This is an edited transcript of our podcast episode with Charles Goodhart CBE, Emeritus Professor of Banking and Finance at the LSE, and former Previously Chief Adviser for the BoE. We discussed the problem with the Fed’s AIT objectives, China’s integration into the global economy, and the challenges of an ageing population. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Charles’ Background and Career Path
Bilal Hafeez (02:20):
Now, on to this episode’s guest, Charles Goodhart, CBE. Charles is Emeritus Professor of Banking and Finance at the LSE, having previously been its Deputy Director. Before that, he had worked at Bank of England for 17 years, including as Chief Adviser, and later, in 1997, as an Independent Member of the Bank of England’s new Monetary Policy Committee until May 2000. He even has an economic law named after him – Goodhart’s law. He’s written numerous books, including most recently, The Great Demographic Reversal: Aging Societies, Waning Inequality and an Inflation Revival. Now, on to our conversation.
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This is an edited transcript of our podcast episode with Charles Goodhart CBE, Emeritus Professor of Banking and Finance at the LSE, and former Previously Chief Adviser for the BoE. We discussed the problem with the Fed’s AIT objectives, China’s integration into the global economy, and the challenges of an ageing population. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Charles’ Background and Career Path
Bilal Hafeez (02:20):
Now, on to this episode’s guest, Charles Goodhart, CBE. Charles is Emeritus Professor of Banking and Finance at the LSE, having previously been its Deputy Director. Before that, he had worked at Bank of England for 17 years, including as Chief Adviser, and later, in 1997, as an Independent Member of the Bank of England’s new Monetary Policy Committee until May 2000. He even has an economic law named after him – Goodhart’s law. He’s written numerous books, including most recently, The Great Demographic Reversal: Aging Societies, Waning Inequality and an Inflation Revival. Now, on to our conversation.
Bilal Hafeez (02:55):
Welcome, Charles, to the podcast. I’ve been looking forward to this for a while. You’ve long been a researcher and writer I’ve long admired, so welcome to the podcast.
Charles Goodhart (03:04):
Thank you. Glad to be here.
Bilal Hafeez (03:06):
Great. And before we go into our more meaty part of the conversation, I wanted to ask you about your history, your personal history. And we can maybe start all the way back to when you started, what you studied at university, and did you at that point know you’d go on to become an economist? Was that your ambition at the time? And perhaps some of the highlights of your career since then.
Charles Goodhart (03:26):
Okay. Well, it’s a long story. I was the youngest of three brothers, of an American father who came over to England after World War I and became the first American ever to become the master of an Oxford college. And of the three sons, the oldest became a politician. My father wanted him to become Prime Minister, which he didn’t do. The older brother was actually the cleverest of the lot of us. My father was an academic jurisprudence lawyer, and he wanted my elder brother to follow in his footsteps and to become an academic, which he didn’t do. He became a practicing lawyer. And I was supposed to go into the family financial business. So, when I went up to Cambridge. It was suggested I read economics. I’d been an historian up to that. And I found actually, rather to my surprise, that I was rather good at it and first thing I’d ever got a first at. So, I got a first at economics. And then I decided, “Well, I like it. I seem to do it well. So, I’ll stick with it.”
And after Trinity College, Cambridge, I went over to Harvard to do my PhD, where I did a PhD on a historical subject as well. I came back to Cambridge. The then-Chair of the Economics faculty, where I was an Assistant Lecturer, said that he would only recommend me for tenure if I became secretary of the faculty, which was a horrible administrative job. So, I took the first decent job out. That was in ’65. That was to become part of George Brown’s Department of Economic Affairs. And from there, I went to London School of Economics because I’d been a sort of monetary historian, and Professor Richard Sayers was the doyenne, the head of monetary historians at that time.
And then, I was asked to go into the Bank of England. The Bank of England at that time had a system of asking young monetary economists to go into the Bank for two years. And I was very fortunate, because it was the beginning of monetarism. And I’d actually met Milton Friedman. I’d been at some of the discussions between monetarists and Milton Friedman and Jim Tobin. And I knew what it was about. There was nobody at the Bank of England who had any idea what monetarism was about. So, I could explain monetarism to the Bank, and I could explain the Bank and what it was trying to do and what it wanted to do to monetarists. So, I found myself at a quite young age actually quite indispensable for a time at the Bank, so I stayed.
