Today I’m speaking with Ken Rogoff, who  is a professor at Harvard, recent author  

of Our Dollar, Your Problem, and  former Chief Economist at the IMF. 

Ken, thanks so much for coming on the podcast. Thanks so much for having me and welcome to  

Harvard, which is where we’re filming this. In your book you have a lot of anecdotes of  

meeting different Chinese leaders, especially  when you were Chief Economist at the IMF. It  

seems like you had positive experiences. They  would listen. You met the Premier with your  

family, and he would listen to your advice. One, how does that inform your view about how  

competent their leadership is? Two, how do you  think they got into this mess, with their big  

stimulus or whatever else you think went wrong? To the extent that when you were talking to  

them in the early 2000s, it seemed  like you were seeing eye to eye,  

or that they would understand your perspective. Do you think something changed in the meantime? 

First I want to be careful to say  that they listen to everybody. 

The Chinese are way better than we are  at hearing a hundred different views.  

Mine would be one of many that they heard. I was very impressed by the competence of the  

Chinese leaders. I actually gave a lecture in the  Party’s training school where, if you’re a mayor,  

a provincial governor, any bureaucrat on  your way up, you go to this thing which  

for them is like Harvard Business School. They really looked for competence. Of course  

there were various loyalty things. But when you  met the leaders—and I met a lot of them when I  

was at the school—they actually asked really raw  questions too. They said things I couldn’t believe  

they were asking. And I was told that within  the school, you're allowed to say anything. 

So they had that system for a long time. When  you met Chinese technocrats—or even the mayor of  

Shanghai—they were impressive. I'm not saying ours  aren't, but it's a mix. I think you know that.  

I think Xi Jinping has really changed that. He’s  been the president since 2013, and over time he’s  

pushed out that system and moved more toward  loyalists, people who are less technocratic. 

Probably the most important talk I ever  gave in China was at what's called the  

China Development Forum in 2016. It's this giant hall that had most  

of the top leaders in the party. A  lot of the elite of the tech world,  

Mark Zuckerberg and many others were there. I said, “Okay, I'm looking at your housing.  

I'm looking at your infrastructure. It looks to me like you're going into  

a classical housing crisis problem. Your catch-up is over.  

Your demographics don’t look good.” I gave a list of things. “And by the way,  

it looks like power is becoming  very centralized in the economy.” 

And I said, “I'm a Western economist. You're  doing an amazing job. What do I know? But I  

don’t think that would be good for growth.” After I gave the talk—I just figured you only  

live once, you just have to say what you  have to say—a couple of top leaders came  

up to me and said, “Professor Rogoff,  we very much appreciated your remarks.” 

I was thinking, “Oh no, they’re going to put  me in jail or something at the end of this.” 

I’m less impressed by them now. And I’m worried.  Let’s say they get into a crisis—which I think  

they’re in now. I think they're still in a  deep crisis—or somehow hotter heads prevail  

between the United States and China and we get  into some kind of entanglement nobody wants. 

I worry that we’re not as competent. I’m speaking  about right now. We have some very good people,  

but the average quality at the  very top, I think, has gone down. 

And China’s not as competent either. That’s  a recipe for having bad things happen. 

On that talk, you mentioned in the book  that, before, you had to clear your talk. 

So you gave them a sort of watered-down  version of what you were going to say. 

I have to say, it would take some gusto  to go up to the top party leaders. 

Were you nervous while you were giving the  talk, saying, “Oh, it’s too centralized”? 

I mean I was pretty experienced by that time.  I frankly never used notes, so the idea that I  

was going to read my speech didn’t even occur  to me. Maybe it was a little bit spontaneous. 

But I certainly felt at that moment,  what am I here for? What’s the point  

of coming to this? Why don’t I talk about  the elephant in the room? Everybody knows  

this. I don’t know if everybody knew it, but  it was clear to me and I’m going to say it. 

I think a lot of people in that  situation—even though they should or  

the logic makes sense—they often don’t. Yeah, I’m a professor. So people who  

had a big tech company or a finance  company, or all these other businesses,  

most of them can’t afford to do that. I think they know that when they invite  

a professor, they can’t cut your...  They can stop you from going again. 

They invited me again, by the way.  Although the second time I just  

talked to a tiny room instead of the big hall. But, I give credit to the Chinese for listening. 

You’ve said that the seeds of their current  crisis were sown in 2010 with their big stimulus. 

Is it wrong then to blame Xi Jinping for  this? That was before his time. It was Hu  

Jintao’s government that launched the stimulus  that’s causing all these problems now. 

Hu Jinato did it, but they kept it going. The  local government debt, that was an innovation  

put in with the 2010 stimulus. But they kind of  left it running and used it as a stimulus program. 

Long tangent, but the local governments don’t  have enough ways to fund themselves. So they  

were allowed to sell land to start and fund  these construction companies, get revenue, and  

sustain themselves. They let that keep going. When Xi Jinping came in, I was told he was  

going to be Ronald Reagan. I had very good  contacts in the intellectual sphere in China.  

Someone who had worked for me when I was  chief economist at the IMF, other people I  

knew whom I really trust. They're really smart and  well-connected, I don’t want to say their names. 

But they were telling me, “He's going to  change everything. This is really the time  

we’re going to liberalize our markets a bit.  We’re going to do the things we haven’t done.” 

And he didn't do that much. If you  look at China’s growth, it actually  

slowed down quite a bit when he came into power. There are different ways to measure a country’s  

output because China produces completely  different stuff than we do. They use their  

currency and we use ours. Nothing's perfect. But one way to do it is this. What do they report  

their output to be in Chinese currency? What  do we report ours to be in dollars? Then we use  

the exchange rate to compare. We can look at growth that  

way and if you do for China, it’s been  spectacular. It’s been very, very good. 

It’s obvious they're pulling it out of thin air. But there are these approaches trying to control  

for how you’d really compare how an ordinary  person lives or how an ordinary firm gets by. 

When you look at those measures, China’s grown  is quite a bit less. If you go 1980 to 2012,  

the official growth rate is almost 10 percent. This purchasing power parity rate—forgive me for  

using those words—is like just over 7 percent. If you look in more recent years, it’s really  

slowed down a lot. Even the official numbers  have slowed down. I don’t know the number off  

the top of my head, but it’s 6% or 7% for  Xi Jinping, and maybe only 3.5%. They’re  

starting from a very low base. Okay, things were gonna slow  

down. It’s not all his fault. But I think he’s been reluctant to  

take risks and I think it’s gotten us to where  we are. I think they’re in a lot of trouble.  

They’re overbuilt in infrastructure. They’re  overbuilt in housing. Have you been to China? 

I was there six months ago. Where did you go? 

Shanghai, Beijing, Chongqing,  Chengdu, Hangzhou, and Emeishan. 

So you saw a few of the medium-sized cities.  At least one of them, I think, is the new tech  

center. I can’t pronounce it. Hangzhou? 

Yeah it’s a big tech center. Some of the  smaller cities don't feel like the big  

cities. And 60% of Chinese income is from  what they call their tier-three cities. 

I grew up in Rochester, that’s like a tier-three  city in the United States. But you could pick  

Cincinnati, Liverpool. Rouen— I may  not be saying it right—in France is  

an example of a tier-three city. And they have invested like crazy.  

I’ve been to a few and I’ve studied the  data on it a lot. They have amazing roads,  

amazing real estate, amazing housing. But the feel of death in those cities... 

They were very good at building stuff.  The Soviet Union was very good at building  

cement factories and steel plants and  railroads. But they’ve run their course. 

They have other stuff: green  energy, AI, electric vehicles. 

But believe it or not, that stuff’s still tiny  compared to infrastructure and real estate. 

Real estate’s a third of the  economy by some measures. 

So I think they’re in a lot of trouble  now in China. They let it go on too long. 

But again, I wasn’t running things. If things  seem to be working and you try to change things,  

you get thrown out. It’s not  easy to be in those shoes. 

When I was in China, we visited a town of  half a million people outside of Chengdu,  

so one of these tier-three cities. Arriving  there, the train station is huge. Compounds are  

huge. Even when you’re driving around, like  a movie theater is this humongous complex. 

I realized things were bigger in China. I  was used to that because I’d seen these other  

cities by that point. But I just thought,  I’ve seen cities of half a million people.  

