you understand them better. The European Union is based on this in continental Europe. My country didn't share enough, to continue to participate in it. So this is a world in which, when we look at an international organization, we need to be very careful about universal international organizations where everybody has a right of veto, which I'm going to come back to when we discuss the WTO. And even more important, if you have universal organizations, it needs to be tremendously important that some can go further together. That this is possible under the WTO, partly because of the European community back in the 1950s. But the Trans-Pacific Partnership is basically saying, "Well, the terms of trade under the WTO have problems for us, and we want to go further, and trade amongst our ourselves. In particular in terms of subsidies from state-owned enterprises. And that's because we, the members of the Trans-Pacific Partnership, sign up to a broadly liberal view of trade." China does not sign up to a broadly liberal view of trade. That's its right, but it's a design fault, or it would be a design fault, if everybody was locked in to now, an international trade system that is somewhere between liberal and illiberal.
We need peaceful coexistence with China, and that can probably include some trade with China, but that should not include trade with China where we would be overly dependent in vulnerable ways.
Beckworth: So applying that to the WTO, to trade policy in general, you want to have trade policy that's based on how close our values are? Using those concentric circles, who is our...
Tucker: How much of a threat… you start off by saying, "How close are our values?"
Tucker: So let's say, our values are far apart. You then say, "Well, the fact our values are far apart, are they a threat, as well?" So it's like a decision tree.
Tucker: Yeah, actually they're a decision tree, as well. "Oh, well that's a dangerous thing to do, then I'm not going to be overdependent upon that." Or, "We don't share many values, but they're not a threat to us in the conceivable future, a half century or more. Well, we can do a bit more with them, but we shouldn't be doing things that foster their regime in some way.” You go down another way and say, "Well, actually we do share lots of values, and we don't fear each other at all. Well actually, we [inaudible]. We can exploit economic efficiency, the division of labor, comparative advantage on that. We can go further." This is friend-shoring, and I wrote the book before friend-shoring had come up, but I think one can get to friend-shoring...
Tucker: ... not as a policy that is invented in 15 minutes in a meeting, but after one's really thought about a sustainable place of broaching international relations.
Beckworth: So doesn't this have big implications for the entire post-World War II international setup, the IMF, the WTO, United Nations. It sounds like there would be different levels of authority or decision-making within those institutions. You'd have to revamp them.
Tucker: Yes, it does. It's the simple answer. I think one shouldn't get out of bed and start doing that tomorrow morning, because in a sense, the book has four scenarios. And the new world order, or reshaped world order, that isn't going to be possible until probably, God help us, there's been a decisive conflict of some kind. Or more likely, other popular states have risen, and there's a new top table. And until then, I think that in the monetary and financial sphere, I think we're going to have a kind of lingering status quo, because of the inertial value of incumbency. In a sense that's what you were playing to me earlier, about the dollar. I think it's true, but not to be taken for granted. Whereas I think with trade, it's much more difficult, and cross-border investment, even more. I can imagine… in the Cold War there was an outfit based in Vienna called CoCom, I think it was called CoCom. This is described somewhere in the book, where lots of countries, Western countries, had restrictions on what exports to Soviet bloc, and investment in the Soviet bloc. And of course, actually they needed to coordinate on that. What's the point of America having policies that ban this, that and the other if, say, I'm making this up. France and Germany are prepared to do it, and vice versa.
Tucker: And so you need a way of agreeing, not identical, but coherent approaches to how you take care, how you weigh national security in cross-border investment policies, and trade, and trade policies. And that has to happen outside of the WTO. It has to happen outside of the international organizations. It also means, by the way, that the WTO Treaty makes provision for national security exceptions. But it is important not to abuse them. It's important to mean it. Sometimes people are going to disagree, but there's a difference between disagreement based on honest different judgments, and people just kind of making up… Canada being a national security threat. The problem with that bit of trade policy towards Canada, is that it makes it harder to use the national security exemption legitimately where it matters. I mean, the thing about policy, and maybe this is just because I was in a policy institution for 30-odd years, is you have to think about the next case. And you have to think about the next decade, and the one after that. But that goes back… it's not quite the silos point, but it's another manifestation of, "Oh, it just got really serious."
