1 00:00:16,679 --> 00:00:23,239 so so um so remember what has been 2 00:00:20,160 --> 00:00:25,920 happening to the US economy as as as 3 00:00:23,239 --> 00:00:28,799 economy and and it happens similarly 4 00:00:25,920 --> 00:00:30,480 with a few lcks and leads and and 5 00:00:28,800 --> 00:00:32,719 differences in sizes but around the 6 00:00:30,480 --> 00:00:34,960 world in most economies around the world 7 00:00:32,719 --> 00:00:38,439 as the economy began to reopen from 8 00:00:34,960 --> 00:00:40,719 covid H we had a situation where we had 9 00:00:38,439 --> 00:00:42,519 sort of too much demand for Supply the 10 00:00:40,719 --> 00:00:45,000 the potential output using the 11 00:00:42,520 --> 00:00:48,079 terminology you'll have in the ISL NPC 12 00:00:45,000 --> 00:00:49,840 model was slow in picking up because we 13 00:00:48,079 --> 00:00:52,239 still had lots of bottlenecks in the 14 00:00:49,840 --> 00:00:55,320 supply chains and and in different 15 00:00:52,238 --> 00:00:57,878 sectors of the economy H some people 16 00:00:55,320 --> 00:01:00,799 didn't didn't want to come back to work 17 00:00:57,878 --> 00:01:03,358 to the labor force for a while and and 18 00:01:00,799 --> 00:01:04,198 and so on so so the supply side was very 19 00:01:03,359 --> 00:01:07,000 still 20 00:01:04,198 --> 00:01:10,319 impair ER not as impair as in the middle 21 00:01:07,000 --> 00:01:12,759 of the covid in 2020 say but it's still 22 00:01:10,319 --> 00:01:16,000 in pair while 23 00:01:12,759 --> 00:01:18,280 demand was very strong because people 24 00:01:16,000 --> 00:01:20,879 were fed up of being staying at home 25 00:01:18,280 --> 00:01:23,599 they had saved a lot during the the 26 00:01:20,879 --> 00:01:25,359 covid recession and they wanted to spend 27 00:01:23,599 --> 00:01:27,359 okay and there had been lots of fiscal 28 00:01:25,359 --> 00:01:29,680 support and monetary policy support and 29 00:01:27,359 --> 00:01:30,879 so on so people feel wealthy and felt 30 00:01:29,680 --> 00:01:33,799 rich 31 00:01:30,879 --> 00:01:36,759 and and so they want to spend you know 32 00:01:33,799 --> 00:01:38,680 if is there's a big demand but Supply is 33 00:01:36,759 --> 00:01:40,920 not there that is starts introducing 34 00:01:38,680 --> 00:01:43,360 inflationary pressures that's say we 35 00:01:40,920 --> 00:01:45,879 have a a negative output a positive 36 00:01:43,359 --> 00:01:47,359 output Gap output above potential output 37 00:01:45,879 --> 00:01:49,519 that puts immediately inflationary 38 00:01:47,359 --> 00:01:51,759 pressure that's what we learn from the 39 00:01:49,519 --> 00:01:55,759 Philips curve and all that 40 00:01:51,759 --> 00:01:58,840 okay and now for a while the the the FED 41 00:01:55,759 --> 00:02:00,200 um did not want to react to this because 42 00:01:58,840 --> 00:02:01,680 they thought that this was going to be 43 00:02:00,200 --> 00:02:04,920 mostly a temporary phenomenon that 44 00:02:01,680 --> 00:02:06,880 Supply would recover pretty rapidly and 45 00:02:04,920 --> 00:02:08,479 that you know people would after taking 46 00:02:06,879 --> 00:02:11,038 one trip well they wouldn't want to take 47 00:02:08,479 --> 00:02:12,560 a second one fiscal support was winding 48 00:02:11,038 --> 00:02:14,679 down and so on so they thought this 49 00:02:12,560 --> 00:02:16,239 would go away and they didn't want to 50 00:02:14,680 --> 00:02:17,840 sort of cool off the economy because 51 00:02:16,239 --> 00:02:20,719 they thought they didn't want to fight a 52 00:02:17,840 --> 00:02:23,519 temporary fight now as a result of new 53 00:02:20,719 --> 00:02:26,239 shocks the war and things like that but 54 00:02:23,519 --> 00:02:28,840 also that the initial call was not right 55 00:02:26,239 --> 00:02:31,640 was incorrect that there was a lot of 56 00:02:28,840 --> 00:02:34,159 inertia in demand and and and and that 57 00:02:31,639 --> 00:02:37,439 that pickup in demand sort of lasted a 58 00:02:34,159 --> 00:02:40,239 lot longer than I expected H is that 59 00:02:37,439 --> 00:02:43,079 that inflation really began to rise and 60 00:02:40,239 --> 00:02:45,039 the Fed was really CAU what is called 61 00:02:43,080 --> 00:02:46,959 behind the curve know they needed to 62 00:02:45,039 --> 00:02:49,400 they were they should have started at 63 00:02:46,959 --> 00:02:50,920 least Expos it's easy to see it that way 64 00:02:49,400 --> 00:02:52,680 they should have remember what you have 65 00:02:50,919 --> 00:02:54,799 if you have an a situation where output 66 00:02:52,680 --> 00:02:56,360 is above potential output the interest 67 00:02:54,800 --> 00:02:58,120 rate is supposed to be rising so the FED 68 00:02:56,360 --> 00:03:00,159 is supposed to be increasing the 69 00:02:58,120 --> 00:03:02,239 interest rate but it didn't for a while 70 00:03:00,158 --> 00:03:04,000 assuming that the forces that were 71 00:03:02,239 --> 00:03:07,480 bringing potential output down and 72 00:03:04,000 --> 00:03:09,318 demand up were so transitory when they 73 00:03:07,479 --> 00:03:11,919 discovered that wasn't the case they had 74 00:03:09,318 --> 00:03:14,039 to start catching up as a result of that 75 00:03:11,919 --> 00:03:17,439 they began to hike interest very very 76 00:03:14,039 --> 00:03:20,719 rapidly okay and the unusually rapidly 77 00:03:17,439 --> 00:03:23,280 for economy like the US and the reason 78 00:03:20,719 --> 00:03:25,719 there are many reasons why why policy 79 00:03:23,280 --> 00:03:28,598 makers especially monetary policy makers 80 00:03:25,719 --> 00:03:30,318 prefer to be gradualist meaning to move 81 00:03:28,598 --> 00:03:34,199 things in smaller steps rather than in 82 00:03:30,318 --> 00:03:36,919 one big Bank ER especially in the way up 83 00:03:34,199 --> 00:03:38,479 no if if it is to cut rates they're very 84 00:03:36,919 --> 00:03:41,399 willing to be very aggressive in cutting 85 00:03:38,479 --> 00:03:43,359 rates but racing rates is something they 86 00:03:41,400 --> 00:03:45,239 tend to be reluctant to do very very 87 00:03:43,360 --> 00:03:47,040 rapidly and one of the main reasons 88 00:03:45,239 --> 00:03:49,400 they're reluctant to do that very 89 00:03:47,039 --> 00:03:51,438 rapidly is because something may break 90 00:03:49,400 --> 00:03:53,158 in the process and there are certain 91 00:03:51,438 --> 00:03:54,318 things are very important if they break 92 00:03:53,158 --> 00:03:55,759 there are certain other things are not 93 00:03:54,318 --> 00:03:57,280 very important if they break but one of 94 00:03:55,759 --> 00:03:59,919 the things that is very important if 95 00:03:57,280 --> 00:04:01,719 they break is Banks okay and and and 96 00:03:59,919 --> 00:04:03,919 that's typically where you get run into 97 00:04:01,719 --> 00:04:07,878 trouble when there is episodes of very 98 00:04:03,919 --> 00:04:09,318 fast hikes in rates now because the US 99 00:04:07,878 --> 00:04:12,280 banking sector especially the large 100 00:04:09,318 --> 00:04:14,438 Banks were sort of very resilient they 101 00:04:12,280 --> 00:04:16,000 had lot of capital and so on there 102 00:04:14,438 --> 00:04:17,798 wasn't a lot of concern that that would 103 00:04:16,000 --> 00:04:20,238 be an issue in the US because again the 104 00:04:17,798 --> 00:04:22,078 the big Banks look very healthy uh 105 00:04:20,238 --> 00:04:24,119 deposits were flowing out of big Banks 106 00:04:22,079 --> 00:04:26,439 but it was happening all at a normal 107 00:04:24,120 --> 00:04:28,240 Pace it's normal that deposits go out of 108 00:04:26,439 --> 00:04:31,240 the banking sector when interest rates 109 00:04:28,240 --> 00:04:33,038 are to rise uh but there was no sign of 110 00:04:31,240 --> 00:04:35,680 major trouble well that changed a month 111 00:04:33,038 --> 00:04:37,879 ago as you well know and something broke 112 00:04:35,680 --> 00:04:41,199 finally no and that the major episode 113 00:04:37,879 --> 00:04:44,120 there was the Silicon Valley Bank know 114 00:04:41,199 --> 00:04:46,720 we Al saw a big bank bank run there and 115 00:04:44,120 --> 00:04:49,639 eventually that bank collapsed and since 116 00:04:46,720 --> 00:04:52,960 then things have looked a little more 117 00:04:49,639 --> 00:04:55,960 complicated so here you have for example 118 00:04:52,959 --> 00:04:58,918 a a Commercial Bank deposits as I said 119 00:04:55,959 --> 00:05:01,399 as I said as the FED began to hike so 120 00:04:58,918 --> 00:05:04,599 focus on the red line the FED began to 121 00:05:01,399 --> 00:05:06,279 hike rates then H deposits began to 122 00:05:04,600 --> 00:05:09,360 people began to move their money out of 123 00:05:06,279 --> 00:05:11,638 deposit into US treasuries money market 124 00:05:09,360 --> 00:05:14,038 funds things of that kind that was 125 00:05:11,639 --> 00:05:15,918 normal okay and that didn't lead to a 126 00:05:14,038 --> 00:05:17,879 big cut in lending which is what you 127 00:05:15,918 --> 00:05:20,639 worried about when when Banks lose 128 00:05:17,879 --> 00:05:23,279 funding but things began to change quite 129 00:05:20,639 --> 00:05:26,038 rapidly well in the second half of 2022 130 00:05:23,279 --> 00:05:28,799 this was perceived felt mostly by large 131 00:05:26,038 --> 00:05:30,599 Banks and when deposits decline 132 00:05:28,800 --> 00:05:33,400 gradually in large Banks that's not such 133 00:05:30,600 --> 00:05:35,520 a big issue because deposits are not the 134 00:05:33,399 --> 00:05:37,799 only funding source that that big banks 135 00:05:35,519 --> 00:05:40,918 have they have many other sources of 136 00:05:37,800 --> 00:05:43,199 funding H but then things that's what 137 00:05:40,918 --> 00:05:45,918 happens this year things accelerated 138 00:05:43,199 --> 00:05:47,160 very very quickly H this year and so 139 00:05:45,918 --> 00:05:49,279 this is different this is a different 140 00:05:47,160 --> 00:05:51,280 animal from this sort of very controlled 141 00:05:49,279 --> 00:05:54,159 decline in deposits as interest we're 142 00:05:51,279 --> 00:05:57,559 hiking this is a very sharp decline in 143 00:05:54,160 --> 00:06:00,199 deposits okay uh so that's a problem 144 00:05:57,560 --> 00:06:04,399 because that that's an avoid 145 00:06:00,199 --> 00:06:06,439 will hit lending okay so that's when to 146 00:06:04,399 --> 00:06:09,359 show up in terms of the moldes we have 147 00:06:06,439 --> 00:06:11,240 had if you were to use your ISL MPC 148 00:06:09,360 --> 00:06:13,639 model it would show up as an increas in 149 00:06:11,240 --> 00:06:15,160 X remember we had premium and stuff like 150 00:06:13,639 --> 00:06:18,639 that well that's a way you probably 151 00:06:15,160 --> 00:06:22,319 could model what is happening right 152 00:06:18,639 --> 00:06:25,160 now now one of the big as I said before 153 00:06:22,319 --> 00:06:28,160 these are in different Scala so a small 154 00:06:25,160 --> 00:06:30,360 Bank deposits on the left large Banks 155 00:06:28,160 --> 00:06:34,280 deposit on the on the right 156 00:06:30,360 --> 00:06:37,319 as I said before through most of of this 157 00:06:34,279 --> 00:06:39,079 episode in which deposits were declining 158 00:06:37,319 --> 00:06:42,360 in the in the banking 159 00:06:39,079 --> 00:06:45,000 sector it was mostly a phenomenon that 160 00:06:42,360 --> 00:06:48,598 was that that affected large Banks and 161 00:06:45,000 --> 00:06:50,519 it was very grad okay but what happened 162 00:06:48,598 --> 00:06:53,000 since a month ago is essentially small 163 00:06:50,519 --> 00:06:55,639 and mediumsized Banks experien a very 164 00:06:53,000 --> 00:06:57,720 large running deposits part of that went 165 00:06:55,639 --> 00:06:59,280 to money market us treasuries and and 166 00:06:57,720 --> 00:07:00,080 part of it you don't see different scale 167 00:06:59,279 --> 00:07:01,679 and 168 00:07:00,079 --> 00:07:03,079 but it went actually to large Banks it 169 00:07:01,680 --> 00:07:08,079 was relocation it's called that's called 170 00:07:03,079 --> 00:07:11,478 flight to Quality okay now even if if if 171 00:07:08,079 --> 00:07:14,359 this has been a full relocation of of H 172 00:07:11,478 --> 00:07:16,800 deposits from large bank to from small 173 00:07:14,360 --> 00:07:18,120 Banks to large Banks and so no deposit 174 00:07:16,800 --> 00:07:20,038 would have declined in the whole banking 175 00:07:18,120 --> 00:07:22,000 sector that would have consequences for 176 00:07:20,038 --> 00:07:23,959 the economy because these type of banks 177 00:07:22,000 --> 00:07:26,879 don't lend to the same type of 178 00:07:23,959 --> 00:07:31,038 people small Banks small especially 179 00:07:26,879 --> 00:07:33,680 Regional Banks lend a lot to people that 180 00:07:31,038 --> 00:07:35,918 to businesses and people that do not 181 00:07:33,680 --> 00:07:37,759 have other sources of funding they tend 182 00:07:35,918 --> 00:07:40,359 to be small businesses and so on the 183 00:07:37,759 --> 00:07:42,720 only way they can get borrow is either 184 00:07:40,360 --> 00:07:44,598 from the family or from a bank but they 185 00:07:42,720 --> 00:07:46,400 cannot issue bonds and things like that 186 00:07:44,598 --> 00:07:48,240 no and so they don't have other sources 187 00:07:46,399 --> 00:07:50,719 of 188 00:07:48,240 --> 00:07:52,478 funding and so that's the problem 189 00:07:50,720 --> 00:07:54,680 because what you see here is naturally 190 00:07:52,478 --> 00:07:57,560 when you start seeing deposits going out 191 00:07:54,680 --> 00:07:59,120 there have been also H losses 192 00:07:57,560 --> 00:08:01,000 experienced by the Banks because they 193 00:07:59,120 --> 00:08:03,439 had to recognize the losses in the asset 194 00:08:01,000 --> 00:08:05,279 side once they lost deposit is that they 195 00:08:03,439 --> 00:08:08,038 had to cut lending and you can see here 196 00:08:05,279 --> 00:08:10,119 what has been happening to lending large 197 00:08:08,038 --> 00:08:12,199 Banks they began to slow down here but 198 00:08:10,120 --> 00:08:14,879 it's a gradual slow down you have seen a 199 00:08:12,199 --> 00:08:17,879 very sharp decline in lending over the 200 00:08:14,879 --> 00:08:21,280 last three or four weeks okay so we're 201 00:08:17,879 --> 00:08:27,240 in the early phases what we like to call 202 00:08:21,279 --> 00:08:30,318 as described as a credit crunch okay and 203 00:08:27,240 --> 00:08:33,320 um now that's a the problem as I said 204 00:08:30,319 --> 00:08:36,839 before because those 205 00:08:33,320 --> 00:08:39,879 banks these Banks Banks in Gray here are 206 00:08:36,839 --> 00:08:42,000 the banks that lend primarily to small 207 00:08:39,879 --> 00:08:43,838 and medium-sized businesses okay so you 208 00:08:42,000 --> 00:08:46,360 see here the share of 209 00:08:43,839 --> 00:08:49,720 commercial H and Industrial loans by 210 00:08:46,360 --> 00:08:51,959 Bank size H and this is loans to small 211 00:08:49,720 --> 00:08:54,040 businesses loan to larger business these 212 00:08:51,958 --> 00:08:57,879 are the banks that are in grade before 213 00:08:54,039 --> 00:09:00,078 below $250 billion and you see that that 214 00:08:57,879 --> 00:09:03,879 they have a large share of loans to 215 00:09:00,078 --> 00:09:05,639 small businesses okay so those sectors 216 00:09:03,879 --> 00:09:07,278 are going to suff suffer a lot so 217 00:09:05,639 --> 00:09:09,399 there's going to be a a contraction in 218 00:09:07,278 --> 00:09:11,278 the economy and it's going to be very 219 00:09:09,399 --> 00:09:13,799 concentrated on the small businesses 220 00:09:11,278 --> 00:09:15,919 mediumsized businesses and so on and 221 00:09:13,799 --> 00:09:17,278 again it's more problematic a 222 00:09:15,919 --> 00:09:18,439 contraction in lending to those 223 00:09:17,278 --> 00:09:21,120 businesses because they don't have 224 00:09:18,440 --> 00:09:24,320 alternative sources of funding that's it 225 00:09:21,120 --> 00:09:29,039 okay it's either return earnings the 226 00:09:24,320 --> 00:09:31,360 family if it is really really small or H 227 00:09:29,039 --> 00:09:31,360 ER 228 00:09:31,720 --> 00:09:36,160 Banks again big corporations these guys 229 00:09:34,519 --> 00:09:38,959 probably have are borrowing from 10 230 00:09:36,159 --> 00:09:41,838 different banks and and and they have 231 00:09:38,958 --> 00:09:44,000 issued corporate bonds and and they even 232 00:09:41,839 --> 00:09:45,959 have commercial paper this a entirely 233 00:09:44,000 --> 00:09:47,919 different life when you live here than 234 00:09:45,958 --> 00:09:50,479 when you live 235 00:09:47,919 --> 00:09:52,000 here H if you look by sectors that also 236 00:09:50,480 --> 00:09:54,639 is going to have implications for 237 00:09:52,000 --> 00:09:56,480 sectors so this is going to be clearly 238 00:09:54,639 --> 00:09:58,679 contractionary but it's not going to be 239 00:09:56,480 --> 00:10:00,839 equally contractionary it will depend on 240 00:09:58,679 --> 00:10:03,319 the composition of your sectors and not 241 00:10:00,839 --> 00:10:05,680 all sectors have the same share of small 242 00:10:03,320 --> 00:10:07,360 businesses and and and mediumsized 243 00:10:05,679 --> 00:10:10,000 businesses you see here the construction 244 00:10:07,360 --> 00:10:11,480 services a very large share most of the 245 00:10:10,000 --> 00:10:13,440 more than half of the businesses in 246 00:10:11,480 --> 00:10:16,600 construction are really small or 247 00:10:13,440 --> 00:10:18,640 mediumsized businesses okay H big 248 00:10:16,600 --> 00:10:21,240 contract with utilities where sort of 249 00:10:18,639 --> 00:10:24,480 they are all big businesses and so on 250 00:10:21,240 --> 00:10:25,879 okay so so big dispersion and so this is 251 00:10:24,480 --> 00:10:28,519 going to be a contraction is going to be 252 00:10:25,879 --> 00:10:30,078 very felt is felt very strongly here at 253 00:10:28,519 --> 00:10:32,360 the top 254 00:10:30,078 --> 00:10:34,799 okay so that's what is happening right 255 00:10:32,360 --> 00:10:36,879 now and from the point of view of the 256 00:10:34,799 --> 00:10:39,278 aggregate essentially where we have gone 257 00:10:36,879 --> 00:10:42,278 is from a path like this to a path like 258 00:10:39,278 --> 00:10:43,838 that so the economy was overheating so 259 00:10:42,278 --> 00:10:46,360 we need to slow down the economy there's 260 00:10:43,839 --> 00:10:47,800 no way around that output was above 261 00:10:46,360 --> 00:10:49,919 potential output that was causing 262 00:10:47,799 --> 00:10:51,359 inflationary pressure we needed to bring 263 00:10:49,919 --> 00:10:54,120 this stuff down and the economy was 264 00:10:51,360 --> 00:10:57,800 slowing down but it was happening at 265 00:10:54,120 --> 00:11:00,639 sort of a very slow pace and that was a 266 00:10:57,799 --> 00:11:02,759 bit exas exasperating for the FED but it 267 00:11:00,639 --> 00:11:04,200 was happening very very slowly among 268 00:11:02,759 --> 00:11:06,519 other things because of the balance 269 00:11:04,200 --> 00:11:08,800 sheets of the household sector and 270 00:11:06,519 --> 00:11:12,519 corporations in general was so very 271 00:11:08,799 --> 00:11:14,719 healthy but now things are accelerating 272 00:11:12,519 --> 00:11:16,639 very quickly because once you produce 273 00:11:14,720 --> 00:11:19,680 credit CR credit constraints and things 274 00:11:16,639 --> 00:11:21,120 like that like that so of the same 275 00:11:19,679 --> 00:11:22,559 declines in wealth that we were 276 00:11:21,120 --> 00:11:25,039 experienced before that were dragging 277 00:11:22,559 --> 00:11:27,838 aggregate demand down have a much larger 278 00:11:25,039 --> 00:11:29,838 effect and so we're changing from some a 279 00:11:27,839 --> 00:11:32,519 world that look like that to world it's 280 00:11:29,839 --> 00:11:34,240 going to look a lot more like this and 281 00:11:32,519 --> 00:11:37,120 that's tricky for the central bank 282 00:11:34,240 --> 00:11:38,919 because now the FED needs to before 283 00:11:37,120 --> 00:11:42,120 there was no way around they had to hike 284 00:11:38,919 --> 00:11:44,759 interest rate H because the main problem 285 00:11:42,120 --> 00:11:46,480 was inflation now they know that as they 286 00:11:44,759 --> 00:11:47,958 hike interest rate they still need to 287 00:11:46,480 --> 00:11:51,000 hike interest rate I think unless it is 288 00:11:47,958 --> 00:11:53,838 a big mess ER because inflation is still 289 00:11:51,000 --> 00:11:55,240 way above their target ER but they have 290 00:11:53,839 --> 00:11:56,519 to be very worried that this stuff 291 00:11:55,240 --> 00:11:58,680 doesn't become to 292 00:11:56,519 --> 00:12:01,879 steep the things get to be very 293 00:11:58,679 --> 00:12:04,638 nonlinear when the financial sector is 294 00:12:01,879 --> 00:12:07,200 involved and and so probably that means 295 00:12:04,639 --> 00:12:09,159 that on net they already did it in the 296 00:12:07,200 --> 00:12:13,600 previous meeting everyone anticipated 50 297 00:12:09,159 --> 00:12:16,120 basis points of hikes once svb happened 298 00:12:13,600 --> 00:12:19,399 the bets went down dramatically and the 299 00:12:16,120 --> 00:12:22,360 realization went down to 25 basis points 300 00:12:19,399 --> 00:12:23,839 and so that's where we are H now now if 301 00:12:22,360 --> 00:12:27,039 everything