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00:00First off, this debate about inflation, is it being underappreciated at the state, you think?
00:07I think the numbers are going to get worse. That's for sure. The question is how much.
00:13And if you look at the amount of pass-through that has to happen in the United States,
00:21there's about a percentage point and change that has to be passed through directly from the imported goods into prices.
00:33About a third to a half has taken place so far. There's another 50% to 60% which has to come through.
00:42And that means inflation going into the middle of next year is going to be higher than the current 3%.
00:49And it's close to 4% on a three-month basis. So it is going to be high and much higher than what the Fed feels comfortable with.
01:00So the Fed is cutting into an inflationary rise.
01:05And that, of course, is one source of concern, especially given what you just heard,
01:12given that financial markets are booming, given that credit markets are booming, credit spreads are very thin.
01:18And so the Fed is, at this point, adding fuel to that.
01:22Now, the Fed's argument, which is not irrelevant, is that labor markets are weak.
01:28And we saw today some signs of greater layoffs.
01:33The good thing about labor markets so far was lower hiring, but no layoffs or very limited layoffs.
01:41Now you're seeing some signs of layoffs, and that would cause a lot of concern, both amongst the authorities, but also amongst the public.
01:50Right now, those who have jobs are pretty comfortable.
01:53But if they fear for their jobs in the United States, it is going to put a dampener on consumption, which has been a big supporter so far.
02:00So you talk about the layoffs, Amazon cutting 30,000 jobs, you have UPS cutting 30,000 jobs as well.
02:09The question that's being debated right now is whether or not inflation is a bigger risk than the labor market.
02:15What's your take?
02:15Where do you stand?
02:17Well, to my mind, I think there's a third risk also.
02:20So let me add the economist's, you know, alternative, which is that it's not just the labor market, it's not just inflation, it's also the financial markets, which are very buoyant.
02:36You just heard your last guest talk about the potential for some, you know, bubbles building up and some kind of collapse down the line.
02:46Well, think about that.
02:47That's a huge concern if it happens.
02:50I'm not saying it's on its way.
02:52What I'm saying is the cost of a credit-fueled rise and then a collapse down the line is going to be enormous for not just the United States, but the industrial world.
03:05And there's not that much fiscal space to deal with a crash of that sort, of the, you know, the kind of fiscal space we had during the global financial crisis and the kind we had during the pandemic.
03:18That's just not available right now.
03:22Before we touch on the possible collapse, I just want to finish off our conversation on inflation.
03:28You talk about how it's going to get worse.
03:31Question number one, is 3% the new 2% because the Fed is cutting at 3%?
03:36And are we possibly looking at 4% perhaps in 2026?
03:41No, the only way that Fed can justify this, I don't think it's changed its target.
03:46It is still 2%.
03:47But I think the way it would justify this is saying, one, labor market conditions would indicate that with a weakening labor market, we will see a downward pull on inflation.
04:00Yes, inflation will go up in the short run.
04:03That comes from these tariffs and fast-throughs, et cetera.
04:06But it will get pulled down.
04:08And that's why we're cutting, anticipating that we don't want too much weakness in the labor market, just enough to get inflation back on track.
04:17So I don't think if you, you know, shine a light on any one of the Fed governors, they will say we've abandoned a 2% target.
04:26They will just say, look, we think we will get there.
04:29But at this point, we think that we don't want too much labor market weakness.
04:34And we're trying to build insurance cuts against that.
04:39We talk about how this is an interdependent world.
04:42We just heard how China's trade data has come in weaker than anticipated.
04:46I mean, what trickle through may we see perhaps in the U.S. economy?
04:51You know, we talk about inflation.
04:52Is that inflationary for the U.S.?
04:56You know, China is, in fact, at this point, disinflationary for the world, right?
05:03I mean, it's not just the areas where, you know, the old areas where China has excess capacity.
05:12And we just heard it's not able to export it directly to the U.S.
05:16Yes, there is a substantial amount of transshipment happening.
05:20And we have to see what happens when the U.S. sort of starts attacking transshipments from China via other countries to the United States.
