Biggest Supply Shock Since The 1970s? Harvard Economist’s ‘Painful’ Reveal

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David

Introduces Kenneth Rogoff, professor at Harvard and former IMF chief economist, to discuss the future of the US dollar, global reserve currency status, inflation, and Fed policy.

Kenneth Rogoff

The US will eventually run into trouble as interest rates gradually rise due to rising debt and global wars. A big shock could lead to a burst of inflation, financial repression, or even selective default, as seen historically when the US abrogated the gold standard.

David

The DXY is rising despite the risk of a soft default; asks why the dollar isn't reflecting this reality.

Kenneth Rogoff

Interest rates are already going up because of the war. The US is facing a supply shock the likes of which we haven't seen since the 1970s, which pushes interest rates up and creates painful trade-offs, unlike demand shocks.

David

Asks if the world has fundamentally changed with more frequent supply shocks.

Kenneth Rogoff

We are in a more volatile period with big shocks (pandemic, financial crisis). The Iran war, closing of the Straits of Hormuz, and military buildup are pushing interest rates up.

David

Asks about Howard Lutnick's claim that globalization has failed the West.

Kenneth Rogoff

Globalization has been the best thing for the United States. Reducing globalization would be very painful, making interest rates go up and hurting the dollar's benefit of cheap money.

David

Iran is charging a toll in Yuan for ships passing through the Straits of Hormuz; asks if this is the end of the petrodollar.

Kenneth Rogoff

The dollar likely peaked about 10 years ago. If Iran is viewed as a defeat for the US, that is not good for the dollar franchise. There is a gradual shift towards invoicing trade in Chinese currency.

David

Asks about Rogoff's research showing the dollar's preeminence peaked in 2015 and the system will split between US, China, and Europe.

Kenneth Rogoff

The dollar is headed for a long sustained decline due to external factors (overuse of sanctions pushing countries away) and internal factors (US debt, loss of trust, threats to central bank independence).

David

Asks if Russia and allies have successfully de-dollarized and if there is an alternative.

Kenneth Rogoff

They have dramatically de-dollarized using Chinese currency and cryptocurrency. Crypto is a real competitor for the dollar in the global underground economy.

David

Asks if the world is heading into a multi-polar block and which currencies will dominate.

Kenneth Rogoff

The dollar will remain on top but as 'king of a smaller hill'. The RMB and euro will become much bigger as the US is seen as aggressive and erratic.

David

Asks if we are headed for another gold standard.

Kenneth Rogoff

No, the gold standard blew up for good reasons. Central bank independence works well, though it is under duress.

David

Asks if a policy of weakening the dollar would strengthen US manufacturing.

Kenneth Rogoff

The dollar is very high and due to come down another 15-20% against Asian currencies. I have conviction it is likely to go down, guessing 5% by end of 2026.

David

Asks about Senator Rubio's claim that the US has been de-industrialized.

Kenneth Rogoff

The industrial base is smaller because tech, biotech, and medicine grew. The US is good at high-profit margin things. Trying to rebuild manufacturing to 30-40% of the economy would mean a lot less of everything else and lower income.

David

Asks if the US can remain the political and economic hegemon.

Kenneth Rogoff

The US will have to accommodate China's growing strength. Losing wars is not good for the franchise. It is distinctly possible the Iran situation looks like a big win for Iran.

David

Asks what Rogoff would change in his book given recent events.

Kenneth Rogoff

He added a chapter worrying about corruption in the US and things undermining institutions. He was worried about either party winning.

David

Asks what could have been different if Kamala Harris won.

Kenneth Rogoff

Central bank independence would have been undermined in other ways (inequality, environment, social justice), leaving the US vulnerable to giant inflation. He was very worried about either outcome.

David

Asks for the most pressing domestic economic issues and recommendations for the administration.

Kenneth Rogoff

Deregulation has gone too far in the financial sector, risking another financial crisis in 3-4 years. AI regulation is needed to enforce copyright and intellectual property to slow it down and give society time to adjust.

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