And I stayed very happily from 1968, when I went into the Bank, until 1985, becoming a Chief Adviser along the way, and doing a variety of exercises, including going off to Hong Kong to advise them on the link between the Hong Kong dollar and the US dollar. Then in ’85, there was an opportunity for me to become effectively the Chief Economist, but the appointment information went instead to my very good friend, who is slightly younger than me, and excellent economist, John Flemming. So, I said to myself, “Well, John is younger than me. He’ll be in that position perhaps forever. So, I better do something else,” because I didn’t want to just go on doing the same old job. So, I went off and took a Chair at LSE again and founded, with Mervyn King, the Financial Markets Group in 1986, and remained at LSE as a teacher and professor until 2002 when I retired.
But I didn’t give up work when I retired, because I enjoy economics. I continued to work there. And so, I still work in economics, and I still have an office at LSE. And I hope to go on working as an economist with a historical bent, rather than a mathematical bent. Economics is a lovely mixture of history and math. At the moment, I think the history is too undervalued, and mathematical modeling is perhaps a bit too overvalued. But that’s my prejudice.
Importance of Understanding Money Demand and the Money Multiplier
Bilal Hafeez (07:44):
Yeah. That’s a great story. And you’ve had quite an accomplished career in economics so far, and you continue to have one, so that’s really good. We plan to talk a lot about demographics, which is off the back off your recently published book. But before we do that, you touched on monetarism, and you said you were involved in the early period of when that was entering the mainstream of economic though. I mean, what’s your view on monetarism today? Because obviously, it had its heyday, you could say, in the ’60s, ’70s and perhaps early ’80s. And then since then, it’s kind of fizzled out a bit. Or not fizzled out, but it hasn’t been as dominant in the discourse. I mean, do you have a view on the role of monetarism today?
Charles Goodhart (08:25):
Yes. My own research, which actually got published in probably one of my more important early papers, called “The Importance of Money.” There is a really quite stable demand for money function, which means that velocity isn’t going to move around too much except in really extraordinary circumstances. And the COVID pandemic is one of those. But I was always an opponent and disbelieved in what is known as the money multiplier, where there is a stable relationship between the monetary base (the reserves that the commercial banks hold with the central bank) and the total broad money supply, which, unfortunately, is what has given the rest of monetarism…much of which I think has got a great deal of sense to it. What has given the rest of monetarism a very bad name is that the shift in the operations in money markets – from having the reserves held in the Bank of England earning a zero interest rate, to having the reserves held in central banks earning interest – broke entirely the relationship between the monetary base and the broad money supply. And particularly, the monetarists in the USA simply did not realize this.
And in 2008, 2010, when the reserve base of the money supply increased dramatically, but the broader monetary aggregates did not increase strongly, the US monetarists like Allan Meltzer went around saying that hyperinflation is coming tomorrow. And of course, it didn’t, because the money multiplier collapsed. And that, in effect, has put what is valid and what is correct and what is interesting about monetarism very much in the shade. So, most central banks now give hardly interest in what is happening to the broader monetary aggregates, which in the last year or two has actually been phenomenal. And the rise in the broad monetary aggregates, which was not present in the period from 2008-2013, has now really been, in many countries, dramatic, just as fast or faster than during the major World Wars. And the view of many of us is that it’s not going to lead to hyperinflation, but it is going to lead to much more inflation than the mainstream view in central banks now expect.
Should Central Banks Target Monetary Aggregates and House Prices?
Bilal Hafeez (11:08):
Yeah. I mean, I guess one kind of question, I guess issue with monetarism or looking at monetary aggregates is how we define what money is. Because that’s been one of the challenges. Because lots of the lines have been blurred between money market funds that deposit, to shadow banking, to just the sprawling areas of money. And then the other aspect of this is there seems to be, in relation to inflation, that there is a possibility that lots of this kind of excess money that exists goes into financial markets rather than the real economy. And so, say, as the broad monetary aggregates expand, is it ex-ante? Can we say that it will necessarily go into the real economy and then drive inflation higher? Or equally, it could just go into equity markets or property or something. What do you think about those two?
Charles Goodhart (12:01):
Both those comments are absolutely spot-on. And it has been one of the great weaknesses of any form of monetarism that the nature of money tends to change over time. There are ways of dealing with it. There’s an economist called Barnett who’s developed a Divisia monetary index, which is less prone to that kind of bias and distortion than most other estimates of money. And there are ways of dealing with trying to estimate money. But that money, or rather the nature of money, does change to evolve over time is undoubtedly correct. And one does have to adjust for that.