05:29But there's also this very real question that countries across the world have.
05:34If, in fact, Chinese final exports to the U.S. are falling, where are they going?
05:40Are they coming in our direction?
05:42And will they be disinflationary for us because, you know, more capacity, more production is going to be disinflationary?
05:51So the rest of the world is already suffering from, you know, lower U.S. demand for their goods.
05:57Add to that higher Chinese supply and you've got a disinflationary force acting in many, many countries.
06:06Does give their central banks room to cut rates, but is also a source of concern for growth, which they will worry about.
06:14Professor, we heard earlier from Gita Gopinath, who sounded a note of caution.
06:23She talked about how the world is pretty reliant on the U.S. economy and also the U.S. market.
06:28And if that were to collapse, we may see a destruction of $35 trillion of wealth.
06:33What's your take on it?
06:35I mean, do share her view.
06:37What are your own concerns?
06:38I think that right now it's anybody's guess how soon the returns from AI will come.
06:50And clearly a lot of market action, as well as real investment, is predicated on those returns showing up sooner rather than later.
06:59The history of past technological advances is that the anticipation of the returns is high, but the actual delivery is much further down the line.
07:11It shows up, but much later.
07:15As, you know, for example, we're seeing the benefits of the Internet, the dot-com boom, maybe, you know, really in force 10, 15 years after we thought it would actually show up.
07:30And I think similarly, it may be the case that the returns from AI may take time.
07:35Now, of course, there are people who point to the fact that OpenAI has got such a large clientele so quickly that, you know, we are seeing some of the returns show up.
07:50For example, in these very layoffs you're talking about, that it may be that because the layoffs of corporate staff, companies are finding ways to do things more efficiently.
08:02I think at this point, it's anybody's guess.
08:05I don't think anybody really knows how quickly these returns will show up.
08:09And will they sort of be enough to offset the enormous costs of investment, the depreciation, the energy costs that are going into AI?
08:20I think we have to wait and see.
08:22But, you know, often it's the pace of growth that worries people rather than just the levels.
08:30And the pace of growth has been substantial over the last few years in this area.
08:36And so, yeah, the sentiment is it looks bubbly, but I doubt anybody can tell for sure.
08:45I'm just wondering if, you know, what early warning indicators are you looking out for?
08:51Well, you know, we saw from the dot-com boom that merely an increase in stock prices, you know, it's not as worrisome.
09:08If it is also accompanied by an enormous amount of investment fueled by credit.
09:15That was what we saw during the global financial crisis, a combination of higher asset prices, including financial assets,
09:23but also funded with a lot of debt.
09:29And when both those occur together, when the asset prices come down, what you're left with is excess debt and a hangover,
09:39which is very hard to clear in the short run.
09:43So the worry is that we are moving at this point steadily from a fairly reasonably levered corporate sector in the United States,
09:56a fairly circumspect banking sector and a household sector which hasn't borrowed too much,
10:02especially because their largest source of borrowing, which is against their house,
10:07mortgage rates have been really high and have prevented that kind of excess borrowing.
10:11But I think as you see the, you know, the Fed cutting into this environment,
10:16the worry is if credit picks up strongly at this point, more so than what is already out there,
10:23and it starts funding some of this investment that's going into, for example, AI,
10:30but also not just data centers, also the energy supplies that are thought to be necessary to fuel the AI,
10:40I think these are the kinds of places where disappointment can result in both asset prices crashing,
10:47what would the price of data centers be if there's no demand for it,
10:50plus the concern about, you know, debt against it, who's going to repay it.
10:57So far it hasn't been big because a lot of these big, you know, AI players have funded it through internal cash flows,
11:04but now they're moving into funding it with debt and more and more players are moving into that.
11:11We have to see how far it goes.
11:13And that's why I really worry about the financial excess as the third concern over and above inflation and weakness in labor markets.
11:23Professor Rajan, your take on the Indian economy.
11:26I'm asking because when you take a look at the currency, it's among the cheapest in the region.
11:31What's going on there, you think?
