WEBVTT

00:00:16.679 --> 00:00:23.239
so so um so remember what has been

00:00:20.160 --> 00:00:25.920
happening to the US economy as as as

00:00:23.239 --> 00:00:28.799
economy and and it happens similarly

00:00:25.920 --> 00:00:30.480
with a few lcks and leads and and

00:00:28.800 --> 00:00:32.719
differences in sizes but around the

00:00:30.480 --> 00:00:34.960
world in most economies around the world

00:00:32.719 --> 00:00:38.439
as the economy began to reopen from

00:00:34.960 --> 00:00:40.719
covid H we had a situation where we had

00:00:38.439 --> 00:00:42.519
sort of too much demand for Supply the

00:00:40.719 --> 00:00:45.000
the potential output using the

00:00:42.520 --> 00:00:48.079
terminology you'll have in the ISL NPC

00:00:45.000 --> 00:00:49.840
model was slow in picking up because we

00:00:48.079 --> 00:00:52.239
still had lots of bottlenecks in the

00:00:49.840 --> 00:00:55.320
supply chains and and in different

00:00:52.238 --> 00:00:57.878
sectors of the economy H some people

00:00:55.320 --> 00:01:00.799
didn't didn't want to come back to work

00:00:57.878 --> 00:01:03.358
to the labor force for a while and and

00:01:00.799 --> 00:01:04.198
and so on so so the supply side was very

00:01:03.359 --> 00:01:07.000
still

00:01:04.198 --> 00:01:10.319
impair ER not as impair as in the middle

00:01:07.000 --> 00:01:12.759
of the covid in 2020 say but it's still

00:01:10.319 --> 00:01:16.000
in pair while

00:01:12.759 --> 00:01:18.280
demand was very strong because people

00:01:16.000 --> 00:01:20.879
were fed up of being staying at home

00:01:18.280 --> 00:01:23.599
they had saved a lot during the the

00:01:20.879 --> 00:01:25.359
covid recession and they wanted to spend

00:01:23.599 --> 00:01:27.359
okay and there had been lots of fiscal

00:01:25.359 --> 00:01:29.680
support and monetary policy support and

00:01:27.359 --> 00:01:30.879
so on so people feel wealthy and felt

00:01:29.680 --> 00:01:33.799
rich

00:01:30.879 --> 00:01:36.759
and and so they want to spend you know

00:01:33.799 --> 00:01:38.680
if is there's a big demand but Supply is

00:01:36.759 --> 00:01:40.920
not there that is starts introducing

00:01:38.680 --> 00:01:43.360
inflationary pressures that's say we

00:01:40.920 --> 00:01:45.879
have a a negative output a positive

00:01:43.359 --> 00:01:47.359
output Gap output above potential output

00:01:45.879 --> 00:01:49.519
that puts immediately inflationary

00:01:47.359 --> 00:01:51.759
pressure that's what we learn from the

00:01:49.519 --> 00:01:55.759
Philips curve and all that

00:01:51.759 --> 00:01:58.840
okay and now for a while the the the FED

00:01:55.759 --> 00:02:00.200
um did not want to react to this because

00:01:58.840 --> 00:02:01.680
they thought that this was going to be

00:02:00.200 --> 00:02:04.920
mostly a temporary phenomenon that

00:02:01.680 --> 00:02:06.880
Supply would recover pretty rapidly and

00:02:04.920 --> 00:02:08.479
that you know people would after taking

00:02:06.879 --> 00:02:11.038
one trip well they wouldn't want to take

00:02:08.479 --> 00:02:12.560
a second one fiscal support was winding

00:02:11.038 --> 00:02:14.679
down and so on so they thought this

00:02:12.560 --> 00:02:16.239
would go away and they didn't want to

00:02:14.680 --> 00:02:17.840
sort of cool off the economy because

00:02:16.239 --> 00:02:20.719
they thought they didn't want to fight a

00:02:17.840 --> 00:02:23.519
temporary fight now as a result of new

00:02:20.719 --> 00:02:26.239
shocks the war and things like that but

00:02:23.519 --> 00:02:28.840
also that the initial call was not right

00:02:26.239 --> 00:02:31.640
was incorrect that there was a lot of

00:02:28.840 --> 00:02:34.159
inertia in demand and and and and that

00:02:31.639 --> 00:02:37.439
that pickup in demand sort of lasted a

00:02:34.159 --> 00:02:40.239
lot longer than I expected H is that

00:02:37.439 --> 00:02:43.079
that inflation really began to rise and

00:02:40.239 --> 00:02:45.039
the Fed was really CAU what is called

00:02:43.080 --> 00:02:46.959
behind the curve know they needed to

00:02:45.039 --> 00:02:49.400
they were they should have started at

00:02:46.959 --> 00:02:50.920
least Expos it's easy to see it that way

00:02:49.400 --> 00:02:52.680
they should have remember what you have

00:02:50.919 --> 00:02:54.799
if you have an a situation where output

00:02:52.680 --> 00:02:56.360
is above potential output the interest

00:02:54.800 --> 00:02:58.120
rate is supposed to be rising so the FED

00:02:56.360 --> 00:03:00.159
is supposed to be increasing the

00:02:58.120 --> 00:03:02.239
interest rate but it didn't for a while

00:03:00.158 --> 00:03:04.000
assuming that the forces that were

00:03:02.239 --> 00:03:07.480
bringing potential output down and

00:03:04.000 --> 00:03:09.318
demand up were so transitory when they

00:03:07.479 --> 00:03:11.919
discovered that wasn't the case they had

00:03:09.318 --> 00:03:14.039
to start catching up as a result of that

00:03:11.919 --> 00:03:17.439
they began to hike interest very very

00:03:14.039 --> 00:03:20.719
rapidly okay and the unusually rapidly

00:03:17.439 --> 00:03:23.280
for economy like the US and the reason

00:03:20.719 --> 00:03:25.719
there are many reasons why why policy

00:03:23.280 --> 00:03:28.598
makers especially monetary policy makers

00:03:25.719 --> 00:03:30.318
prefer to be gradualist meaning to move

00:03:28.598 --> 00:03:34.199
things in smaller steps rather than in

00:03:30.318 --> 00:03:36.919
one big Bank ER especially in the way up

00:03:34.199 --> 00:03:38.479
no if if it is to cut rates they're very

00:03:36.919 --> 00:03:41.399
willing to be very aggressive in cutting

00:03:38.479 --> 00:03:43.359
rates but racing rates is something they

00:03:41.400 --> 00:03:45.239
tend to be reluctant to do very very

00:03:43.360 --> 00:03:47.040
rapidly and one of the main reasons

00:03:45.239 --> 00:03:49.400
they're reluctant to do that very

00:03:47.039 --> 00:03:51.438
rapidly is because something may break

00:03:49.400 --> 00:03:53.158
in the process and there are certain

00:03:51.438 --> 00:03:54.318
things are very important if they break

00:03:53.158 --> 00:03:55.759
there are certain other things are not

00:03:54.318 --> 00:03:57.280
very important if they break but one of

00:03:55.759 --> 00:03:59.919
the things that is very important if

00:03:57.280 --> 00:04:01.719
they break is Banks okay and and and

00:03:59.919 --> 00:04:03.919
that's typically where you get run into

00:04:01.719 --> 00:04:07.878
trouble when there is episodes of very

00:04:03.919 --> 00:04:09.318
fast hikes in rates now because the US

00:04:07.878 --> 00:04:12.280
banking sector especially the large

00:04:09.318 --> 00:04:14.438
Banks were sort of very resilient they

00:04:12.280 --> 00:04:16.000
had lot of capital and so on there

00:04:14.438 --> 00:04:17.798
wasn't a lot of concern that that would

00:04:16.000 --> 00:04:20.238
be an issue in the US because again the

00:04:17.798 --> 00:04:22.078
the big Banks look very healthy uh

00:04:20.238 --> 00:04:24.119
deposits were flowing out of big Banks

00:04:22.079 --> 00:04:26.439
but it was happening all at a normal

00:04:24.120 --> 00:04:28.240
Pace it's normal that deposits go out of

00:04:26.439 --> 00:04:31.240
the banking sector when interest rates

00:04:28.240 --> 00:04:33.038
are to rise uh but there was no sign of

00:04:31.240 --> 00:04:35.680
major trouble well that changed a month

00:04:33.038 --> 00:04:37.879
ago as you well know and something broke

00:04:35.680 --> 00:04:41.199
finally no and that the major episode

00:04:37.879 --> 00:04:44.120
there was the Silicon Valley Bank know

00:04:41.199 --> 00:04:46.720
we Al saw a big bank bank run there and

00:04:44.120 --> 00:04:49.639
eventually that bank collapsed and since

00:04:46.720 --> 00:04:52.960
then things have looked a little more

00:04:49.639 --> 00:04:55.960
complicated so here you have for example

00:04:52.959 --> 00:04:58.918
a a Commercial Bank deposits as I said

00:04:55.959 --> 00:05:01.399
as I said as the FED began to hike so

00:04:58.918 --> 00:05:04.599
focus on the red line the FED began to

00:05:01.399 --> 00:05:06.279
hike rates then H deposits began to

00:05:04.600 --> 00:05:09.360
people began to move their money out of

00:05:06.279 --> 00:05:11.638
deposit into US treasuries money market

00:05:09.360 --> 00:05:14.038
funds things of that kind that was

00:05:11.639 --> 00:05:15.918
normal okay and that didn't lead to a

00:05:14.038 --> 00:05:17.879
big cut in lending which is what you

00:05:15.918 --> 00:05:20.639
worried about when when Banks lose

00:05:17.879 --> 00:05:23.279
funding but things began to change quite

00:05:20.639 --> 00:05:26.038
rapidly well in the second half of 2022

00:05:23.279 --> 00:05:28.799
this was perceived felt mostly by large

00:05:26.038 --> 00:05:30.599
Banks and when deposits decline

00:05:28.800 --> 00:05:33.400
gradually in large Banks that's not such

00:05:30.600 --> 00:05:35.520
a big issue because deposits are not the

00:05:33.399 --> 00:05:37.799
only funding source that that big banks

00:05:35.519 --> 00:05:40.918
have they have many other sources of

00:05:37.800 --> 00:05:43.199
funding H but then things that's what

00:05:40.918 --> 00:05:45.918
happens this year things accelerated

00:05:43.199 --> 00:05:47.160
very very quickly H this year and so

00:05:45.918 --> 00:05:49.279
this is different this is a different

00:05:47.160 --> 00:05:51.280
animal from this sort of very controlled

00:05:49.279 --> 00:05:54.159
decline in deposits as interest we're

00:05:51.279 --> 00:05:57.559
hiking this is a very sharp decline in

00:05:54.160 --> 00:06:00.199
deposits okay uh so that's a problem

00:05:57.560 --> 00:06:04.399
because that that's an avoid

00:06:00.199 --> 00:06:06.439
will hit lending okay so that's when to

00:06:04.399 --> 00:06:09.359
show up in terms of the moldes we have