works as 302 00:12:23,839 --> 00:12:28,920 plan and more or less that's a forecast 303 00:12:27,039 --> 00:12:29,919 at this moment there isn't any panic and 304 00:12:28,919 --> 00:12:31,879 so on 305 00:12:29,919 --> 00:12:34,360 is that we're going to experience not a 306 00:12:31,879 --> 00:12:37,360 technically a recession but significant 307 00:12:34,360 --> 00:12:40,839 slowdown in in in the next quarters or 308 00:12:37,360 --> 00:12:44,000 so okay so that that's that's what that 309 00:12:40,839 --> 00:12:46,920 sort of the consensus expecting to to 310 00:12:44,000 --> 00:12:48,679 see H as a result of all these combined 311 00:12:46,919 --> 00:12:50,198 forces the effect that it still needs to 312 00:12:48,679 --> 00:12:53,198 tighten because of aggregate demand 313 00:12:50,198 --> 00:12:55,439 reasons and the very negative effect of 314 00:12:53,198 --> 00:12:57,919 the credit crunch especially on certain 315 00:12:55,440 --> 00:12:59,959 parts of the economy okay but that's 316 00:12:57,919 --> 00:13:03,719 what if everything again it works as 317 00:12:59,958 --> 00:13:06,879 plan means things continue to go Fairly 318 00:13:03,720 --> 00:13:08,839 smoothly H then it's certainly not going 319 00:13:06,879 --> 00:13:11,399 to be a a good year for economic 320 00:13:08,839 --> 00:13:13,240 activity ER but it shouldn't be a 321 00:13:11,399 --> 00:13:16,559 disaster either and that's sort of where 322 00:13:13,240 --> 00:13:18,440 we are at and and the tension is well if 323 00:13:16,559 --> 00:13:23,198 the financial crisis sort 324 00:13:18,440 --> 00:13:24,399 of leaks into the larger Banks then then 325 00:13:23,198 --> 00:13:26,479 these numbers are going to get a lot 326 00:13:24,399 --> 00:13:30,159 worse of course but that's that's that's 327 00:13:26,480 --> 00:13:33,639 a concern at the moment but uh but it 328 00:13:30,159 --> 00:13:35,719 doesn't seem like the central scenario 329 00:13:33,639 --> 00:13:37,278 now there are also some good news 330 00:13:35,720 --> 00:13:39,199 happening because remember that the 331 00:13:37,278 --> 00:13:41,639 problem we have the problem you have 332 00:13:39,198 --> 00:13:44,559 comes from two sides one side is too 333 00:13:41,639 --> 00:13:46,039 much demand and that the FED can affect 334 00:13:44,559 --> 00:13:48,759 very quickly that's that's what it's 335 00:13:46,039 --> 00:13:51,519 doing by hiking interest rate not as 336 00:13:48,759 --> 00:13:53,720 quickly as they would like but still 337 00:13:51,519 --> 00:13:56,078 they they have an impact on that but the 338 00:13:53,720 --> 00:13:58,519 other problem was aggregate supply and 339 00:13:56,078 --> 00:14:00,519 in particular is that the labor market 340 00:13:58,519 --> 00:14:02,799 look very tight and remember when we did 341 00:14:00,519 --> 00:14:04,600 the Philips curve and all that the labor 342 00:14:02,799 --> 00:14:06,559 market is very critical in all that 343 00:14:04,600 --> 00:14:10,000 process of generating inflation and so 344 00:14:06,559 --> 00:14:11,599 on that's a reason you sort of try to 345 00:14:10,000 --> 00:14:14,360 generate more unemployment essentially 346 00:14:11,600 --> 00:14:16,920 to lower wage pressure because that 347 00:14:14,360 --> 00:14:19,959 means less pressure on prices and so on 348 00:14:16,919 --> 00:14:22,559 so forth and one of the problems is that 349 00:14:19,958 --> 00:14:24,599 again looks is very nice in principle 350 00:14:22,559 --> 00:14:26,559 that we have very low unemployment rate 351 00:14:24,600 --> 00:14:31,040 but it's very difficult to sort of lower 352 00:14:26,559 --> 00:14:31,039 wage pressure If unemployment is so low 353 00:14:31,278 --> 00:14:35,559 having said this and this is the part 354 00:14:33,000 --> 00:14:37,919 that I say is sort of Fairly good news 355 00:14:35,559 --> 00:14:40,000 having said this in the mod we simplify 356 00:14:37,919 --> 00:14:41,679 things and we just put an employment as 357 00:14:40,000 --> 00:14:43,600 the only variable that could adjust and 358 00:14:41,679 --> 00:14:45,758 that was important for wages as aside 359 00:14:43,600 --> 00:14:47,360 from some institutional things in 360 00:14:45,759 --> 00:14:48,959 practice there are many other indicators 361 00:14:47,360 --> 00:14:51,199 and really what really matters is 362 00:14:48,958 --> 00:14:53,319 employment what happens we took as a 363 00:14:51,198 --> 00:14:55,120 fixed n we took a fixed the 364 00:14:53,320 --> 00:14:56,839 participation rate and that's the reason 365 00:14:55,120 --> 00:14:59,278 unemployment was the variable summarize 366 00:14:56,839 --> 00:15:02,720 everything but what really puts pressure 367 00:14:59,278 --> 00:15:04,120 on labor market is shortage of workers 368 00:15:02,720 --> 00:15:06,120 if you have an unemployment rate that is 369 00:15:04,120 --> 00:15:08,759 constant but there are lots of workers 370 00:15:06,120 --> 00:15:10,720 have coming into the labor force and 371 00:15:08,759 --> 00:15:12,600 that's not doesn't put as much pressure 372 00:15:10,720 --> 00:15:15,079 on on wages and therefore less pressure 373 00:15:12,600 --> 00:15:17,240 on inflation and this is exactly what we 374 00:15:15,078 --> 00:15:18,719 beginning to see in the US economy and I 375 00:15:17,240 --> 00:15:21,278 think that's very good news it gives us 376 00:15:18,720 --> 00:15:25,639 hope that this inflationary process may 377 00:15:21,278 --> 00:15:27,958 come down a little faster so this is 378 00:15:25,639 --> 00:15:30,079 labor market participation remember so 379 00:15:27,958 --> 00:15:33,119 this unemployment number 380 00:15:30,078 --> 00:15:35,239 spike a lot but it under represented how 381 00:15:33,120 --> 00:15:37,639 much contraction there was in labor in 382 00:15:35,240 --> 00:15:40,240 employment and so on because many people 383 00:15:37,639 --> 00:15:42,600 simply exit the labor force and those 384 00:15:40,240 --> 00:15:45,240 remember we don't count as an employed 385 00:15:42,600 --> 00:15:48,120 okay and so that happened it was a very 386 00:15:45,240 --> 00:15:50,198 sharp decline in the in the labor force 387 00:15:48,120 --> 00:15:52,360 in the labor participation rate so 388 00:15:50,198 --> 00:15:53,919 decline in the labor force and then that 389 00:15:52,360 --> 00:15:55,639 recovery is one of the things that 390 00:15:53,919 --> 00:15:57,318 happened much slower than the FED 391 00:15:55,639 --> 00:15:59,440 anticipated and that was part of the 392 00:15:57,318 --> 00:16:02,159 mistake is they thought that this was 393 00:15:59,440 --> 00:16:04,000 going to come back quickly and that for 394 00:16:02,159 --> 00:16:05,919 potential output was going to rise very 395 00:16:04,000 --> 00:16:08,839 quickly and it didn't that was one of 396 00:16:05,919 --> 00:16:10,599 the the the mistakes the forast mistakes 397 00:16:08,839 --> 00:16:12,560 but now it's clearly it's coming back to 398 00:16:10,600 --> 00:16:15,040 levels that are sort of more consistent 399 00:16:12,559 --> 00:16:17,399 with historical 400 00:16:15,039 --> 00:16:20,198 levels if you look at the employment to 401 00:16:17,399 --> 00:16:21,958 population ratio also big decline for 402 00:16:20,198 --> 00:16:24,559 similar reasons but if you look at 403 00:16:21,958 --> 00:16:26,318 employment to population ratio today is 404 00:16:24,559 --> 00:16:30,000 clearly sort of getting back to the 405 00:16:26,318 --> 00:16:31,599 trend it had before okay so so that's 406 00:16:30,000 --> 00:16:34,000 that's very good news in the sense that 407 00:16:31,600 --> 00:16:36,240 even if unemployment doesn't move a lot 408 00:16:34,000 --> 00:16:38,600 this sort of reduces well it's good for 409 00:16:36,240 --> 00:16:41,039 output expands and so on but it also 410 00:16:38,600 --> 00:16:44,199 lowers the pre inflationary pressures in 411 00:16:41,039 --> 00:16:46,439 the economy and another component that 412 00:16:44,198 --> 00:16:49,198 actually that that I think I mentioned a 413 00:16:46,440 --> 00:16:52,160 couple of times in in the lecture but is 414 00:16:49,198 --> 00:16:54,000 immigration in in a market like the us a 415 00:16:52,159 --> 00:16:56,759 lot of the labor forces comes from 416 00:16:54,000 --> 00:16:58,440 immigration okay and and that stopped 417 00:16:56,759 --> 00:17:02,360 for a while for a variety of reasons but 418 00:16:58,440 --> 00:17:04,798 certainly Co had a a big effect so so 419 00:17:02,360 --> 00:17:07,759 that meant sort of about 420 00:17:04,798 --> 00:17:09,798 500,000 less people a year coming into 421 00:17:07,759 --> 00:17:11,439 the US Labor Force and that has big 422 00:17:09,798 --> 00:17:14,558 impacts especially in some sectors of 423 00:17:11,439 --> 00:17:18,000 the economy okay lots of and and that's 424 00:17:14,558 --> 00:17:19,639 clearly being fixed now okay we may have 425 00:17:18,000 --> 00:17:21,720 other problems people may fight for 426 00:17:19,640 --> 00:17:24,160 political reasons and the SS whatever 427 00:17:21,720 --> 00:17:27,959 but from the point of view of macro this 428 00:17:24,160 --> 00:17:30,640 is certainly helping okay and in fact if 429 00:17:27,959 --> 00:17:32,640 you look at where the wage pressure is 430 00:17:30,640 --> 00:17:34,200 really coming from in the US economy is 431 00:17:32,640 --> 00:17:37,919 coming from those sectors where sort of 432 00:17:34,200 --> 00:17:40,080 immigrants play a big role you know um 433 00:17:37,919 --> 00:17:42,480 accommodation Food Services stuff like 434 00:17:40,079 --> 00:17:44,119 that you see that there sort of wages 435 00:17:42,480 --> 00:17:45,839 Rose pretty dramatically because there 436 00:17:44,119 --> 00:17:48,558 was a massive shortage there for two 437 00:17:45,839 --> 00:17:50,720 reasons one people didn't want to go 438 00:17:48,558 --> 00:17:52,918 back to those sectors to work close 439 00:17:50,720 --> 00:17:56,679 contact and stuff like that and the 440 00:17:52,919 --> 00:17:58,919 other one is that the important flow of 441 00:17:56,679 --> 00:18:01,720 supply of workers into that had sort of 442 00:17:58,919 --> 00:18:04,320 slowed down quite dramatically okay so 443 00:18:01,720 --> 00:18:06,558 that's where we're at and as a result of 444 00:18:04,319 --> 00:18:09,119 all these good forces despite the fact 445 00:18:06,558 --> 00:18:11,359 that we have very low 446 00:18:09,119 --> 00:18:12,918 unemployment you can see that wage 447 00:18:11,359 --> 00:18:16,038 pressure is beginning to decline in the 448 00:18:12,919 --> 00:18:17,759 US okay so it was very high there but 449 00:18:16,038 --> 00:18:19,960 those numbers are very distorted by 450 00:18:17,759 --> 