Your other comment is that the relationship between money is closer with the financial variables than it is with real variables – that is also absolutely spot-on. But I think it raises the question of, if that is so, if monetary variables tend to affect financial variables more than real variables, why are the targets for monetary policy real variables rather than financial variables? Effectively, what has happened is that your monetary variables are affecting things like housing markets very much at the moment. I mean, we’ve got a synchronized house price boom going on more or less everywhere in the world, which is undoubtedly quite largely due to monetary policy. We’ve got a lot of financial variables at what appears to be very high asset values. Some people talk about bubbles. And yet until fairly recently, the real variables haven’t been doing much.
So, the monetary policy has gone on more and more expansionary, and with the tax and other benefits of debt rather than equity it does mean that we’ve started to work our way into a world in which debt ratio is both public sector debt ratios and non-financial or financial debt ratios have been, in many cases, remarkably high. Not in all cases. For example, the countries which had their housing prices in 2008, 2010, the private, personal debt ratios have not risen to the same level. Germany has had no real increase in debt ratios. But they’re the exceptions rather than the rules. And having monetary policy focus on real variables, which it is only tangential in affecting, rather than financial variables, which it affects directly, is, I think, a sort of really rather fundamental point.
And the progress that we’ve developed, whereby in order to try and bring inflation subject to many strong disinflationary forces, which our book talks about, back to sort of normal levels has led to progressively, continuously, easier, laxer, lower interest rates, increases now in monetary aggregates, which has led the debt ratios everywhere to increase to such an extent it’s actually going to be quite hard to get out of the debt trap without either provoking inflation or interest rate changes, which might lead to a recession and even perhaps a financial collapse.
The Problem with the Fed’s New Inflation Targeting Objectives
Bilal Hafeez (15:32):
Okay. Yeah, yeah. No, all very valid points. And I know we’re veering off topic here, but we have seen recently central banks have been changing their targets. So, for example, the Fed now has their flexible average inflation target, and presumably the ECB will soon follow along those lines. There’s this idea of targeting price levels at some level, or inflation catch-up, make-up policy. From what you’re saying, it almost sounds like your preference would have been to broaden the targets of monetary policy towards financial variables and broader array of targets rather than necessarily just focus on the inflation, adjusting inflation targets. I mean, is that a fair characterization?
Charles Goodhart (16:14):
Yeah, it is. It’s a very difficult subject because historically and traditionally, and in my view, quite properly, central banks and monetary phenomena have always been required to have the stability of the internal and external price level very much at their center. But that said, I do think that a greater attachment somehow and to some extent to more financial variables and asset prices, particularly in housing, would be desirable. Which means that if you’re going to give more weight to housing prices, you’ve probably got to have a greater role for fiscal policy in assisting monetary policy in the maintenance of generalized stability of prices of the standard consumption variables.
Bilal Hafeez (17:16):
Yeah, understood. And your view on this average inflation targeting or some kind of catch-up policy? I mean, do you think that was a wise move? Or do you think that was-
Charles Goodhart (17:25):
No. Not really. It was not a wise move.
Bilal Hafeez (17:29):
Why not?
Charles Goodhart (17:29):
It was sufficiently dodgy that the Fed very carefully has never, ever specified over what period it was averaging. And averaging which particular price index? What is more, in my view, the blip in inflation that is currently developing, notably in the US but to a lesser extent in the UK, and probably to even a lesser extent in the EU, may drive inflation up to such a level that most of the previous undershoots will already, by the end of the year, have been reversed. And it wouldn’t surprise me is that if you took the US CPI and you took any reasonable back time period, you would find that by the end of 2021, the whole of the previous undershoot will have been almost entirely reversed by the scale of the blip in 2021. And since, in my view, the inflation will continue in 2022 and 2023 significantly, but not all that much above the targeted 2%, does that mean that average inflation target in the US will require the Fed to aim for a target level below 2% in future?
Basically, it was a silly idea introduced to deal with what was perceived as a particular concern of the moment. And I think that they were sufficiently disturbed by what they’d done to the extent that they’ve never communicated to the world at large over what period they are going to average, and exactly which index they’re averaging. Talk about not communicating fully.
Bilal Hafeez (19:23):
Yeah. And if you listen to Fed speakers around the subject, they all seem to have a different interpretation of what average inflation targeting is. There’s no consistency in even what the Fed members themselves are saying, so there is this ambiguity which probably does go back to what you’re saying, that this was almost like a regrettable move by them.