00:06:06.439 --> 00:06:11.240
had if you were to use your ISL MPC

00:06:09.360 --> 00:06:13.639
model it would show up as an increas in

00:06:11.240 --> 00:06:15.160
X remember we had premium and stuff like

00:06:13.639 --> 00:06:18.639
that well that's a way you probably

00:06:15.160 --> 00:06:22.319
could model what is happening right

00:06:18.639 --> 00:06:25.160
now now one of the big as I said before

00:06:22.319 --> 00:06:28.160
these are in different Scala so a small

00:06:25.160 --> 00:06:30.360
Bank deposits on the left large Banks

00:06:28.160 --> 00:06:34.280
deposit on the on the right

00:06:30.360 --> 00:06:37.319
as I said before through most of of this

00:06:34.279 --> 00:06:39.079
episode in which deposits were declining

00:06:37.319 --> 00:06:42.360
in the in the banking

00:06:39.079 --> 00:06:45.000
sector it was mostly a phenomenon that

00:06:42.360 --> 00:06:48.598
was that that affected large Banks and

00:06:45.000 --> 00:06:50.519
it was very grad okay but what happened

00:06:48.598 --> 00:06:53.000
since a month ago is essentially small

00:06:50.519 --> 00:06:55.639
and mediumsized Banks experien a very

00:06:53.000 --> 00:06:57.720
large running deposits part of that went

00:06:55.639 --> 00:06:59.280
to money market us treasuries and and

00:06:57.720 --> 00:07:00.080
part of it you don't see different scale

00:06:59.279 --> 00:07:01.679
and

00:07:00.079 --> 00:07:03.079
but it went actually to large Banks it

00:07:01.680 --> 00:07:08.079
was relocation it's called that's called

00:07:03.079 --> 00:07:11.478
flight to Quality okay now even if if if

00:07:08.079 --> 00:07:14.359
this has been a full relocation of of H

00:07:11.478 --> 00:07:16.800
deposits from large bank to from small

00:07:14.360 --> 00:07:18.120
Banks to large Banks and so no deposit

00:07:16.800 --> 00:07:20.038
would have declined in the whole banking

00:07:18.120 --> 00:07:22.000
sector that would have consequences for

00:07:20.038 --> 00:07:23.959
the economy because these type of banks

00:07:22.000 --> 00:07:26.879
don't lend to the same type of

00:07:23.959 --> 00:07:31.038
people small Banks small especially

00:07:26.879 --> 00:07:33.680
Regional Banks lend a lot to people that

00:07:31.038 --> 00:07:35.918
to businesses and people that do not

00:07:33.680 --> 00:07:37.759
have other sources of funding they tend

00:07:35.918 --> 00:07:40.359
to be small businesses and so on the

00:07:37.759 --> 00:07:42.720
only way they can get borrow is either

00:07:40.360 --> 00:07:44.598
from the family or from a bank but they

00:07:42.720 --> 00:07:46.400
cannot issue bonds and things like that

00:07:44.598 --> 00:07:48.240
no and so they don't have other sources

00:07:46.399 --> 00:07:50.719
of

00:07:48.240 --> 00:07:52.478
funding and so that's the problem

00:07:50.720 --> 00:07:54.680
because what you see here is naturally

00:07:52.478 --> 00:07:57.560
when you start seeing deposits going out

00:07:54.680 --> 00:07:59.120
there have been also H losses

00:07:57.560 --> 00:08:01.000
experienced by the Banks because they

00:07:59.120 --> 00:08:03.439
had to recognize the losses in the asset

00:08:01.000 --> 00:08:05.279
side once they lost deposit is that they

00:08:03.439 --> 00:08:08.038
had to cut lending and you can see here

00:08:05.279 --> 00:08:10.119
what has been happening to lending large

00:08:08.038 --> 00:08:12.199
Banks they began to slow down here but

00:08:10.120 --> 00:08:14.879
it's a gradual slow down you have seen a

00:08:12.199 --> 00:08:17.879
very sharp decline in lending over the

00:08:14.879 --> 00:08:21.280
last three or four weeks okay so we're

00:08:17.879 --> 00:08:27.240
in the early phases what we like to call

00:08:21.279 --> 00:08:30.318
as described as a credit crunch okay and

00:08:27.240 --> 00:08:33.320
um now that's a the problem as I said

00:08:30.319 --> 00:08:36.839
before because those

00:08:33.320 --> 00:08:39.879
banks these Banks Banks in Gray here are

00:08:36.839 --> 00:08:42.000
the banks that lend primarily to small

00:08:39.879 --> 00:08:43.838
and medium-sized businesses okay so you

00:08:42.000 --> 00:08:46.360
see here the share of

00:08:43.839 --> 00:08:49.720
commercial H and Industrial loans by

00:08:46.360 --> 00:08:51.959
Bank size H and this is loans to small

00:08:49.720 --> 00:08:54.040
businesses loan to larger business these

00:08:51.958 --> 00:08:57.879
are the banks that are in grade before

00:08:54.039 --> 00:09:00.078
below $250 billion and you see that that

00:08:57.879 --> 00:09:03.879
they have a large share of loans to

00:09:00.078 --> 00:09:05.639
small businesses okay so those sectors

00:09:03.879 --> 00:09:07.278
are going to suff suffer a lot so

00:09:05.639 --> 00:09:09.399
there's going to be a a contraction in

00:09:07.278 --> 00:09:11.278
the economy and it's going to be very

00:09:09.399 --> 00:09:13.799
concentrated on the small businesses

00:09:11.278 --> 00:09:15.919
mediumsized businesses and so on and

00:09:13.799 --> 00:09:17.278
again it's more problematic a

00:09:15.919 --> 00:09:18.439
contraction in lending to those

00:09:17.278 --> 00:09:21.120
businesses because they don't have

00:09:18.440 --> 00:09:24.320
alternative sources of funding that's it

00:09:21.120 --> 00:09:29.039
okay it's either return earnings the

00:09:24.320 --> 00:09:31.360
family if it is really really small or H

00:09:29.039 --> 00:09:31.360
ER

00:09:31.720 --> 00:09:36.160
Banks again big corporations these guys

00:09:34.519 --> 00:09:38.959
probably have are borrowing from 10

00:09:36.159 --> 00:09:41.838
different banks and and and they have

00:09:38.958 --> 00:09:44.000
issued corporate bonds and and they even

00:09:41.839 --> 00:09:45.959
have commercial paper this a entirely

00:09:44.000 --> 00:09:47.919
different life when you live here than

00:09:45.958 --> 00:09:50.479
when you live

00:09:47.919 --> 00:09:52.000
here H if you look by sectors that also

00:09:50.480 --> 00:09:54.639
is going to have implications for

00:09:52.000 --> 00:09:56.480
sectors so this is going to be clearly

00:09:54.639 --> 00:09:58.679
contractionary but it's not going to be

00:09:56.480 --> 00:10:00.839
equally contractionary it will depend on

00:09:58.679 --> 00:10:03.319
the composition of your sectors and not

00:10:00.839 --> 00:10:05.680
all sectors have the same share of small

00:10:03.320 --> 00:10:07.360
businesses and and and mediumsized

00:10:05.679 --> 00:10:10.000
businesses you see here the construction

00:10:07.360 --> 00:10:11.480
services a very large share most of the

00:10:10.000 --> 00:10:13.440
more than half of the businesses in

00:10:11.480 --> 00:10:16.600
construction are really small or

00:10:13.440 --> 00:10:18.640
mediumsized businesses okay H big

00:10:16.600 --> 00:10:21.240
contract with utilities where sort of

00:10:18.639 --> 00:10:24.480
they are all big businesses and so on

00:10:21.240 --> 00:10:25.879
okay so so big dispersion and so this is

00:10:24.480 --> 00:10:28.519
going to be a contraction is going to be

00:10:25.879 --> 00:10:30.078
very felt is felt very strongly here at

00:10:28.519 --> 00:10:32.360
the top

00:10:30.078 --> 00:10:34.799
okay so that's what is happening right

00:10:32.360 --> 00:10:36.879
now and from the point of view of the

00:10:34.799 --> 00:10:39.278
aggregate essentially where we have gone

00:10:36.879 --> 00:10:42.278
is from a path like this to a path like

00:10:39.278 --> 00:10:43.838
that so the economy was overheating so

00:10:42.278 --> 00:10:46.360
we need to slow down the economy there's

00:10:43.839 --> 00:10:47.800
no way around that output was above

00:10:46.360 --> 00:10:49.919
potential output that was causing

00:10:47.799 --> 00:10:51.359
inflationary pressure we needed to bring

00:10:49.919 --> 00:10:54.120
this stuff down and the economy was

00:10:51.360 --> 00:10:57.800
slowing down but it was happening at

00:10:54.120 --> 00:11:00.639
sort of a very slow pace and that was a

00:10:57.799 --> 00:11:02.759
bit exas exasperating for the FED but it

00:11:00.639 --> 00:11:04.200
was happening very very slowly among

00:11:02.759 --> 00:11:06.519
other things because of the balance

00:11:04.200 --> 00:11:08.800
sheets of the household sector and

00:11:06.519 --> 00:11:12.519
corporations in general was so very

00:11:08.799 --> 00:11:14.719
healthy but now things are accelerating

00:11:12.519 --> 00:11:16.639
very quickly because once you produce

00:11:14.720 --> 00:11:19.680
credit CR credit constraints and things

00:11:16.639 --> 00:11:21.120
like that like that so of the same

00:11:19.679 --> 00:11:22.559
declines in wealth that we were

00:11:21.120 --> 00:11:25.039
experienced before that were dragging

00:11:22.559 --> 00:11:27.838
aggregate demand down have a much larger

00:11:25.039 --> 00:11:29.838
effect and so we're changing from some a

00:11:27.839 --> 00:11:32.519
world that look like that to world it's

00:11:29.839 --> 00:11:34.240
going to look a lot more like this and

00:11:32.519 --> 00:11:37.120
that's tricky for the central bank

00:11:34.240 --> 00:11:38.919
because now the FED needs to before

00:11:37.120 --> 00:11:42.120
there was no way around they had to hike

00:11:38.919 --> 00:11:44.759
interest rate H because the main problem

00:11:42.120 --> 00:11:46.480
was inflation now they know that as they

00:11:44.759 --> 00:11:47.958
hike interest rate they still need to

00:11:46.480 --> 00:11:51.000
hike interest rate I think unless it is

00:11:47.958 --> 00:11:53.838
a big mess ER because inflation is still

00:11:51.000 --> 00:11:55.240
way above their target ER but they have

00:11:53.839 --> 00:11:56.519
to be very worried that this stuff

00:11:55.240 --> 00:11:58.680
doesn't become to

00:11:56.519 --> 00:12:01.879
steep the things get to be very

00:11:58.679 --> 00:12:04.638
nonlinear when the financial sector is

00:12:01.879 --> 00:12:07.200
involved and and so probably that means

00:12:04.639 --> 00:12:09.159