00:18:21,200 composition effects and stuff like that 451 00:18:19,960 --> 00:18:22,519 but these were the numbers that were 452 00:18:21,200 --> 00:18:24,919 very worrisome I mean with wage 453 00:18:22,519 --> 00:18:27,558 inflation of 6% it's going to be very 454 00:18:24,919 --> 00:18:29,759 difficult to bring inflation to 2% down 455 00:18:27,558 --> 00:18:31,798 you need much lower wag inflation but 456 00:18:29,759 --> 00:18:35,240 you see that that is beginning to 457 00:18:31,798 --> 00:18:36,839 decline 2% is still too high for a 458 00:18:35,240 --> 00:18:39,079 steady state if you want to go back to 459 00:18:36,839 --> 00:18:40,678 2% inflation rate because you can have 460 00:18:39,079 --> 00:18:42,079 an increase in real wage but that has to 461 00:18:40,679 --> 00:18:43,080 be more or less aligned with the rate of 462 00:18:42,079 --> 00:18:45,480 growth of 463 00:18:43,079 --> 00:18:47,319 productivity which is much lower than 464 00:18:45,480 --> 00:18:49,679 that I mean at best it's 1% one and a 465 00:18:47,319 --> 00:18:52,319 half sometimes but so you could live 466 00:18:49,679 --> 00:18:55,960 with three and a half% weight real 467 00:18:52,319 --> 00:18:59,879 nominal wage growth but four four and a 468 00:18:55,960 --> 00:19:02,798 half it's it's a bit too much 469 00:18:59,880 --> 00:19:04,440 okay anyway so that's a that's that's 470 00:19:02,798 --> 00:19:07,839 the state of economy any questions about 471 00:19:04,440 --> 00:19:12,120 the state of economy open questions 472 00:19:07,839 --> 00:19:17,158 no no you're happy with it I'm fine good 473 00:19:12,119 --> 00:19:19,119 okay good so so what I want to next is 474 00:19:17,159 --> 00:19:21,760 so this was a summary and I all that I 475 00:19:19,119 --> 00:19:23,798 did here I did close economy economics 476 00:19:21,759 --> 00:19:25,279 okay all the my description I didn't 477 00:19:23,798 --> 00:19:27,319 need to tell you what was happening in 478 00:19:25,279 --> 00:19:30,000 the rest of the world and so on that 479 00:19:27,319 --> 00:19:31,639 would have been a lot harder to do if if 480 00:19:30,000 --> 00:19:33,159 if this was Singapore for example 481 00:19:31,640 --> 00:19:34,280 because Singapore depends a lot on the 482 00:19:33,159 --> 00:19:35,400 rest of the world and it's very 483 00:19:34,279 --> 00:19:37,558 difficult to tell a story that just 484 00:19:35,400 --> 00:19:40,038 depends on what happen in Singapore the 485 00:19:37,558 --> 00:19:42,440 US is pretty unique in that you can tell 486 00:19:40,038 --> 00:19:44,519 most of the story based on what happens 487 00:19:42,440 --> 00:19:47,558 in the US most not all but most of the 488 00:19:44,519 --> 00:19:50,480 story and that's what I just did almost 489 00:19:47,558 --> 00:19:52,319 anywhere else you need to think about 490 00:19:50,480 --> 00:19:54,319 even if you're in Japan big economy and 491 00:19:52,319 --> 00:19:55,759 so on effects will play a big role and 492 00:19:54,319 --> 00:19:56,918 so when you describe the state of the 493 00:19:55,759 --> 00:20:01,000 economy you're going to be talking about 494 00:19:56,919 --> 00:20:03,440 the Yen very high very low or 495 00:20:01,000 --> 00:20:06,240 not here you don't worry much about the 496 00:20:03,440 --> 00:20:08,480 dollar but the US is very unique on 497 00:20:06,240 --> 00:20:11,558 that I think no other country in the 498 00:20:08,480 --> 00:20:13,798 world has that that feature okay so now 499 00:20:11,558 --> 00:20:16,079 we're going to open up the economy and 500 00:20:13,798 --> 00:20:18,480 again perhaps it's it's the least 501 00:20:16,079 --> 00:20:21,399 important for the us but anywhere else 502 00:20:18,480 --> 00:20:23,640 is tremendously important more so it's 503 00:20:21,400 --> 00:20:25,559 becoming increasingly important for the 504 00:20:23,640 --> 00:20:27,200 US it has been becoming increasingly 505 00:20:25,558 --> 00:20:29,200 important for the US now we're in the 506 00:20:27,200 --> 00:20:31,759 middle of a de globalization mess we 507 00:20:29,200 --> 00:20:33,679 shall see where we end up so there has 508 00:20:31,759 --> 00:20:36,279 been a bit of a reversion of a very 509 00:20:33,679 --> 00:20:38,000 strong Trend towards integrating the 510 00:20:36,279 --> 00:20:40,279 economies of the world through many 511 00:20:38,000 --> 00:20:43,038 different channels and so I want to talk 512 00:20:40,279 --> 00:20:44,440 about what are the key variables in the 513 00:20:43,038 --> 00:20:46,319 when you integrate an economy to the 514 00:20:44,440 --> 00:20:49,558 rest of the world and and and things of 515 00:20:46,319 --> 00:20:51,839 that kind H I'm going to start with some 516 00:20:49,558 --> 00:20:53,000 definitions what are variables are we're 517 00:20:51,839 --> 00:20:56,199 going to be talking about that we 518 00:20:53,000 --> 00:20:57,440 weren't talking about up to now so one 519 00:20:56,200 --> 00:20:59,440 of the things that's going to be very 520 00:20:57,440 --> 00:21:02,120 important in an open economy exchange 521 00:20:59,440 --> 00:21:03,960 rate okay and here I'm giv you I'm going 522 00:21:02,119 --> 00:21:06,879 to Define things very formally later on 523 00:21:03,960 --> 00:21:10,919 but but but here you see an 524 00:21:06,880 --> 00:21:13,320 example of the US dollar Visa the main 525 00:21:10,919 --> 00:21:15,240 trading partners the US trades with many 526 00:21:13,319 --> 00:21:17,158 different parts of the world and there's 527 00:21:15,240 --> 00:21:19,319 an bilateral effects between those 528 00:21:17,159 --> 00:21:21,200 things and this measure here is 529 00:21:19,319 --> 00:21:22,359 something that weights by the amount of 530 00:21:21,200 --> 00:21:24,200 trade that we have with different 531 00:21:22,359 --> 00:21:25,639 economies of the world trace the 532 00:21:24,200 --> 00:21:29,120 different effects and says well is the 533 00:21:25,640 --> 00:21:30,600 dollar strong weak or whatever 534 00:21:29,119 --> 00:21:33,558 this is a matter of convention there's 535 00:21:30,599 --> 00:21:35,199 many ways you can no there are two ways 536 00:21:33,558 --> 00:21:37,240 in which you can do it but we're going 537 00:21:35,200 --> 00:21:40,679 to do it the following way what this 538 00:21:37,240 --> 00:21:42,839 effects will reflect is the price of the 539 00:21:40,679 --> 00:21:46,440 domestic currency in foreign currency 540 00:21:42,839 --> 00:21:48,918 terms so that means when this goes up 541 00:21:46,440 --> 00:21:51,200 means the dollar was becoming very 542 00:21:48,919 --> 00:21:54,200 expensive okay and that's a that's a 543 00:21:51,200 --> 00:21:55,600 very sharp I I'll get back to it but we 544 00:21:54,200 --> 00:21:58,840 call that an appreciation of the 545 00:21:55,599 --> 00:22:01,158 currency okay so here the the dollar was 546 00:21:58,839 --> 00:22:02,959 becoming very expensive in terms of 547 00:22:01,159 --> 00:22:05,440 other 548 00:22:02,960 --> 00:22:08,240 currencies the opposite happened sort of 549 00:22:05,440 --> 00:22:11,278 starting the second half of 2022 and now 550 00:22:08,240 --> 00:22:13,038 we have some had some Cycles here during 551 00:22:11,278 --> 00:22:14,480 this year but that's sort of that's 552 00:22:13,038 --> 00:22:18,480 going to be a very important variable 553 00:22:14,480 --> 00:22:18,480 the FX we call it the FX exchange 554 00:22:19,038 --> 00:22:24,519 rate another variable that we haven't 555 00:22:21,720 --> 00:22:27,519 talked about but but that is going to be 556 00:22:24,519 --> 00:22:31,000 important here is is and and that 557 00:22:27,519 --> 00:22:32,879 politicians argue a lot about it for 558 00:22:31,000 --> 00:22:36,079 with the wrong arguments but but but 559 00:22:32,880 --> 00:22:38,919 they do ER is the trades balance trade 560 00:22:36,079 --> 00:22:41,558 trade balance of goods and services of 561 00:22:38,919 --> 00:22:44,278 goods and services so this the trade 562 00:22:41,558 --> 00:22:48,038 balance of goods and services is simply 563 00:22:44,278 --> 00:22:50,159 a er um the difference between the 564 00:22:48,038 --> 00:22:52,919 exports so what a country sells to the 565 00:22:50,159 --> 00:22:54,919 rest of the world versus its import that 566 00:22:52,919 --> 00:22:58,080 is how much it buys from the rest of the 567 00:22:54,919 --> 00:22:59,320 world okay so this is monthly data for 568 00:22:58,079 --> 00:23:03,519 the US 569 00:22:59,319 --> 00:23:06,119 the US nowadays sort of runs a deficit a 570 00:23:03,519 --> 00:23:08,639 trade balance deficit of the order of 7 571 00:23:06,119 --> 00:23:11,519 70 billion dollars a 572 00:23:08,640 --> 00:23:14,640 month that means it exports to the rest 573 00:23:11,519 --> 00:23:18,158 of the world about S no 70 billion 574 00:23:14,640 --> 00:23:21,159 dollar less than it Imports sorry sorry 575 00:23:18,159 --> 00:23:23,760 yeah seven less than it Imports perfect 576 00:23:21,159 --> 00:23:27,159 okay you have seen that this is 577 00:23:23,759 --> 00:23:30,599 pretty H sustained 578 00:23:27,159 --> 00:23:33,760 actually here look pretty balanced but 579 00:23:30,599 --> 00:23:36,839 but but but the US on on on average has 580 00:23:33,759 --> 00:23:39,640 a situation like that okay the US tends 581 00:23:36,839 --> 00:23:41,480 to export less than it Imports and then 582 00:23:39,640 --> 00:23:43,520 that's when politicians get all very 583 00:23:41,480 --> 00:23:45,120 worked out and said you know this is 584 00:23:43,519 --> 00:23:47,400 unfair competition from the rest of the 585 00:23:45,119 --> 00:23:49,678 world and so on so forth I think in 586 00:23:47,400 --> 00:23:52,559 general has very little to do with that 587 00:23:49,679 --> 00:23:54,880 it has to do that with the fact that the 588 00:23:52,558 --> 00:23:57,720 US likes to save less than the rest of 589 00:23:54,880 --> 00:23:59,200 the world and and but but let me not get 590 00:23:57,720 --> 00:24:02,159 into that and think much later in the 591 00:23:59,200 --> 00:24:03,558 course but anyway that's the situation 592 00:24:02,159 --> 00:24:06,039 for the 593 00:24:03,558 --> 00:24:07,798 US this is obviously a blep that has to 594 00:24:06,038 --> 00:24:11,119 do with covid and so on but you see that 595 00:24:07,798 --> 00:24:13,879 we're now more or less back to to where 596 00:24:11,119 --> 00:24:16,399 we were before this was a period 597 00:24:13,880 --> 00:24:19,120 actually of lots of global political 598 00:24:16,400 --> 00:24:20,960 tension because it had one counterpart 599 00:24:19,119 --> 00:24:24,719 that was very big it was 600 00:24:20,960 --> 00:24:26,000 China okay and it is called