11:34Well, it was one of the strongest for a while, right, last year.
11:37And so I think it's a little bit of reaction.
11:41Clearly, it may be some of the issues with the United States are weighing on the currency.
11:51More as, you know, I think this is hopefully a short-term fracas between India and the United States
12:01that they will figure out a way to deal with both the oil issue,
12:07which I think the United States has raised, India buying oil from Russia,
12:12and, of course, the wider issue of trade and, you know, the imbalances right now between India and the U.S. on goods.
12:24Hopefully, they will do a deal at a much lower level of tariffs than 50 percent, which is what it is right now.
12:31And it's more like the East Asian level of between 10 and 20 percent.
12:37That certainly will give a boost to the Indian economy.
12:41Not that trade with the U.S. is that big.
12:45It's about 80 billion in Indian exports to the U.S. in terms of goods and about 40 billion in imports.
12:52So the trade deficit is about 40 billion, which is 1 percent of GDP.
12:56Not a huge deal as far as Indian growth goes, if some of that is upset,
13:02but certainly affects some sectors significantly.
13:05And that's a big worry, sectors like textiles, which have gotten used to selling into the United States.
13:11Would you say that the weakness in the rupee is helping to buffer the impact from U.S. tariffs?
13:20It's small.
13:22And this is why I said, you know, part of the issue was the rupee was quite strong, you know,
13:27through last year when the dollar was strengthening against most currencies.
13:32The rupee held, you know, broadly held its own against the dollar.
13:36Recently, it has weakened.
13:39And you're right that that could be moderately helpful.
13:43But I think the bigger issue for India really is it's very hard to see the rupee weakening enough to offset a 50 percent tariff level.
13:53So that's not going to make India competitive vis-a-vis, you know, other countries in exporting to the U.S.
13:59That 50 percent has to come down significantly.
14:03But broadly speaking, on the overall growth side, India is doing pretty well, you know, between six and a half and seven this year.
14:13And, you know, that's that's not a number to sneeze at.
14:16The details are a little weak, but but overall, I think it's it's a good number.
14:22But, Professor, it is about job creation, right?
14:26In India, that's part of the problem.
14:28There's a sense out there that perhaps, you know, India is wasting away its demographic dividends simply because jobs cannot be created enough for the young people.
14:40That's that's the huge issue.
14:41That's the central issue in the Bihar elections, which are going on right now.
14:47But a huge issue for India is how do you create jobs for the young people entering the labor force?
14:53As you know, every Asian economy really got a growth boost when it provided those jobs and and had many more people sort of entering the labor force.
15:05The dependency ratio goes down and growth picks up.
15:09Now, India is not creating enough jobs.
15:11Now, we have to in India think very sensibly about how that's going to come.
15:17It's not going to come from the goods exports of the kind that China or even Vietnam did.
15:24That's that's a very competitive and, you know, increasingly automated area.
15:29And of course, it's now being hit by enormous waves of protectionism.
15:34I think for the masters, creating jobs means creating more rural service, creating more urban service jobs.
15:43And how do we create those urban service jobs?
15:45How do we skill up people to do those jobs of carpentry, plumber, masonry?
15:51All that stuff is something that every government in India needs to think about.
15:55Professor Arjun, you touched on the Bihar election.
15:59How closely are you watching it?
16:01What are the implications, you think?
16:03Well, I'm watching it at a distance.
16:05So I don't want to pretend to be an expert on the on the details of the election.
16:09But it clearly is a very important election for India because, you know, in the 2024 election, the opposition seemed to gain substantial ground vis-a-vis the ruling party.
16:24The ruling party actually went into having to form a coalition with other parties in order to in order to have the majority in parliament.
16:32Since then, the ruling BJP party has won many of the key elections that have been held.
16:43And Bihar is is one election where the opposition thinks it has a chance.
16:50And and of course, therefore, it is going to be washed keenly.
16:54Does this upset the momentum for the BJP and does it then ogre for the elections coming next year or does the BJP sort of continue with its juggernaut like like progress?
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