# US Dollar, Deficits, & Safe Assets: Entering a New Global Economic Order? | Markus Academy | Ep. 142

https://www.youtube.com/watch?v=FOM42ZJ9BrM

[00:08] Thanks for joining us.
[00:11] Uh today I will talk about US dollars deficits, safe assets and are we entering a new global order and it will be a special guest today.
[00:22] It's just me.
[00:25] Um so the key questions I would like to address today are the following.
[00:28] How can we make sense about the recent geopolitical shifts and uncertainties we are facing and what are the possible future world orders we might be exposed to and is in particular transition phase to a new order is it very dangerous and how can we transition in a new to a new order in a resilient way
[00:49] The second question is what roles will the US dollar the US treasury play as a safe asset in the global financial architecture what role does it play now and what which one will you play in the future?
[01:00] What happens if the safe asset status becomes shaky and what are the
[01:05] implications for the exchange rate and the term spread?
[01:09] the difference between the long-term US Treasury uh Treasury yield and the short-term US Treasury that's a term spread and finally I will talk about the role of trade policy how to think about geopolitical aspects about it the choke points and how the world will change if you move away from a global resilient world order where everybody focus much more national resilience on their own.
[01:34] So I will first focus on the world order potential future world orders then on the safe asset role of the US dollar and US treasury in particular and then on the trade components.
[01:46] So when we look at the geopolitical shifts we have several geopolitical shifts.
[01:50] One which is going on for quite some while is a shift in technology.
[01:54] We have much more technologies where they're increasing concerns to scale.
[01:59] your huge fixed cost low marginal cost and for these technologies and for these products
[02:06] Market size matters.
[02:08] So one way to respond to that is to move to a global market.
[02:11] So globalization was the answer.
[02:13] Uh you can actually scale up things much more but then you also specialize much more specifically particular product but you do it at a global scale in order to exploit the increasing returns to scale.
[02:27] And then we have recently a shift in the world order.
[02:28] We had initially a common framework which was very much a multilateral framework.
[02:34] So people came together uh to international multilateral organizations and a rule-based framework.
[02:41] There were common rules for all the countries for small countries and large countries common rules.
[02:47] And the foundations of this multilateral common order was a mutual independencies.
[02:53] We were all dependent on each other and because we were so dependent on each others we had an incentive to really work within this common framework.
[03:01] So we had essentially numerous choke points against each other.
[03:07] and some of them were you know in trade just in time deliveries or just in in time global value change that made us all vulnerable to some dangers in some other country.
[03:18] and this way we could support uh a common framework because we all dependent on each other a lot.
[03:23] Now we go away from a common framework much more to a bargaining uh framework where rather than multilaterally coming together to a common many countries coming together to common for up with common ground rules there will be bilateral bargaining between two countries.
[03:40] It's less rule-based but much more transactional and in such a world you want to focus on the resilience of your own country.
[03:50] So rather than having just in time uh arrangements, you would like to have a just in case just in case something goes wrong.
[03:55] So you have less of a global resilience.
[03:59] You have no incentive to invest in global resilience.
[04:00] You just you're interested in more national resilience.
[04:04] The stability of your own uh country matters much more rather than the global system.
[04:10] And because of that we will have a geopolitical or power shift from small countries which are protected from a rule-based system to large countries or large trading blocks.
[04:21] So in a in if you're bilateral bargaining system it is much more that you have this large countries and trading blocks having much more influence and within a trading block.
[04:31] It will also be the case that larger countries have a bigger say because they have more weight in bargaining with other large countries.
[04:41] That also means that large emerging countries will be at the center stage as well and will have a larger impact as well.
[04:49] So that's the first political shift I would like to talk.
[04:54] So what does this mean for a potential new world order?
[04:58] So we don't know where it will go but there's three potential avenues we can go.
[05:10] We can stick with a uniolar world where is things are multilateral US dominated as a hegimon pax America continues and US
[05:14] dollar and US treasury as a key assets.
[05:17] US dollar is a key currency and US treasury as a key safe asset or reserve asset.
[05:22] We can move to a bipolar world augmented bipolar world u but there are two options in the bipolar world.
[05:29] I the US isolates China.
[05:32] So everybody is with the United States except China and China is isolated or the US isolates itself.
[05:38] So the US is isolated and around it uh you know people are more aligned with China and you see that China is already approaching now especially countries in Asia to be more aligned with China.
[05:57] So there's this entry if we go to bipolar world it's not clear how this will play out depends very much how the policy will play out and then there's also the question where will Europe be or go will it try to balance between China and United States or will it be totally aligned with the United States or not
[06:14] what is the arrangement for Europe if you think from a technology perspective
[06:20] we see already a bipolar world emerging and finally uh there's a multipolar outcome and then a question is how many poles will emerge
[06:31] how will it be a three polar five polar 10 polar world and for this there's also some uh thinking behind that
[06:38] so in particular there's an argument there's a hypothesis if we move from a uniolar world to a multipolar world typically it will be five poles okay
[06:48] and the five poles are more stable and peaceful despite of some potentially shifting alliances and rivalries.
[06:56] And the question is why five?
[06:58] What's so magic about the number five?
[07:01] First of all, why is it not an even number?
[07:04] And the problem with an even number is if you know 2x two and if one switches from uh one to the other one, then there's total imbalance immediately.
[07:14] So each power is very
[07:16] pivotal.
[07:19] So that makes it not good to have an even number, an even split between two uh you know equally sized poles.
[07:27] The other question is why not then three but three essentially doesn't work well because then you have a two and one arrangement and that's not sufficiently balanced because the two will dominate the one.
[07:36] This doesn't work either.
[07:39] So then there's another odd number is five.
[07:42] That's a magic number.
[07:46] And why not seven or nine or 11?
[07:49] So if you have a larger number than these then typically you have a free rider problem.
[07:52] So if you have a large number of poles each pole will actually free ride on the others.
[07:58] So you have a free rider problem.
[08:00] This actually becomes more too severe the free rider problem.
[08:04] And so that's essentially the hypothesis.
[08:06] It will go back to a five pole world.
[08:10] And you know Hfred Munla in particular explains historical examples where this happened.
[08:14] So for example after 30 years
[08:18] war after 1648 there essentially the end of this Vienna Madrid Habsburg empire where you know Austria Hungary on the one side but also Spain and Benilocks countries today's Benilux countries were part of the Habsburg Empire and that emerged into some five polar world from a European perspective there was also Hungary Spain as two different poles France England and Sweden.
[08:47] And later on Spain was replaced by Russia and Sweden was replaced by Prussia.
[08:52] But it always remained a five polar world.
[08:55] These five poles control essentially the old world at that time.