that on net they already did it in the

00:12:07.200 --> 00:12:13.600
previous meeting everyone anticipated 50

00:12:09.159 --> 00:12:16.120
basis points of hikes once svb happened

00:12:13.600 --> 00:12:19.399
the bets went down dramatically and the

00:12:16.120 --> 00:12:22.360
realization went down to 25 basis points

00:12:19.399 --> 00:12:23.839
and so that's where we are H now now if

00:12:22.360 --> 00:12:27.039
everything works as

00:12:23.839 --> 00:12:28.920
plan and more or less that's a forecast

00:12:27.039 --> 00:12:29.919
at this moment there isn't any panic and

00:12:28.919 --> 00:12:31.879
so on

00:12:29.919 --> 00:12:34.360
is that we're going to experience not a

00:12:31.879 --> 00:12:37.360
technically a recession but significant

00:12:34.360 --> 00:12:40.839
slowdown in in in the next quarters or

00:12:37.360 --> 00:12:44.000
so okay so that that's that's what that

00:12:40.839 --> 00:12:46.920
sort of the consensus expecting to to

00:12:44.000 --> 00:12:48.679
see H as a result of all these combined

00:12:46.919 --> 00:12:50.198
forces the effect that it still needs to

00:12:48.679 --> 00:12:53.198
tighten because of aggregate demand

00:12:50.198 --> 00:12:55.439
reasons and the very negative effect of

00:12:53.198 --> 00:12:57.919
the credit crunch especially on certain

00:12:55.440 --> 00:12:59.959
parts of the economy okay but that's

00:12:57.919 --> 00:13:03.719
what if everything again it works as

00:12:59.958 --> 00:13:06.879
plan means things continue to go Fairly

00:13:03.720 --> 00:13:08.839
smoothly H then it's certainly not going

00:13:06.879 --> 00:13:11.399
to be a a good year for economic

00:13:08.839 --> 00:13:13.240
activity ER but it shouldn't be a

00:13:11.399 --> 00:13:16.559
disaster either and that's sort of where

00:13:13.240 --> 00:13:18.440
we are at and and the tension is well if

00:13:16.559 --> 00:13:23.198
the financial crisis sort

00:13:18.440 --> 00:13:24.399
of leaks into the larger Banks then then

00:13:23.198 --> 00:13:26.479
these numbers are going to get a lot

00:13:24.399 --> 00:13:30.159
worse of course but that's that's that's

00:13:26.480 --> 00:13:33.639
a concern at the moment but uh but it

00:13:30.159 --> 00:13:35.719
doesn't seem like the central scenario

00:13:33.639 --> 00:13:37.278
now there are also some good news

00:13:35.720 --> 00:13:39.199
happening because remember that the

00:13:37.278 --> 00:13:41.639
problem we have the problem you have

00:13:39.198 --> 00:13:44.559
comes from two sides one side is too

00:13:41.639 --> 00:13:46.039
much demand and that the FED can affect

00:13:44.559 --> 00:13:48.759
very quickly that's that's what it's

00:13:46.039 --> 00:13:51.519
doing by hiking interest rate not as

00:13:48.759 --> 00:13:53.720
quickly as they would like but still

00:13:51.519 --> 00:13:56.078
they they have an impact on that but the

00:13:53.720 --> 00:13:58.519
other problem was aggregate supply and

00:13:56.078 --> 00:14:00.519
in particular is that the labor market

00:13:58.519 --> 00:14:02.799
look very tight and remember when we did

00:14:00.519 --> 00:14:04.600
the Philips curve and all that the labor

00:14:02.799 --> 00:14:06.559
market is very critical in all that

00:14:04.600 --> 00:14:10.000
process of generating inflation and so

00:14:06.559 --> 00:14:11.599
on that's a reason you sort of try to

00:14:10.000 --> 00:14:14.360
generate more unemployment essentially

00:14:11.600 --> 00:14:16.920
to lower wage pressure because that

00:14:14.360 --> 00:14:19.959
means less pressure on prices and so on

00:14:16.919 --> 00:14:22.559
so forth and one of the problems is that

00:14:19.958 --> 00:14:24.599
again looks is very nice in principle

00:14:22.559 --> 00:14:26.559
that we have very low unemployment rate

00:14:24.600 --> 00:14:31.040
but it's very difficult to sort of lower

00:14:26.559 --> 00:14:31.039
wage pressure If unemployment is so low

00:14:31.278 --> 00:14:35.559
having said this and this is the part

00:14:33.000 --> 00:14:37.919
that I say is sort of Fairly good news

00:14:35.559 --> 00:14:40.000
having said this in the mod we simplify

00:14:37.919 --> 00:14:41.679
things and we just put an employment as

00:14:40.000 --> 00:14:43.600
the only variable that could adjust and

00:14:41.679 --> 00:14:45.758
that was important for wages as aside

00:14:43.600 --> 00:14:47.360
from some institutional things in

00:14:45.759 --> 00:14:48.959
practice there are many other indicators

00:14:47.360 --> 00:14:51.199
and really what really matters is

00:14:48.958 --> 00:14:53.319
employment what happens we took as a

00:14:51.198 --> 00:14:55.120
fixed n we took a fixed the

00:14:53.320 --> 00:14:56.839
participation rate and that's the reason

00:14:55.120 --> 00:14:59.278
unemployment was the variable summarize

00:14:56.839 --> 00:15:02.720
everything but what really puts pressure

00:14:59.278 --> 00:15:04.120
on labor market is shortage of workers

00:15:02.720 --> 00:15:06.120
if you have an unemployment rate that is

00:15:04.120 --> 00:15:08.759
constant but there are lots of workers

00:15:06.120 --> 00:15:10.720
have coming into the labor force and

00:15:08.759 --> 00:15:12.600
that's not doesn't put as much pressure

00:15:10.720 --> 00:15:15.079
on on wages and therefore less pressure

00:15:12.600 --> 00:15:17.240
on inflation and this is exactly what we

00:15:15.078 --> 00:15:18.719
beginning to see in the US economy and I

00:15:17.240 --> 00:15:21.278
think that's very good news it gives us

00:15:18.720 --> 00:15:25.639
hope that this inflationary process may

00:15:21.278 --> 00:15:27.958
come down a little faster so this is

00:15:25.639 --> 00:15:30.079
labor market participation remember so

00:15:27.958 --> 00:15:33.119
this unemployment number

00:15:30.078 --> 00:15:35.239
spike a lot but it under represented how

00:15:33.120 --> 00:15:37.639
much contraction there was in labor in

00:15:35.240 --> 00:15:40.240
employment and so on because many people

00:15:37.639 --> 00:15:42.600
simply exit the labor force and those

00:15:40.240 --> 00:15:45.240
remember we don't count as an employed

00:15:42.600 --> 00:15:48.120
okay and so that happened it was a very

00:15:45.240 --> 00:15:50.198
sharp decline in the in the labor force

00:15:48.120 --> 00:15:52.360
in the labor participation rate so

00:15:50.198 --> 00:15:53.919
decline in the labor force and then that

00:15:52.360 --> 00:15:55.639
recovery is one of the things that

00:15:53.919 --> 00:15:57.318
happened much slower than the FED

00:15:55.639 --> 00:15:59.440
anticipated and that was part of the

00:15:57.318 --> 00:16:02.159
mistake is they thought that this was

00:15:59.440 --> 00:16:04.000
going to come back quickly and that for

00:16:02.159 --> 00:16:05.919
potential output was going to rise very

00:16:04.000 --> 00:16:08.839
quickly and it didn't that was one of

00:16:05.919 --> 00:16:10.599
the the the mistakes the forast mistakes

00:16:08.839 --> 00:16:12.560
but now it's clearly it's coming back to

00:16:10.600 --> 00:16:15.040
levels that are sort of more consistent

00:16:12.559 --> 00:16:17.399
with historical

00:16:15.039 --> 00:16:20.198
levels if you look at the employment to

00:16:17.399 --> 00:16:21.958
population ratio also big decline for

00:16:20.198 --> 00:16:24.559
similar reasons but if you look at

00:16:21.958 --> 00:16:26.318
employment to population ratio today is

00:16:24.559 --> 00:16:30.000
clearly sort of getting back to the

00:16:26.318 --> 00:16:31.599
trend it had before okay so so that's

00:16:30.000 --> 00:16:34.000
that's very good news in the sense that

00:16:31.600 --> 00:16:36.240
even if unemployment doesn't move a lot

00:16:34.000 --> 00:16:38.600
this sort of reduces well it's good for

00:16:36.240 --> 00:16:41.039
output expands and so on but it also

00:16:38.600 --> 00:16:44.199
lowers the pre inflationary pressures in

00:16:41.039 --> 00:16:46.439
the economy and another component that

00:16:44.198 --> 00:16:49.198
actually that that I think I mentioned a

00:16:46.440 --> 00:16:52.160
couple of times in in the lecture but is

00:16:49.198 --> 00:16:54.000
immigration in in a market like the us a

00:16:52.159 --> 00:16:56.759
lot of the labor forces comes from

00:16:54.000 --> 00:16:58.440
immigration okay and and that stopped

00:16:56.759 --> 00:17:02.360
for a while for a variety of reasons but

00:16:58.440 --> 00:17:04.798
certainly Co had a a big effect so so

00:17:02.360 --> 00:17:07.759
that meant sort of about

00:17:04.798 --> 00:17:09.798
500,000 less people a year coming into

00:17:07.759 --> 00:17:11.439
the US Labor Force and that has big

00:17:09.798 --> 00:17:14.558
impacts especially in some sectors of

00:17:11.439 --> 00:17:18.000
the economy okay lots of and and that's

00:17:14.558 --> 00:17:19.639
clearly being fixed now okay we may have

00:17:18.000 --> 00:17:21.720
other problems people may fight for

00:17:19.640 --> 00:17:24.160
political reasons and the SS whatever

00:17:21.720 --> 00:17:27.959
but from the point of view of macro this

00:17:24.160 --> 00:17:30.640
is certainly helping okay and in fact if

00:17:27.959 --> 00:17:32.640
you look at where the wage pressure is

00:17:30.640 --> 00:17:34.200
really coming from in the US economy is

00:17:32.640 --> 00:17:37.919
coming from those sectors where sort of

00:17:34.200 --> 00:17:40.080
immigrants play a big role you know um

00:17:37.919 --> 00:17:42.480
accommodation Food Services stuff like

00:17:40.079 --> 00:17:44.119
that you see that there sort of wages

00:17:42.480 --> 00:17:45.839
Rose pretty dramatically because there

00:17:44.119 --> 00:17:48.558
was a massive shortage there for two

00:17:45.839 --> 00:17:50.720
reasons one people didn't want to go

00:17:48.558 --> 00:17:52.918
back to those sectors to work close

00:17:50.720 --> 00:17:56.679
contact and stuff like that and the

00:17:52.919 --> 00:17:58.919
other one is that the important flow of