Charles Goodhart (19:41):
Yeah. And well, I feel actually rather sorry for them in the sense that the COVID pandemic and getting out of the COVID pandemic are events which have had really no real precedent. To that extent, we’re all flying blind to quite a considerable degree. When you’re flying blind, it is not a good idea to lay down a new strategy or new set of tactics, because you don’t really know whether your new tactics or new strategies will fit an unprecedented set of occasions. And also, everybody tends to mimic the Fed. And the ECB is in the process of trying to devise a new tactics and strategy. Just don’t do it. Wait two or three years until something approaching normality returns, and then think about the longer term.
Bilal Hafeez (20:37):
Yeah. And then, of course, we have Goodhart’s law as well, in terms of whatever you target is going to stop working.
Charles Goodhart (20:42):
Yeah, well. Alas, it works only too well.
Understanding China’s Integration to the Global Economy
Bilal Hafeez (20:46):
Yeah. Now, I really did want to talk about your book, The Great Demographic Reversal, because it’s a topic, demography, which one, I think we don’t really discuss enough, and secondly, it’s not as well understood. There’s simple heuristics people have around demographics which often aren’t backed either by theory or by data. So, I wanted us to focus a bit more on that. And one of the things I found in reading your analysis was the importance of understanding China and what China has done to the global labor supply, and how that, in some ways, gives us a lot of clues in trying to understand demographic trends we’re going to have in the next period of time. Perhaps we can start with China, in terms of how you view China’s impact on the global economy, and then we can go from there.
Charles Goodhart (21:36):
Well, let me start with a couple of facts. First, China has been the largest country, in terms of population, in the world. I say has been, because the decline in the birthrate spurred on by the one child policy is about to make Chinese population significantly decline, while India’s population is still very much on the rise. So, China’s role as the most populous country by quite a long way in the world is eroding and may reverse within the not too far distant future.
The second point I would make is that China was undoubtedly the most advanced and leading country in the world for a millennium until about the seventeenth century, when the Industrial Revolution began in Europe, and notably in the UK. And that means that China has a remarkable history, and it has a history of being able to manage a very considerable system. In my simple world, growth is really a function of good governance and education. And the Chinese population have been well educated and increasingly so in recent years, and whatever else one my think about the Communist leadership, they have at any rate since Chairman Deng shown a remarkable ability and aptitude to press forward quite single-mindedly to return China to its former position as a, if not the, leading economic power. And they have, in that sense, effective governance and good education. And unless they make some terrible mistakes, they are likely to remain one of the leading economic powers in the world for a very, very long time. And the growth of China over the last 40 years has really been the dominant factor in the world as a whole.
The challenges of an ageing population
Bilal Hafeez (23:49):
Yeah. Yeah, absolutely. That makes sense. And then in terms of how that maps onto demography, you’re making a point that we’re at some kind of important reversal point globally in terms of demographics, whether that’s China, whether that’s the Western economies and so on. Can you elaborate a bit more on that?
Charles Goodhart (24:05):
Well actually, we’re past it. The turning point was about 2010, and it was then really that the world’s working age population peaked and began to decline, particularly in the advanced economies. And it was then that life expectancy started to rise so much and retirement ages did not rise alongside so that the ratio of dependents, particularly elderly dependents, to workers began to increase very sharply. And the elderly are much more expensive than the young not because they actually consume more, but because they get persistent diseases, particularly neurodegenerative diseases, which need a great deal of medical care, medical support. And actually, human care, human assistance. And those are both very expensive in terms of public sector expenditure.
Factors that Depressed Inflation Are Now Turning
Bilal Hafeez (25:04):
And you’ve said the reversal has already started. And I guess one of the challenges with looking at demography is it’s a slow-moving variable. Yet we can relate these demographic changes to growth. There should be some kind of impact on growth, and also on inflation, presumably. How do you relate the two together?
Charles Goodhart (25:24):
Well, if we’re talking specifically about inflation, the effect of the massive increase in working age population and the fact that women cease to just do housework and actually join the labor force meant that over the last 30 to 40 years, there’s been an absolute explosion in the availability of workers for anyone who can shift their production from high wage to low wage centers, particularly to China. And China has become the manufacturing hub of the world. And that has meant that the bargaining power of labor in the Western economies has actually been trashed. And when your bargaining power goes down over a period of three decades or so, four decades, really, it means that it’s going to cut back on wages. And the availability of labor, this massive, huge, long-term upward shot in the availability of labor, has meant that inequality inevitably has increased a lot within countries. But actually overall, world inequality has declined because the improvement in Asia, the most populace part of the world, has meant that between-country inequality has declined much more, in effect, while within-country inequality has increased.