[08:58] Similarly after the Napoleonic wars in 1815 also five poles emerged again there was AustriaHungary there was Great Britain, France, Germany or Prussia out of Russia became Germany without Austria and then Russia.
[09:15] So five poles emerg.
[09:17] So there are some historical examples.
[09:19] whenever there's one pole is replaced by a multipolar world it typically ends up in a five polar uh world and similarly could be if there is a transition to a five polar world that we go from a US dominated world to one where US China European Union India and then the question is will it be Russia or Japan if you focus more on the military might it's probably more Russia or if you focus more on economic might uh you might focus more on Japan and that's still open in particular as technology is changing warfare down the road significantly.
[09:58] It's not clear that Russia will be able to keep up with that.
[10:00] So that's potentially we move to a different world and then the question is how do we manage the transition to this different world and the challenge in this is typically that the transition is very complicated.
[10:15] So if you move from a global order let's say to a new order a
[10:21] more fragmented order or global own order.
[10:23] So typically transition is not very smooth as is indicated by this blue line here.
[10:27] It's much for following a J curve.
[10:29] there's some overshooting and then you might hopefully come back and there's a lot of uncertainty whether everything goes smooth in particular you might actually if the Jacob is most pronounced you might hit a tipping point and then actually rather than you know coming back to the new more stable environment with five poles for example it could also derail the whole system because you hit the tipping point and overall these transition periods are periods of high uncertainty cy.
[10:57] So everything will change, disruptions occur and you know disruptions might in the long run lead to a no new long stable outcome but it might also lead to some situation where the whole systems derail and you don't get to a long unstable outcome.
[11:15] Now this is essentially what I wanted to say about you know the new
[11:22] world order.
[11:25] We have a uniolar world right now moving to a bipolar world but it might also move to a multipolar world.
[11:30] and then it's most likely to go to a five-polar world but the transition phase that's where the resilience is not guaranteed.
[11:35] it's not guaranteed that actually come back to a resilient phase.
[11:43] now I would like to with this geopolitical perspective then I would like to say what does this mean for global finance.
[11:49] what does it mean for global trade uh and you what does it mean for the US dollar, for the US Treasury uh and so forth.
[11:58] And this actually goes uh based on on some work I did together with Sebastian Merkel and Julie Sanikov on safe assets and also a more recent paper which is a twocountry version of the safe asset paper which is the international monetary system a risk perspective paper.
[12:14] which you know explains what how we can understand how can we make sense of of such a world of
[12:23] the shift away from the current setting uh to a different setting.
[12:27] what are the dangers and driven from the uncertainties with that and then the next block will then deal with global trade and choke points and tariffs for the global trade perspective.
[12:38] Now what's a safe asset?
[12:41] A safe asset I I would argue uh is for example can be a currency that's like the US dollar if it's held by foreign governments and it's a reserve currency or by foreign central banks.
[12:56] The safe asset, the classic safe asset is some government debt in form of the US Treasury.
[13:00] The global safe asset is the US Treasury.
[13:02] It's also reserve asset because it's also held by foreign government.
[13:06] So save asset is a broader term than reserve asset uh because reserve asset is only to the extent it is held for safety reasons, precautionary reasons by governments or central banks.
[13:19] Safe assets also means it can be held by citizens as well for
[13:24] precautionary reasons.
[13:27] So what is a safe asset?
[13:30] Uh that's a good friend analogy is that it's a good friend.
[13:33] A friend in indeed is a friend in need.
[13:35] That's you know when you need it, it is around.
[13:38] It's available.
[13:40] You can sell it and it can overcome your personal shocks.
[13:42] You might overcome also your some aggregate crisis shocks for the whole economy.
[13:46] So it's it's a good friend.
[13:49] it's around.
[13:51] It's helping you when you're in crisis.
[13:54] So that's a good friend analogy.
[13:56] That's part of the safe asset elements.
[13:58] The other thing is the safe assetlogology.
[13:59] A safe asset is safe because it's perceived to be safe.
[14:04] So which asset turns out to be the safe asset?
[14:07] We have to coordinate on it and then delete then as we all agree upon this is a safe asset.
[14:16] um then it is actually the case that it you know remained a safe asset.
[14:23] Now a safe asset gives you potentially a cash
[14:25] flow but it also gives you a service flow.
[14:30] So the asset pricing equation for the safe asset is the present value of the cash flows plus the present value of the service flow.
[14:35] So in terms of cash flows that's you know the interest payment you might get and their interest payment might be much lower than compared to other assets.
[14:45] So in this sense it has a low interest rate it has a convenience yield uh a convenience yield is part of the service flow.
[14:52] So the interest rate differential is part of the service flow is because it gives you u you some convenience it and that's why often it's empirically measured as a lower interest rate but it does even more you can actually print dollars or US treasuries without ever paying back.
[15:10] So it might have some public component as well.
[15:12] So the service flow might also have some public component on it and that's formally speaking the the transverity condition does not need to hold in the aggregate level in this economy.
[15:24] It might hold in
[15:26] Italy.
[15:31] Um that it's you know it holds but not at the aggregate level.
[15:33] If for example the interest rate is smaller than the growth rate of the global economy that's the real interest rate here.
[15:40] Now let me explain this save asset u in more detail with a simple example.
[15:47] So let's take an extreme example where the cash flow is zero.
[15:49] So it doesn't pay anything.
[15:52] So the cash flow is zero.
[15:54] So traditionally I suppose you could say the value of this asset the normal bond price divided by the price level.
[15:59] So the real value of this asset should be zero as well.
[16:01] But it might also yield a service flow.
[16:03] And let me illustrate what a service flow comes from.
[16:07] And for this purpose I have uh two people A and B.
[16:10] Let's say Alan and Beth.
[16:13] There's the safe asset which has zero cash flow.
[16:14] And then there might be some other asset which has some other cash flow positive cash flow.
[16:21] And let's assume for simplicity when the world goes up the cash flow of Ellen a cash flow asset of Ellen's asset expansion of of Beth asset
[16:29] contracts and when the world goes down it's exactly the opposite.
[16:34] So Alan and Beth, you know, they have negatively correlated uh cash flow assets and they ideally should write an insurance contract with each other, some derivative contract or insurance contract with each other.
[16:45] But let's suppose there's a financial friction, they cannot write this contract.
[16:49] So what else can they do?
[16:52] They can hold the same asset which pays no cash flow.
[16:55] And when the shock occurs, then Beth sells some of the zero cash flow asset to Alan in exchange of this positive cash flow asset.
[17:07] And when the world goes down, they're trade in the opposite direction.
[17:11] So by holding the zero cash flow asset, they can actually expose through retrading, they can actually insure themsel themselves.
[17:18] So they know they will retrade in the future in one direction if the world goes up, in the other direction if the world goes down.
[17:25] And this way they can actually ensure each other.