the the time 601 00:24:24,720 --> 00:24:28,519 of the global 602 00:24:26,000 --> 00:24:31,200 imbalances and that the US was learning 603 00:24:28,519 --> 00:24:33,278 very large trade deficits and then China 604 00:24:31,200 --> 00:24:34,960 in particular was running very large 605 00:24:33,278 --> 00:24:38,558 trade surpluses and and so there were 606 00:24:34,960 --> 00:24:42,480 lots of political quarters because of 607 00:24:38,558 --> 00:24:44,918 that here you have a so obviously the US 608 00:24:42,480 --> 00:24:46,558 has many many trading partners and with 609 00:24:44,919 --> 00:24:49,640 respect to many of them it has very 610 00:24:46,558 --> 00:24:54,000 large deficits so on net and here are 611 00:24:49,640 --> 00:24:57,240 the main I rank the the 10 main net 612 00:24:54,000 --> 00:24:59,720 deficits for the us so I don't know when 613 00:24:57,240 --> 00:25:01,440 was this but anyway it looks like that 614 00:24:59,720 --> 00:25:04,000 sort of for the 615 00:25:01,440 --> 00:25:06,720 last eight or so 616 00:25:04,000 --> 00:25:09,359 years remove Co it looks more or less 617 00:25:06,720 --> 00:25:11,600 like this all the time and you see that 618 00:25:09,359 --> 00:25:15,079 the US indeed large 619 00:25:11,599 --> 00:25:19,439 large exports to China about $153 620 00:25:15,079 --> 00:25:23,278 billion a year and it Imports about 536 621 00:25:19,440 --> 00:25:25,640 billions a year so the net deficit is$ 622 00:25:23,278 --> 00:25:27,480 380 billion dollar a year and that's the 623 00:25:25,640 --> 00:25:29,000 reason this is a big political thing 624 00:25:27,480 --> 00:25:30,839 okay because it sounds 625 00:25:29,000 --> 00:25:32,960 like a big deficit but there are other 626 00:25:30,839 --> 00:25:35,759 countries with respect to Mexico 130 627 00:25:32,960 --> 00:25:36,759 billion and so on the US exports a lot 628 00:25:35,759 --> 00:25:39,960 more to 629 00:25:36,759 --> 00:25:42,278 Mexico ER Vietnam a lot of what happens 630 00:25:39,960 --> 00:25:45,079 from Vietnam is really Chinese exports 631 00:25:42,278 --> 00:25:47,558 in this guys but but uh but there you 632 00:25:45,079 --> 00:25:50,960 see it okay there are many others 633 00:25:47,558 --> 00:25:53,079 Germany is always a a problem but uh a 634 00:25:50,960 --> 00:25:55,600 problem for somebody that his deficit as 635 00:25:53,079 --> 00:26:00,240 a problem 636 00:25:55,599 --> 00:26:00,240 uh and so on okay 637 00:26:01,759 --> 00:26:06,640 now that's a on the good side this is 638 00:26:04,079 --> 00:26:09,599 this is this what I was saying here is 639 00:26:06,640 --> 00:26:11,640 that you know one sense of openness is 640 00:26:09,599 --> 00:26:13,599 on the goods and services Market that 641 00:26:11,640 --> 00:26:15,360 you buy goods from the rest of the world 642 00:26:13,599 --> 00:26:17,639 the rest of the world buys goods from 643 00:26:15,359 --> 00:26:21,038 you sometimes these things are balanced 644 00:26:17,640 --> 00:26:22,919 sometimes they're not H when at the 645 00:26:21,038 --> 00:26:24,319 aggre level they're not balance for a 646 00:26:22,919 --> 00:26:28,799 very long period of time unless you're 647 00:26:24,319 --> 00:26:31,119 the US that often causes problems ER um 648 00:26:28,798 --> 00:26:33,720 but at the bilateral level if you look 649 00:26:31,119 --> 00:26:35,479 at any country we'll have situations 650 00:26:33,720 --> 00:26:37,720 like this some country where they export 651 00:26:35,480 --> 00:26:40,240 a lot to and import very little from and 652 00:26:37,720 --> 00:26:42,720 vice versa but that's the way the US 653 00:26:40,240 --> 00:26:47,519 looks another sense of openness which is 654 00:26:42,720 --> 00:26:50,720 very important is financial openness no 655 00:26:47,519 --> 00:26:54,319 meaning that you can also buy or save 656 00:26:50,720 --> 00:26:57,640 using foreign assets or domestic assets 657 00:26:54,319 --> 00:26:59,960 okay so you can buy a foreign asset 658 00:26:57,640 --> 00:27:01,480 perhaps not directly or most of you 659 00:26:59,960 --> 00:27:03,759 directly but you can do it through a 660 00:27:01,480 --> 00:27:07,558 broker and so on you can buy foreign 661 00:27:03,759 --> 00:27:10,599 assets or and foreigners buy lots of us 662 00:27:07,558 --> 00:27:12,720 assets okay that's a sense of openness 663 00:27:10,599 --> 00:27:15,158 in financial markets that you can buy 664 00:27:12,720 --> 00:27:17,319 you're not stuck with your own your 665 00:27:15,159 --> 00:27:19,240 country's financial asset you can also 666 00:27:17,319 --> 00:27:20,798 invest in other Count's Financial assets 667 00:27:19,240 --> 00:27:24,120 and vice 668 00:27:20,798 --> 00:27:26,558 versa those things probably you how I 669 00:27:24,119 --> 00:27:29,519 mean you notice trade openness a lot 670 00:27:26,558 --> 00:27:30,678 more probably than financial openness no 671 00:27:29,519 --> 00:27:34,158 because you're all the time buying 672 00:27:30,679 --> 00:27:36,720 imported goods and stuff like that 673 00:27:34,159 --> 00:27:38,440 H while you probably not involving lot 674 00:27:36,720 --> 00:27:40,519 of transactions of international 675 00:27:38,440 --> 00:27:45,080 financial instruments and so on but they 676 00:27:40,519 --> 00:27:47,159 are very large okay so if Pension funds 677 00:27:45,079 --> 00:27:48,879 and so on they're all involved in very 678 00:27:47,159 --> 00:27:50,919 large transactions in fact transactions 679 00:27:48,880 --> 00:27:52,640 in financial markets are an order of 680 00:27:50,919 --> 00:27:55,399 magnitude larger than transactions in 681 00:27:52,640 --> 00:27:58,799 the Goods Market very large and here you 682 00:27:55,398 --> 00:28:01,879 have an example of a 683 00:27:58,798 --> 00:28:03,960 by origin the the the you know foreign 684 00:28:01,880 --> 00:28:07,640 Holdings of us 685 00:28:03,960 --> 00:28:11,640 assets and this is in in in billions 686 00:28:07,640 --> 00:28:14,559 so these guys here this is China and 687 00:28:11,640 --> 00:28:16,759 Canada so have the largest and the UK 688 00:28:14,558 --> 00:28:18,000 those have sort of you know in the order 689 00:28:16,759 --> 00:28:21,158 of $2 690 00:28:18,000 --> 00:28:23,640 trillion of us assets they're 691 00:28:21,159 --> 00:28:25,399 holding Japan should be here also L A 692 00:28:23,640 --> 00:28:28,840 there there it is 693 00:28:25,398 --> 00:28:32,000 yeah now in these two countries 694 00:28:28,839 --> 00:28:35,240 here a lot of those Holdings 695 00:28:32,000 --> 00:28:37,440 actually well particularly in China more 696 00:28:35,240 --> 00:28:39,679 than than in Japan in China is a little 697 00:28:37,440 --> 00:28:42,038 less than than Japan 698 00:28:39,679 --> 00:28:44,440 Japan they save a lot so they need to 699 00:28:42,038 --> 00:28:47,278 buy lots of financial assets and the US 700 00:28:44,440 --> 00:28:49,080 is as the main producer of financial 701 00:28:47,278 --> 00:28:51,919 Assets in the world so they save a lot 702 00:28:49,079 --> 00:28:53,519 on that but also the central bank 703 00:28:51,919 --> 00:28:55,360 because of currency intervention and so 704 00:28:53,519 --> 00:28:58,440 on buys lots of us 705 00:28:55,359 --> 00:29:00,599 treasuries China this is mostly the 706 00:28:58,440 --> 00:29:03,519 Central Bank buying US treasuries 707 00:29:00,599 --> 00:29:05,839 foreign reserves okay large amount of 708 00:29:03,519 --> 00:29:09,960 reserves Canada is private sector 709 00:29:05,839 --> 00:29:12,278 Pension funds and so on for but you see 710 00:29:09,960 --> 00:29:14,798 Brazilians also buy lots of assets from 711 00:29:12,278 --> 00:29:17,319 the US again central banks play big 712 00:29:14,798 --> 00:29:20,398 roles in all this Australia is less the 713 00:29:17,319 --> 00:29:22,798 Central Bank much more private sector UK 714 00:29:20,398 --> 00:29:25,879 is all private sector and so 715 00:29:22,798 --> 00:29:28,398 on and then Europe okay but point of 716 00:29:25,880 --> 00:29:30,559 that picture is that there's lots of 717 00:29:28,398 --> 00:29:31,719 countries in the world resent of 718 00:29:30,558 --> 00:29:33,879 different countries in the world that 719 00:29:31,720 --> 00:29:35,640 buy us Financial assets and in big 720 00:29:33,880 --> 00:29:38,200 amounts 721 00:29:35,640 --> 00:29:40,799 okay I don't know what the total number 722 00:29:38,200 --> 00:29:40,798 today is 723 00:29:46,240 --> 00:29:52,558 probably actually let me not make up 724 00:29:48,720 --> 00:29:55,360 that number you may find it 725 00:29:52,558 --> 00:29:57,639 um but it is certainly in 726 00:29:55,359 --> 00:30:01,719 the2 trillion dollar or something like 727 00:29:57,640 --> 00:30:05,038 that of H assets held us assets held by 728 00:30:01,720 --> 00:30:06,360 foreigners you can check it and tell me 729 00:30:05,038 --> 00:30:09,640 it's probably 730 00:30:06,359 --> 00:30:13,918 more here's the other way around us 731 00:30:09,640 --> 00:30:15,720 residents Holdings of foreign assets 732 00:30:13,919 --> 00:30:18,640 okay 733 00:30:15,720 --> 00:30:21,480 ER you see us 734 00:30:18,640 --> 00:30:24,840 us residents hold lots of Canadian 735 00:30:21,480 --> 00:30:28,599 assets okay and mostly developed 736 00:30:24,839 --> 00:30:31,519 economies but you have India China and 737 00:30:28,599 --> 00:30:36,719 so on lots of Latino American 738 00:30:31,519 --> 00:30:39,120 assets and so on okay so the US is so 739 00:30:36,720 --> 00:30:43,159 it's not only that the rest of the world 740 00:30:39,119 --> 00:30:45,678 demands us asset but us 741 00:30:43,159 --> 00:30:47,679 residents perhaps not directly most of 742 00:30:45,679 --> 00:30:51,759 you but indirectly demand lots of 743 00:30:47,679 --> 00:30:53,720 foreign assets okay um there are some 744 00:30:51,759 --> 00:30:54,960 very fascinating facts that happen here 745 00:30:53,720 --> 00:30:56,600 because the type of assets that 746 00:30:54,960 --> 00:30:58,519 foreigners tend to demand from the US 747 00:30:56,599 --> 00:31:02,638 are very different from the ones that 748 00:30:58,519 --> 00:31:06,240 us er um demands from the rest of the 749 00:31:02,638 --> 00:31:08,678 world ER in fact one of the things that 750 00:31:06,240 --> 00:31:11,599 that the reasons the US can afford 751 00:31:08,679 --> 00:31:14,120 running those chronic trade 752 00:31:11,599 --> 00:31:15,959 deficits is because it tends to get much 753 00:31:14,119 --> 00:31:18,359 higher Returns on the asset it buys 754 00:31:15,960 --> 00:31:21,038 abroad than foreigners get on the assets 755 00:31:18,359 --> 00:31:24,079 they buy in the US and the difference 756 00:31:21,038 --> 00:31:26,240 