Beckworth: I want to read in closing here, an op-ed by Sebastian Mallaby. I'm not going to read it, but just mention it, because it's an application, I think, of what you're suggesting. Or maybe it's not, and you can let me know, but he had an op-ed in the Washington Post recently titled, *Biden Needs Allies to Keep China and Russia in Check. Here's How to Do It.* And he goes through and he outlines a number of things, the amazing effort that the US put forth with the Russia-Ukraine war. And he talks about the chip embargo, the semiconductor export ban, and how it's really thorough, it's at four different levels. But he argues, in order to make it work, the US needs to do more with its allies because they're going to be tempted over time to go back to China. And his big argument is that the US really needs to engage in deeper trade deals with its allies, as an incentive to keep them on board with this semiconductor export ban. So is that something that would be consistent with your approach to this issue, going forward?
The Geopolitical Advantage of Trade Deals
Tucker: Yes. I hope Sebastian cited my book in his piece. Yes, I do. I think it was a huge error for the United States to withdraw from the Trans-Pacific deal. And I think it's very hard to get back in now without making life very hard for South China Sea states, because if you allow the United States in, you allow Beijing in, and I suspect both will stay out. But no, I basically do think that, and I think that these trade deals should be thought of. Let me start somewhere else. When I was reading about trade policy, and there's a chapter or two chapters really, devoted to trade policy. I was really struck by what a tough world it is. I mean, I chaired two and a half international committees, I was a staffer for 20 years. I was a policymaker for just short of a dozen years. I was really struck by how tough and brutal that world is, but it's also quite self-contained. And they need to think about, just as the people in the Federal Reserve and in the ECB, the people in Europe need to think about, "No, it's not in our interest to undermine the dollar, or to wish that the dollar wasn't the world reserve currency, because our security umbrella comes from Washington. And thank you very much for that. And we understand we need to spend more on it."
Tucker: But similarly, for the trade people, it's almost the other way around. United States trade negotiators need to think, "Well, who do we need to kind of treat like friends? Yes, it's not a tea party, but who do we need to avoid alienating? Who do we need to keep close to us?" Let me end perhaps, David, with a story of... It's about the dollar and trade. It's about the 1970s. You mentioned Bretton Woods, Bretton Woods falls apart, the United States, obviously a mess. Watergate, Vietnam, civil rights movement, kind of frustrated, at that point. The United States is in a really terrible thing. And then, Bretton Woods falls apart, and the Federal Reserve hasn't really got an alternative anchor. There's a fantastic moment where President Nixon says, "The Smithsonian Agreement is the best monetary agreement in the history of the world," but of course it lasts a month or so. And this is one of the reasons I dedicated the book to Paul Volcker, as well as to Jacques de Larosière. There's a generation of US officials, Washington officials, that go off, I think from State Department and Treasury. And they go off to Saudi Arabia, and they basically have talks where United States pledges more security support, and Saudi Arabia pledges to continue invoicing oil in dollars. And the day that Saudi Arabia, or whoever, decides to invoice in a different currency will be an enormous moment.
You have to make judgments. We don't like everything that Saudi Arabia does, but we don't want them invoicing in renminbi. And that's something that we have to weigh very carefully. And they have to weigh what life is going to be like with the West, in a world where fossil fuels are no longer so important.
Tucker: And so this comes back into… you have to make judgments. We don't like everything that Saudi Arabia does, but we don't want them invoicing in renminbi. And that's something that we have to weigh very carefully. And they have to weigh what life is going to be like with the West, in a world where fossil fuels are no longer so important. But if you look where the few Chinese overseas military bases are, one of them is about keeping those… all routes open, and I don't think we should be surprised by that. My country, for well over a hundred years, your country now, has bases… which base will keep the sea lanes open? Your country keeps the sea lanes open. Keeping the sea lanes open, occasionally, US [inaudible], “international law, that's something we can just pick and choose." Because Europe cares about it so much, you can't pick and choose, and securely keep your allies. And so, all of these things have to be balanced. But remember that negotiation, in the middle of the 1970s. "Will you please keep invoicing oil in dollars? And we will continue to provide your security."
Beckworth: Well, on that sobering note, our time is up. Our guest today has been Sir Paul Tucker. Paul, thank you again for coming on the show.
Tucker: Thank you for it, David. And thank you for taking such an interest in Global Discord.
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