[17:29] And you can see that's actually got this insurance
[17:31] role through retrading creates some value and that's why you value this asset.
[17:35] So if the zero cash asset has a positive price you can do this retrading and this way you can generate uh some value out of that.
[17:42] Now of course um this cash flow this service flow is has a positive value because it allows more insurance it to retrading and this way you value it and because you value it it is uh worthwhile.
[17:58] Of course there could be another equilibrium where it's the value is zero and then you couldn't do the retrading either.
[18:05] So it is like has a bubbly feature.
[18:07] There's one equilibrium the safe asset has some value then they can use it for retrading to mature each other to overcome differential frictions and there's another equilibrium where has zero value and then you couldn't trade about it but essentially the important message is that it doesn't have to pay any cash flows this asset it pays service flows service flows you can use this asset
[18:31] through retrading to insure each other.
[18:33] Alan and B can insure each other.
[18:36] Now if the risk is higher so let's suppose we go in a recession with high risk then actually this retrading this.
[18:46] you would value this retrading this insurance element even more if risk is high you like this insurance through retrading even more so the value would go up even further.
[18:54] So when you're in a recession, you go in with high risk, the value of the safe asset is going up and that makes a safe asset actually also extremely valuable or good for aggregate prices because if you go in the financial crisis, it is inatic risk is going up and these assets appreciate.
[19:13] Think about gold, think about US treasuries.
[19:15] Typically, typically I would say they appreciate in bad times.
[19:20] They have in other words a negative cap beta.
[19:26] And that's essentially what uh makes them extremely valuable.
[19:29] So they have to pay even less cash flow because they
[19:32] have this negative cap beta uh on it.
[19:35] So the required return and cash flow return is even lower.
[19:39] So expressed differently the person or the entity in this case US Treasury issuing safe asset has some exorbitant privileges and they come in three flavors.
[19:52] So typically John Connelly Nixon's treasury sector is that the dollar is our currency but your problem but it is has for the United States it has three privileges and there are permanent privileges which occurs all the time and they're particularly high privileges when you go into some crisis time some global crisis.
[20:11] So what are the permanent structural uh privileges and advantages for United States issuing being able to issue the safe asset a global safe asset the US Treasury of course you always have to pay less on an interest on it so cash flow payment has to it can be lower and people are still willing to hold it that's an interested that's a
[20:33] convenience I was talking about before
[20:36] the second uh permanent is benefit is
[20:40] that you can print this bubble US
[20:42] treasuries you never have to pay them
[20:44] back if the real interest rate is lower
[20:47] than the global growth rate, the global
[20:49] GDP growth rate. And that's typically
[20:51] the case. If you compare the real growth
[20:54] rate uh in the world, G is typically
[20:57] higher than the real interest rate of US
[21:00] treasuries. And so this safe asset
[21:03] status is very very beneficial if you
[21:06] able to issue these papers and others
[21:08] like to hold it because they can do
[21:10] their own personal retrating to ensure
[21:12] themselves and you essentially can cash
[21:16] in uh from this benefit this safe asset
[21:20] creates the US treasury creates for
[21:22] others through trading. So that's a
[21:26] permanent benefit exorbitant privilege
[21:28] the US enjoys. Now if we go in a crisis
[21:33] and if you stay the beacon of stability
[21:36] if you if this safe asset status is
[21:40] essentially guaranteed there will be
[21:42] flight to safety in your country
[21:45] especially in times of crisis when
[21:47] there's a crisis as I said people value
[21:50] the risk asset more highly and they want
[21:52] to hold even more of this risk asset
[21:54] because there's so muchic risk floating
[21:56] around so the safe asset appreciates in
[21:59] bad times it has a negative cap and beta
[22:02] that says the US government can issue
[22:05] that at even higher price. It's even
[22:07] cheaper for for the US government to
[22:10] issue that and essentially whenever
[22:12] there's a crisis it can easily expand uh
[22:16] its debt level and start some fiscal
[22:18] stimulus. This way the US can actually
[22:21] overcome a financial crisis more easily
[22:23] because instead of going to fiscal
[22:25] austerity measures it can actually do
[22:27] some fiscal stimulus and smooth the
[22:29] crisis and make sure it grows out of the
[22:31] crisis more quickly. So that's the third
[22:34] exorbitant privilege. So essentially
[22:36] there are three at least three
[22:38] privileges. One is a steady low interest
[22:40] rate the convenience yield. One is that
[22:43] you actually can issue these US
[22:46] treasuries and you essentially don't
[22:48] have to pay them back. You can roll them
[22:50] over all the time. And the third is the
[22:52] benefit is particularly high when you're
[22:55] in a crisis. That's the core movement or
[22:57] co-variance benefit is also very
[23:00] attractive for the entity like the US
[23:04] government who is which is able to issue
[23:08] uh the safe
[23:10] asset. Now from such a perspective you
[23:14] might argue do we measure the trade
[23:17] deficit or the current account deficit
[23:20] correctly because what we don't do when
[23:24] we do the current account or the trade
[23:25] deficit you know how much do we exports
[23:27] what's import this uh what are the trade
[23:31] flows what are the service flows and so
[23:33] forth do we measure this correctly and
[23:35] if you look at the statistic there's
[23:37] some missing parts to it so if you were
[23:40] to do it correctly
[23:41] you should include the service flow also
[23:44] in the current account deficit and we
[23:47] don't do it. So we don't include all
[23:50] service flows. We include the
[23:52] convenience here. The convenience here
[23:54] is captures in the trade deficit or in
[23:57] the current account deficit. uh but the
[24:01] safe asset status from this dynamic
[24:03] retrading the service flow you provide
[24:05] this type of service is not captured in
[24:08] the safe asset status in the in the
[24:11] current account deficit and this third
[24:14] benefit the third privilege the flight
[24:16] to safety is also not captured in the
[24:19] current account deficit so the second
[24:22] and the third exorbitant privilege is
[24:24] not captured in the deficit and that's
[24:27] actually uh a problem because we
[24:29] mismeasure and hence the political
[24:31] debate is also uh going in the wrong
[24:33] direction in this way because it doesn't
[24:35] capture all the elements which services
[24:38] we provide essentially the US is also
[24:40] providing the service flow to the others
[24:44] and it should be part of the current
[24:45] account deficit measure but is not
[24:48] included so that's in terms of the
[24:50] current
[24:51] account you could also say we mismeasure
[24:54] the net for an asset position how much
[24:57] net for an asset position Does the US
[25:00] have? So the US has a
[25:03] lot of assets towards foreigners because
[25:07] it invests and for direct investments,
[25:10] invest in portfolios. So it has a lot of
[25:13] these assets which have very high cash