00:17:56.679 --> 00:18:01.720
supply of workers into that had sort of

00:17:58.919 --> 00:18:04.320
slowed down quite dramatically okay so

00:18:01.720 --> 00:18:06.558
that's where we're at and as a result of

00:18:04.319 --> 00:18:09.119
all these good forces despite the fact

00:18:06.558 --> 00:18:11.359
that we have very low

00:18:09.119 --> 00:18:12.918
unemployment you can see that wage

00:18:11.359 --> 00:18:16.038
pressure is beginning to decline in the

00:18:12.919 --> 00:18:17.759
US okay so it was very high there but

00:18:16.038 --> 00:18:19.960
those numbers are very distorted by

00:18:17.759 --> 00:18:21.200
composition effects and stuff like that

00:18:19.960 --> 00:18:22.519
but these were the numbers that were

00:18:21.200 --> 00:18:24.919
very worrisome I mean with wage

00:18:22.519 --> 00:18:27.558
inflation of 6% it's going to be very

00:18:24.919 --> 00:18:29.759
difficult to bring inflation to 2% down

00:18:27.558 --> 00:18:31.798
you need much lower wag inflation but

00:18:29.759 --> 00:18:35.240
you see that that is beginning to

00:18:31.798 --> 00:18:36.839
decline 2% is still too high for a

00:18:35.240 --> 00:18:39.079
steady state if you want to go back to

00:18:36.839 --> 00:18:40.678
2% inflation rate because you can have

00:18:39.079 --> 00:18:42.079
an increase in real wage but that has to

00:18:40.679 --> 00:18:43.080
be more or less aligned with the rate of

00:18:42.079 --> 00:18:45.480
growth of

00:18:43.079 --> 00:18:47.319
productivity which is much lower than

00:18:45.480 --> 00:18:49.679
that I mean at best it's 1% one and a

00:18:47.319 --> 00:18:52.319
half sometimes but so you could live

00:18:49.679 --> 00:18:55.960
with three and a half% weight real

00:18:52.319 --> 00:18:59.879
nominal wage growth but four four and a

00:18:55.960 --> 00:19:02.798
half it's it's a bit too much

00:18:59.880 --> 00:19:04.440
okay anyway so that's a that's that's

00:19:02.798 --> 00:19:07.839
the state of economy any questions about

00:19:04.440 --> 00:19:12.120
the state of economy open questions

00:19:07.839 --> 00:19:17.158
no no you're happy with it I'm fine good

00:19:12.119 --> 00:19:19.119
okay good so so what I want to next is

00:19:17.159 --> 00:19:21.760
so this was a summary and I all that I

00:19:19.119 --> 00:19:23.798
did here I did close economy economics

00:19:21.759 --> 00:19:25.279
okay all the my description I didn't

00:19:23.798 --> 00:19:27.319
need to tell you what was happening in

00:19:25.279 --> 00:19:30.000
the rest of the world and so on that

00:19:27.319 --> 00:19:31.639
would have been a lot harder to do if if

00:19:30.000 --> 00:19:33.159
if this was Singapore for example

00:19:31.640 --> 00:19:34.280
because Singapore depends a lot on the

00:19:33.159 --> 00:19:35.400
rest of the world and it's very

00:19:34.279 --> 00:19:37.558
difficult to tell a story that just

00:19:35.400 --> 00:19:40.038
depends on what happen in Singapore the

00:19:37.558 --> 00:19:42.440
US is pretty unique in that you can tell

00:19:40.038 --> 00:19:44.519
most of the story based on what happens

00:19:42.440 --> 00:19:47.558
in the US most not all but most of the

00:19:44.519 --> 00:19:50.480
story and that's what I just did almost

00:19:47.558 --> 00:19:52.319
anywhere else you need to think about

00:19:50.480 --> 00:19:54.319
even if you're in Japan big economy and

00:19:52.319 --> 00:19:55.759
so on effects will play a big role and

00:19:54.319 --> 00:19:56.918
so when you describe the state of the

00:19:55.759 --> 00:20:01.000
economy you're going to be talking about

00:19:56.919 --> 00:20:03.440
the Yen very high very low or

00:20:01.000 --> 00:20:06.240
not here you don't worry much about the

00:20:03.440 --> 00:20:08.480
dollar but the US is very unique on

00:20:06.240 --> 00:20:11.558
that I think no other country in the

00:20:08.480 --> 00:20:13.798
world has that that feature okay so now

00:20:11.558 --> 00:20:16.079
we're going to open up the economy and

00:20:13.798 --> 00:20:18.480
again perhaps it's it's the least

00:20:16.079 --> 00:20:21.399
important for the us but anywhere else

00:20:18.480 --> 00:20:23.640
is tremendously important more so it's

00:20:21.400 --> 00:20:25.559
becoming increasingly important for the

00:20:23.640 --> 00:20:27.200
US it has been becoming increasingly

00:20:25.558 --> 00:20:29.200
important for the US now we're in the

00:20:27.200 --> 00:20:31.759
middle of a de globalization mess we

00:20:29.200 --> 00:20:33.679
shall see where we end up so there has

00:20:31.759 --> 00:20:36.279
been a bit of a reversion of a very

00:20:33.679 --> 00:20:38.000
strong Trend towards integrating the

00:20:36.279 --> 00:20:40.279
economies of the world through many

00:20:38.000 --> 00:20:43.038
different channels and so I want to talk

00:20:40.279 --> 00:20:44.440
about what are the key variables in the

00:20:43.038 --> 00:20:46.319
when you integrate an economy to the

00:20:44.440 --> 00:20:49.558
rest of the world and and and things of

00:20:46.319 --> 00:20:51.839
that kind H I'm going to start with some

00:20:49.558 --> 00:20:53.000
definitions what are variables are we're

00:20:51.839 --> 00:20:56.199
going to be talking about that we

00:20:53.000 --> 00:20:57.440
weren't talking about up to now so one

00:20:56.200 --> 00:20:59.440
of the things that's going to be very

00:20:57.440 --> 00:21:02.120
important in an open economy exchange

00:20:59.440 --> 00:21:03.960
rate okay and here I'm giv you I'm going

00:21:02.119 --> 00:21:06.879
to Define things very formally later on

00:21:03.960 --> 00:21:10.919
but but but here you see an

00:21:06.880 --> 00:21:13.320
example of the US dollar Visa the main

00:21:10.919 --> 00:21:15.240
trading partners the US trades with many

00:21:13.319 --> 00:21:17.158
different parts of the world and there's

00:21:15.240 --> 00:21:19.319
an bilateral effects between those

00:21:17.159 --> 00:21:21.200
things and this measure here is

00:21:19.319 --> 00:21:22.359
something that weights by the amount of

00:21:21.200 --> 00:21:24.200
trade that we have with different

00:21:22.359 --> 00:21:25.639
economies of the world trace the

00:21:24.200 --> 00:21:29.120
different effects and says well is the

00:21:25.640 --> 00:21:30.600
dollar strong weak or whatever

00:21:29.119 --> 00:21:33.558
this is a matter of convention there's

00:21:30.599 --> 00:21:35.199
many ways you can no there are two ways

00:21:33.558 --> 00:21:37.240
in which you can do it but we're going

00:21:35.200 --> 00:21:40.679
to do it the following way what this

00:21:37.240 --> 00:21:42.839
effects will reflect is the price of the

00:21:40.679 --> 00:21:46.440
domestic currency in foreign currency

00:21:42.839 --> 00:21:48.918
terms so that means when this goes up

00:21:46.440 --> 00:21:51.200
means the dollar was becoming very

00:21:48.919 --> 00:21:54.200
expensive okay and that's a that's a

00:21:51.200 --> 00:21:55.600
very sharp I I'll get back to it but we

00:21:54.200 --> 00:21:58.840
call that an appreciation of the

00:21:55.599 --> 00:22:01.158
currency okay so here the the dollar was

00:21:58.839 --> 00:22:02.959
becoming very expensive in terms of

00:22:01.159 --> 00:22:05.440
other

00:22:02.960 --> 00:22:08.240
currencies the opposite happened sort of

00:22:05.440 --> 00:22:11.278
starting the second half of 2022 and now

00:22:08.240 --> 00:22:13.038
we have some had some Cycles here during

00:22:11.278 --> 00:22:14.480
this year but that's sort of that's

00:22:13.038 --> 00:22:18.480
going to be a very important variable

00:22:14.480 --> 00:22:18.480
the FX we call it the FX exchange

00:22:19.038 --> 00:22:24.519
rate another variable that we haven't

00:22:21.720 --> 00:22:27.519
talked about but but that is going to be

00:22:24.519 --> 00:22:31.000
important here is is and and that

00:22:27.519 --> 00:22:32.879
politicians argue a lot about it for

00:22:31.000 --> 00:22:36.079
with the wrong arguments but but but

00:22:32.880 --> 00:22:38.919
they do ER is the trades balance trade

00:22:36.079 --> 00:22:41.558
trade balance of goods and services of

00:22:38.919 --> 00:22:44.278
goods and services so this the trade

00:22:41.558 --> 00:22:48.038
balance of goods and services is simply

00:22:44.278 --> 00:22:50.159
a er um the difference between the

00:22:48.038 --> 00:22:52.919
exports so what a country sells to the

00:22:50.159 --> 00:22:54.919
rest of the world versus its import that

00:22:52.919 --> 00:22:58.080
is how much it buys from the rest of the

00:22:54.919 --> 00:22:59.320
world okay so this is monthly data for

00:22:58.079 --> 00:23:03.519
the US

00:22:59.319 --> 00:23:06.119
the US nowadays sort of runs a deficit a

00:23:03.519 --> 00:23:08.639
trade balance deficit of the order of 7

00:23:06.119 --> 00:23:11.519
70 billion dollars a

00:23:08.640 --> 00:23:14.640
month that means it exports to the rest

00:23:11.519 --> 00:23:18.158
of the world about S no 70 billion

00:23:14.640 --> 00:23:21.159
dollar less than it Imports sorry sorry

00:23:18.159 --> 00:23:23.760
yeah seven less than it Imports perfect

00:23:21.159 --> 00:23:27.159
okay you have seen that this is

00:23:23.759 --> 00:23:30.599
pretty H sustained

00:23:27.159 --> 00:23:33.760
actually here look pretty balanced but

00:23:30.599 --> 00:23:36.839
but but but the US on on on average has

00:23:33.759 --> 00:23:39.640
a situation like that okay the US tends

00:23:36.839 --> 00:23:41.480
to export less than it Imports and then

00:23:39.640 --> 00:23:43.520
that's when politicians get all very

00:23:41.480 --> 00:23:45.120
worked out and said you know this is

00:23:43.519 --> 00:23:47.400
unfair competition from the rest of the

00:23:45.119 --> 00:23:49.678
world and so on so forth I think in

00:23:47.400 --> 00:23:52.559
general has very little to do with that

00:23:49.679 --> 00:23:54.880
it has to do that with the fact that the

00:23:52.558 --> 00:23:57.720
US likes to save less than the rest of