allows you to find sort of systematic 757 00:31:24,079 --> 00:31:29,000 trade deficits and the reason for that 758 00:31:26,240 --> 00:31:30,638 is a lot of the US assets that for buy 759 00:31:29,000 --> 00:31:32,159 they do it for safety reasons they're 760 00:31:30,638 --> 00:31:34,439 buying us treasure it's very safe 761 00:31:32,159 --> 00:31:36,919 instrument just in case there is a big 762 00:31:34,440 --> 00:31:39,960 mess they they want to have those assets 763 00:31:36,919 --> 00:31:42,159 so it's it's almost for insurance reason 764 00:31:39,960 --> 00:31:44,679 ER the US Treasures are sort of 765 00:31:42,159 --> 00:31:47,399 perceived as the main safe Assets in the 766 00:31:44,679 --> 00:31:50,519 world okay so they they hold it for for 767 00:31:47,398 --> 00:31:54,959 that reason while the US mostly hold 768 00:31:50,519 --> 00:31:56,759 assets abroad for a you know risky 769 00:31:54,960 --> 00:32:01,000 Investments either foreign direct 770 00:31:56,759 --> 00:32:03,398 investment or Equity stuff like that and 771 00:32:01,000 --> 00:32:05,079 typically most fixed income investments 772 00:32:03,398 --> 00:32:09,678 in the US a lot of it a lot of what you 773 00:32:05,079 --> 00:32:11,678 see here is just us resident reaching 774 00:32:09,679 --> 00:32:13,559 for 775 00:32:11,679 --> 00:32:15,880 yield 776 00:32:13,558 --> 00:32:18,240 Brazilian Sovereign bonds equivalence of 777 00:32:15,880 --> 00:32:20,639 the US treasuries you know give you 9% 778 00:32:18,240 --> 00:32:25,519 10% it's a lot higher than the US tends 779 00:32:20,638 --> 00:32:29,839 to give H 14% even now and so on so so 780 00:32:25,519 --> 00:32:29,839 so net the US tends to make 781 00:32:30,000 --> 00:32:34,398 has less Assets in the rest of the world 782 00:32:32,278 --> 00:32:38,038 than foreigners have of the US and it 783 00:32:34,398 --> 00:32:39,918 still makes sufficiently more return 784 00:32:38,038 --> 00:32:41,638 higher return on average on an asset it 785 00:32:39,919 --> 00:32:44,120 holds from the rest of the world that it 786 00:32:41,638 --> 00:32:46,678 has a surplus which which it can Finance 787 00:32:44,119 --> 00:32:48,359 the trade deficit This is complicated 788 00:32:46,679 --> 00:32:52,278 you don't need to know the details but I 789 00:32:48,359 --> 00:32:52,278 to tell you what the kind of things are 790 00:32:52,839 --> 00:32:59,240 happening so so there's three senses in 791 00:32:56,398 --> 00:33:01,158 which you can have a a and of of 792 00:32:59,240 --> 00:33:04,159 openness the two that I have described 793 00:33:01,159 --> 00:33:05,360 implicitly already Goods in Goods Market 794 00:33:04,159 --> 00:33:08,080 that you can 795 00:33:05,359 --> 00:33:10,439 buy foreign goods and you can sell Goods 796 00:33:08,079 --> 00:33:12,480 to the rest of the world and the second 797 00:33:10,440 --> 00:33:14,360 one is financial markets which is what I 798 00:33:12,480 --> 00:33:17,720 just described you can choose between 799 00:33:14,359 --> 00:33:19,879 domestic and foreign assets the main 800 00:33:17,720 --> 00:33:21,759 impediments to the forers typically are 801 00:33:19,880 --> 00:33:25,120 tariffs and quotas and you have heard a 802 00:33:21,759 --> 00:33:27,319 lot about tariffs and so on these days 803 00:33:25,119 --> 00:33:28,719 ER the main impediment for financial 804 00:33:27,319 --> 00:33:31,398 Market is what is called Capital 805 00:33:28,720 --> 00:33:33,120 controls very rarely develop economies 806 00:33:31,398 --> 00:33:35,479 impose Capital 807 00:33:33,119 --> 00:33:39,079 controls but emerging markets do it 808 00:33:35,480 --> 00:33:40,679 regularly okay H limit the amount of 809 00:33:39,079 --> 00:33:42,879 especially Capital outflows when lots of 810 00:33:40,679 --> 00:33:46,200 capitalist Le in the country they try to 811 00:33:42,880 --> 00:33:48,080 stop you from doing more of that and and 812 00:33:46,200 --> 00:33:50,440 they sometimes do it in the way in 813 00:33:48,079 --> 00:33:52,439 because they they want to avoid the 814 00:33:50,440 --> 00:33:54,519 micro instability that comes from the 815 00:33:52,440 --> 00:33:56,240 big reversal of capital flows so they 816 00:33:54,519 --> 00:33:58,278 don't let lots of capital flow in during 817 00:33:56,240 --> 00:34:01,519 the boom just to prevent 818 00:33:58,278 --> 00:34:03,519 a reversal later on that's capital 819 00:34:01,519 --> 00:34:06,679 controls and there's a third way of 820 00:34:03,519 --> 00:34:09,440 opening to the rest of the world H which 821 00:34:06,679 --> 00:34:11,918 is Factor markets okay which is that 822 00:34:09,440 --> 00:34:14,519 firms can choose location I mean some 823 00:34:11,918 --> 00:34:18,398 plants we're seeing you know Japanese 824 00:34:14,519 --> 00:34:21,440 plants that that that do not export 825 00:34:18,398 --> 00:34:24,559 Toyotas from directly from 826 00:34:21,440 --> 00:34:27,079 from from Japan they have the plant here 827 00:34:24,559 --> 00:34:29,398 either in Canada or somewhere in the US 828 00:34:27,079 --> 00:34:31,119 and they sell locally so that's that's 829 00:34:29,398 --> 00:34:33,519 relocation of factors of production 830 00:34:31,119 --> 00:34:36,519 Japanese Capital that relocates to some 831 00:34:33,519 --> 00:34:38,320 place in Canada or in the US and labor 832 00:34:36,519 --> 00:34:41,119 you can also have workers that move from 833 00:34:38,320 --> 00:34:45,879 one place to the other that's another 834 00:34:41,119 --> 00:34:45,879 form of openness no free Capital free 835 00:34:46,320 --> 00:34:51,440 free Factor mobility in this part of the 836 00:34:50,119 --> 00:34:53,960 course we're not going to talk about 837 00:34:51,440 --> 00:34:56,000 this okay we're going to just we're 838 00:34:53,960 --> 00:34:58,519 going to focus in the on these 839 00:34:56,000 --> 00:34:59,880 two the first we're going to look at is 840 00:34:58,519 --> 00:35:03,320 going to be a model of the Goods Market 841 00:34:59,880 --> 00:35:07,640 and that's going to be very much H like 842 00:35:03,320 --> 00:35:10,039 the islm but with an open economy and 843 00:35:07,639 --> 00:35:12,358 then we're going to bring in interest 844 00:35:10,039 --> 00:35:13,480 rate but now on you which is what 845 00:35:12,358 --> 00:35:14,880 remember what we did in the closed 846 00:35:13,480 --> 00:35:16,480 economy first we look at the Goods 847 00:35:14,880 --> 00:35:19,039 Market then we look at interest rate 848 00:35:16,480 --> 00:35:20,480 determination that was our LM and then 849 00:35:19,039 --> 00:35:23,599 we put the things together we came up 850 00:35:20,480 --> 00:35:25,280 with slm here the tricky thing is that 851 00:35:23,599 --> 00:35:26,800 there's not only one interest rate there 852 00:35:25,280 --> 00:35:28,079 are really two you have to decide 853 00:35:26,800 --> 00:35:29,960 between the domestic and foreign 854 00:35:28,079 --> 00:35:31,760 interest rate and then there's an 855 00:35:29,960 --> 00:35:32,960 exchange rate in between which will also 856 00:35:31,760 --> 00:35:34,920 affect so that's the reason it's going 857 00:35:32,960 --> 00:35:36,838 to get a little more complicated because 858 00:35:34,920 --> 00:35:38,480 you're going to be having two different 859 00:35:36,838 --> 00:35:40,440 prices two different Goods you can buy 860 00:35:38,480 --> 00:35:42,719 you can going to have also two different 861 00:35:40,440 --> 00:35:45,480 assets you can buy okay and the effects 862 00:35:42,719 --> 00:35:48,118 is going to affect all those things if 863 00:35:45,480 --> 00:35:50,119 when whenever I say FS I mean thechange 864 00:35:48,119 --> 00:35:52,838 rate 865 00:35:50,119 --> 00:35:55,800 okay forign exchange that's the reason 866 00:35:52,838 --> 00:36:00,920 sometimes called 867 00:35:55,800 --> 00:36:03,680 FX now one thing that happens er er is 868 00:36:00,920 --> 00:36:06,240 that because economies are so integrated 869 00:36:03,679 --> 00:36:08,239 in in goods and financial markets is 870 00:36:06,239 --> 00:36:10,159 that bus business Cycles tend to be 871 00:36:08,239 --> 00:36:11,679 especially large one large large ones 872 00:36:10,159 --> 00:36:16,118 tend to be very synchronized around the 873 00:36:11,679 --> 00:36:16,118 world you see here Emerging 874 00:36:16,760 --> 00:36:22,240 Markets sorry yeah this is the world 875 00:36:19,599 --> 00:36:23,400 that's that's emerging markets and 876 00:36:22,239 --> 00:36:25,598 that's advanced 877 00:36:23,400 --> 00:36:27,358 economies you can see the kind of things 878 00:36:25,599 --> 00:36:29,359 we discuss in the growth section which 879 00:36:27,358 --> 00:36:31,960 is these countries tend to grow faster 880 00:36:29,358 --> 00:36:33,679 than these countries because they're 881 00:36:31,960 --> 00:36:37,480 catching up okay that's the reason 882 00:36:33,679 --> 00:36:39,039 they're called emerging you know H but 883 00:36:37,480 --> 00:36:43,079 at the level of business cycle they're 884 00:36:39,039 --> 00:36:44,880 very synchronized I mean the 2008 2009 885 00:36:43,079 --> 00:36:47,440 recession was a recession 886 00:36:44,880 --> 00:36:49,160 globally this one doesn't have covid but 887 00:36:47,440 --> 00:36:52,599 but well Co naturally was very 888 00:36:49,159 --> 00:36:54,399 synchronized around the world but big 889 00:36:52,599 --> 00:36:56,400 the the point I'm making here is that 890 00:36:54,400 --> 00:36:58,559 once you're very integrated to the rest 891 00:36:56,400 --> 00:37:00,240 of the world you're Al exposed to a new 892 00:36:58,559 --> 00:37:02,440 source of shocks it may help you in many 893 00:37:00,239 --> 00:37:03,759 instances but you're also exposed to 894 00:37:02,440 --> 00:37:05,679 things that come 895 00:37:03,760 --> 00:37:07,560 from the rest of the world and the 896 00:37:05,679 --> 00:37:11,039 evidence is that business Cycles are 897 00:37:07,559 --> 00:37:12,759 very synchronized it's very difficult 898 00:37:11,039 --> 00:37:15,279 for the rest of the world to be immune 899 00:37:12,760 --> 00:37:16,839 to us recession for example it's very 900 00:37:15,280 --> 00:37:19,319 easy for the US to be immune to an 901 00:37:16,838 --> 00:37:22,078 Argentinian recession that's that's a 902 00:37:19,318 --> 00:37:24,440 different story but but but when things 903 00:37:22,079 --> 00:37:26,400 are large invol the large economies 904 00:37:24,440 --> 00:37:29,039 typically that will leak into the rest 905 00:37:26,400 --> 00:37:30,599 of the world China has sort of changed a 906 00:37:29,039 --> 00:37:32,880 little bit the composition used to be 907 00:37:30,599 --> 00:37:36,760 the case that that was always