[25:15] flows. But the US has a lot of
[25:18] liabilities because US government is
[25:20] issuing a lot of US treasuries which is
[25:22] a safe asset. But you know the way the
[25:26] net for an asset position is calculated
[25:28] it takes essentially on the asset side
[25:31] it takes the market value of the assets
[25:33] and the liability side it takes a the
[25:36] market value of the liabilities but the
[25:39] liabilities have not only the present
[25:41] value of the cash flows but also the
[25:44] present value of the service flows but
[25:46] the present value of the service flows
[25:47] we don't have to pay as US citizens we
[25:50] only have to pay the cash flows so if
[25:53] you really want to get the true net
[25:55] foreign asset position, you should
[25:57] actually take the assets with the high
[25:59] cash flow
[26:00] valuations and only take the first
[26:03] component and not the second component
[26:05] because we don't have to pay as your
[26:08] citizens the service flow that comes
[26:10] exactly when the others use it as long
[26:12] as we preserve the safe asset
[26:14] status and that also explains if you
[26:17] look at the income statement what the US
[26:20] pays on interest payments and what it
[26:23] receives from dividends from abroad is
[26:25] is roughly balanced. Uh this of course
[26:28] does not reflect yet uh that the service
[26:30] flow coming from you know being able to
[26:33] issue increasingly further always US
[26:36] treasures printing essentially dollars
[26:38] and also the flight safety benefits that
[26:41] the US
[26:43] enjoys. So in this sense the exorbitant
[26:45] privilege is much bigger. It has this
[26:47] three components and only the first
[26:49] component is contained in the
[26:51] statistics. the second the third is not
[26:53] part of the
[26:56] statistics. Now if you look at the trade
[26:59] deficit essentially there are two tales
[27:00] of the trade deficits going back. So one
[27:02] is that and that's very much in the
[27:04] media there's one tale saying oh the US
[27:07] is US consumptiondriven the US citizens
[27:11] buy some Chinese products to consume
[27:14] there's more future debt and then
[27:16] actually we have to pay it back uh in
[27:18] the future it's not clear that we have
[27:19] to pay it back because
[27:22] uh it might be able to run this bubbly
[27:26] safe asset scheme so that's you can
[27:29] actually run a great deficit forever
[27:32] measured the traditional way. The second
[27:35] thing is actually a trade deficit might
[27:37] not be driven by US consumption but by
[27:41] US investment
[27:42] opportunities. So for example, the US
[27:44] offers some great investment
[27:46] opportunities. Let's say to Chinese
[27:48] citizens, the Chinese invest in US
[27:51] because of high expected
[27:53] returns. Now the Chinese pay with goods
[27:56] in order to get these investment
[27:57] opportunities that creates a trade
[27:59] deficit. Now um but in the future when
[28:04] the US has to repay the high returns to
[28:06] China there will be a low trade deficit
[28:09] in the future or there will be has to be
[28:11] a trade surplus. But if this is going
[28:14] on, if the investment opportunities keep
[28:16] growing with a faster growing US
[28:18] economy, this in the future might be far
[28:20] far in the future and might never really
[28:23] materialize. In particular, if you have
[28:26] the service flows which with which you
[28:28] pay back in the in the future and you
[28:31] have to keep in mind also that as
[28:34] foreigners invest in United States, they
[28:36] create jobs for the US citizens. there
[28:40] will be some benefits to workers and
[28:42] others from these investments. So it's
[28:44] not really clear that a trade deficit on
[28:46] its own is such a negative thing if it
[28:49] comes uh with investments in United
[28:53] States. Now the next question I would
[28:55] like to address of is then the dollar
[28:58] over evaluated is it you know too strong
[29:02] should we strategically weaken the
[29:03] dollar and the question is you know what
[29:06] does it mean what's the correct value of
[29:08] of of the dollar of an exchange rate do
[29:11] we need some purchasing power parity PBP
[29:14] adjusted for the balas effect um in
[29:18] order to have the correct benchmark or
[29:21] not and under what circumstances can it
[29:23] be that the dollar is too strong and we
[29:26] should, you know, push the dollar down.
[29:28] In most circumstances, it, you know, you
[29:31] don't want to push it down. You really
[29:32] want to enjoy the exorbitant privilege
[29:34] and you would like to have a strong
[29:36] dollar. But you can think of one
[29:39] particular one I would like to outline
[29:42] where it might be the case that having
[29:44] the reserve currency or the safe asset
[29:46] status might actually uh you know not be
[29:50] beneficial in one particular dimension
[29:53] and that's the case when you have an
[29:55] industry a tradable sector industry
[29:57] which has very much increasing returns
[29:59] of scale and learning by doing
[30:01] externalities means in order to improve
[30:04] your products to make your production
[30:06] process is more efficient you really
[30:08] have to do it and learn by doing this
[30:10] and if you don't do it you don't learn
[30:12] that and if this is particular for the
[30:14] tradable sector production then you can
[30:17] have a circumstances where I may say a
[30:19] very strong dollar might also have some
[30:22] disadvantages not only the advantages I
[30:25] mentioned before the mechanism is the
[30:27] following if you have some global safe
[30:29] asset demand like a reserve asset demand
[30:32] that benefits US in the short run US
[30:35] citizens demand more goods they are
[30:37] wealthier. They demand more non-tradable
[30:39] and also tradable goods. So goods which
[30:42] can trade internationally and other
[30:44] goods which are purely domestic and
[30:46] can't be traded. So you import your
[30:49] wealth here as your citizen you want to
[30:51] consume more of both you and for the
[30:54] tradeables you essentially um consume
[30:58] more from importing. So you create some
[31:00] trade deficit but this also means uh the
[31:04] wages so the non-tradable goods becomes
[31:06] more scarce so there will rise in value
[31:09] the wages will also rise and there's
[31:11] something like a Dutch disease analogy
[31:13] kicking
[31:14] in so the manufacturing for the tradable
[31:18] sector shifts uh to China and if then
[31:21] there is increasing returns to scale and
[31:23] this learning by doing so more
[31:26] increasing returns to scale over time
[31:28] then actually in the long run China can
[31:31] take an advantage from that and that's
[31:34] you know might be a dynamic element
[31:36] which pushes in the other direction as I
[31:39] said this is one particular disadvantage
[31:41] of every reserve currency a long
[31:44] structural uh
[31:46] disadvantage and that's you know one has
[31:49] to keep in mind but there it's one
[31:52] disadvantage compared to many many
[31:55] advantages now you might also say what
[31:58] does what can we lean against that we
[32:01] can also impose tariffs and how does
[32:03] this affect the safe asset demand and
[32:06] let's first consider tariffs when
[32:08] there's no
[32:09] retaliation of course imposing tariffs
[32:11] typically improves the terms of trade so
[32:13] assuming that there are some goods with
[32:15] home buyers uh where you know you really
[32:18] want to consume more your home goods
[32:20] which is produced at home you have some
[32:22] biased and taste bias for
[32:24] that so if you are terms of telling
[32:27] improve the foreigners wealth declines.