00:23:54.880 --> 00:23:59.200
the world and and but but let me not get

00:23:57.720 --> 00:24:02.159
into that and think much later in the

00:23:59.200 --> 00:24:03.558
course but anyway that's the situation

00:24:02.159 --> 00:24:06.039
for the

00:24:03.558 --> 00:24:07.798
US this is obviously a blep that has to

00:24:06.038 --> 00:24:11.119
do with covid and so on but you see that

00:24:07.798 --> 00:24:13.879
we're now more or less back to to where

00:24:11.119 --> 00:24:16.399
we were before this was a period

00:24:13.880 --> 00:24:19.120
actually of lots of global political

00:24:16.400 --> 00:24:20.960
tension because it had one counterpart

00:24:19.119 --> 00:24:24.719
that was very big it was

00:24:20.960 --> 00:24:26.000
China okay and it is called the the time

00:24:24.720 --> 00:24:28.519
of the global

00:24:26.000 --> 00:24:31.200
imbalances and that the US was learning

00:24:28.519 --> 00:24:33.278
very large trade deficits and then China

00:24:31.200 --> 00:24:34.960
in particular was running very large

00:24:33.278 --> 00:24:38.558
trade surpluses and and so there were

00:24:34.960 --> 00:24:42.480
lots of political quarters because of

00:24:38.558 --> 00:24:44.918
that here you have a so obviously the US

00:24:42.480 --> 00:24:46.558
has many many trading partners and with

00:24:44.919 --> 00:24:49.640
respect to many of them it has very

00:24:46.558 --> 00:24:54.000
large deficits so on net and here are

00:24:49.640 --> 00:24:57.240
the main I rank the the 10 main net

00:24:54.000 --> 00:24:59.720
deficits for the us so I don't know when

00:24:57.240 --> 00:25:01.440
was this but anyway it looks like that

00:24:59.720 --> 00:25:04.000
sort of for the

00:25:01.440 --> 00:25:06.720
last eight or so

00:25:04.000 --> 00:25:09.359
years remove Co it looks more or less

00:25:06.720 --> 00:25:11.600
like this all the time and you see that

00:25:09.359 --> 00:25:15.079
the US indeed large

00:25:11.599 --> 00:25:19.439
large exports to China about $153

00:25:15.079 --> 00:25:23.278
billion a year and it Imports about 536

00:25:19.440 --> 00:25:25.640
billions a year so the net deficit is$

00:25:23.278 --> 00:25:27.480
380 billion dollar a year and that's the

00:25:25.640 --> 00:25:29.000
reason this is a big political thing

00:25:27.480 --> 00:25:30.839
okay because it sounds

00:25:29.000 --> 00:25:32.960
like a big deficit but there are other

00:25:30.839 --> 00:25:35.759
countries with respect to Mexico 130

00:25:32.960 --> 00:25:36.759
billion and so on the US exports a lot

00:25:35.759 --> 00:25:39.960
more to

00:25:36.759 --> 00:25:42.278
Mexico ER Vietnam a lot of what happens

00:25:39.960 --> 00:25:45.079
from Vietnam is really Chinese exports

00:25:42.278 --> 00:25:47.558
in this guys but but uh but there you

00:25:45.079 --> 00:25:50.960
see it okay there are many others

00:25:47.558 --> 00:25:53.079
Germany is always a a problem but uh a

00:25:50.960 --> 00:25:55.600
problem for somebody that his deficit as

00:25:53.079 --> 00:26:00.240
a problem

00:25:55.599 --> 00:26:00.240
uh and so on okay

00:26:01.759 --> 00:26:06.640
now that's a on the good side this is

00:26:04.079 --> 00:26:09.599
this is this what I was saying here is

00:26:06.640 --> 00:26:11.640
that you know one sense of openness is

00:26:09.599 --> 00:26:13.599
on the goods and services Market that

00:26:11.640 --> 00:26:15.360
you buy goods from the rest of the world

00:26:13.599 --> 00:26:17.639
the rest of the world buys goods from

00:26:15.359 --> 00:26:21.038
you sometimes these things are balanced

00:26:17.640 --> 00:26:22.919
sometimes they're not H when at the

00:26:21.038 --> 00:26:24.319
aggre level they're not balance for a

00:26:22.919 --> 00:26:28.799
very long period of time unless you're

00:26:24.319 --> 00:26:31.119
the US that often causes problems ER um

00:26:28.798 --> 00:26:33.720
but at the bilateral level if you look

00:26:31.119 --> 00:26:35.479
at any country we'll have situations

00:26:33.720 --> 00:26:37.720
like this some country where they export

00:26:35.480 --> 00:26:40.240
a lot to and import very little from and

00:26:37.720 --> 00:26:42.720
vice versa but that's the way the US

00:26:40.240 --> 00:26:47.519
looks another sense of openness which is

00:26:42.720 --> 00:26:50.720
very important is financial openness no

00:26:47.519 --> 00:26:54.319
meaning that you can also buy or save

00:26:50.720 --> 00:26:57.640
using foreign assets or domestic assets

00:26:54.319 --> 00:26:59.960
okay so you can buy a foreign asset

00:26:57.640 --> 00:27:01.480
perhaps not directly or most of you

00:26:59.960 --> 00:27:03.759
directly but you can do it through a

00:27:01.480 --> 00:27:07.558
broker and so on you can buy foreign

00:27:03.759 --> 00:27:10.599
assets or and foreigners buy lots of us

00:27:07.558 --> 00:27:12.720
assets okay that's a sense of openness

00:27:10.599 --> 00:27:15.158
in financial markets that you can buy

00:27:12.720 --> 00:27:17.319
you're not stuck with your own your

00:27:15.159 --> 00:27:19.240
country's financial asset you can also

00:27:17.319 --> 00:27:20.798
invest in other Count's Financial assets

00:27:19.240 --> 00:27:24.120
and vice

00:27:20.798 --> 00:27:26.558
versa those things probably you how I

00:27:24.119 --> 00:27:29.519
mean you notice trade openness a lot

00:27:26.558 --> 00:27:30.678
more probably than financial openness no

00:27:29.519 --> 00:27:34.158
because you're all the time buying

00:27:30.679 --> 00:27:36.720
imported goods and stuff like that

00:27:34.159 --> 00:27:38.440
H while you probably not involving lot

00:27:36.720 --> 00:27:40.519
of transactions of international

00:27:38.440 --> 00:27:45.080
financial instruments and so on but they

00:27:40.519 --> 00:27:47.159
are very large okay so if Pension funds

00:27:45.079 --> 00:27:48.879
and so on they're all involved in very

00:27:47.159 --> 00:27:50.919
large transactions in fact transactions

00:27:48.880 --> 00:27:52.640
in financial markets are an order of

00:27:50.919 --> 00:27:55.399
magnitude larger than transactions in

00:27:52.640 --> 00:27:58.799
the Goods Market very large and here you

00:27:55.398 --> 00:28:01.879
have an example of a

00:27:58.798 --> 00:28:03.960
by origin the the the you know foreign

00:28:01.880 --> 00:28:07.640
Holdings of us

00:28:03.960 --> 00:28:11.640
assets and this is in in in billions

00:28:07.640 --> 00:28:14.559
so these guys here this is China and

00:28:11.640 --> 00:28:16.759
Canada so have the largest and the UK

00:28:14.558 --> 00:28:18.000
those have sort of you know in the order

00:28:16.759 --> 00:28:21.158
of $2

00:28:18.000 --> 00:28:23.640
trillion of us assets they're

00:28:21.159 --> 00:28:25.399
holding Japan should be here also L A

00:28:23.640 --> 00:28:28.840
there there it is

00:28:25.398 --> 00:28:32.000
yeah now in these two countries

00:28:28.839 --> 00:28:35.240
here a lot of those Holdings

00:28:32.000 --> 00:28:37.440
actually well particularly in China more

00:28:35.240 --> 00:28:39.679
than than in Japan in China is a little

00:28:37.440 --> 00:28:42.038
less than than Japan

00:28:39.679 --> 00:28:44.440
Japan they save a lot so they need to

00:28:42.038 --> 00:28:47.278
buy lots of financial assets and the US

00:28:44.440 --> 00:28:49.080
is as the main producer of financial

00:28:47.278 --> 00:28:51.919
Assets in the world so they save a lot

00:28:49.079 --> 00:28:53.519
on that but also the central bank

00:28:51.919 --> 00:28:55.360
because of currency intervention and so

00:28:53.519 --> 00:28:58.440
on buys lots of us

00:28:55.359 --> 00:29:00.599
treasuries China this is mostly the

00:28:58.440 --> 00:29:03.519
Central Bank buying US treasuries

00:29:00.599 --> 00:29:05.839
foreign reserves okay large amount of

00:29:03.519 --> 00:29:09.960
reserves Canada is private sector

00:29:05.839 --> 00:29:12.278
Pension funds and so on for but you see

00:29:09.960 --> 00:29:14.798
Brazilians also buy lots of assets from

00:29:12.278 --> 00:29:17.319
the US again central banks play big

00:29:14.798 --> 00:29:20.398
roles in all this Australia is less the

00:29:17.319 --> 00:29:22.798
Central Bank much more private sector UK

00:29:20.398 --> 00:29:25.879
is all private sector and so

00:29:22.798 --> 00:29:28.398
on and then Europe okay but point of

00:29:25.880 --> 00:29:30.559
that picture is that there's lots of

00:29:28.398 --> 00:29:31.719
countries in the world resent of

00:29:30.558 --> 00:29:33.879
different countries in the world that

00:29:31.720 --> 00:29:35.640
buy us Financial assets and in big

00:29:33.880 --> 00:29:38.200
amounts

00:29:35.640 --> 00:29:40.799
okay I don't know what the total number

00:29:38.200 --> 00:29:40.798
today is

00:29:46.240 --> 00:29:52.558
probably actually let me not make up

00:29:48.720 --> 00:29:55.360
that number you may find it

00:29:52.558 --> 00:29:57.639
um but it is certainly in

00:29:55.359 --> 00:30:01.719
the2 trillion dollar or something like

00:29:57.640 --> 00:30:05.038
that of H assets held us assets held by

00:30:01.720 --> 00:30:06.360
foreigners you can check it and tell me

00:30:05.038 --> 00:30:09.640
it's probably

00:30:06.359 --> 00:30:13.918
more here's the other way around us

00:30:09.640 --> 00:30:15.720
residents Holdings of foreign assets

00:30:13.919 --> 00:30:18.640
okay

00:30:15.720 --> 00:30:21.480
ER you see us

00:30:18.640 --> 00:30:24.840
us residents hold lots of Canadian

00:30:21.480 --> 00:30:28.599
assets okay and mostly developed

00:30:24.839 --> 00:30:31.519
economies but you have India China and

00:30:28.599 --> 00:30:36.719
so on lots of Latino American

00:30:31.519 --> 00:30:39.120
assets and so on okay so the US is so

00:30:36.720 --> 00:30:43.159
it's not only that the rest of the world

00:30:39.119 --> 00:30:45.678
demands us asset but us

00:30:43.159 --> 00:30:47.679
residents perhaps not directly most of

00:30:45.679 --> 00:30:51.759
you but indirectly demand lots of