And in the old days, if you wanted to know where you were in the world’s inequality pecking order, you actually only had to ask, “Where were you born?” And if you were born in France or Canada or in the US, more or less by definition you were in the top 20%. And if you were born in India or China or Africa, almost by definition you were in the bottom 40%. Now, that division by country is no longer anything like as strong as it was earlier. There’s some very good work by Milanovic on all of this, and I’m really to some large extent simply quoting the work that he has done. So, the inequality story is a very nuanced one. All the desperately poor peasants in China and Vietnam, Thailand and so on and South Korea are within striking distance of the poor people in the West. And that just didn’t used to be the case at all.
But of course, the ordinary, blue collar worker in the West has done really very badly, while those with capital, whether human capital, technical skills or financial capital, have done brilliantly over the last 20 to 30 years. So, it’s sort of swings and roundabouts. But actually, one of the aspects of our story is the reversal of demography, and to some extent, reversal of the globalization we’ve had in recent decades. It’s going to mean that within-country inequality will actually itself start to reverse, and our countries will become gradually a bit more equal than they have been in the last decade or so.
Bilal Hafeez (28:46):
And you touched on one point in terms of this abundance of labor that we’ve had over the last 30, 40 years, which has reduced the bargaining power of workers, which in turn has depressed their wages. In relation to that, do you think this was to do with the fact that there was this abundance of labor? Or was it to do with politics? And I guess it’s hard to disentangle these two, but there’s been a big drive across the Western economies to break the power of the unions, reduce workers’ rights, and make it harder for unions to form. There’s been the growth of the service sector as well, which again tends to be less unionized. I mean, how do you think about these kinds of other forces that have also affected the bargaining power of workers?
Charles Goodhart (29:27):
A very good question, and they’ve both gone in the same direction. And we tend to think, and we’ve argued in our book, that it’s basically the law of supply and demand that’s had the major effect. In other words, it’s been simply the massive availability of workers. But above that, we wouldn’t deny that the attempt to specifically reduce the power of trade unions has gone along in the same direction. But I think that we would argue that the inequality has also increased in those countries where the politics haven’t been quite so anti-union.
Bilal Hafeez (30:08):
Okay. Yeah, yeah, understood. Yeah.
Charles Goodhart (30:10):
And it’s a good question, and a very good research area. How far has reduction in the bargaining power of labor been due to just supply and demand? And how far has it been due to politics? And of course, the two interact. So, trying to isolate the relative power of one or the other factor is extraordinarily difficult.
Bilal Hafeez (30:31):
Yeah. And in your book you talk a lot about the dependency ratio, so the young and the old are the dependents, and then you have the working age population. I mean, is there a nuance between the young and the old? If it’s the older side of the dependents that’s driving the change versus the younger side driving the change, does that have some kind of impact on inflation or investment in those sorts of things?
Charles Goodhart (30:56):
Well, as I was saying, the old tend to be more expensive than the young, partly for medical health reasons. And one of our greatest hopes is that we are wrong because medicine will come up with cures for the kind of medical conditions which cause so much problem to the elderly – dementia, Parkinson’s, arthritis and so on. And it may be that that will happen. And if so, we will be absolutely delighted to be wrong because basically, our book is saying that there are going to be a number of problems in dealing with an aging society. And you have to be aware of what problems are likely to come. The horizon of politicians, of economic forecasters and so on is only a couple of years, frequently, at most. And because they’re so slow-moving, these kinds of longer-term issues frequently tend to be pushed under the carpet and ignored until it’s too late.
Why Didn’t Ageing Japan See Inflation?
Bilal Hafeez (31:56):
And one of the classic case studies for aging tends to be Japan. And of course, Japan, when it comes to inflation or even growth, has had a period over the last 20, 30 years of very low inflation, verging on deflation periods, and many people say that’s due to aging. So, because of aging, it’s had low inflation. Whereas you would argue that that’s not the case. Do you want to lay out why you think Japan is not actually a counter-example?
Charles Goodhart (32:26):
For several reasons. One, Japan is right next to China. And there’s what’s known as the gravity theory, which says that you’re much more influenced by nearby neighbors than you are by far away neighbors. And China is the nearby neighbor of Japan, and the Japanese firms saw the availability of cheap and effective labor in China. And they did a great deal of outbound FDI, establishing factories in China and other parts of Asia, and doing a great deal of their output there with the result that manufacturing declined in Japan. And the Japanese workforce shifted from manufacturing to services. And the Japanese workforce shifted from full-time, contract workers in manufacturing to part-time workers in services where again, their power was a very great deal lower. So, Japan was effectively, I think, unable to fight the same disinflationary forces as we face.