[32:29] So there's also the demand for safe
[32:32] assets. The dollar save assets is
[32:34] reduced and that reduces US trade
[32:37] deficits measured the wrong way. As I
[32:39] mentioned before, if you include the
[32:41] service flow, that's not the case. So it
[32:44] reduces US trade deficit, but it also
[32:47] erodess this exorbitant privilege. The
[32:49] first one convenience yield. The second
[32:51] one is safe asset status from printing
[32:54] further and further US treasuries and
[32:56] also potentially the third one when in
[32:59] times of crisis it really expands in
[33:02] value of
[33:04] this. So and and if you now move to a
[33:08] world with retaliation where the other
[33:10] party the other country
[33:12] retaliates you undo these
[33:14] effects but of course the world is a
[33:17] poorer place so everything is going
[33:19] down. So the the other country
[33:21] retaliates and everything the world is a
[33:23] is a worse place is worse
[33:27] off. So the world we live in we lived in
[33:31] is was the the US treasury was the
[33:35] global safe asset or is still the global
[33:38] safe
[33:39] asset but it becomes more shaky. So it's
[33:43] some uncertainty and of course if you
[33:47] have the global safe asset you have this
[33:49] privilege whenever you go in a crisis
[33:52] the value appreciates that means the cap
[33:54] ma is negative the required return is
[33:57] very low you don't have to pay much
[33:59] interest so it's it seems like a very
[34:01] good situation to be in now if the safe
[34:05] asset status becomes shaky if there's
[34:07] uncertainty about it and there could be
[34:09] that the safe asset status jumps from
[34:12] your strategy to another asset like a
[34:14] European safe bond the ASB or the German
[34:17] bond or potentially to some crypto
[34:19] assets or or gold or whatever that's
[34:23] studied by uh this paper with Sebastian
[34:25] Mulanov called the fiscal of the bad
[34:28] level with a bubble where it's studied
[34:30] when the jump uh and how these jumps
[34:33] occur to different
[34:35] assets. So in such a world where it
[34:38] either the the safe asset status jumps
[34:40] to another
[34:42] asset or you know it totally implodes
[34:45] there's no global safe asset. So these
[34:48] are the two potential outcomes. So what
[34:50] does this mean for the US dollar and
[34:52] what does it mean for the term spread
[34:55] again the interest rate differential
[34:56] between the 10year and let's say the 3
[34:58] month US Treasury. Looking at this
[35:01] interesting first of course it weakens
[35:03] the US dollar. If you lose the safe
[35:05] asset status as United States it will
[35:07] weaken the US dollar
[35:10] significantly and it will also lead to
[35:13] an increase in the term spread. So the
[35:15] long-term interest rate will be
[35:17] higher increases relative to the
[35:20] short-term interest rate. Why is that?
[35:22] because the Fed is likely to hike
[35:23] interest rates to contain the inflation
[35:25] coming from this weakening um of of of
[35:30] the whole situation to support the
[35:32] dollar when the safe asset status is
[35:34] shaky and there might also be higher
[35:37] probability of a future loss of the
[35:38] state safe assets that might not occur
[35:40] right away and that also translates
[35:42] immediately into higher term spread. So
[35:45] what I want to say if you look at the US
[35:46] Treasury there's of course a term
[35:50] premium on it. So the long-term interest
[35:52] rate is higher than the short the
[35:55] long-term yield is higher than the
[35:56] short-term yield or 10 year relative to
[35:59] 3 months is and it could be because of a
[36:03] loss of safe asset status that's priced
[36:06] as a risk and you have to pay for this
[36:08] risk in form of a high risk premium.
[36:10] What I mean you the US taxpayer or the
[36:12] US government has to pay for that. Um
[36:15] and this loss of sales asset risk
[36:18] premium is different from a default risk
[36:21] premium. So if the
[36:23] US government will not to pay back
[36:26] because it defaults on its obligation,
[36:29] there's a risk premium on this too. This
[36:31] loss of safe asset risk premium comes on
[36:34] top of the default risk premium. So even
[36:36] if there's no danger at all that the US
[36:39] Treasury will default, it will always
[36:41] pay back its obligation, you still have
[36:44] this additional term risk premium coming
[36:47] from potential loss of safe asset
[36:49] because the safe asset status uh is
[36:54] shaky. Now this relates to s to to the
[36:59] driven dilemma and I want to distinguish
[37:01] between driven dilemma 1.0 and 2.0.
[37:04] What's the drift dilemma? goes back to
[37:06] the Belgian economist Robert Griffin who
[37:08] said during the Bretonwoods system when
[37:12] you know exchanges were fixed to the
[37:14] dollar so all the other currencies had a
[37:16] fixed exchange rate to the dollar and
[37:18] the dollar was convertible to
[37:21] gold and he argued that as the world
[37:25] economy is growing
[37:27] uh more than the US economy is growing
[37:30] then actually there will be a tension in
[37:32] the system because more and more you or
[37:35] currency is needed and they're all back
[37:37] to the dollar and the dollar is back to
[37:40] gold. Everything is growing except the
[37:42] gold is not growing and that creates a
[37:44] tension and this leads to some fragility
[37:47] and ultimately might lead to a run on
[37:49] the dollar or a run on gold. Okay, so
[37:52] you had a the exchange rate was fixed in
[37:54] the Bretton system. uh there was
[37:57] increasing demand for US dollars and the
[38:01] backed gold underneath and there's the
[38:04] ran on the dollar or then in the gold
[38:06] which we saw the gold really brought
[38:08] went to the US and brought the gold back
[38:10] to
[38:11] France and there was a diminishing
[38:13] backing by the gold that was the driven
[38:16] dilemma 1.0 at all. But in 1971, of
[38:19] course, Nixon got rid of the fixed
[38:21] exchange rates. So, strictly speaking,
[38:24] the old driven dilemma does not apply
[38:27] anymore. But there's a new drift
[38:29] dilemma. I call it drift dilemma 2.0.
[38:31] What's a new drift
[38:33] dilemma? Uh, since 1971 when the
[38:36] exchanges are fixed, it's not the
[38:39] increasing demand for US dollars. It's
[38:41] increasing demand for US treasuries as
[38:44] safe assets.