00:30:47.679 --> 00:30:53.720
foreign assets okay um there are some

00:30:51.759 --> 00:30:54.960
very fascinating facts that happen here

00:30:53.720 --> 00:30:56.600
because the type of assets that

00:30:54.960 --> 00:30:58.519
foreigners tend to demand from the US

00:30:56.599 --> 00:31:02.638
are very different from the ones that

00:30:58.519 --> 00:31:06.240
us er um demands from the rest of the

00:31:02.638 --> 00:31:08.678
world ER in fact one of the things that

00:31:06.240 --> 00:31:11.599
that the reasons the US can afford

00:31:08.679 --> 00:31:14.120
running those chronic trade

00:31:11.599 --> 00:31:15.959
deficits is because it tends to get much

00:31:14.119 --> 00:31:18.359
higher Returns on the asset it buys

00:31:15.960 --> 00:31:21.038
abroad than foreigners get on the assets

00:31:18.359 --> 00:31:24.079
they buy in the US and the difference

00:31:21.038 --> 00:31:26.240
allows you to find sort of systematic

00:31:24.079 --> 00:31:29.000
trade deficits and the reason for that

00:31:26.240 --> 00:31:30.638
is a lot of the US assets that for buy

00:31:29.000 --> 00:31:32.159
they do it for safety reasons they're

00:31:30.638 --> 00:31:34.439
buying us treasure it's very safe

00:31:32.159 --> 00:31:36.919
instrument just in case there is a big

00:31:34.440 --> 00:31:39.960
mess they they want to have those assets

00:31:36.919 --> 00:31:42.159
so it's it's almost for insurance reason

00:31:39.960 --> 00:31:44.679
ER the US Treasures are sort of

00:31:42.159 --> 00:31:47.399
perceived as the main safe Assets in the

00:31:44.679 --> 00:31:50.519
world okay so they they hold it for for

00:31:47.398 --> 00:31:54.959
that reason while the US mostly hold

00:31:50.519 --> 00:31:56.759
assets abroad for a you know risky

00:31:54.960 --> 00:32:01.000
Investments either foreign direct

00:31:56.759 --> 00:32:03.398
investment or Equity stuff like that and

00:32:01.000 --> 00:32:05.079
typically most fixed income investments

00:32:03.398 --> 00:32:09.678
in the US a lot of it a lot of what you

00:32:05.079 --> 00:32:11.678
see here is just us resident reaching

00:32:09.679 --> 00:32:13.559
for

00:32:11.679 --> 00:32:15.880
yield

00:32:13.558 --> 00:32:18.240
Brazilian Sovereign bonds equivalence of

00:32:15.880 --> 00:32:20.639
the US treasuries you know give you 9%

00:32:18.240 --> 00:32:25.519
10% it's a lot higher than the US tends

00:32:20.638 --> 00:32:29.839
to give H 14% even now and so on so so

00:32:25.519 --> 00:32:29.839
so net the US tends to make

00:32:30.000 --> 00:32:34.398
has less Assets in the rest of the world

00:32:32.278 --> 00:32:38.038
than foreigners have of the US and it

00:32:34.398 --> 00:32:39.918
still makes sufficiently more return

00:32:38.038 --> 00:32:41.638
higher return on average on an asset it

00:32:39.919 --> 00:32:44.120
holds from the rest of the world that it

00:32:41.638 --> 00:32:46.678
has a surplus which which it can Finance

00:32:44.119 --> 00:32:48.359
the trade deficit This is complicated

00:32:46.679 --> 00:32:52.278
you don't need to know the details but I

00:32:48.359 --> 00:32:52.278
to tell you what the kind of things are

00:32:52.839 --> 00:32:59.240
happening so so there's three senses in

00:32:56.398 --> 00:33:01.158
which you can have a a and of of

00:32:59.240 --> 00:33:04.159
openness the two that I have described

00:33:01.159 --> 00:33:05.360
implicitly already Goods in Goods Market

00:33:04.159 --> 00:33:08.080
that you can

00:33:05.359 --> 00:33:10.439
buy foreign goods and you can sell Goods

00:33:08.079 --> 00:33:12.480
to the rest of the world and the second

00:33:10.440 --> 00:33:14.360
one is financial markets which is what I

00:33:12.480 --> 00:33:17.720
just described you can choose between

00:33:14.359 --> 00:33:19.879
domestic and foreign assets the main

00:33:17.720 --> 00:33:21.759
impediments to the forers typically are

00:33:19.880 --> 00:33:25.120
tariffs and quotas and you have heard a

00:33:21.759 --> 00:33:27.319
lot about tariffs and so on these days

00:33:25.119 --> 00:33:28.719
ER the main impediment for financial

00:33:27.319 --> 00:33:31.398
Market is what is called Capital

00:33:28.720 --> 00:33:33.120
controls very rarely develop economies

00:33:31.398 --> 00:33:35.479
impose Capital

00:33:33.119 --> 00:33:39.079
controls but emerging markets do it

00:33:35.480 --> 00:33:40.679
regularly okay H limit the amount of

00:33:39.079 --> 00:33:42.879
especially Capital outflows when lots of

00:33:40.679 --> 00:33:46.200
capitalist Le in the country they try to

00:33:42.880 --> 00:33:48.080
stop you from doing more of that and and

00:33:46.200 --> 00:33:50.440
they sometimes do it in the way in

00:33:48.079 --> 00:33:52.439
because they they want to avoid the

00:33:50.440 --> 00:33:54.519
micro instability that comes from the

00:33:52.440 --> 00:33:56.240
big reversal of capital flows so they

00:33:54.519 --> 00:33:58.278
don't let lots of capital flow in during

00:33:56.240 --> 00:34:01.519
the boom just to prevent

00:33:58.278 --> 00:34:03.519
a reversal later on that's capital

00:34:01.519 --> 00:34:06.679
controls and there's a third way of

00:34:03.519 --> 00:34:09.440
opening to the rest of the world H which

00:34:06.679 --> 00:34:11.918
is Factor markets okay which is that

00:34:09.440 --> 00:34:14.519
firms can choose location I mean some

00:34:11.918 --> 00:34:18.398
plants we're seeing you know Japanese

00:34:14.519 --> 00:34:21.440
plants that that that do not export

00:34:18.398 --> 00:34:24.559
Toyotas from directly from

00:34:21.440 --> 00:34:27.079
from from Japan they have the plant here

00:34:24.559 --> 00:34:29.398
either in Canada or somewhere in the US

00:34:27.079 --> 00:34:31.119
and they sell locally so that's that's

00:34:29.398 --> 00:34:33.519
relocation of factors of production

00:34:31.119 --> 00:34:36.519
Japanese Capital that relocates to some

00:34:33.519 --> 00:34:38.320
place in Canada or in the US and labor

00:34:36.519 --> 00:34:41.119
you can also have workers that move from

00:34:38.320 --> 00:34:45.879
one place to the other that's another

00:34:41.119 --> 00:34:45.879
form of openness no free Capital free

00:34:46.320 --> 00:34:51.440
free Factor mobility in this part of the

00:34:50.119 --> 00:34:53.960
course we're not going to talk about

00:34:51.440 --> 00:34:56.000
this okay we're going to just we're

00:34:53.960 --> 00:34:58.519
going to focus in the on these

00:34:56.000 --> 00:34:59.880
two the first we're going to look at is

00:34:58.519 --> 00:35:03.320
going to be a model of the Goods Market

00:34:59.880 --> 00:35:07.640
and that's going to be very much H like

00:35:03.320 --> 00:35:10.039
the islm but with an open economy and

00:35:07.639 --> 00:35:12.358
then we're going to bring in interest

00:35:10.039 --> 00:35:13.480
rate but now on you which is what

00:35:12.358 --> 00:35:14.880
remember what we did in the closed

00:35:13.480 --> 00:35:16.480
economy first we look at the Goods

00:35:14.880 --> 00:35:19.039
Market then we look at interest rate

00:35:16.480 --> 00:35:20.480
determination that was our LM and then

00:35:19.039 --> 00:35:23.599
we put the things together we came up

00:35:20.480 --> 00:35:25.280
with slm here the tricky thing is that

00:35:23.599 --> 00:35:26.800
there's not only one interest rate there

00:35:25.280 --> 00:35:28.079
are really two you have to decide

00:35:26.800 --> 00:35:29.960
between the domestic and foreign

00:35:28.079 --> 00:35:31.760
interest rate and then there's an

00:35:29.960 --> 00:35:32.960
exchange rate in between which will also

00:35:31.760 --> 00:35:34.920
affect so that's the reason it's going

00:35:32.960 --> 00:35:36.838
to get a little more complicated because

00:35:34.920 --> 00:35:38.480
you're going to be having two different

00:35:36.838 --> 00:35:40.440
prices two different Goods you can buy

00:35:38.480 --> 00:35:42.719
you can going to have also two different

00:35:40.440 --> 00:35:45.480
assets you can buy okay and the effects

00:35:42.719 --> 00:35:48.118
is going to affect all those things if

00:35:45.480 --> 00:35:50.119
when whenever I say FS I mean thechange

00:35:48.119 --> 00:35:52.838
rate

00:35:50.119 --> 00:35:55.800
okay forign exchange that's the reason

00:35:52.838 --> 00:36:00.920
sometimes called

00:35:55.800 --> 00:36:03.680
FX now one thing that happens er er is

00:36:00.920 --> 00:36:06.240
that because economies are so integrated

00:36:03.679 --> 00:36:08.239
in in goods and financial markets is

00:36:06.239 --> 00:36:10.159
that bus business Cycles tend to be

00:36:08.239 --> 00:36:11.679
especially large one large large ones

00:36:10.159 --> 00:36:16.118
tend to be very synchronized around the

00:36:11.679 --> 00:36:16.118
world you see here Emerging

00:36:16.760 --> 00:36:22.240
Markets sorry yeah this is the world

00:36:19.599 --> 00:36:23.400
that's that's emerging markets and

00:36:22.239 --> 00:36:25.598
that's advanced

00:36:23.400 --> 00:36:27.358
economies you can see the kind of things

00:36:25.599 --> 00:36:29.359
we discuss in the growth section which

00:36:27.358 --> 00:36:31.960
is these countries tend to grow faster

00:36:29.358 --> 00:36:33.679
than these countries because they're

00:36:31.960 --> 00:36:37.480
catching up okay that's the reason

00:36:33.679 --> 00:36:39.039
they're called emerging you know H but

00:36:37.480 --> 00:36:43.079
at the level of business cycle they're

00:36:39.039 --> 00:36:44.880
very synchronized I mean the 2008 2009

00:36:43.079 --> 00:36:47.440
recession was a recession

00:36:44.880 --> 00:36:49.160
globally this one doesn't have covid but

00:36:47.440 --> 00:36:52.599
but well Co naturally was very

00:36:49.159 --> 00:36:54.399
synchronized around the world but big

00:36:52.599 --> 00:36:56.400
the the point I'm making here is that

00:36:54.400 --> 00:36:58.559
once you're very integrated to the rest

00:36:56.400 --> 00:37:00.240