What we would say is, well, a number of things. One is that Japan’s QE never actually managed to get the monetary aggregates going at all far. The monetary aggregates in Japan have just begun to rise in the last year or so, and we’ll see whether that makes a difference. They did their QE wrong because their QE was focused on Japanese commercial bank reserves, not on total monetary growth, not on broad monetary growth. Again, it was a problem with monetarism that had tended to make much too much, put much too much emphasis, on the reserve base in the commercial banks rather than on what was happening to the overall growth of broad money.
Another factor is the shift to part-time working has meant that the available, unused labor supply in Japan is considerably greater than the raw figures of unemployment would actually suggest. And Japanese unemployment has always been remarkably low. And they’ve got a fairly large army of part-time, not-fully-used labor in the service sector. So, in a sense, I think one would say that the demand-supply balance in Japan has not been nearly as strong as some of the simple data might suggest.
The final thing I would say about Japan is that it’s actually done very well – in the sense that its labor force has been declining by 1% per year, whereas its output has been growing by 1% per year, which means its output per worker has been growing by 2% per year, which is actually better than virtually any other country in the West. And countries like the UK and the US have had faster aggregate output, but considerably slower output per worker.
Bilal Hafeez (35:36):
Yeah, no. That’s a very good point, and I think a lot of people lose sight of that because we’re so focused on GDP growth at the absolute level, we don’t look at productivity growth. So, you’re absolutely right on there.
Why Demographics in the US Are Inflationary
Bilal Hafeez (35:48):
I also wanted to ask in terms of the countries that we should start to see inflation trends start to turn because of the rise of aging – presumably it’s not just the US. It would also be Europe and China as well. One of the things is at the moment, the US is experiencing the highest inflation. Perhaps some of it is COVID-related and so on, but nevertheless, it’s the highest. And Europe is the other one where people tend to say Europe is Japan-izing, in the sense that its inflation has been chronically low. But with the demographic argument, presumably Europe should also see a pick-up in inflation because of demography, and same with China as well. When you think about the countries to look out for where you should start to see this trend move higher inflation, how strong is the case for Europe and China?
Charles Goodhart (36:43):
Well, I think is strongest for the US, also because of their policy. Their demand policy and their fiscal measures and their monetary policy have been really quite extraordinarily expansionary. I can understand the reasons why they do so, but if you interact that with slowing working-age population growth, we think that even after the short-term blip inflation will remain significantly higher than they think. I think the same is true in China as well. Then, there is quite a blip in inflation, in prices coming out of factories, in China and so on.
Europe is different because it’s had a much more restrained fiscal expansion, and still a considerably more restrained monetary expansion than the US. And the power of trade unions and the power of labor generally has been lower. So, I would expect the inflationary pressures to remain lower in Europe, at any rate for the next few years, more because of differences in demand-side policies than in the slow-moving trend effects of demography. But I think the demography will catch up with Europe towards the end of this decade, but not in the next few years to anything like the same extent as the US and probably China.
Bilal Hafeez (38:13):
Okay. Understood. And in terms of the relationship between aging and real interest rates, real rates, I mean is there a relationship between the two as well?
Charles Goodhart (38:21):
That’s far more difficult, and I don’t know. My colleague, Manoj Pradhan, tends to think that real interest rates will go up. I think that that’s quite likely to happen as a result of differences between savings propensities and investment propensities as aging gets underway.
On the other hand, what we have at the moment are central banks who are certainly far from even regarding our viewpoint as plausible. They are committed to holding nominal interest rates very low for as far ahead as they want to see. Now, the inflation blip is already driving real interest rates at the short end much further down. And I think that that is likely to happen for the next two, maybe three years if we turn out to be right and inflation is both much higher and more persistent than central bankers now generally think. They now think that expectations will come in to longer-term interest rates.
So, I would expect the yield curve to steepen. And if the yield curve steepens significantly, the decline in real interest rates at the short-end over the next few years, will be much less visible and might even turn into positive real interest rates at the long-end. So, the one prediction that we certainly would make now is for a considerable steepening in the yield curve between shorts and longs.
Can India and Africa Provide the Necessary Demographic Boost to Offset DM Ageing?
Bilal Hafeez (40:16):
Okay. Yeah, yeah. Understood. And how do you think about countries that are not aging? So, if you look at the demographic projections for, say, India and large parts of Africa, those numbers seem to imply quite significant population growth. Could we see another China in the form of India and Africa come into play at the global level, or not?