the case 908 00:37:32,880 --> 00:37:39,318 the if the us sankk then everyone sank 909 00:37:36,760 --> 00:37:41,920 and and and and the and now you have 910 00:37:39,318 --> 00:37:43,239 China which stabilizes it's a difference 911 00:37:41,920 --> 00:37:45,639 it's not completely 912 00:37:43,239 --> 00:37:47,959 correlated with with the US and so that 913 00:37:45,639 --> 00:37:50,118 has been stabilizing actually for many 914 00:37:47,960 --> 00:37:52,039 especially commodity producing economies 915 00:37:50,119 --> 00:37:53,920 and so on but it's still the case big 916 00:37:52,039 --> 00:37:55,639 mess is a big mess everywhere if the 917 00:37:53,920 --> 00:37:57,920 economies were close there would be no 918 00:37:55,639 --> 00:37:59,799 reason unless you have some saw you know 919 00:37:57,920 --> 00:38:02,200 shock covid even if the economies were 920 00:37:59,800 --> 00:38:04,480 completely closed would have been a mess 921 00:38:02,199 --> 00:38:07,159 because you know it's as long as the 922 00:38:04,480 --> 00:38:08,800 virus spread then it's a mess regardless 923 00:38:07,159 --> 00:38:10,759 but that's not the case here this 924 00:38:08,800 --> 00:38:11,839 recession was caused by a financial 925 00:38:10,760 --> 00:38:15,760 shock in the 926 00:38:11,838 --> 00:38:18,318 US okay and still the whole econ the the 927 00:38:15,760 --> 00:38:19,920 global economy as a whole suffer a lot 928 00:38:18,318 --> 00:38:21,440 so Things become very synchronized 929 00:38:19,920 --> 00:38:23,400 because of 930 00:38:21,440 --> 00:38:25,838 that another thing that has been 931 00:38:23,400 --> 00:38:29,358 happening is that 932 00:38:25,838 --> 00:38:31,318 everywhere again still we shall see 933 00:38:29,358 --> 00:38:33,759 where we end up after this covid things 934 00:38:31,318 --> 00:38:35,679 there was a slight reversion of that but 935 00:38:33,760 --> 00:38:37,480 everywhere even the US which one of the 936 00:38:35,679 --> 00:38:40,279 closest economies in the world one of 937 00:38:37,480 --> 00:38:42,119 the closest of the significant economies 938 00:38:40,280 --> 00:38:45,440 ER there has been a sort of there was a 939 00:38:42,119 --> 00:38:47,358 steady Trend rise towards higher 940 00:38:45,440 --> 00:38:48,599 integration to the rest of the world 941 00:38:47,358 --> 00:38:50,078 okay and the same is happening in 942 00:38:48,599 --> 00:38:53,760 financial markets it's just an order of 943 00:38:50,079 --> 00:38:55,760 magnitude larger but but you see here in 944 00:38:53,760 --> 00:38:57,599 the US you see that imports and exports 945 00:38:55,760 --> 00:39:00,200 as a share of GDP they were both Rising 946 00:38:57,599 --> 00:39:01,720 ing over time here shows you what I 947 00:39:00,199 --> 00:39:04,159 showed you before which is the deficit 948 00:39:01,719 --> 00:39:07,159 chronic deficit that the US has had but 949 00:39:04,159 --> 00:39:08,879 still even exports have been rising for 950 00:39:07,159 --> 00:39:13,078 a while 951 00:39:08,880 --> 00:39:18,280 now this number here you know that about 952 00:39:13,079 --> 00:39:23,000 the 20% of the US produced Goods 15% of 953 00:39:18,280 --> 00:39:25,599 GDP the US has about 15% of of of GDP in 954 00:39:23,000 --> 00:39:27,960 Imports and in exports some people use 955 00:39:25,599 --> 00:39:29,760 that the sum for example of Imports plus 956 00:39:27,960 --> 00:39:32,679 exports over GDP as a measure of 957 00:39:29,760 --> 00:39:35,119 openness how open is an economy and it's 958 00:39:32,679 --> 00:39:37,480 okay for comparisons but it's clearly 959 00:39:35,119 --> 00:39:40,039 underestimate how open economies really 960 00:39:37,480 --> 00:39:43,519 are I mean many of the goods that are 961 00:39:40,039 --> 00:39:46,039 considered that that the US does not 962 00:39:43,519 --> 00:39:47,480 import are produced domestically so they 963 00:39:46,039 --> 00:39:49,759 don't count as part of imports or 964 00:39:47,480 --> 00:39:51,400 anything their price is really 965 00:39:49,760 --> 00:39:54,839 determined by International 966 00:39:51,400 --> 00:39:57,039 competition okay the price of a of a 967 00:39:54,838 --> 00:39:59,920 Ford is very different with foreign 968 00:39:57,039 --> 00:40:02,838 compe I that not so we don't count the 969 00:39:59,920 --> 00:40:06,280 fors produced here as Imports or 970 00:40:02,838 --> 00:40:08,318 anything or and if would be part of the 971 00:40:06,280 --> 00:40:10,480 nontradable not tradeable it wouldn't 972 00:40:08,318 --> 00:40:13,358 part of this measure of openness but 973 00:40:10,480 --> 00:40:16,079 it's clear that the price and even the 974 00:40:13,358 --> 00:40:18,159 quality is being affected by exposure to 975 00:40:16,079 --> 00:40:19,640 International competition okay so there 976 00:40:18,159 --> 00:40:21,799 are very few sectors that are not really 977 00:40:19,639 --> 00:40:24,318 exposed to International competitions 978 00:40:21,800 --> 00:40:26,760 yeah haircuts they're not I mean you 979 00:40:24,318 --> 00:40:28,119 know you're not going to unless you 980 00:40:26,760 --> 00:40:31,839 leave sort of at 981 00:40:28,119 --> 00:40:33,358 some country you know County at the 982 00:40:31,838 --> 00:40:35,358 border of with Canada and there is a 983 00:40:33,358 --> 00:40:37,719 town right on the side that that's 984 00:40:35,358 --> 00:40:42,960 that's that's not going to happen 985 00:40:37,719 --> 00:40:46,159 but okay so trend is upward and and and 986 00:40:42,960 --> 00:40:49,318 uh even more so than than those numbers 987 00:40:46,159 --> 00:40:52,118 suggest if you look across the world and 988 00:40:49,318 --> 00:40:54,759 here is what I show you before is what I 989 00:40:52,119 --> 00:40:57,640 said before is the US 990 00:40:54,760 --> 00:40:59,319 actually it's is certainly look very 991 00:40:57,639 --> 00:41:01,039 close relative to others if you look at 992 00:40:59,318 --> 00:41:03,318 across large 993 00:41:01,039 --> 00:41:05,800 economies Japan which is also a very 994 00:41:03,318 --> 00:41:09,679 close economy for a variety of reasons 995 00:41:05,800 --> 00:41:13,839 is still more open than the US UK little 996 00:41:09,679 --> 00:41:16,759 Chile here but you know one thing that 997 00:41:13,838 --> 00:41:18,599 this shows this Dimension here shows is 998 00:41:16,760 --> 00:41:21,359 that the smaller you are the more open 999 00:41:18,599 --> 00:41:23,480 you're likely to be and it makes sense 1000 00:41:21,358 --> 00:41:25,480 it's harder to produce all the goods if 1001 00:41:23,480 --> 00:41:28,240 you have you know a small 1002 00:41:25,480 --> 00:41:30,400 country and and and so so so that's 1003 00:41:28,239 --> 00:41:32,759 that's a pattern the smaller you are 1004 00:41:30,400 --> 00:41:35,838 controlling for a variety of 1005 00:41:32,760 --> 00:41:39,480 factors ER you tend to be more open you 1006 00:41:35,838 --> 00:41:45,000 need to Import and Export more import 1007 00:41:39,480 --> 00:41:47,240 more in particular uh now that pattern 1008 00:41:45,000 --> 00:41:51,519 is disrupted when you look in this 1009 00:41:47,239 --> 00:41:55,239 direction no so this all these 1010 00:41:51,519 --> 00:41:59,639 countries ER which are clearly much 1011 00:41:55,239 --> 00:42:03,399 larger than Chile in terms of GDP and on 1012 00:41:59,639 --> 00:42:06,039 ER have very high export ratios why do 1013 00:42:03,400 --> 00:42:06,039 you think that's the 1014 00:42:12,318 --> 00:42:20,279 case exactly they're in Europe so so you 1015 00:42:17,239 --> 00:42:23,159 know this Europe is very special Europe 1016 00:42:20,280 --> 00:42:25,599 as a whole is as close as the US so if 1017 00:42:23,159 --> 00:42:27,679 you look at the whole area together but 1018 00:42:25,599 --> 00:42:29,400 but there is lots of intra Europe 1019 00:42:27,679 --> 00:42:31,039 exports and imports especially in the 1020 00:42:29,400 --> 00:42:33,000 Euro Zone I mean you have lots of things 1021 00:42:31,039 --> 00:42:36,800 you have the same currency you just you 1022 00:42:33,000 --> 00:42:38,639 know it's it's right next door so so so 1023 00:42:36,800 --> 00:42:42,079 they're very open but they're very open 1024 00:42:38,639 --> 00:42:43,400 within Europe not so much with the rest 1025 00:42:42,079 --> 00:42:46,680 of the 1026 00:42:43,400 --> 00:42:50,280 world but this does a differ shate intra 1027 00:42:46,679 --> 00:42:51,440 Europe exports and imports versus total 1028 00:42:50,280 --> 00:42:53,960 and that's the reason you see these 1029 00:42:51,440 --> 00:42:55,519 numbers are very very large but even 1030 00:42:53,960 --> 00:42:58,039 here within here you see that the 1031 00:42:55,519 --> 00:43:00,400 smaller countries tend to be very open 1032 00:42:58,039 --> 00:43:03,079 much more open than than than bigger 1033 00:43:00,400 --> 00:43:06,079 countries 1034 00:43:03,079 --> 00:43:06,079 okay 1035 00:43:06,119 --> 00:43:12,760 good so H as as I said so 1036 00:43:10,318 --> 00:43:14,719 terminology um this picture looks very 1037 00:43:12,760 --> 00:43:17,599 similar to the picture I show you 1038 00:43:14,719 --> 00:43:21,639 earlier on but it's not there it was a 1039 00:43:17,599 --> 00:43:24,000 trade weighted H dollar and here is just 1040 00:43:21,639 --> 00:43:26,558 one particular bilateral exchange rate 1041 00:43:24,000 --> 00:43:28,358 which is the dollar yen exchange rate 1042 00:43:26,559 --> 00:43:29,559 what happens is is when the dollar 1043 00:43:28,358 --> 00:43:30,719 appreciates typically appreciates 1044 00:43:29,559 --> 00:43:32,640 against everything and so on that's the 1045 00:43:30,719 --> 00:43:34,759 reason the pictures look very similar 1046 00:43:32,639 --> 00:43:36,558 but this was pretty dramatic you know 1047 00:43:34,760 --> 00:43:41,240 there was a very sharp appreciation of 1048 00:43:36,559 --> 00:43:44,280 the of the dollar of well strike what I 1049 00:43:41,239 --> 00:43:47,399 said I'm so anyways this is the pattern 1050 00:43:44,280 --> 00:43:49,280 of the number of yens per dollars 1051 00:43:47,400 --> 00:43:50,200 meaning meaning that's we decided that 1052 00:43:49,280 --> 00:43:52,519 that's the way we're going to find the 1053 00:43:50,199 --> 00:43:55,519 exchange this the price of the domestic 1054 00:43:52,519 --> 00:43:58,358 currency in terms of foreign currency so 1055 00:43:55,519 --> 00:44:01,079 the price of the US dollar goes up up 1056 00:43:58,358 --> 00:44:02,920 when they pay you more yens per dollar 1057 00:44:01,079 --> 00:44:05,318 okay and and it went up very rapidly 1058 00:44:02,920 --> 00:44:07,000 from close to 100 to 150 that was 1059 00:44:05,318 --> 00:44:08,440 