I live in a city of half a million people  in San Francisco. This just doesn’t seem  

proportionate to the size of the population. Then we visited a Buddhist temple that had  

been built recently as a tourist site. It was  ginormous. You would go through one little shrine,  

and then behind it would be an even bigger  structure and then another one concentrically  

for like eight turns. It would take you  probably 10 minutes to drive through this thing.  

There was just nobody there. It was  like me and three other white people. 

It’s very much that feeling. And the young  people don’t want to live there. I have a lot  

of young people here as students and I run into  people. They don’t want to live in these towns,  

and the jobs aren’t there. I can’t  criticize them for trying that. 

If you’d asked me in 2005, “Should we try to  encourage people to go out to the Rochesters  

and the Liverpools and the Rouens in France?”  I would have said yes. There’s too much in the  

big cities. There’s overcrowding. Look  what happened to São Paulo. Look what  

happened to Mumbai. But I would’ve been  wrong. These forces are very powerful. 

So a lot of their growth, and what they call  their GDP, is this stuff. So they’re having to  

reorient and people just aren’t that flexible. It’s like when AI comes and puts everybody out  

of jobs. When construction jobs are gone,  and all these indirect things are gone,  

it’s not that easy to move everyone. If it hadn’t been for financial repression,  

and all this investment had been done  through purely market mechanisms,  

would things have turned out much better? Even if China gets rid of all financial  

repression today, they save a lot. So this  money has to go somewhere. Are there enough  

productive opportunities to soak up all these  savings? Or could there have been in the past? 

If they get rid of financial repression, is this  a problem solved, or could it have been solved? 

What everyone’s told them forever is  their saving rate and investment rate  

are astounding. It was higher before, but it’s  still maybe 45%, their consumption rate… ours  

is pushing 70%. European countries are a little  more temperate, but they’re in the low sixties. 

Their consumption is very low. They have some  wealthy people that you saw when you went to  

the marquee cities. But a lot of China is  living on $200-a-month kind of incomes. 

You could give them money. You could  let them consume instead of exporting  

it. They’ve been very reluctant to do that. You could do things to encourage consumption.  

Actually, even just changing their exchange rate  policy to allow it to appreciate more at times,  

would make imports less expensive. They have been very reluctant to  

do that. That’s what everyone tells them.  That’s certainly what I said in 2016 also. 

The ticket to getting people to spend more is to  provide more security than they have. First of  

all, there’s nothing like our Social Security  system. You need to save for your old age. 

There’s nothing like our health system. If you  work at one of the big state-owned factories,  

they give you healthcare, but  otherwise you’re on your own. 

They’re not allowed to invest abroad. It goes  in waves, but they’re not allowed to put their  

money abroad. So they’re trying to be careful  about all of that and not do things suddenly.  

There’s nothing to do overnight. But fundamentally, if you’re looking  

at China and asking what’s wrong, it’s  that the consumer isn’t spending enough. 

What’s happening right now is worse, because  housing prices are collapsing. That’s the only  

thing they really let people save in. You could  either save in a bank account, which gets you  

a crummy interest rate, or in a house. Now  they’re going down, so people are cutting back. 

They can dig their way out. There’s no  magic bullet to make them grow at 5%. By  

the way, that is the official number but  I don’t think they’re anywhere near that. 

There’s no simple thing, but  the general goal would be to  

try to rebalance investment, and consumption. Going back to your point about whether purchasing  

power parity is the right way to compare, or  whether nominal is the right way to compare. 

I think in the book you say the nominal  comparison of GDP is better because  

you can’t buy Patriot missiles or oil  with purchasing power parity dollars. 

But if we’re trying to compare the strength  of the two countries—their relative strength,  

especially in a military context— if they can  build ships and munitions much more cheaply,  

and they have to pay their soldiers less,  isn’t that actually more relevant if we were  

trying to figure out who would win in a war? Shouldn’t we actually be looking at the fact  

that they have a bigger PPP economy than us  as a sign that they’re actually stronger? 

Yeah. So in the book, I’m talking  about your geopolitical power,  

where if you’re going to give money to somebody,  what’s it worth and how much can they use it. 

But no, you’re absolutely right. They just  crush us in shipbuilding. It’s partly because  

they build commercial ships, and there’s a lot  of symbiosis between commercial and military. 

I think they’re 50% of the global shipbuilding  market. For us to build a new aircraft carrier  

takes years and years and incredible expense. One of the mistakes we’re making is trying to  

build everything ourselves. Let our  allies do some of this. The Koreans  

are really good at building ships. That’s  another place we could be importing from. 

You’re right about the soldiers. They’re  paid much less. They have a lot of  

advantages in a conflict against us. We’re way ahead in your department,  

tech. That is our advantage at the moment. If  that were to dissipate, it would certainly hurt. 

What is your projection? Right  now I think their nominal GDP  

is 75% of America’s, or something like that. Yeah, in dollars, what we call the market terms. 

What’s your projection by  2030 and by 2040, the ratio? 

I didn’t realize it was as high  as 75%. I thought it was a little  

lower. I was actually going to say 75% in 2030. At one point in 2024, it was around two-thirds,  

but it’s really volatile with the exchange  rate. The dollar’s really high. When the  

dollar’s really high, it makes us look bigger. I think they’ll gain about a percent a year on us,  

maybe. I don’t think they’re going to  grow way faster than the United States. 

Wait, that means you think they’ll never  actually have a bigger economy than us? 

It’ll take a long time. We’re  talking about the absolute size.  

They have four times as many people. There were these projections by Goldman  

Sachs and many others that we’d be like  Canada is to the United States pretty soon.  

Like all these extrapolations, they were  proven wrong. That brings me to a big  

topic. A lot of people will look at some trend,  whether it’s growth in something, AI, China— 

I was about to say. That's a common trend in AI. —and just project it into the future. 

Economists at least consider ourselves terrible  at that. You go back and look at any of these  

commissions that were supposed to figure out  what was going on. They happen periodically.  

Maybe Brookings puts one together, maybe  the government does. My former colleague,  

the late Dick Cooper, had a whole list  of these. So it is very hard to know. 

But my gut instinct is that what’s happening to  China is what’s happened to Japan. It’s what’s  

happened to Asia, what happened to the Soviet  Union. We have a more dynamic economy. We’re not  

perfect. Maybe we’re screwing it up right now  with all the tariff wars and deglobalization. 

But we have this dynamism and creativity  that other places—at least other large  

economies—just can’t replicate. They can build stuff. The French  

have better high-speed trains than we do.  I hope you don’t ride on the train from  

Boston to New York. It’s nicer than it  could be, but it’s no high-speed train. 

You mentioned China. Oh my gosh, their  high-speed trains are just incredible. 

They’re good at that. But the really creative  stuff? I don’t want to say they don’t have any.  

There are some amazing Chinese companies. But  let me say that the US is really good at it. 

We’ve kept that in our DNA. I think  it’s very important, to preserve it. 

The 1% per year compression is actually an  extremely bearish forecast. Even people who  

are pessimistic about China will say, “Oh, by 2040  they’ll be at 150 or 125% of US nominal GDP.” They  

think it’ll be bigger, but only slightly bigger.  The fact that you think even by 2040 they won’t  

have caught up is actually very extremely bearish. No, I think they're digging their way out of a  

crisis. Right now we know their prices  are falling. It's not because they're  

inventing stuff really fast. We know that  interest rates are being pushed to zero. 

All these are signs that demand has been  crushed and the economy's not doing well. 

Historically, they have given numbers which are  accurate on average, as best as we can tell.  

I think that's gotten less and  less true in the Xi Jinping era.

Going back to the subject of your book. People  who are trying to predict when and how China might  

invade or blockade Taiwan will look at satellite  photos of different docks and see how many ships  

are there. They'll look at military preparedness. From a monetary perspective, are there signs we  

could be looking for? For example, if they think  a lot of their American-dominated assets will get  

sanctioned or they won’t have access to them,  could we see them liquidating those assets? 

Would there be any sort of preparations that we  could see on the monetary side to let us know  

they’re preparing for something big? I don’t think they’re going to do it  

suddenly. But very crudely, on their reserves  they’re definitely moving more and more into gold. 

It doesn’t necessarily help to move  into euros or Canadian dollars because  

those countries might side with us. But  they’re doing what they can to diversify. 

I don’t think they’ve diversified into crypto yet.  I had a student do a paper on that. But who knows. 

What they are doing very concretely is  not just about what they’re holding.  

That’s the big fact everyone looks at. They officially hold a trillion dollars in  

Treasury reserves. But the estimate a student of  mine did, in a nice paper—and I think others agree  

with it—is that it's more like $2 trillion.  They hold a lot indirectly through proxies. 