of the world you're Al exposed to a new

00:36:58.559 --> 00:37:02.440
source of shocks it may help you in many

00:37:00.239 --> 00:37:03.759
instances but you're also exposed to

00:37:02.440 --> 00:37:05.679
things that come

00:37:03.760 --> 00:37:07.560
from the rest of the world and the

00:37:05.679 --> 00:37:11.039
evidence is that business Cycles are

00:37:07.559 --> 00:37:12.759
very synchronized it's very difficult

00:37:11.039 --> 00:37:15.279
for the rest of the world to be immune

00:37:12.760 --> 00:37:16.839
to us recession for example it's very

00:37:15.280 --> 00:37:19.319
easy for the US to be immune to an

00:37:16.838 --> 00:37:22.078
Argentinian recession that's that's a

00:37:19.318 --> 00:37:24.440
different story but but but when things

00:37:22.079 --> 00:37:26.400
are large invol the large economies

00:37:24.440 --> 00:37:29.039
typically that will leak into the rest

00:37:26.400 --> 00:37:30.599
of the world China has sort of changed a

00:37:29.039 --> 00:37:32.880
little bit the composition used to be

00:37:30.599 --> 00:37:36.760
the case that that was always the case

00:37:32.880 --> 00:37:39.318
the if the us sankk then everyone sank

00:37:36.760 --> 00:37:41.920
and and and and the and now you have

00:37:39.318 --> 00:37:43.239
China which stabilizes it's a difference

00:37:41.920 --> 00:37:45.639
it's not completely

00:37:43.239 --> 00:37:47.959
correlated with with the US and so that

00:37:45.639 --> 00:37:50.118
has been stabilizing actually for many

00:37:47.960 --> 00:37:52.039
especially commodity producing economies

00:37:50.119 --> 00:37:53.920
and so on but it's still the case big

00:37:52.039 --> 00:37:55.639
mess is a big mess everywhere if the

00:37:53.920 --> 00:37:57.920
economies were close there would be no

00:37:55.639 --> 00:37:59.799
reason unless you have some saw you know

00:37:57.920 --> 00:38:02.200
shock covid even if the economies were

00:37:59.800 --> 00:38:04.480
completely closed would have been a mess

00:38:02.199 --> 00:38:07.159
because you know it's as long as the

00:38:04.480 --> 00:38:08.800
virus spread then it's a mess regardless

00:38:07.159 --> 00:38:10.759
but that's not the case here this

00:38:08.800 --> 00:38:11.839
recession was caused by a financial

00:38:10.760 --> 00:38:15.760
shock in the

00:38:11.838 --> 00:38:18.318
US okay and still the whole econ the the

00:38:15.760 --> 00:38:19.920
global economy as a whole suffer a lot

00:38:18.318 --> 00:38:21.440
so Things become very synchronized

00:38:19.920 --> 00:38:23.400
because of

00:38:21.440 --> 00:38:25.838
that another thing that has been

00:38:23.400 --> 00:38:29.358
happening is that

00:38:25.838 --> 00:38:31.318
everywhere again still we shall see

00:38:29.358 --> 00:38:33.759
where we end up after this covid things

00:38:31.318 --> 00:38:35.679
there was a slight reversion of that but

00:38:33.760 --> 00:38:37.480
everywhere even the US which one of the

00:38:35.679 --> 00:38:40.279
closest economies in the world one of

00:38:37.480 --> 00:38:42.119
the closest of the significant economies

00:38:40.280 --> 00:38:45.440
ER there has been a sort of there was a

00:38:42.119 --> 00:38:47.358
steady Trend rise towards higher

00:38:45.440 --> 00:38:48.599
integration to the rest of the world

00:38:47.358 --> 00:38:50.078
okay and the same is happening in

00:38:48.599 --> 00:38:53.760
financial markets it's just an order of

00:38:50.079 --> 00:38:55.760
magnitude larger but but you see here in

00:38:53.760 --> 00:38:57.599
the US you see that imports and exports

00:38:55.760 --> 00:39:00.200
as a share of GDP they were both Rising

00:38:57.599 --> 00:39:01.720
ing over time here shows you what I

00:39:00.199 --> 00:39:04.159
showed you before which is the deficit

00:39:01.719 --> 00:39:07.159
chronic deficit that the US has had but

00:39:04.159 --> 00:39:08.879
still even exports have been rising for

00:39:07.159 --> 00:39:13.078
a while

00:39:08.880 --> 00:39:18.280
now this number here you know that about

00:39:13.079 --> 00:39:23.000
the 20% of the US produced Goods 15% of

00:39:18.280 --> 00:39:25.599
GDP the US has about 15% of of of GDP in

00:39:23.000 --> 00:39:27.960
Imports and in exports some people use

00:39:25.599 --> 00:39:29.760
that the sum for example of Imports plus

00:39:27.960 --> 00:39:32.679
exports over GDP as a measure of

00:39:29.760 --> 00:39:35.119
openness how open is an economy and it's

00:39:32.679 --> 00:39:37.480
okay for comparisons but it's clearly

00:39:35.119 --> 00:39:40.039
underestimate how open economies really

00:39:37.480 --> 00:39:43.519
are I mean many of the goods that are

00:39:40.039 --> 00:39:46.039
considered that that the US does not

00:39:43.519 --> 00:39:47.480
import are produced domestically so they

00:39:46.039 --> 00:39:49.759
don't count as part of imports or

00:39:47.480 --> 00:39:51.400
anything their price is really

00:39:49.760 --> 00:39:54.839
determined by International

00:39:51.400 --> 00:39:57.039
competition okay the price of a of a

00:39:54.838 --> 00:39:59.920
Ford is very different with foreign

00:39:57.039 --> 00:40:02.838
compe I that not so we don't count the

00:39:59.920 --> 00:40:06.280
fors produced here as Imports or

00:40:02.838 --> 00:40:08.318
anything or and if would be part of the

00:40:06.280 --> 00:40:10.480
nontradable not tradeable it wouldn't

00:40:08.318 --> 00:40:13.358
part of this measure of openness but

00:40:10.480 --> 00:40:16.079
it's clear that the price and even the

00:40:13.358 --> 00:40:18.159
quality is being affected by exposure to

00:40:16.079 --> 00:40:19.640
International competition okay so there

00:40:18.159 --> 00:40:21.799
are very few sectors that are not really

00:40:19.639 --> 00:40:24.318
exposed to International competitions

00:40:21.800 --> 00:40:26.760
yeah haircuts they're not I mean you

00:40:24.318 --> 00:40:28.119
know you're not going to unless you

00:40:26.760 --> 00:40:31.839
leave sort of at

00:40:28.119 --> 00:40:33.358
some country you know County at the

00:40:31.838 --> 00:40:35.358
border of with Canada and there is a

00:40:33.358 --> 00:40:37.719
town right on the side that that's

00:40:35.358 --> 00:40:42.960
that's that's not going to happen

00:40:37.719 --> 00:40:46.159
but okay so trend is upward and and and

00:40:42.960 --> 00:40:49.318
uh even more so than than those numbers

00:40:46.159 --> 00:40:52.118
suggest if you look across the world and

00:40:49.318 --> 00:40:54.759
here is what I show you before is what I

00:40:52.119 --> 00:40:57.640
said before is the US

00:40:54.760 --> 00:40:59.319
actually it's is certainly look very

00:40:57.639 --> 00:41:01.039
close relative to others if you look at

00:40:59.318 --> 00:41:03.318
across large

00:41:01.039 --> 00:41:05.800
economies Japan which is also a very

00:41:03.318 --> 00:41:09.679
close economy for a variety of reasons

00:41:05.800 --> 00:41:13.839
is still more open than the US UK little

00:41:09.679 --> 00:41:16.759
Chile here but you know one thing that

00:41:13.838 --> 00:41:18.599
this shows this Dimension here shows is

00:41:16.760 --> 00:41:21.359
that the smaller you are the more open

00:41:18.599 --> 00:41:23.480
you're likely to be and it makes sense

00:41:21.358 --> 00:41:25.480
it's harder to produce all the goods if

00:41:23.480 --> 00:41:28.240
you have you know a small

00:41:25.480 --> 00:41:30.400
country and and and so so so that's

00:41:28.239 --> 00:41:32.759
that's a pattern the smaller you are

00:41:30.400 --> 00:41:35.838
controlling for a variety of

00:41:32.760 --> 00:41:39.480
factors ER you tend to be more open you

00:41:35.838 --> 00:41:45.000
need to Import and Export more import

00:41:39.480 --> 00:41:47.240
more in particular uh now that pattern

00:41:45.000 --> 00:41:51.519
is disrupted when you look in this

00:41:47.239 --> 00:41:55.239
direction no so this all these

00:41:51.519 --> 00:41:59.639
countries ER which are clearly much

00:41:55.239 --> 00:42:03.399
larger than Chile in terms of GDP and on

00:41:59.639 --> 00:42:06.039
ER have very high export ratios why do

00:42:03.400 --> 00:42:06.039
you think that's the

00:42:12.318 --> 00:42:20.279
case exactly they're in Europe so so you

00:42:17.239 --> 00:42:23.159
know this Europe is very special Europe

00:42:20.280 --> 00:42:25.599
as a whole is as close as the US so if

00:42:23.159 --> 00:42:27.679
you look at the whole area together but

00:42:25.599 --> 00:42:29.400
but there is lots of intra Europe

00:42:27.679 --> 00:42:31.039
exports and imports especially in the

00:42:29.400 --> 00:42:33.000
Euro Zone I mean you have lots of things

00:42:31.039 --> 00:42:36.800
you have the same currency you just you

00:42:33.000 --> 00:42:38.639
know it's it's right next door so so so

00:42:36.800 --> 00:42:42.079
they're very open but they're very open

00:42:38.639 --> 00:42:43.400
within Europe not so much with the rest

00:42:42.079 --> 00:42:46.680
of the

00:42:43.400 --> 00:42:50.280
world but this does a differ shate intra

00:42:46.679 --> 00:42:51.440
Europe exports and imports versus total

00:42:50.280 --> 00:42:53.960
and that's the reason you see these

00:42:51.440 --> 00:42:55.519
numbers are very very large but even

00:42:53.960 --> 00:42:58.039
here within here you see that the

00:42:55.519 --> 00:43:00.400
smaller countries tend to be very open

00:42:58.039 --> 00:43:03.079
much more open than than than bigger

00:43:00.400 --> 00:43:06.079
countries

00:43:03.079 --> 00:43:06.079
okay

00:43:06.119 --> 00:43:12.760
good so H as as I said so

00:43:10.318 --> 00:43:14.719
terminology um this picture looks very

00:43:12.760 --> 00:43:17.599
similar to the picture I show you

00:43:14.719 --> 00:43:21.639
earlier on but it's not there it was a

00:43:17.599 --> 00:43:24.000
trade weighted H dollar and here is just

00:43:21.639 --> 00:43:26.558
one particular bilateral exchange rate

00:43:24.000 --> 00:43:28.358
which is the dollar yen exchange rate