Charles Goodhart (40:41):
Well, one thing is I think that the idea that the young population of either Africa or India will migrate en masse to the West – it would need a massive migration. Politically, simply not on the cards. It’s just politically not feasible. That means that, like China imported huge amounts of capital and technical know-how from the West, you would have to have a great transfer of capital and technical know-how from the West to Africa and, to a lesser extent, to India.
Now, some of that we think will happen, and we think that Africa and India will continue to do pretty well under the demographic dividend. The problem that we feel is that the ability to administer it is a great deal more difficult. Remember that China had a very centralized and economically efficient government. In India, you’ve got the continuing disputes between the central, federal government and the states, which are frequently run by different parties. And even worse in Africa, with a population much the same as India, you’ve got 50 different countries, you’ve got a huge number of different languages, division particularly between anglophone and francophone Africa. You’ve got great difficulty getting them to follow any centralized policies. You’ve got all the problems of borders, and you’ve got the problem of governance. And you’ve got the problem of dissensions within and between countries.
Let me take an example. Ethiopia, until this last year or so, over the course of the last, I think, 8 to 10 years has been one of the fastest-growing African countries and had a tremendous record. And then you’ve got this internal fight between Tigray and the center, and that sort of internal fighting, dissension, whatever you like to call it, is going to set Ethiopia back quite a long way. And the prevalence of such concerns is, I think, really quite considerable. It’s a question of governance, and if Africa could govern itself efficiently, without corruption, and in a way that was centralized, then it could become another China. As it stands, we have to say that we have our doubts.
Can Tech Replace the Missing Working Age Population?
Bilal Hafeez (43:16):
Yeah, understood. And how about automation and technology? Because obviously robots can replace humans in lots of different activities, and there’s been a rise of AI and a rise of the digital economy has become larger. We’ve noticed that since COVID. I mean, is that something that could offset some of the decline in the working-age population, or the relative decline?
Charles Goodhart (43:38):
Well, neither me nor my co-author, Manoj, are experts in technology. We leave it to others. But we would say that there’s a very great difference of opinion about those who work in that field. You’ve got Bob Gordon on the one hand who says that all the low-hanging fruit had been picked and the technological advances will slow down. You’ve got others on the other side, who say that digitalization and AI will speed it up. And the honest answer is that we don’t know. Would be jolly nice if technological advances do speed it up.
One of the things about which we are absolutely determined is that robots are not the answer to old age care. What the old really want is sympathy, and they want human empathy. And the empathy quotient of a robot is exactly zero. And by the time you’ve had a robot doing exactly the same thing in exactly the same way, irrespective of how you were feeling, you’re not very keen on it. I don’t know whether you’ve ever had the misfortune to have to have been in a dementia ward in an old people’s care home; I think when, because you will, when you do have that experience, you will come to appreciate that robotics is not the answer. Robotics is the answer to getting rid of many rather dull, repetitive jobs in the rest of the economy. And that will have to release quite a lot of labor to actually help look after the old.
The Japanese now expect that something like 10% of the workforce will have to be deployed to look after the old. They’ve also done their best to see how much robots and other automated devices can help with looking after the old, and they can to some extent. For example, a device that tells people when somebody has wet their bed. A device that enables an old person to be lifted out of bed into a wheelchair, out of the wheelchair, into a bath, and back, and so in, is very helpful. But essentially, what the old want is human sympathy and empathy, and that robots cannot give.
How to Fix the Global Debt Problem
Bilal Hafeez (45:58):
That’s a very fair point there. And I think it’s an important point to make in regard to what problem is technology trying to solve? Understanding that is very important. And as you rightly point out, we need to understand what the needs are of the elderly. And yeah, some clever software or some clever robot just can’t solve many of those problems. And earlier, you touched on debt, and this is how we can round off our macro discussion. Obviously, we have very high levels of debt around the world, whether one looks at public or private or combine them together. And at the same time interest rates are very low, so that’s probably going to continue to allow these high debt levels to be serviced. But at some point, it can’t be sustained, presumably. And everybody has been looking for the big crash in something because of these high debt levels. I mean, how can this high level of debt be resolved in some way?
Charles Goodhart (46:51):
Well, I think it’s very difficult. I mean, there are some suggestions for shifting the relative fiscal benefits of debt as compared with equity. And we do mention two of these in our book, the ACE, the effectively giving an equivalent tax benefit to equities as is presently given to debt, and the border cash flow … I’m probably getting it wrong. But they’re both quite difficult and quite problematic, and no minister of finance has gone very far. No, that’s not true. They have in Belgium. But they haven’t been taken up very widely.