The other part of it is that the whole financial  system runs through the United States. What we  

sometimes call the rails or the pipes of the  system. Your bank gets a purchase and my bank  

gets that I’m going to get a credit. How does  that take place? How does it take place when  

we're in different countries? The United States just  

disproportionately controls that. That, they can’t live with. 

They could live without their $2 trillion for a  little while. But they can’t live without being  

able to pay suppliers and other countries. So they're working hard on developing  

their own payments mechanisms. Russia actually did quite a bit in preparation  

for the invasion. We see China doing that. Maybe they’re selling Treasury bills, we  

don’t know exactly. I would advise that to them,  if I were a Chinese economist talking to them. 

But I don’t think it’s going to be something  they’ll do suddenly. Maybe Trump will bring down  

the markets and then there’s nothing to save. But  they don’t want to be the ones to bring down the  

markets and cause a global crash. What would the alternative  

rails that they're trying to build look  like? Are they buying oil from Iran in RMB? 

Will other countries they need things from  accept that? In 2030, what is their goal? 

Absolutely. There are a lot of countries in  Africa and Latin America—some of them are almost  

client states of China—that they can force. Iran, of course, sells a lot of its oil to  

China even when there are sanctions.  They’re moving in that direction. 

It’s not just about what you invoice the  payment in. It’s how we acknowledge it, how we  

clear our books. That’s what they’re working on. It’s coming. The Europeans are working on it too,  

by the way. Europe is not happy  with the situation. They're actually  

forming a central bank digital currency. It’s  moving quite a bit faster than I thought it  

would. That’s actually one of the reasons  they’re doing it, for international payments.

Let’s talk about Japan, which you also  cover in the book, or their crisis.  

You blame US pressure in advance of that crisis on  the Japanese to raise the value of their currency,  

and the actions by the Bank of Japan. Zooming out, how much of the crisis is  

not caused by things like that, but just the fact  that high-tech manufacturing as a share of world  

output was becoming less important? There are demographic factors as well. 

So something like this was  bound to happen to Japan,  

even if there wasn’t some  big crisis that preceded it? 

South Korea’s GDP per capita isn’t that high  either, at least in comparison to the US. 

How much of this is due to  actions taken by specific actors? 

South Korea had a crisis in 1983 and another in  1997. They haven’t been crisis-free, by the way. 

There are a lot of factors. The  demographics would be the most obvious one. 

The rise of not just China but  Korea and other competitors too. 

Japan invented a business model that a  lot of countries have since duplicated.  

The model was export-led growth. Something people might not think  

about is it creates competition. Most countries aren’t as big as the  

United States, and there aren’t as many different  firms trying to do the same thing. Of course,  

we have trouble with competition here. Famously, in Mexico at one time,  

there were only two telephone companies,  two bread companies, two taco companies. 

It’s very hard not to let monopolies  sit and use their political power. 

So how do you get around that? Japan  did something that was really pretty  

innovative. Germany did it too to some extent. In the export sector you’re competing with  

the world, not just with domestic firms.  That created innovation and creativity. 

Japan did really well with that.  But over time, others imitated it  

and started building the same things. So that’s part of it. The aging is part  

of it. But I think the financial  crisis was a very big part of it. 

What is the counterfactual? Suppose that the  crisis hadn’t happened, how much wealthier is  

Japan today than it might have been otherwise? Oh, I think 50% wealthier per person,  

way wealthier. That’s where they started.  It depends on which measure you use. But by  

market exchange rates they were richer  than the United States in the late 1980s. 

Even if you use the more complicated  measures, they were richer than any European  

country, richer than Germany, France, Italy. They’ve moved to the bottom of the rung now. 

The financial crisis wasn’t the only thing.  It’s a long story but we effectively forced  

them to move faster to open up and deregulate than  they were culturally and politically ready to. 

I give that as an example of something  in the book where I changed my mind. 

I had looked at that for a long time  afterward. Going back to 2005—that’s  

long after the Japanese crisis—I would hear from  people like Jiang Zemin, who was the president  

of China that I met, "We’re not going to  let this happen to us. There’s no way.” 

We were discussing how I thought maybe they  shouldn’t have such a fixed exchange rate.  

He said, “That’s what the United States  told Japan. Look what happened to Japan.” 

I didn’t push back that much with someone  like that. You talk to other people. But  

I heard that from many people. I used to think, how can that  

be? There’s this thing called the Plaza  Accord in September 1985 where we pushed  

them to make their exchange rate more free. But I used to say that you did that in 1985. 

Carmen Reinhart, my co-author  on many things, and I date the  

crisis to 1992. That’s seven years later. I continued to think that but over the years,  

particularly recently, I’ve  started to think I was wrong. 

These things unfold slowly.  Crises don’t happen overnight.  

Japan deregulated and it worked. But  they didn’t know what they were doing. 

I think it was a huge mistake for Japan to agree. I actually heard from someone who attended  

the 10th anniversary of the  Plaza Accord, held in Tokyo. 

The person who had been head of the Bank of  Japan in 1985 gave a speech to officials. 

He went like this and apologized, very  symbolically, “I have ruined our country.  

I did this. I take responsibility.” He told that too when he read my book. 

Financial repression is bad. But financial  liberalization needs to be done gradually.  

If you do it too quickly, you get a  crisis. Many crises are caused by that. 

Asking as somebody who obviously doesn’t  know the details, at a high level how  

would you explain it to a novice? How could a country be 50% less  

wealthy than it otherwise might have  been, simply from a financial crisis? 

Whatever they could’ve otherwise produced,  why can they still not produce it? 

A country’s producing a bunch of things. Why  are they producing 50% less just because of  

a financial crisis a couple decades ago? Their case is very unusual, although  

having a number like 10% or 20% is very typical. In fact, one of my professors at MIT was teaching  

us about the Great Depression. He said, “Here’s  how to think about it. We were growing like this,  

then we get here and we go like this, and then  we’re going like this. We never got this back.” 

There’s a lot of economic  models where, Solow catch-up… 

Yes but what happened with a financial  crisis—particularly in Japan—is that it  

sort of blew up their business model. For example, maybe China wouldn’t have  

overtaken them so quickly if they’d been able to  borrow more freely, if their financial markets  

were working better, if they had been more  adroit. Their consumption collapsed. Japan  

didn’t quite know how to deal with that. We in the US were much more brutal in  

what we allowed to happen than Japan,  but we got out of it pretty quickly. 

I’m not sure we got back to where we  were, but we got out of it very quickly. 

Japan has a very consensus-driven society. They  don’t want anyone to be in bad shape. Their  

struggle with this held them back for a long time. Maybe 50% is too high and I should say 25% or 30%,  

but a lot better shape than they have been. Just to put it into context, what do you  

think the counterfactual wealth of  America looks like today without 2008? 

Boy, that's a good question. I'm hesitant because  I probably have some paper giving a number for  

that and I might say the wrong thing. We certainly cumulatively lost a lot.  

It led to this political crisis  that caused us to lose a lot more. 

I don't know, probably 15% lower.  It’s a lot lower than it would be. 

We had this dynamic which we're living in right  now. It's still an echo of that financial crisis. 

Now, mind you, you're asking about our  national income. Inequality matters and  

would we have done other things? In some ways, the 2008–2009  

crisis was a condemnation of the  system and people could see it. 

Maybe it led to some healthy  cleansing. But I think it led  

to a lot more damage than healthy cleansing. I think this updates me toward the view that  

financial crises are even worse than I think.  It isn't just this bad thing that happens and  

you recover. If there's 15% lingering even  after almost 20 years, then wow that’s huge. 

You’re losing a lot of cumulative growth. Look  at Greece today or Portugal. You kind of get  

back to where you're having a positive  growth rate, but you're not picking up… 

They're very different from a normal  recession. Actually in a normal recession,  

you go down and then back up. The United States had thought  

it was immune to financial crises.  We really hadn't had one since 1933. 

We had a different book that came  out in 2009. I mostly write papers,  

but this was a book with Carmen Reinhart.  It was called This Time Is Different. 

We had some papers published in advance.  We said: “No, they're different when you  

have a financial crisis, it lasts way  longer. The slowdown is way worse.” 

And we were mocked when we were saying that. I  think the New York Times had a two-page spread  

saying how ridiculous everyone thought this was. We could have been proven wrong and maybe  

if we’d done things better we  would have. But it is the norm. 