[38:46] And rather than having a run on the
[38:47] dollar and the underlying gold, you can
[38:50] have a collapse of the US safe asset
[38:53] status. So the US Treasury might lose
[38:55] its safe asset status. As I said
[38:57] earlier, remember this Ellen and Bath,
[39:00] there's one equilibrium where the safe
[39:02] asset is worth something, but there's
[39:03] another one the safe asset not worth
[39:05] something. And if it's not worth
[39:06] something, you cannot use it for the
[39:07] retrading anymore. So it collapses and
[39:10] the value of the safe asset may go
[39:12] away. Now of course if the value of the
[39:15] NF asset collapses you can always say as
[39:18] government I provide some fiscal
[39:20] backing. If I have fiscal capacity I can
[39:24] always raise taxes cut government
[39:26] expenditures to prop up the value to
[39:28] this high value again and then it will
[39:31] not collapse. But for this you have to
[39:34] be able you have to have the fiscal
[39:36] capacity to really raise the taxes
[39:39] without political uprising
[39:42] uh or cut expenditures such that you can
[39:45] really uh protect the high value of the
[39:48] government
[39:50] bonds and you know that's questionable
[39:52] but whe that's feasible whe the fiscal
[39:54] capacity is there some people observer
[39:57] political observer says your US could
[39:59] implement a value added tax of 15 20%
[40:02] like in Europe Europe uh and then prop
[40:05] up this uh this US treasuries again but
[40:08] it's not clear whether that's
[40:10] politically feasible but the diminishing
[40:13] backing by uh so as the world economy is
[40:16] growing faster than the US economy the
[40:18] tension becomes bigger and bigger and
[40:20] that's the drift dilemma 2.0
[40:23] zero. Now you could say yes. So we have
[40:26] if the world is called growing and
[40:28] growing everything is relying on the
[40:30] United States to provide this safe
[40:32] asset. US gets actually some exorbitant
[40:34] privilege out of that. Uh and you know
[40:37] whenever there is a crisis a financial
[40:40] crisis and volatility is going up this
[40:42] privilege is getting even bigger. That's
[40:44] a privilege itself that it's especially
[40:45] high in bad
[40:47] times. But it's actually not so good for
[40:50] emerging economies because there's a
[40:53] shifting for emerging economies as
[40:55] flight to safety to the US and that
[40:57] benefits the US in times of global
[40:59] crisis but doesn't it hurts the emerging
[41:02] economies in times of global crisis.
[41:05] Now let's say if we move to a multipolar
[41:08] world uh perhaps it's better if the safe
[41:11] asset is not only provided by the US
[41:13] Treasury by the United States we have
[41:15] some other continents other poles to
[41:18] provide some safe assets as well and for
[41:20] the European Union you can think of the
[41:23] ASPIS or what the European Commission
[41:25] calls the SBBS the sovereign bond backed
[41:28] securities where you know you don't have
[41:30] one European bond in in Europe you have
[41:33] a German bond or a French bond Italian
[41:35] bond and all this and they're all
[41:37] different bonds. You could say I pull
[41:39] part big chunk of these bonds and draft
[41:42] them in a senior bond and in a junior
[41:44] bond. So that means that you know the
[41:47] junior bond is protecting the senior
[41:49] bond. If there were a default in one of
[41:51] these bonds then the junior bond would
[41:53] be hit first and only after the junior
[41:55] bond is wiped out the senior bond is
[41:57] touched. So in this sense you know the
[42:00] senior bond is safe. It is safe that
[42:03] it's risk-free but we still have to
[42:05] coordinate that this senior bond will be
[42:10] one of the global safe assets. So this
[42:12] requires some regulatory requirements
[42:16] and that it can also be for regulatory
[42:18] purposes be treated as a safe asset. The
[42:21] emerging economies that can do the same
[42:23] thing. Let's call them glosses a global
[42:25] safe bonds for the for for the globe.
[42:30] And what happens now if you have a
[42:31] financial crisis risk is going up and
[42:33] everybody wants to fly a flight to
[42:35] safety. You go this flight to safety
[42:37] typically goes across borders. So
[42:40] typically it moves you know from Latin
[42:42] America and and all the emerging
[42:44] economies to the United
[42:46] States then actually it would move from
[42:49] the junior bond to the senior bond. So
[42:52] rather than having flight to safety
[42:53] across countries, across borders, you
[42:57] have it across asset classes. But the
[42:59] senior bond is an emerging market bond
[43:02] and the junior bond is an emerging
[43:03] market bond. So you have flight to
[43:04] safety across asset classes instead of
[43:07] across um um across countries across
[43:12] borders. So China of course can also
[43:15] open up um its um bond market. But then
[43:20] for this it has to remove its capital
[43:22] controls. Right now it can't offer a
[43:24] safe asset for the rest of the world.
[43:26] And of course you also would like to uh
[43:28] you know that you follow the rule of the
[43:30] law rather than being rule ruled by law
[43:34] uh in in a
[43:37] sense. Now so that's all what I wanted
[43:39] to say but let me summarize. I think
[43:42] what we're seeing we're seeing radical
[43:44] radical shifts for in the terms in terms
[43:46] of uh the world order potentially
[43:50] potentially we might also stay in a
[43:52] uniolar world with the US or we might
[43:54] move to a bipolar world it's hard to
[43:56] predict but it has huge implications
[43:59] about the safe assets and the safe asset
[44:03] in form of the US treasury right now
[44:04] provides the exorbitant privileges in
[44:06] three
[44:08] forms and the question is how can
[44:11] preserve these safe asset features for
[44:14] the US or for the world in general uh in
[44:17] order to keep the world as a more
[44:19] resilient world where you know not in
[44:21] particular if the transition is very
[44:23] very risky and we don't know where we
[44:25] will end up with
[44:28] now on top of the US dollar there of
[44:31] course there will be new digital
[44:32] currency evolving I talked about uh
[44:34] crypto and other digital currencies they
[44:37] don't have to be all in a crypto space
[44:39] and there will some new currencies,
[44:42] potential reserve currencies emerging as
[44:45] well. And you see a revival already now
[44:48] in the form of
[44:49] CBDC's many countries which didn't you
[44:52] know thought initially to do some
[44:54] central bank digital currencies step
[44:57] back and slow down but now with the
[44:58] geopolitical changes many many countries
[45:00] are now reviving their ideas to come
[45:03] back to uh uh CBDC center bank digital
[45:08] currencies. Now let me move beyond you
[45:12] know this geopolitical changes and
[45:14] beyond global finance to talk a little
[45:17] bit about global trade and actually this
[45:18] will interact with with the global
[45:20] finance and also the potentially uniolar
[45:24] bipolar or multipolar world
[45:32] order. Now what I want to stress here is
[45:35] choke points and threat points. Okay. So
[45:39] the way you can think about the global
[45:40] world order essentially before the
[45:44] recent events uh you can think of we all
[45:48] were mutually interdependent and what
[45:51] does it mean to be mutually independent?
[45:52] We had threat points against each other.