We do need to deal with reducing the tax advantages of debt as compared with equity. And I think that there are other steps that we need to undertake to try and make equity finance more advantageous to managers rather than debt finance. That said, I would add one thing, which is I do worry about the statements that central banks say that say we know very easily how to reduce inflation should inflation take hold to a greater extent than we now think. Problem is that the debt ratios are already so very high that trying to deal with inflationary pressures by raising interest rates will be politically and economically much more difficult than the central bankers now evince.
I’m reminded that some 20 or 25 years ago, if you’d asked almost any group of economists, “Can central banks increase inflation?” They would have said almost to a man and woman, “Yes, of course they can. All they have to do is print a bit more money and inflation will return.” Well, they tried. It didn’t happen. Now they’re saying, “No, if inflation should come back, we know how to deal with it. It’s not going to be a problem.” I think the level of debt is already so high that it will be a problem. They’re being unduly complacent.
Bilal Hafeez (49:07):
I mean, yeah. It sounds like we’re going to have a rocky next 5 or 10 years.
Charles Goodhart (49:12):
Well, yes. I have to say that I very much hope that the projections that Manoj and I have been making are incorrect, and that the mainstream view that everything is going to be fine, that inflation will remain low after returning back to target almost miraculously, and ultimately, and that interest rates can continue to be rock-bottom for as far ahead as anyone can see. I very much hope that that’s correct because it will be a lot easier, it will be a lot more attractive and pleasant a world to live in than the world that we see coming down the road. I hope we’re wrong.
Charles’ Productivity Hacks and Book Picks
Bilal Hafeez (49:55):
Okay. Not many economists say that. It’s good for you to say that. But I did want to end by asking you a few more personal questions. One is you’re obviously very well read and you must consume a lot of literature and so on, read lots of papers. I mean, do you have a system or a certain discipline you use to keep on top of the latest research and the latest thinking in your areas of interest?
Charles Goodhart (50:19):
Yes. The world has moved on in terms of aggregated research and reading. One of the problems is that a general publication usually takes now between 18 months and two years between submission of the article initially and it being published in the journal, for all kinds of reasons. As a result, virtually everybody with a paper they think might be publishable publishes it as a working or discussion paper in a series of outlets, the NBER particularly in America, the CBER in the UK. And the central banks all have their own working paper series. And I keep my eye on the weekly working paper and discussion paper series, and I read them, not the journal. Nowadays, a single paper published in a journal is just a sort of symbol that it has passed through the refereeing process. But anyone who wants to keep up with modern research goes to the discussion and working paper series.
Bilal Hafeez (51:30):
Yeah, understood. And finally, are there any books that have really influenced you over your professional life? Whether that’s early on in your career, or more recently some books you’ve thought they’re really good, enlightening books that you’ve read?
Charles Goodhart (51:45):
I tend to reach much more in the way of papers. I think the book that probably influenced me most, although I disagreed with bits of it, was Friedman and Schwartz, Monetary History of the United States. Again, I’m a historian by training and inclination. I thought Barry Eichengreen’s Golden Fetters was a brilliant book. Besides that, I think almost all of the works of both Dennis Robertson and Jim Tobin have been the economists and the analyses that have influenced me more than any other.
Bilal Hafeez (52:21):
Okay. No, that’s great. And actually, just a follow-up question. On the Friedman & Schwartz book on money, why do you think there hasn’t been other books on money that have been published since that book? Because it seems almost like that was the big, sweeping monetary history book, and then we haven’t really got a similarly book published since then. No one seems to have written a book for the last 40 years on the last 40 years of monetary history.
Charles Goodhart (52:46):
If I was younger, I’d take up the challenge and try and do it myself. Since I’m approaching 85, I think it’s well beyond me. Oh, I don’t know. I mean the splendid Kindleberger [Manias, Panics, and Crashes], which was taken on with my friend Bob Aliber, is a book on crises over the years, which I recommend to anybody.
Bilal Hafeez (53:09):
Okay. That’s good. Okay, that’s really good. And if people wanted to follow your work, obviously there’s a book which I’ll include the link to in the show notes. I mean, do you publish articles anywhere, or are there other channels where people can follow you?
Charles Goodhart (53:25):
Well, they could look me up under Wikipedia. That’s probably the easiest, simple way of doing it. It’s the way I look up most people.
Bilal Hafeez (53:32):
Great. Well, with that I just wanted to give you a big thank you. It’s a really excellent conversation. I learnt a lot during this discussion.
Charles Goodhart (53:39):
Well thank you, I’ve enjoyed talking to you. It’s been good fun.