There’s a few exceptions, like  Sweden got out in a year or two. 

But normally they really are  different from a normal recession.

You say in the book that you expect there to  be another spike in inflation within the next  

decade and also that the fiscal position of  the United States doesn’t seem sustainable. 

If you go forward 10 or 20 years,  when we do hit this, when the  

piper comes calling, what actually happens? Is it going to be some acute crisis, like what  

happened in Greece? Or are we going to have some  kind of Lost Decade like Japan? What will happen? 

Typically, you have a crisis of some sort when  your debt is high and your political system is  

inflexible. We’ve checked those boxes. Then you get hit by a shock you weren’t  

ready for. You get caught on your back foot. It  depends on what the shock is, and how we react. 

The way Japan reacted was through what we call  financial repression, basically stuffing debt  

into every insurance company, pension fund, bank. The central bank holds almost 100% of GDP in debt.  

We think we have a lot—I don’t actually know  the number off the top of my head for the Fed,  

but I want to say around $7 trillion. Japan would have the equivalent of $30 trillion. 

So they’ve done this. It’s not the only  reason they haven’t grown, not by any means,  

but it’s not good for growth. That’s one option. I think for the United States, that’s tough.  

We’re just a very market-driven system. If our  financial system had that kind of pressure put  

on it, it would be worse than when Japan did it. And a lot of people lend to us. We can’t do that  

to them. We can’t force French insurance companies  to hold US debt. We can only force U.S. ones. 

So I think the most likely  thing will be inflation,  

which only lets off steam. Because inflation  sort of pulls… well, it’s like a default. 

And I’m not talking about hyperinflation. I’m  talking 10–20% inflation over a period. We just  

went through that. That actually knocked about 10%  of GDP off our debt. We might need more next time. 

So it lets some steam off, but if you’re  still spending too much and you haven’t  

fixed anything you’re back in the problem. That’s what’s going on now. We had some steam  

let off, but it wasn’t enough. I think when it happens again,  

markets will be very unforgiving about it.  They’ll look at us and say, “You are not to  

be trusted.” So it’ll raise the interest  rate more, our debt will build up faster. 

I think at that point… There’s this saying  about Americans attributed to Winston Churchill:  

we always do the right thing after we try  everything else. I suspect we’ll try other things. 

Just for the audience, there are four ways we  could get out of the debt: We could default,  

which you don’t think is likely... But really good for my book. 

Already you timed this one so well. I’ll be  shorting the market when your next one comes out. 

...Financial repression. I guess you could  actually cut the deficit. Or inflation. 

You’re saying if there’s another  round of inflation, then after that... 

What everyone calls austerity. By the way, this  word “austerity” that progressives use whenever  

you ignore debt building up and spend whatever  you want, “austerity” is when you don’t do that. 

I think Ezra Klein’s book Abundance  actually makes the point that there are  

costs and benefits to a lot of things. This “austerity” language pretends  

there are no costs to having your  debt be higher and only benefits. 

So yes, that’s what everyone else has to do.  We’ve gone longer than most without doing it. 

If it's going to be a financial crisis  and financial crises are this bad… 

Inflation crisis. A financial crisis  is the private sector, and the public  

sector bails out the private sector. So, the government, we’re not going to  

default. We're going to inflate, or do financial  repression, or baby steps austerity or something. 

We're not going to have a crisis like Greece had.  That’s just wrong. But inflation's not pleasant. 

Why wouldn’t we? Because we can print money. We can  

honor our debts. We just never have to default.  Greece was using the euro and didn’t have control. 

Japan was using its own  currency and it didn’t default. 

They had a financial crisis, not a  debt crisis. They never defaulted  

on their government debt in that period. I’m not sure if they ever did. I’m sorry,  

they did in World War II. Of course, Japan  defaulted on its government debt in World  

War II. That’s an interesting story. But it was a financial crisis they had.  

Financial crisis is what’s making your banking  system not work, lending to innovators not work,  

lending to dynamic companies not work. Ben Bernanke wrote at the time a  

thought piece about this. He didn’t  really have numbers. He conjectured  

that was why the Great Depression was so bad. When Milton Friedman, one of the great economists  

of all time, looked at the Great Depression,  he said: “You didn’t print enough money. You  

tightened the money supply too much." And Ben came along 25 years later.  

He was a classmate of mine in graduate school.  I had the office next to him at Princeton. 

He came along and wrote this amazing  paper. Again, it was just a thought piece,  

which is not a typical economics paper. He said, “If it was just that you didn’t print  

enough money, eventually wages and prices would  adjust. Yeah, maybe it wouldn’t happen in a year,  

maybe it wouldn’t happen in two years, but the  Depression took 10 years. How can that be?” 

He made this conjecture. There’s been a lot of  subsequent work showing it. Again, there’s a lot  

of debate about this, let me be careful. But I certainly view the weight of  

evidence as saying financial crises are really  bad, which has led us to the situation in the  

United States where we’ve gotten a little  happy-go-lucky about bailing everyone out. 

I would describe Treasury and Federal  Reserve policy today as, “When in doubt,  

bail it out.” Because they saw what happened. But as your financial sector grows,  

that will lead to a problem someday. It did, of course, in the Silicon Valley Bank  

case. It continues to have echoes of that. But I think an inflation crisis is more  

likely than a financial crisis, although  these things are very hard to predict. 

You say in the book that we didn’t outgrow our  World War II debt. What happened instead was  

that financial repression after the war, and then  the inflation of the 1970s made our debt-to-GDP  

ratio… It should have been 70-something,  but it ended up around 20-something instead. 

Of course, we just had inflation recently.  Do you think there’s some irrationality in  

the market for US government debt already, given  that we can forecast what’s going to happen here? 

They can read your book and see that  inflation’s going to go up. They can  

look through history at what’s happened. Do you think there’s some irrationality  

in terms of what people are doing? I think, number one, is that they have too much  

faith in the independence of the Federal Reserve. The Fed’s been this amazing institution that’s  

evolved. It’s been the guardian of  low inflation. We can argue about  

if it’s the right inflation or not. The Federal Reserve insists it’s very  

independent. The Supreme Court recently ruled that  Trump couldn’t fire Powell, the head of the Fed. 

But I think they’re dreaming. There are so  many ways Congress and the President could  

override the Fed, especially if they declare some  kind of wartime or “war-on-pandemic” situation. 

Though I wonder from the politician’s  perspective, maybe the independence of the  

Fed gives them a convenient way to pass the buck  that they’re actually happy about. They can say,  

“Ah, I’d love to do this irresponsible thing, but  I can’t because of the Fed. It’s out of my hands.” 

That’s for sure. That’s why Trump bashes the Fed.  It’s not the only reason he does it. I think he  

actually disagrees with them. But he feels  that bashing the Fed, if there’s a recession  

which there might be, gives him someone  to blame for not lowering interest rates. 

It depends if we run into a world where interest  rates start creeping up… Right now, the 10-year  

rate is around 4.5%. That’s the nominal rate. The  inflation-indexed one is a little over 2%. The  

30-year rate is around 5%. I think those are going  to drift up. And that makes mortgage rates go up,  

student loans go up, car loans go up,  business loans go up. It’s painful. 

The question is, at what point  does that pain become real? 

As I mentioned, this would be catalyzed if  we’re hit by a shock, where you can somewhat  

take back independence temporarily from the Fed. I think it’s easier to do than people think. Given  

that I think shocks are going to happen—maybe  AGI brings a shock we don’t yet imagine—people  

trust in Fed independence too much. Now, I love Fed independence. I actually  

wrote the first paper on why you should  have an independent central bank back when  

there were virtually no independent central  banks. I was a pawn at the Federal Reserve. 

I’m talking my own book when I say it’s a  great idea. I don’t mean my “book” book,  

I mean my human capital. I like to say that the Federal  

Reserve fights for its independence every day. I hear senators say, “They’re idiots.” I hear  

people in Silicon Valley say, “They’re idiots.  We should bring them under the Treasury.” 

I used to hear that just from progressives.  But now I’ve heard that recently from  

some tech titans, that “Scott Bessent, the  Treasury Secretary, he’s smarter than Powell.  

Why don’t we let him run things?” They could. It does seem like the Fed works really well as  

it exists now. It’s independent. Sure, there are  people who criticize its actions as you say. But  

on the whole, it seems like a reliable  institution that makes smart calls. They can  

be wrong, of course, but it seems so much more  competent than much of the rest of government. 