[45:54] We had choke points against each other
[45:56] and Larry Summers called at some point
[45:58] the balance of financial terror. So I
[46:00] will call it balance of choke points. Uh
[46:02] it doesn't need to be balanced. I might
[46:04] have 57 choke points against you and you
[46:07] have 65 choke points against me. There's
[46:10] so many dependencies. We don't want to
[46:12] hurt each other because whenever I hurt
[46:13] you, you will hurt me back. Now with the
[46:16] invasion of Russian, Ukraine and Russia
[46:20] cutting off the gas to to Europe, I you
[46:23] know people thought before and there
[46:25] they would never do it because it hurts
[46:27] them as well as as it hurts uh Europe.
[46:31] uh this whole thinking is is not put
[46:34] into question. Okay. So we have
[46:35] traditionally a system of mutually in
[46:38] the the dependencies in form of choke
[46:40] points against each other
[46:43] and in such a multilateral in such a
[46:46] system we can support a multilateral
[46:48] arrangement where we actually have
[46:50] international organizations which then
[46:52] build on this. But underneath the
[46:54] foundation of this is this mutual
[46:56] interdependency which uh keeps peace and
[46:59] also makes it possible to have some
[47:01] arrangements on top of it. Of course
[47:05] then uh we can say okay if we don't have
[47:08] this we want to reduce the choke points
[47:10] and how can we reduce the choke points
[47:12] one is we do reshoring we're less
[47:14] dependent on the others so bring the
[47:15] production back you can bring it back to
[47:18] to France so called French shoring or
[47:20] you can also do some multisourcing where
[47:22] you know you source not only for one
[47:24] country but you can also get some
[47:26] resilience from the fact that you can
[47:28] actually source from different countries
[47:30] potentially from different continents.
[47:33] Over time you can also have strategic
[47:36] storage uh things to get more
[47:38] independence and less mutual
[47:40] interdependence but more independence
[47:42] and resilience national resilience. This
[47:44] way you can also have some
[47:47] advantages. Now in order to do this I
[47:49] really want to go a little bit deeper in
[47:52] the choke point analysis. I call it
[47:54] chokeoint analysis 101. The question is
[47:58] how can we make uh you know understand
[48:00] choke points and if the counterpart is
[48:03] imposing choke points on you uh you have
[48:06] to be aware which way it will go and you
[48:09] might also want to impose choke points
[48:11] on others. Okay. And the first thing if
[48:15] you have some direct production uh say
[48:17] you just take inputs and produce
[48:19] something uh that's it and there's no
[48:21] production chain you might think oh good
[48:23] measure of a choke point is the
[48:25] elasticity of substitution how easily
[48:28] can you substitute if something goes
[48:30] away how easily can I substitute with
[48:32] something else so for a firm if one
[48:34] input good goes away how easily can I
[48:36] substitute with some other input good or
[48:38] for a consumer if you know one
[48:42] consumption good goes away is it that
[48:43] dramatic thing or can I easily
[48:46] substitute so you think it's assistive
[48:47] substitution which is uh the critical
[48:50] point so you can think if it's a leont I
[48:52] cannot substitute much uh if the perfect
[48:55] substitutes on the other extreme I can
[48:57] easily substitute and between there's a
[48:59] copless utility or production
[49:02] function now that's then the question is
[49:05] substitution over what time
[49:06] horizon because you might also say
[49:09] oh in the short run it's very difficult
[49:13] to substitute one imper good for another
[49:14] input good but if you give me a year or
[49:17] two I can actually stretch it much but
[49:19] how costly is to wait for one year or
[49:21] two that depends on the inter temporal
[49:23] elasticity of substitution so you have
[49:25] the elasticity of substitution across
[49:27] goods interacting with the intertemporal
[49:29] elasticity of substitution that's what
[49:32] Samson called the luchalier principle u
[49:35] you know it's very product specific and
[49:37] it depends on the product specific
[49:38] interal elasticity of substitution as
[49:40] well so if you learn to adjust fast and
[49:43] adapt. If you're very resilient, you
[49:45] have a lot of connections to a lot of
[49:47] suppliers, you can adjust more easily.
[49:49] So the interlusition is much better for
[49:52] you because you can adjust more easily.
[49:53] You can stretch it over time more
[49:55] easily. And so this depends on your
[49:59] adaptability. But that's in a world
[50:01] where there's no production chains. It's
[50:03] like a simple production inputs and then
[50:06] outputs or you just consume uh various
[50:08] goods. But typically we have some
[50:10] production chains. So you have a whole
[50:12] chain of uh production going on from
[50:16] input and the up upstream firm to a
[50:20] downstream firm the further downstream
[50:22] firm and so forth. And here have a very
[50:24] simple production
[50:26] chain. So there's one consumer here down
[50:29] here and he consumes potentially some EV
[50:33] car or some diesel engine car and then
[50:36] there's some inputs going into that and
[50:38] there might be a long production chain
[50:40] going on. And then the question is what
[50:43] elasticity of substitutions matter. Is
[50:45] it the consumption elasticity of
[50:47] substitutions which matter here or is it
[50:49] this production elasticity of
[50:50] substitution mattering? And if it's a
[50:52] longer consumption chain there might be
[50:53] others. Are these elasticity of
[50:55] substitution
[50:56] mattering? And if you look at it more
[50:59] carefully if the elysive substitution
[51:01] between electric car and a diesel car is
[51:04] infinity. So you can easily switch from
[51:06] one to that. don't have any preference
[51:09] or you don't the elusive substitution is
[51:11] infinity then it doesn't really matter
[51:14] what what elic substitution in
[51:17] production chain happens because we just
[51:19] switch from here to here and and you
[51:22] know the elastic substitution within the
[51:25] production component is not really
[51:27] relevant. So what matters is very much
[51:30] the elastic substitution the further
[51:32] downstream you go the more relevant the
[51:34] elasticive substitution becomes. So in
[51:36] extreme case if the elastic substitution
[51:38] between one and two so this EV car and
[51:41] the diesel engine car is uh infinity
[51:45] these elasticities don't matter at all
[51:47] if it's not perfect then of course they
[51:49] start to mattering to some extent okay
[51:52] but there are exceptions so let's
[51:54] suppose
[51:57] uh the substitution between this product
[52:00] and this product is zero like alont uh
[52:06] infill function. Think of antibiotics or
[52:08] some certain medicine. You cannot
[52:10] substitute you know one type of medicine
[52:12] for another type of medicine. It's very
[52:14] specific. But then suddenly these illust
[52:18] substitutions matter as well. Okay. So
[52:21] then you have choke points. If you
[52:23] control some of these you have a choke
[52:25] point over the other country.