massive there were massive interventions 1060 00:44:07,000 --> 00:44:12,000 here because it was clear that this was 1061 00:44:08,440 --> 00:44:15,519 getting totally out of hand but but uh 1062 00:44:12,000 --> 00:44:18,400 but any so that was okay and we 1063 00:44:15,519 --> 00:44:21,759 say in this case so when a currency 1064 00:44:18,400 --> 00:44:23,480 gains in value we call that in terms of 1065 00:44:21,760 --> 00:44:24,920 other currencies there's no sense of a 1066 00:44:23,480 --> 00:44:26,440 currency gaining value in terms of 1067 00:44:24,920 --> 00:44:27,880 nothing it has to be in terms of other 1068 00:44:26,440 --> 00:44:30,920 currency that's what an exchange itate 1069 00:44:27,880 --> 00:44:33,920 is we say that the currency is 1070 00:44:30,920 --> 00:44:35,559 appreciating okay so in this case is the 1071 00:44:33,920 --> 00:44:38,159 nominal exchange rate so it's dollars 1072 00:44:35,559 --> 00:44:40,680 per dollars when the 1073 00:44:38,159 --> 00:44:43,078 dollar when the dollar is going up here 1074 00:44:40,679 --> 00:44:45,799 we say the dollar is appreciating 1075 00:44:43,079 --> 00:44:46,920 relative to the Japanese Yen okay that 1076 00:44:45,800 --> 00:44:48,079 means the dollar is becoming more 1077 00:44:46,920 --> 00:44:50,639 expensive they have to give you more 1078 00:44:48,079 --> 00:44:53,160 yens per dollar you can look at it from 1079 00:44:50,639 --> 00:44:54,558 the point of view of Japan and then the 1080 00:44:53,159 --> 00:44:56,759 picture would look the other way around 1081 00:44:54,559 --> 00:44:58,920 and it says in this same picture I know 1082 00:44:56,760 --> 00:45:02,359 that the Japanese yen is 1083 00:44:58,920 --> 00:45:03,720 depreciating relative to the US dollar 1084 00:45:02,358 --> 00:45:05,719 okay so depreciation is when your 1085 00:45:03,719 --> 00:45:08,838 currency loses value appreciation is 1086 00:45:05,719 --> 00:45:08,838 when your currency gains 1087 00:45:12,119 --> 00:45:17,480 value a k i mean if I tell you unless 1088 00:45:16,000 --> 00:45:20,079 you sort of more or less knows the 1089 00:45:17,480 --> 00:45:23,519 prices in the different places if I tell 1090 00:45:20,079 --> 00:45:27,240 you that that that the Japanese 1091 00:45:23,519 --> 00:45:30,000 ER the US buys 1030 1092 00:45:27,239 --> 00:45:32,078 Japanese Yen you can tell me and then I 1093 00:45:30,000 --> 00:45:34,079 ask you where would you like to buy your 1094 00:45:32,079 --> 00:45:36,599 car and assume that the car is the same 1095 00:45:34,079 --> 00:45:39,000 quality no transport cost and so on and 1096 00:45:36,599 --> 00:45:42,359 I tell you look the Japanese yen is give 1097 00:45:39,000 --> 00:45:44,519 you you you for each dollar you get 120 1098 00:45:42,358 --> 00:45:46,639 130 Japanese Y where do you want to buy 1099 00:45:44,519 --> 00:45:46,639 your 1100 00:45:47,480 --> 00:45:52,119 cars that's the right answer you have no 1101 00:45:49,679 --> 00:45:54,039 clue that doesn't tell you anything know 1102 00:45:52,119 --> 00:45:55,599 it tells you the the the nominal 1103 00:45:54,039 --> 00:45:57,599 exchanger tells you the relative value 1104 00:45:55,599 --> 00:45:59,079 of of currencies 1105 00:45:57,599 --> 00:46:01,000 but to make the decision of where you 1106 00:45:59,079 --> 00:46:02,880 buy your car you need to know which car 1107 00:46:01,000 --> 00:46:05,800 is more expensive and that's for that's 1108 00:46:02,880 --> 00:46:07,160 not enough to know the the the the the 1109 00:46:05,800 --> 00:46:09,160 the exchange the nominal exchange you 1110 00:46:07,159 --> 00:46:11,519 need to know what is the price of the 1111 00:46:09,159 --> 00:46:13,199 car in each place in its own currency 1112 00:46:11,519 --> 00:46:15,039 and then I'm going to use exchange rate 1113 00:46:13,199 --> 00:46:18,639 to translate them into some common 1114 00:46:15,039 --> 00:46:21,440 currency suppose I tell you now that H 1115 00:46:18,639 --> 00:46:23,639 the the price of of of the they do the 1116 00:46:21,440 --> 00:46:26,280 opposite experiment they say look the 1117 00:46:23,639 --> 00:46:27,440 price of a of a of a the same car in 1118 00:46:26,280 --> 00:46:29,800 Japan 1119 00:46:27,440 --> 00:46:31,720 is um 1120 00:46:29,800 --> 00:46:33,960 150,000 1121 00:46:31,719 --> 00:46:35,318 Yen well there you all have to lots of 1122 00:46:33,960 --> 00:46:40,159 zeros 1123 00:46:35,318 --> 00:46:41,920 but 150,000 Y and and in the US is500 1124 00:46:40,159 --> 00:46:44,440 this a used car something 1125 00:46:41,920 --> 00:46:46,960 $1,500 and and then I ask you a question 1126 00:46:44,440 --> 00:46:49,440 where do you want to buy your 1127 00:46:46,960 --> 00:46:51,400 car you can't answer either because you 1128 00:46:49,440 --> 00:46:52,880 don't know how to compare unless I give 1129 00:46:51,400 --> 00:46:54,920 you the nominal exchanges as well you 1130 00:46:52,880 --> 00:46:58,640 don't know how to compare those 150,000 1131 00:46:54,920 --> 00:47:01,720 yens for versus the 50 $100 so you need 1132 00:46:58,639 --> 00:47:03,960 both and that concept that captures both 1133 00:47:01,719 --> 00:47:07,239 is what is called the real exchange rate 1134 00:47:03,960 --> 00:47:08,960 the real exchange is design for that to 1135 00:47:07,239 --> 00:47:11,399 capture where you're going to do your 1136 00:47:08,960 --> 00:47:14,079 imports and exports okay and it's a 1137 00:47:11,400 --> 00:47:15,440 relative pricing of two not currencies 1138 00:47:14,079 --> 00:47:17,599 but 1139 00:47:15,440 --> 00:47:19,880 Goods okay so that's what the real 1140 00:47:17,599 --> 00:47:23,599 exchange is is the price of domestic 1141 00:47:19,880 --> 00:47:26,160 Goods relative to foreign Goods how many 1142 00:47:23,599 --> 00:47:28,318 japanese cars you give me for one car us 1143 00:47:26,159 --> 00:47:30,480 car that's a real exchange rate which is 1144 00:47:28,318 --> 00:47:32,759 different from the nominal exchange 1145 00:47:30,480 --> 00:47:34,039 rate now it's related to the nominal 1146 00:47:32,760 --> 00:47:36,040 exchange rate and it happens that in 1147 00:47:34,039 --> 00:47:38,759 practice a lot of the volatility of that 1148 00:47:36,039 --> 00:47:40,480 price is as result of the volatility of 1149 00:47:38,760 --> 00:47:42,359 the nominal exchange but this let me and 1150 00:47:40,480 --> 00:47:45,199 this with this I will stop so let me 1151 00:47:42,358 --> 00:47:47,119 call Epsilon the real exchange rate and 1152 00:47:45,199 --> 00:47:48,919 let me let me see how we're going to get 1153 00:47:47,119 --> 00:47:50,318 to that expression here so what want to 1154 00:47:48,920 --> 00:47:53,440 compare here is the relative value of 1155 00:47:50,318 --> 00:47:55,679 two goods because that's what will 1156 00:47:53,440 --> 00:47:57,599 matter for my my consumption decision or 1157 00:47:55,679 --> 00:48:00,279 my purchase decision 1158 00:47:57,599 --> 00:48:02,400 so suppose we're talking about this car 1159 00:48:00,280 --> 00:48:04,680 and suppose I know that the price of a 1160 00:48:02,400 --> 00:48:07,480 of of of the car in the US is 1161 00:48:04,679 --> 00:48:09,719 p okay and now I want to compare it with 1162 00:48:07,480 --> 00:48:13,679 the with well do I buy it here or do I 1163 00:48:09,719 --> 00:48:15,919 buy it in Japan for that um I'm going to 1164 00:48:13,679 --> 00:48:18,039 have to I I'm going to have to compare 1165 00:48:15,920 --> 00:48:20,000 them in the same currency so the first 1166 00:48:18,039 --> 00:48:24,119 thing I'm going to do is I'm going to 1167 00:48:20,000 --> 00:48:27,119 translate my US dollar price for to 1168 00:48:24,119 --> 00:48:30,318 Japanese dollar to to Yen pricing okay 1169 00:48:27,119 --> 00:48:32,119 so say the the the I'm going to have 1170 00:48:30,318 --> 00:48:34,279 simpler numbers than the one there 1171 00:48:32,119 --> 00:48:37,480 supposed to the car in the US cost 1172 00:48:34,280 --> 00:48:41,839 $10,000 suppose that for each dollar you 1173 00:48:37,480 --> 00:48:44,358 get 10 Yen then then $10,000 time 10 1174 00:48:41,838 --> 00:48:46,400 that means it's $ 100,000 Yen so the us 1175 00:48:44,358 --> 00:48:49,519 if I buy the car in the US I pay 100,000 1176 00:48:46,400 --> 00:48:51,960 Yen and so now ah sorry this was not 1177 00:48:49,519 --> 00:48:54,480 Japan in this example it's the UK well 1178 00:48:51,960 --> 00:48:57,358 the same story okay and it's even 1179 00:48:54,480 --> 00:49:00,199 simpler ER is say 1180 00:48:57,358 --> 00:49:04,480 then then the the car in the US cost 1181 00:49:00,199 --> 00:49:08,838 $10,000 and the The Exchange each dollar 1182 00:49:04,480 --> 00:49:12,159 buys 80 cents of 80 cents of of pounds 1183 00:49:08,838 --> 00:49:14,078 so that means 8,000 pound so the US car 1184 00:49:12,159 --> 00:49:16,480 is is cost 1185 00:49:14,079 --> 00:49:19,920 8,000 now I compare it with a car in the 1186 00:49:16,480 --> 00:49:21,240 UK say the same car and the ratio of 1187 00:49:19,920 --> 00:49:23,280 these two things is what we call the 1188 00:49:21,239 --> 00:49:25,919 real exchange rate so it's the price of 1189 00:49:23,280 --> 00:49:28,559 the domestic Good Times the exchange 1190 00:49:25,920 --> 00:49:32,358 rate divided by the foreign price and 1191 00:49:28,559 --> 00:49:35,160 that's a real exchange so if the if the 1192 00:49:32,358 --> 00:49:38,039 if the price in the of the of the car in 1193 00:49:35,159 --> 00:49:39,838 the UK was $9,000 and I could buy the 1194 00:49:38,039 --> 00:49:41,318 car in the US for $8,000 I would 1195 00:49:39,838 --> 00:49:42,719 probably buy it in the US in practice 1196 00:49:41,318 --> 00:49:44,480 there are difference between the two car 1197 00:49:42,719 --> 00:49:46,358 on but that tells you that's the kind of 1198 00:49:44,480 --> 00:49:48,920 thing that the real exchange means is a 1199 00:49:46,358 --> 00:49:51,279 relative price of goods okay but the way 1200 00:49:48,920 --> 00:49:52,798 to go from that is you have to multiply 1201 00:49:51,280 --> 00:49:54,559 the nominal exchange rate times the 1202 00:49:52,798 --> 00:49:56,880 price because that converts it into the 1203 00:49:54,559 --> 00:49:59,839 same currency as the price and then you 1204 00:49:56,880 --> 00:50:03,318 can compare them that's 1205 00:49:59,838 --> 00:50:05,480 idea so let let's stop here and we're 1206 00:50:03,318 --> 00:50:07,960 going to continue talking about open 1207 00:50:05,480 --> 00:50:11,079 economy next week so next on Wednesday 1208 00:50:07,960 --> 00:50:15,920 what I'm going to do is a review of of H 1209 00:50:11,079 --> 00:50:15,920 ISL MPC and and and growth