If you wanted to replicate how  the Fed works—if you wanted other  

parts of government to work that way—is there  something we could do? Or is it more of a human  

capital problem than an independence problem? Like, bankers and economists are really smart.  

I don’t know if you could replicate  that in the Department of Education or  

the Department of Agriculture. One of the things the Fed has is this simple  

barometer that everybody sees. They don’t really  see it, but they have a feeling. They see gasoline  

prices, that's probably how they decide what  inflation is. But they have this simple barometer. 

Mind you, particularly in recent years,  progressives have wanted the Fed to  

solve inequality, social justice, and the  environment. But they have one barometer  

that they kind of control over the long run,  not in the short run but over the long run. 

So that makes it a little easier to say,  “You wanted us to have low inflation.” 

Whereas so many other things the government  does might be making everybody better off,  

but they’re making some people more better  off. Maybe some people aren’t better off  

at all. It suddenly becomes very political. Nobody elected the Fed, so it’s harder to  

make those decisions. I’m obviously a  technocrat, or I side with technocrats.  

My students are technocrats. I think  way more things should be like that. 

But if you wanted to do that, suppose you get  called by the Pentagon tomorrow and they say,  

“We want to run the Pentagon like the  Fed.” What do you tell them to do? 

I was going to say, the Pentagon? I’m not speaking  about the current Pentagon, but just up till now.  

I haven’t looked closely but it’s been run pretty  darn well. The military’s pretty efficient. 

There are people who tell me, “Okay, Elon  Musk can take a payload into space at 15%  

of—or maybe one-fifteenth of—what NASA  does. Why don’t we let Elon Musk run  

the Pentagon?” There may be something to that. I think to some extent—and maybe I’m defending  

them too much—but you never know where the next  blow is going to come from. It always looks like  

a lot of your stuff is wasted, you built up. But  your enemy is looking at what you have. Where are  

you weak? Where are you strong? So I wouldn’t  have picked the Pentagon as the obvious thing. 

But let’s say crypto regulation, that  would be a good example. Why don’t we  

have something more independent there? Instead,  as you well know, it’s been overrun by politics. 

In fact, there’s this huge thing going on right  now. I don’t know how it’s going to play out.  

The Fed has been protected, though not as  much as you’d think. But Trump got to the  

Supreme Court and was told he can fire the  head of any agency. I assume, by inference,  

he can also fire anybody at any agency. I think that’s a terrible mistake. We  

need to have independent agencies. You have an  evaluation process. They answer to Congress.  

If they go off in the wrong direction, you try to  fix it. But to just have everything switch every  

four years? That’s really very worrisome. Before Trump—maybe for intrinsic reasons,  

maybe because of norms—it was really hard  to fire people anyway. That didn’t produce  

remarkable competence across the government. Let me try to consolidate some of the things  

you mentioned. Maybe it’s really important to  structure more of the government like that.  

If you're running a department, you  have just one target like the Fed’s  

2% inflation target. That’s all you have  to do. Don’t worry about anything else. 

I do think it’s impressive that the Fed has  avoided mission creep. It seems like every  

institution in the world falls into mission  creep—companies, government departments… 

Oh, they haven’t avoided it. They’ve  been under incredible pressures.  

Obviously, things have changed. But I talk about this a bit in my book. You  

go through the working papers and research coming  out of the various Federal Reserves and it's all  

about inequality, the environment, social justice. You’d be strained to find a paper about monetary  

policy during that period, because  they were under pressure. Part of  

being independent is bending with the wind. But they’ve managed to keep their core competency,  

their core function of setting  monetary policy independent. 

No, it’s been amazing. But it is a constant fight. You can go to a country like Turkey. I don’t know  

what the inflation rate is today,  but it hovered up toward 100%. 

And Erdoğan—the president of Turkey—would fire the  head of the central bank every year. Every time  

they tried to raise interest rates, he’d fire  them. You can find other countries like that. 

So we’ve been lucky. But you  can’t count on that continuing. 

Apart from the political pressure problems  from the outside, you mentioned watching  

your younger colleagues or younger economists  writing working papers at the Fed about these  

other issues like inequality or climate change. From the inside, given what the younger people  

in this profession care about, do you expect  the competence or the focus to just decline  

by default, given the new generation? No, this was a wake-up call. There was  

a blog that Hoover did. They looked at the  most-used words in our big annual meetings. 

There’s this thing called the American Economic  Association meetings. Everybody goes. They took  

all the abstracts and titles from the  last 15 years and the word inflation had  

not appeared until this year. But why are you optimistic  

about when they get in charge...? There’s an intellectual market. This  

was a huge miss and there’s a market for figuring  it out. One of the good things about the American  

university system—at least in the sciences,  and I’ll speak for economics—is that things  

drift off but if something is way wrong—and  they were certainly way wrong about inflation,  

I believe, and way wrong about interest  rates and debt—then there’s some rebalancing. 

We have a very competitive system of publishing.  We have a seminar system that’s just ruthless.  

There’s a debate around it. It’s not settled,  and maybe I’m wrong and they’re right but it’s  

definitely being debated now. Whereas 10 years ago, I think I  

was like a lone voice in the wilderness  saying these things might happen again. 

I would teach inflation to my students. They’d  sit there patiently. It was like I was teaching  

them the music of Fred Astaire or something.  They’d go, “Okay, it’s the 21st-century,  

the Internet, that can never happen.” Or I’d teach debt. If I had foreign students,  

they were all having problems. But the  American students were like, we can  

just do whatever we want. But it’s changed. Going back to the potential future problems,  

if we do go the financial repression route and  not the inflation route, how bad will that be? 

As you were saying, after World War II we had  financial repression. But that was when we had  

the highest growth ever. On the other hand,  China and Japan, it seems like a lot of their  

problems might be caused by the misallocation  of capital that financial repression created. 

Do you have some intuition about  how much we screw ourselves over  

with that route, as opposed to inflation? We’ll start with World War II but it’s never just  

one thing, obviously. There were a lot of things. So with World War II first of all, financial  

repression was easy. The financial markets  had been destroyed by the Great Depression. 

World War II became something of  a command-and-control economy. 

There are a lot of interesting papers about World  War II that show that Americans just worked really  

enthusiastically. There was real patriotism in  the production. I’m not saying we’re not now,  

but back then they were able to fill factory  jobs that we probably couldn’t even fill today. 

As we emerged from World War II we had all the  soldiers come home. That’s a huge growth lift.  

We didn’t manage it perfectly. We actually had  quite a bit of inflation during that period. 

The financial markets, as you grew up in and  as young people know them today, didn’t exist  

back then. The world has changed a lot. Does that mean US growth would have been  

even higher after World War II if we had  just kept the government debt or figured  

out some other way to deal with it and  let financial markets develop earlier? 

Maybe. We didn’t have any financial crises for a  long time because the markets were very repressed. 

Oftentimes, when you get a financial crisis  it’s exactly when somebody comes along and says,  

“I know, I can make us grow way  faster. Let’s just take away all  

the rules and regulations overnight.” That happened in one country after  

another. It works, until you blow up.  So you’d have to say that, by and large,  

it was managed rather well. We  grew. The rest of the world grew. 

It took time for private markets  to develop. One thing I should’ve  

emphasized was that our debt was very high  after World War II, about what it is now. 

But there was nothing else. There wasn’t all this  private debt. That had all been defaulted on. I’m  

being slightly hyperbolic but maybe it was 50%  of GDP altogether. Everything else, state and  

local debt, had been defaulted on. Now, it’s  bigger than the federal debt by a wide margin. 

So it was a very different world, putting in  financial repression back then, compared to now  

when that’s a big part of our business  models in the financial sector. 

Just to make sure we’ve completed the  concrete scenarios, basically your  

prediction is that there’ll be some crisis, some  surge of inflation, then there’ll be austerity. 

And then what happens? Is growth  really slow afterward because  

the government can’t spend as much? What do  the next few decades look like in your world? 

I think it will be quite a wake-up call for  Americans, having to adjust under difficult  

circumstances. Most likely, we get hit by a  shock. We want to borrow a lot. The bonds are  

rising faster than they did the other times  we did. And we're not able to do as much. 

It’s not the end of the world. During the  European debt crisis from 2010 to 2012,  

most European countries raised their retirement  ages. They didn’t do it right away. They did it  

10 or 15 years out. There’s stuff you can do. So I want to be careful here and say it’s  

not like the end of the world,  but it’ll be pretty unpleasant. 