[52:29] Now you might also have um a choke point
[52:33] even if the substitution here is not
[52:36] leont is not zero. Let's suppose it's a
[52:37] reasonable number uh here a finite
[52:40] number. So it's not infinity and not
[52:42] zero. Uh so you can substitute between
[52:44] the two. But there's some universal
[52:47] inputs. So whatever you produce whether
[52:49] it's an EV car or diesel car or whatever
[52:52] you do there's always this black um
[52:55] line. And you always have the same input
[52:57] some microchip or some oil or some input
[53:00] you always need
[53:01] independent which you know consumption
[53:04] good you want to
[53:05] consume then actually then this
[53:08] elasticity here matter as well between
[53:10] this essential input and the other
[53:12] inputs. Okay. So that creates another
[53:14] chop point. So what do I want to say? So
[53:17] generally you would say if you have a
[53:18] production chain what matters upstream
[53:21] is less relevant. what matters
[53:22] downstream is much much more relevant
[53:25] except if there's some universal inputs
[53:30] um which are needed no matter how you
[53:34] switch it downstream then the upstream
[53:36] elasticity substitutions matter as well
[53:38] and that's essentially how you measure
[53:39] what is a choke point. So ideally when
[53:41] you go through different products and
[53:43] make lists where the choke points you
[53:46] have to look at these elasticity of
[53:47] substitutions. Now of course the whole
[53:49] thing is more complicated once you have
[53:51] a production network but it's not clear
[53:54] that you know something is only a
[53:55] consumption good it can also be produced
[53:57] for some input as well. So my computer
[54:00] for example is used for my consumption
[54:02] but it's also used for some input as an
[54:04] input good in order to produce something
[54:07] else and it gets even more involved than
[54:09] this but this gives you the basic idea
[54:12] normally focus substitutions further
[54:14] downstream rather than upstream except
[54:16] if it's an essential
[54:18] uh then going on. So let me
[54:22] conclude. So what we are seeing we see a
[54:24] change of world order. The old order was
[54:29] guided by mutual
[54:31] interdependencies. The foundation was we
[54:34] all dependent on each other. So we don't
[54:36] want to hurt each other too much. We
[54:38] just want to you know we can live then
[54:41] in multilateral organizations like the
[54:44] IMF the World Bank in other multil we
[54:47] can have a common framework rule of law
[54:50] multilateral
[54:51] arrangement and there's a balance of
[54:54] choke points essentially uh and
[54:56] globalization global value change create
[54:58] a lot of choke points with most made
[55:00] each other more mutually interdependent
[55:02] and that made the whole global system
[55:05] more stable. Now we move to a system of
[55:08] more national resilience where each in a
[55:10] way each nation is resilient on its own
[55:13] and then you don't need multilateral you
[55:15] go more bilateral that benefits the
[55:17] large countries and small countries
[55:19] suffer because small countries benefit
[55:21] from a common rule and rather than
[55:24] having rule-based arrangements is much
[55:27] more
[55:27] transactional and it might end up in a
[55:30] multipolar world and I argued uh you
[55:33] know it could be bipolar we could be
[55:35] five polar uh which there are some
[55:38] theories behind
[55:39] it. The challenge is of course if you
[55:42] move to such a world uh the transition
[55:45] is typically thorny and there might be J
[55:48] curve effects and they might hit the
[55:50] tipping point and might derail the whole
[55:52] thing. So it's highly uncertain, highly
[55:54] risky what comes out and of course this
[55:57] will cause some risk premium. If you
[55:59] have a global safe asset, people will
[56:02] flock into the safe asset. But if the
[56:06] safe asset status become
[56:07] shaky, then you don't have a safe asset
[56:10] either. So, so far the US was providing
[56:13] with US Treasury and with US dollar, it
[56:16] provided a safe asset, a global safe
[56:18] asset. And this US treasures helped its
[56:20] owners across the world to improve their
[56:23] own resilience. whenever they face some
[56:29] medioc of course in times of global
[56:31] crisis there would be flight to safety
[56:33] into the United States in the US
[56:35] Treasury that gives a even bigger
[56:38] privilege to United States the third
[56:40] exorbitant privilege as I mentioned in
[56:42] terms of flight to safety US can go
[56:44] easily very cheaply into debt and
[56:47] stimulate their way out of it and
[56:48] emerging economies can't do that but if
[56:51] the safe asset status becomes shaken
[56:54] Then people will look for alternatives
[56:55] for the US Treasury. Either the German
[56:58] bond or your Japanese yen somebody has a
[57:01] problems there too. German bond might
[57:03] not be big enough. There might be the
[57:05] European safe bonds the SPS or there
[57:07] might be emerging economies might set up
[57:09] some close piece or we might move into
[57:10] some crypto uh space as well. But rather
[57:14] than the currencies what matters here is
[57:16] actually
[57:17] uh assets. It's not about you know
[57:20] trading. It's about having
[57:23] assets the store of value aspect to it.
[57:27] Now that's for the global finance
[57:28] perspective and then at the end I wanted
[57:30] to talk a brief words about the global
[57:32] trade. I think for global trade what
[57:35] matters a lot is the choke points. We
[57:37] have to understand what choke points are
[57:39] coming from and where the counterpart is
[57:41] setting on the choke points and it's a
[57:45] strategic interaction. So it's not just
[57:47] some random shock you face some risk you
[57:49] face. It is the strategic choice of your
[57:52] counterparty and that makes the whole
[57:54] system much more systemic. So what
[57:56] matters is here the elasticity of
[57:57] substitution and if you have a
[57:59] production chain it is really typically
[58:03] the downstream aspect which the
[58:05] elasticity of substitution matter a lot
[58:07] except you have critical products then
[58:09] in upstream matter as well. If the same
[58:11] product goes in all these things and
[58:14] there's of course a time dimension how
[58:16] quickly can you bounce back? how build
[58:19] quickly can you build new links and all
[58:21] this and for this you need some
[58:22] adaptability
[58:24] uh to go through that. So with this I
[58:28] hope I gave you a little bit an overview
[58:30] what economic analysis and political
[58:33] analysis putting it together can yield
[58:35] and of course that's built on research
[58:38] I've done and many others have done and
[58:40] build many others research
[58:43] uh to structure the thoughts how to make
[58:46] sense of the recent developments and how
[58:48] to help us to predict a little bit what
[58:51] is coming up uh depending what the
[58:53] political moves are but what the
[58:55] implications on the financial side on
[58:56] the global financial side, the global
[58:58] financial
[58:59] architecture and also how one should
[59:02] think about global trade in a world
[59:04] where people withdraw from the
[59:06] multilateral global system to a more
[59:09] fragmented system and potentially
[59:11] multipolar system. So, thanks for your
[59:15] attention and I hope to see you then
[59:18] soon again next time with a guest
[59:21] speaker um where we can bounce ideas
[59:25] back and forth. I appreciate um your
[59:28] patience and your loyalty to this uh
[59:33] channel. Bye-bye.
[59:40] [Music]