This will affect the entire world, since  the global system is very dollar-centric.  

It won’t be good for our franchise,  the dollar being so used everywhere. 

As other countries start using the dollar less,  our interest rates will climb even higher. 

I’m an academic. I’m not trying to push my ideas  by being maximally hysterical. But hysterical is  

definitely within the realm of possibility here. What I’m saying is more likely than not,  

not that it’s not definitely going to happen. We  could have growth. We could have a whole lot of  

high-skill immigration. We could make changes.  There are a lot of things that could go well. 

On the growth thing, Europe’s growth has been  pretty bad after 2010. Japan obviously has had  

pretty bad growth after their crisis. Why will  we be in a different position if we do have this  

kind of crisis? Why will growth continue apace? No, it’s going to cause a pause in growth. The  

main reason debt crises happen is we don’t  have an automated system of working it out.  

When the stock market crashes it’s painful,  you’re looking around for who got hurt. 

But when you have debt crashes, we take five  years, ten years, to figure out who owes what. 

It’s that process of allocating  the losses that causes problems. 

That, by the way, is why so many  people thought, “China’s fine. The  

president will just tell everyone what it is.” That turns out to be not as true as they thought.

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

What do you mean by saying AGI is coming? Any job that can be done purely through  

computers is automated. So white-collar work, the  work we do even, is automated within 20 years. 

Anytime you get a big productivity boost, it’s  fantastic. If it comes quickly, yes that can  

solve problems. I will say that historically,  there have been lots of times when countries  

had good growth—even higher than their interest  rates—and they still got into trouble because  

fiscal policy isn’t mechanical. It’s political. It’s about how much you spend, who wants  

what. It’s not an arithmetic question. Let me say it another way. Nobody ever  

defaulted or had high inflation because  of arithmetic, because they couldn’t pay,  

or couldn’t have called in someone who knew what  to do. They do it because of political pressures. 

I think if AGI came that fast and  that big, it would make the populism  

phenomenon we’re facing now seem like nothing. If AI is going to be massively deflationary—if  

it makes all these goods so much cheaper—should  we be printing a bunch of money to still stick to  

2% inflation? Or does that not matter anymore? Well, we certainly can run monetary policy the  

same way. You don’t automatically get deflation  just because some goods are going down. 

You can do things to increase demand so that there  are upward pressures on final prices. Even if the  

AI workers aren’t demanding anything, you can put  in a lot of demand so firms charge a lot, not just  

for the services that AI is replacing but also  for the raw minerals and materials that go in. 

Fundamentally, when you have productivity, it  makes it easier for the monetary authorities—the  

Federal Reserve—to deliver low inflation  and good growth. That’s what they’re trying  

to do. It makes their job easier. And I think it  takes the pressure off them—somewhat—to inflate,  

because things are going pretty well.  So there aren't the same pressures. 

But should they be trying to fight  the deflation at all, in that world? 

Because traditionally we need inflation to  root out the rentiers and to fight downward  

wage rigidity. But now the AIs have all the  jobs, so we don’t need to worry about that. 

There are a bunch of biases humans have  that we need inflation to correct for. Do  

we even need that in a world with AI? Okay, that is a very good point. Frankly,  

Keynes founded modern macroeconomics.  He was an incredible Renaissance person,  

having both sides of the brain. One of his insights that just  

transformed things was this. Before Keynes, we used what  

we now call general equilibrium models: demand and  supply, prices moving to keep everything in line. 

But Keynes was looking at the Great Depression  and said, “Prices should be coming down. But  

they’re not. Why aren't they?” That’s really a cornerstone.  

At the end of the day, it’s mostly  human behavior. It’s mostly workers. 

So if you have these docile AI workers—they’re  not workers, they’re just firms—and if you have  

firms that are willing to let prices fall, then  certainly you can do that. I mean, we’re still  

going to have some human workers? I don't know. But here’s a question on what monetary policy  

should be. Do you think interest rates  are going to go up or down? When we had  

deflation last time—from demand-deflation,  like after the financial crisis and the  

pandemic—interest rates went down. My intuition here is that interest  

rates would need to go up. I mean real interest  rates, real inflation-adjusted interest rates. 

And then, deflation isn’t such a problem. You  just don’t let the interest rates go up as much. 

Last time, interest rates went to basically  zero. That’s a whole other line of discussion.  

They felt they couldn’t lower them  into significantly negative territory. 

So they were sort of paralyzed. There was  this deflation, or at least too-low inflation. 

Monetary authorities thought they  knew how to create inflation,  

but that’s always been by cutting interest  rates lower. When they hit a bottom, they don’t. 

I have a whole book about negative interest  rates and that’s a whole other thing. 

If we’re imagining real interest rates  going up, then it’s not much of a technical  

problem. You just let the interest rates rise  a little less so you’re not getting deflation. 

Do you expect interest rates to go up? Because one  factor is that you want to invest in the future,  

the future has so much more potential. Another  is that maybe you want to consume more now,  

because you know you’re going to be wealthier  in the future anyway. You might as well start  

spending as much as you can now. I think AGI and AI are upward  

pressures on interest rates for lots of  crude reasons. The huge energy needs. 

Traditionally, when you did a lot  of investment it raised wages,  

but it’s possible— there are economists like  Daron Acemoglu who’ve shown it can go both ways,  

it’s not difficult to show that—if you're really  just substituting for workers, it’s making capital  

more valuable, you just invest even more. The pressures on monetary policy will depend a  

little bit on that. In principle, it makes life  easier. If it did push the interest rate down to  

zero, there are interesting questions  around that, but maybe your audience  

might not be as fascinated by them as I am. Let’s talk about it a little bit. If we expect  

interest rates to go up because of AI, what  should the government be doing right now to  

be ready for that? Should they be locking in  hundred-year bonds at the current interest  

rates since they’re only going up from here? I’m going to get to that. But first, just where  

we are… I follow interest rates today  all the time. Maybe a lot of people  

who listen to you don’t. But let’s talk  about inflation-adjusted interest rates. 

There’s a 10-year bond that’s indexed to  the inflation rate, issued by our Treasury. 

Inflation-indexed debt is only about 10% of our  total debt. There are tax considerations—it’s  

not perfect—but it’s a pretty good measure  of what we call the real interest rate. 

It had gone to minus one at one point after the  pandemic. It averaged zero for about 10 years,  

from 2012 to 2021. And it’s higher now. That is, for a macroeconomist, the biggest  

question in the world. Because it affects asset  prices, it affects risk, it affects volatility. 

I regard it as just a normalization.  I think it was likely to happen. 

If you go around and talk to some of my  younger colleagues, or folks at other places,  

there’s quite a debate about that. A  lot of people think, “We’re getting old,  

we’re not inventing anything...” I know you’ve  just been arguing against that and good for you. 

I tend to think interest rates are more likely to  go up than down, going forward. I’m talking about  

these long-term interest rates—the Federal  Reserve just sets the overnight interest  

rate—these long-term interest rates are set by  markets, and I think they’re more likely to go up. 

But I think AGI is only a piece of it. Debt is  rising everywhere. There’s the remilitarization  

of much of the world. Needing to deal with climate  change. Eventually if we’re not dealing with it,  

then we’re dealing with climate disasters. There’s growing populism, geopolitical  

fracturing, many things. I tend to think interest  

rates are going to go up but not just for the  good reason that we’ve gotten more creative  

and that everything’s going to be better. You've said in the book that you expect a  

rebalancing from US equities to foreign  equities. US equities have outpaced  

foreign stocks for the last couple of decades. You say you expect this to change or that there  

will be some rebalancing. What causes that? What I say very concretely is that when the  

dollar is really high, you should expect the  euro to go up. I feel strongly about that.  

My first important paper was about exchange  rates. That’s why the book’s about exchange rates. 

When Japan’s really weak or when the dollar’s  really strong—it’s very hard to predict exchange  

rates—but I think the euro will do well. There’s a lot of room to catch-up in Europe. 

I actually think I’m nuanced in what I say  in the book. Trump hadn’t been elected yet,  

but I say Europe seems to be  under pressure to re-militarize. 

I was aware that Harris was probably  going to cut the US defense budget,  

so that would put pressure on them. Re-militarizing would actually be  

good for the euro. It would be good  for technology in Europe. It would  

give them more geopolitical power in the system. Now, just so your listeners can calibrate this,  

my first book was a very mathematical one,  Foundations of International Macroeconomics. 

In theory, you should diversify. You shouldn’t  put all your money in the United States. I did a  

video with Zbigniew Brzezinski, Mika  Brzezinski’s father. For those who  

don’t know, he was Carter’s Kissinger. I did a video with him that Merrill Lynch  

produced. It was about why international  diversification could be good. What they  

got me to say was very, very limited.  I feel quite fine about what I said. 

I wasn’t doing any consulting at the time,  just academic work. I didn’t do speeches,  

I didn’t do consulting. I talked to  central banks a bit, but I didn’t do  

anything for money. But I did get paid for that. It circulated half a million copies of it. A lot  

of my friends teased me and said I would’ve made a  lot more money if I hadn’t followed my own advice.  

I can think of plenty of other examples like that. But yes, my instinct is that—this idea that our  

US premium should just keep getting  bigger and bigger—these things have  

some regression to the mean. Maybe not  with AI all being in the US, I don’t know. 

Is it that you’re predicting  that the S&P keeps growing at 8%,  

but foreign equities do even better? I’m just going to safely say foreign  

equities do better than dollar equities. But not because the growth in US equities  

slows down, it’s just that  foreign equities do even better? 

Look, you have a lot of friends who spend all  their time doing this. I wouldn’t pretend to. 

I hold a very neutral portfolio because I talk to  policymakers and world leaders even on occasion. 

I don’t want to be someone who’s talking about  regulating Bitcoin and owning a lot of Bitcoin,  

to pick a random example. So I wouldn’t regard myself  

as great at this. But yes, I think there’s  a case for international diversification,  

particularly into Europe at this point  because they have so much potential catch-up. 

Just as in California, where you’re from, there’s  a little bit of dim awareness that it might be  

overregulated and you might want to do things  differently, I feel that’s happening in Europe. 

If you look internationally, if you'd been  betting on catch-up, I wonder how you’d  

backtest it. There’s some intuition there that if  you’re poor and you’re further from the frontier,  

it makes sense that it would be easier for you to  catch up. But there’s another intuition that if  

you’ve been persistently behind the frontier,  there must be some deep endogenous reason. 

You’re absolutely right. For example, Asia has  a lot more governance problems on the whole.  

There’s a reason that their price-earnings  ratios are lower, because you don’t  

trust the governance. You’re right. That’s fair and a lot of people are  

just betting on that. But I don’t think Europe  is so hopeless that it can’t pull it together. 

I can make a comparison. I'm a basketball fan.  The Boston Celtics just got crushed by the Knicks,  

just before we’re taping this. Part of  it is because our star, Jayson Tatum,  

was injured. You may not have gotten any  better, Europe in this case, but if somebody’s  

hobbling the United States—I do think that’s  going on to some extent now—you do better. 

Is there some institutional reform we  could make that would get us out of this  

political equilibrium we're stuck in. Both parties, when they're in power,  

are incentivized to increase the debt and there's  no institutional check on that proclivity. 

There have been a lot of people who’ve tried  this, for example by having what are called  

fiscal councils. I did a paper once with  Julia Pollak, who’s a brilliant economist,  

when she was an undergraduate. That was quite a  while ago. A number of countries experimented with  

fiscal councils, but it hasn't worked. The country that's done the most with  

this is probably the United Kingdom. George  Osborne, when he was Chancellor, set up this  

fiscal authority. The big thing they did  is they made predictions so the government  

doesn’t get to make up different predictions. You don’t necessarily have to go by their numbers,  

but they got to say whatever they thought. Our CBO does not get to do that quite the  

same. Our Congressional Budget  Office is very good, but they are  

constrained to believe what Congress tells them. If Congress says, “We’re putting in this tax hook,  

but it’s going to go away after ten years,”  or “We’re doing this policy, it’s all going  

to change,” then they’re forced to use those  parameters. The UK version is more independent. 

There are lots of complaints about it, but that’s  a very poor man’s fiscal authority, just somebody  

who says, “This is what your deficit looks like.” It’s the same thing as our CBO, but with more  

independence. It helps. But I think it  has to go to our electoral system, right?  

Our campaign financing. Do we have term limits? You think that would help? I think, if anything,  

if you’re longer in office, you might have a more  long-term incentive. To the extent that a lot of  

the deficit problems are caused by populism, I  don’t know how much campaign finance would help. 

Maybe you’re right. I don’t have  a magical solution to this. It’s  

all over the world. Nobody's finding  a particularly great solution to it. 

The only encouraging thing is that  these things go in waves. So maybe  

this one will end. But we’re certainly in  a really difficult situation right now. 

Somebody asked me, “If you were advising a  Republican president or something, what would  

you do? What problem would you face?” The biggest  problem is that in a few years there’s going to  

be a Democratic president. They’re going to do  exactly the opposite of what you wanted to do.  

It’s the same thing for the Democratic presidents. How do you have some continuity? How do you have  

policies put in place that the public can rely on? We’ve done well in the United States in some ways  

because our government’s been kind of weak and  hasn’t been doing stuff. The private sector can  

work around it. I’m not saying it’s perfect.  There are lots of things we should do. But  

look, this is out of my paycheck, so to speak. You're the former Chief Economist of the IMF! 

All right, but that’s economics.  These are very political questions. 

Brexit’s an example of democracy gone amok.  What a dumb idea. I don’t know if Brexit was  

right or wrong. I feel like we’ll know in 50  years. But you shouldn’t be able to do it with  

a simple majority vote. You should need a  two-thirds vote, or something like that. 

There’s a whole government department here  with people specializing in what we should do. 

Actually, I think there are  experiments. Washington State  

experimented with different voting choices.  Maine did. There are these ideas out there,  

but we’re a long way from converging on anything. If you think people are underweighting how big  

the debt issue is, are you especially  long on countries which have a low  

debt-to-GDP ratio, like Australia or Norway? It's not the only thing going on in the world,  

your debt is just one thing. Countries  like Australia and Canada for example  

are what we call commodity exporters. They know that sometimes the sun shines  

and sometimes it's a dark winter. They don’t quite sell oil but they  

sell some coal, natural gas, and some oil. They understand things move around and that  

they need to save for a rainy day. Norway is in a whole other league. 

But yes, there are lots of factors to  whether a country will do well. The  

lower-debt countries have less of a problem. But Canada and Australia face very volatile  

income streams because of commodities, so  they tend to be more nervous about debt. 

By the way, they also have a lot of housing debt,  in Canada for example that's been a big problem. 

But I’m bullish on the United States.  Don’t misunderstand me. I’m not saying  

everyone should leave the United States  and go to Canada, although my wife  

thinks that sometimes but for other reasons. When I was playing chess in the late 1960s,  

I was living by myself in Europe. Nixon  got elected. I felt about Nixon the way  

I think a lot of people in your generation  or at least millennials feel about Trump. 

I didn’t want to come back to the United  States. So there are a lot of people who talk  

that way. But I think the United States is great. Countries that are smaller, that aren’t the  

reserve currency, that don’t have access to  these deep pockets of domestic and foreign  

borrowing—and all of those countries fit into  that framework, they need to be more careful. 

This "exorbitant privilege," as you talk about  it, is it possible that one way in which it's  

bad for us is that it allows, or incentivizes  us, to take on more debt than it's wise to? 

And especially if this isn’t a permanent advantage  we have. When you’re at the top, you take out this  

cheap debt. And over time you lose your reserve  status, or it weakens at least, and you have to  

refinance that debt at higher interest rates. So in the short term, you’re incentivizing  

this behaviour which is not  sustainable in the long run. 

Is there a political economy explanation  for why that might be bad for us? 

I've heard that argument, but I basically think  it's great for us. It's not just the government.  

It’s all of us who borrow less. Do we wish we  were paying higher interest rates? Probably  

most people who are getting a mortgage right  now feel like our interest rates are plenty  

high. They don't need to see them higher. I think with the exorbitant privilege, there  

are some drawbacks we don't need to get into.  But it's basically incredibly fantastic if you  

owe $37 trillion as our government does, to be  paying half a percent to a percent less. We're  

talking about hundreds of billions of dollars. Our ability to see what's going on everywhere.  

A lot of what our spying does is using our  exorbitant privilege and the dollar network. 

Sanctions. I mentioned, I was in my teens  at the end of the 1960s when I didn't want  

to come back. One reason I didn’t want to come  back was the Vietnam War was pretty terrifying. 

I had many friends get drafted. Their brains got  fried by heroin even if they didn’t get killed. 

And, sanctions. I'm not saying that we've solved  all our wars with sanctions. But make no mistake,  

we have used that in place of military  intervention a few times. So that’s been  

great. I think losing that, and not appreciating  how important that is, is a terrible blunder  

that we might be making right now. This is a very naive question. I  

know you address it at length in your book. I’ll ask the question in the most straightforward  

way and then you can explain what's going on. How should I think about the fact that we are  

basically giving the rest of the world  pieces of paper and we're getting real  

goods and services in exchange? Sure, at a high level you can say  

that they're getting this liquidity or  they're getting this network and that's  

what makes it worth it. But I don’t know, are  we fundamentally getting away with something? 

So just to note, the United Kingdom is  not the reserve currency. They're not  

the dominant currency. They used to be,  a hundred years ago. They look a lot like  

us now, with big current account deficits. That’s actually why Trump was able to  

strike a deal with them. Because they weren’t  really running a surplus against us, anyway. 

They’re over-financialized, even more than we are. The core of the benefit we get is that we  

borrow by issuing safe assets—if you want to  call our debt safe—and we invest in risky stuff. 

Charles Kindleberger, wrote one of the great  books on crises. I had him as a professor at MIT. 

He called us bankers to the world. He  said “Yep, we’re running this deficit,  

they’re holding a lot of our Treasury bills,  but we are making money hand over fist.” 

It’s the same thing as the equity premium  where you hold stocks and it’s not always,  

but on average better than holding  bonds. So that’s been very good. 

You have the fact that the dollar  is very liquid, the markets. 

Say you're a Silicon Valley firm and you're  big enough to issue debt internationally.  

I don’t know if any Silicon Valley  firms ever issue debt, but if you did,  

people will buy it because it’s in dollars. If you're the same firm in France, forget it.  

They don’t want to hold euros. Even if you promise  to pay in dollars, they’re not happy about it  

because your income isn't in dollars. So it’s been fantastic. This  

is something that's been debated. Stephen Miran, who was a Harvard student,  

he's the head of Trump’s Council of  Economic Advisers. Very smart guy. 

He's made this clever argument that because  everybody loves our currency, it makes us less  

competitive in everything else. It partly hollowed  out our manufacturing and that’s terrible. 

There’s a little bit of truth to that.  First of all, the dollar goes like this,  

so it’s not always high. Second, I mentioned the  

United Kingdom is kind of in the same boat. We’re good at a lot of things. We’re good at tech.  

Tech makes the dollar stronger, make no mistake. We’re good at biotech, agriculture. We’re good at  

a lot of other things that make the dollar high. And if you’re good at these things, it’s harder  

to be good at manufacturing. It  bids up the cost of everything. 

On the whole, we’re performing this banking  function. That’s really the big thing.  

It’s been going on since the ’50s and ’60s. That’s  the core of our so-called exorbitant privilege. 

There’s a really interesting book  by Charles Mann. I think it's called  

1493. It’s about how during the Ming Dynasty in  17th-century China, they kept issuing different  

paper currencies and it was super unstable. People  in China wanted a reliable medium of exchange. 

So tens of thousands of tons of silver  from the New World, from the Spanish,  

would be exchanged for enormous amounts  of real goods exported from China. 

So from the Spanish perspective, they’re  getting shiploads and shiploads of real  

goods, and all they’re giving up is this  medium of exchange. I don’t know how  

analogous that is to the current situation. There are countries like Ecuador and others  

that dollarize. They literally use the dollar  and they need dollars. We’re able to have them  

hold dollars. It’s not silver, but we print it  and they pay very low interest rates. They’re  

holding Treasury bills, not physical dollars.  Yeah, it’s fantastic for us. We definitely  

pay less on our debt because of that. That’s a fascinating example you bring  

up. The Chinese actually invented the printing  press. They invented paper currency way before the  

Europeans. But then, what do you know, they kept  printing a lot of it and had a lot of inflation. 

I hadn’t read that book, but it’s a great  example. I knew they were using silver,  

but that number is bigger than I had heard. Final question. A big part of your book  

discusses the different countries which seemed at  different times to be real competitors to America. 

You talk about the Soviet Union, Japan, China  today. We've discussed why they didn’t pan out. 

We can go into the details on any one of those  examples, but in the big picture is there some  

explanation that generalizes across all these  examples of why America has been so competitive?  

Or why it's been so hard to displace? It’s not just that we’ve stayed on top,  

we’ve just gone like this. Remember, in the 1970s,  Europe actually peeled away from the dollar bloc.  

But the rest of the world started globalizing.  China globalized. Eventually the Soviet Union,  

and the dollar just colonized all these places. They were all holding dollar debt, using dollars.  

It’s much bigger than even the British pound was  when the sun never set on the British Empire. 

So it’s been amazing and surprising to people  like myself. If you read what everyone was  

saying at the time, it was just that it kept  going up. That our share of everything kept  

getting bigger and bigger. Definitely, to some extent,  

we’ve been lucky. We talked about Japan. I think China made a big mistake by  

sticking to the dollar so long. Europe should have delayed bringing  

Greece into the Euro, because their  crisis wouldn’t have been so bad. 

So we’ve been fortunate with blunders by  our opposition. We’ve done some good things. 

But I think the thing Americans forget  is that we have been lucky a lot of  

times. I worry our luck is wearing thin. I quote a chess player—the great Bent Larsen,  

who was number two to Bobby Fischer when  I was playing. He was asked, “Would you  

rather be lucky or good in a chess game?” And he said, “Both.” So I think Americans  

forget. They know we’re good and we  are good. We’ve talked about dynamism,  

this secret sauce that we’ve had so far. But  I think we’ve also been lucky. If you ran it  

all again, it didn’t have to go the same way. It’s a very scary kind of luck. If it’s so easy  

for these other countries to make some mistake  that causes them to totally fall behind, it should  

update you in favor of the idea that, in general,  it’s easy for a country to get itself in a rut. 

It’s like the Fermi estimate thing. The fact  that you don’t see other alien civilizations  

is actually very scary, because it suggests  that there’s some kind of filter which makes  

it really hard to keep your civilization going. I hope not, but we’ll see. It’s certainly  

been amazing how the dollar’s  done and how the US has done. 

I hope we continue, but we are doing a lot  of things right now… I don’t think Trump is  

the cause of the dollar being in gentle  decline. That’s just wrong. I think it  

would’ve happened with Harris winning. But he is the president at the moment,  

and things like Liberation Day… I’ve  talked to tech people who think it’s  

just brilliant. I understand that. We can  debate it. I’m happy to debate it with them. 

We look at the rule of law. Okay, I’m sitting at  Harvard University. Naturally it feels that way.  

But also we talked about the president being  able to remove all the independent agencies. 

It used to be that if you were a foreign  investor and you invested in the United States,  

you thought you’d get your money back. Maybe the  stock would’ve gone down. Maybe the real estate  

you bought would’ve gone down. But you’d get paid. I think we were more exceptional than most about  

that. That’s in doubt now. There’s no question. The book’s about a lot of things besides  

exorbitant privilege, the whole arc of the US.  But when I was telling people about the book, “I  

don’t know, I’m looking at the numbers,  I’m looking at what China’s doing, I’m  

reading about Europe and their central bank  digital currency. I think we’re going downhill.” 

I showed it to academics, I showed it to financial  people, I showed it to tech people. They said,  

“You’re nuts.” They didn’t want to think  about it. I don’t know if I’m right.  

But I think it’s worth thinking about. When I was in China, I met up with some  

venture capitalists there and they were quite  depressed in general. Even founders say it’s  

hard to raise money. I was asking them why, and  they said investors don’t want to invest because  

even if you invest in the next Alibaba, who’s  to say the government doesn’t cancel the IPO? 

They’re in trouble. Yeah. I think Europe has  a bright future in this context, of being the  

team that doesn’t have as many injured players. But yeah, China… it’s not going to be forever,  

but I think for five or ten years  they’re going to stay in trouble. 

Okay. Thank you so much for sitting down  with me and also answering all my questions. 

I’m sure there are many misconceptions  and naive questions and so forth. 

I appreciate your patience and  you educating me on this topic. 

No, it’s an honor to be on your famous  podcast. I heard from so many young  

people when I told them I was talking to you. They were like, “You're with Dwarkesh? Just fly  

back from here! Do whatever you need to do!” So I’m glad you were able to come here. 

It’s really been interesting, and I’m glad  to learn more about everything you’re doing. 

The honor’s mine. It was great to be  able to travel here and speak with you.