00:43:26.559 --> 00:43:29.559
what happens is is when the dollar

00:43:28.358 --> 00:43:30.719
appreciates typically appreciates

00:43:29.559 --> 00:43:32.640
against everything and so on that's the

00:43:30.719 --> 00:43:34.759
reason the pictures look very similar

00:43:32.639 --> 00:43:36.558
but this was pretty dramatic you know

00:43:34.760 --> 00:43:41.240
there was a very sharp appreciation of

00:43:36.559 --> 00:43:44.280
the of the dollar of well strike what I

00:43:41.239 --> 00:43:47.399
said I'm so anyways this is the pattern

00:43:44.280 --> 00:43:49.280
of the number of yens per dollars

00:43:47.400 --> 00:43:50.200
meaning meaning that's we decided that

00:43:49.280 --> 00:43:52.519
that's the way we're going to find the

00:43:50.199 --> 00:43:55.519
exchange this the price of the domestic

00:43:52.519 --> 00:43:58.358
currency in terms of foreign currency so

00:43:55.519 --> 00:44:01.079
the price of the US dollar goes up up

00:43:58.358 --> 00:44:02.920
when they pay you more yens per dollar

00:44:01.079 --> 00:44:05.318
okay and and it went up very rapidly

00:44:02.920 --> 00:44:07.000
from close to 100 to 150 that was

00:44:05.318 --> 00:44:08.440
massive there were massive interventions

00:44:07.000 --> 00:44:12.000
here because it was clear that this was

00:44:08.440 --> 00:44:15.519
getting totally out of hand but but uh

00:44:12.000 --> 00:44:18.400
but any so that was okay and we

00:44:15.519 --> 00:44:21.759
say in this case so when a currency

00:44:18.400 --> 00:44:23.480
gains in value we call that in terms of

00:44:21.760 --> 00:44:24.920
other currencies there's no sense of a

00:44:23.480 --> 00:44:26.440
currency gaining value in terms of

00:44:24.920 --> 00:44:27.880
nothing it has to be in terms of other

00:44:26.440 --> 00:44:30.920
currency that's what an exchange itate

00:44:27.880 --> 00:44:33.920
is we say that the currency is

00:44:30.920 --> 00:44:35.559
appreciating okay so in this case is the

00:44:33.920 --> 00:44:38.159
nominal exchange rate so it's dollars

00:44:35.559 --> 00:44:40.680
per dollars when the

00:44:38.159 --> 00:44:43.078
dollar when the dollar is going up here

00:44:40.679 --> 00:44:45.799
we say the dollar is appreciating

00:44:43.079 --> 00:44:46.920
relative to the Japanese Yen okay that

00:44:45.800 --> 00:44:48.079
means the dollar is becoming more

00:44:46.920 --> 00:44:50.639
expensive they have to give you more

00:44:48.079 --> 00:44:53.160
yens per dollar you can look at it from

00:44:50.639 --> 00:44:54.558
the point of view of Japan and then the

00:44:53.159 --> 00:44:56.759
picture would look the other way around

00:44:54.559 --> 00:44:58.920
and it says in this same picture I know

00:44:56.760 --> 00:45:02.359
that the Japanese yen is

00:44:58.920 --> 00:45:03.720
depreciating relative to the US dollar

00:45:02.358 --> 00:45:05.719
okay so depreciation is when your

00:45:03.719 --> 00:45:08.838
currency loses value appreciation is

00:45:05.719 --> 00:45:08.838
when your currency gains

00:45:12.119 --> 00:45:17.480
value a k i mean if I tell you unless

00:45:16.000 --> 00:45:20.079
you sort of more or less knows the

00:45:17.480 --> 00:45:23.519
prices in the different places if I tell

00:45:20.079 --> 00:45:27.240
you that that that the Japanese

00:45:23.519 --> 00:45:30.000
ER the US buys 1030

00:45:27.239 --> 00:45:32.078
Japanese Yen you can tell me and then I

00:45:30.000 --> 00:45:34.079
ask you where would you like to buy your

00:45:32.079 --> 00:45:36.599
car and assume that the car is the same

00:45:34.079 --> 00:45:39.000
quality no transport cost and so on and

00:45:36.599 --> 00:45:42.359
I tell you look the Japanese yen is give

00:45:39.000 --> 00:45:44.519
you you you for each dollar you get 120

00:45:42.358 --> 00:45:46.639
130 Japanese Y where do you want to buy

00:45:44.519 --> 00:45:46.639
your

00:45:47.480 --> 00:45:52.119
cars that's the right answer you have no

00:45:49.679 --> 00:45:54.039
clue that doesn't tell you anything know

00:45:52.119 --> 00:45:55.599
it tells you the the the nominal

00:45:54.039 --> 00:45:57.599
exchanger tells you the relative value

00:45:55.599 --> 00:45:59.079
of of currencies

00:45:57.599 --> 00:46:01.000
but to make the decision of where you

00:45:59.079 --> 00:46:02.880
buy your car you need to know which car

00:46:01.000 --> 00:46:05.800
is more expensive and that's for that's

00:46:02.880 --> 00:46:07.160
not enough to know the the the the the

00:46:05.800 --> 00:46:09.160
the exchange the nominal exchange you

00:46:07.159 --> 00:46:11.519
need to know what is the price of the

00:46:09.159 --> 00:46:13.199
car in each place in its own currency

00:46:11.519 --> 00:46:15.039
and then I'm going to use exchange rate

00:46:13.199 --> 00:46:18.639
to translate them into some common

00:46:15.039 --> 00:46:21.440
currency suppose I tell you now that H

00:46:18.639 --> 00:46:23.639
the the price of of of the they do the

00:46:21.440 --> 00:46:26.280
opposite experiment they say look the

00:46:23.639 --> 00:46:27.440
price of a of a of a the same car in

00:46:26.280 --> 00:46:29.800
Japan

00:46:27.440 --> 00:46:31.720
is um

00:46:29.800 --> 00:46:33.960
150,000

00:46:31.719 --> 00:46:35.318
Yen well there you all have to lots of

00:46:33.960 --> 00:46:40.159
zeros

00:46:35.318 --> 00:46:41.920
but 150,000 Y and and in the US is500

00:46:40.159 --> 00:46:44.440
this a used car something

00:46:41.920 --> 00:46:46.960
$1,500 and and then I ask you a question

00:46:44.440 --> 00:46:49.440
where do you want to buy your

00:46:46.960 --> 00:46:51.400
car you can't answer either because you

00:46:49.440 --> 00:46:52.880
don't know how to compare unless I give

00:46:51.400 --> 00:46:54.920
you the nominal exchanges as well you

00:46:52.880 --> 00:46:58.640
don't know how to compare those 150,000

00:46:54.920 --> 00:47:01.720
yens for versus the 50 $100 so you need

00:46:58.639 --> 00:47:03.960
both and that concept that captures both

00:47:01.719 --> 00:47:07.239
is what is called the real exchange rate

00:47:03.960 --> 00:47:08.960
the real exchange is design for that to

00:47:07.239 --> 00:47:11.399
capture where you're going to do your

00:47:08.960 --> 00:47:14.079
imports and exports okay and it's a

00:47:11.400 --> 00:47:15.440
relative pricing of two not currencies

00:47:14.079 --> 00:47:17.599
but

00:47:15.440 --> 00:47:19.880
Goods okay so that's what the real

00:47:17.599 --> 00:47:23.599
exchange is is the price of domestic

00:47:19.880 --> 00:47:26.160
Goods relative to foreign Goods how many

00:47:23.599 --> 00:47:28.318
japanese cars you give me for one car us

00:47:26.159 --> 00:47:30.480
car that's a real exchange rate which is

00:47:28.318 --> 00:47:32.759
different from the nominal exchange

00:47:30.480 --> 00:47:34.039
rate now it's related to the nominal

00:47:32.760 --> 00:47:36.040
exchange rate and it happens that in

00:47:34.039 --> 00:47:38.759
practice a lot of the volatility of that

00:47:36.039 --> 00:47:40.480
price is as result of the volatility of

00:47:38.760 --> 00:47:42.359
the nominal exchange but this let me and

00:47:40.480 --> 00:47:45.199
this with this I will stop so let me

00:47:42.358 --> 00:47:47.119
call Epsilon the real exchange rate and

00:47:45.199 --> 00:47:48.919
let me let me see how we're going to get

00:47:47.119 --> 00:47:50.318
to that expression here so what want to

00:47:48.920 --> 00:47:53.440
compare here is the relative value of

00:47:50.318 --> 00:47:55.679
two goods because that's what will

00:47:53.440 --> 00:47:57.599
matter for my my consumption decision or

00:47:55.679 --> 00:48:00.279
my purchase decision

00:47:57.599 --> 00:48:02.400
so suppose we're talking about this car

00:48:00.280 --> 00:48:04.680
and suppose I know that the price of a

00:48:02.400 --> 00:48:07.480
of of of the car in the US is

00:48:04.679 --> 00:48:09.719
p okay and now I want to compare it with

00:48:07.480 --> 00:48:13.679
the with well do I buy it here or do I

00:48:09.719 --> 00:48:15.919
buy it in Japan for that um I'm going to

00:48:13.679 --> 00:48:18.039
have to I I'm going to have to compare

00:48:15.920 --> 00:48:20.000
them in the same currency so the first

00:48:18.039 --> 00:48:24.119
thing I'm going to do is I'm going to

00:48:20.000 --> 00:48:27.119
translate my US dollar price for to

00:48:24.119 --> 00:48:30.318
Japanese dollar to to Yen pricing okay

00:48:27.119 --> 00:48:32.119
so say the the the I'm going to have

00:48:30.318 --> 00:48:34.279
simpler numbers than the one there

00:48:32.119 --> 00:48:37.480
supposed to the car in the US cost

00:48:34.280 --> 00:48:41.839
$10,000 suppose that for each dollar you

00:48:37.480 --> 00:48:44.358
get 10 Yen then then $10,000 time 10

00:48:41.838 --> 00:48:46.400
that means it's $ 100,000 Yen so the us

00:48:44.358 --> 00:48:49.519
if I buy the car in the US I pay 100,000

00:48:46.400 --> 00:48:51.960
Yen and so now ah sorry this was not

00:48:49.519 --> 00:48:54.480
Japan in this example it's the UK well

00:48:51.960 --> 00:48:57.358
the same story okay and it's even

00:48:54.480 --> 00:49:00.199
simpler ER is say

00:48:57.358 --> 00:49:04.480
then then the the car in the US cost

00:49:00.199 --> 00:49:08.838
$10,000 and the The Exchange each dollar

00:49:04.480 --> 00:49:12.159
buys 80 cents of 80 cents of of pounds

00:49:08.838 --> 00:49:14.078
so that means 8,000 pound so the US car

00:49:12.159 --> 00:49:16.480
is is cost

00:49:14.079 --> 00:49:19.920
8,000 now I compare it with a car in the

00:49:16.480 --> 00:49:21.240
UK say the same car and the ratio of

00:49:19.920 --> 00:49:23.280
these two things is what we call the

00:49:21.239 --> 00:49:25.919
real exchange rate so it's the price of

00:49:23.280 --> 00:49:28.559
the domestic Good Times the exchange

00:49:25.920 --> 00:49:32.358
rate divided by the foreign price and

00:49:28.559 --> 00:49:35.160
that's a real exchange so if the if the

00:49:32.358 --> 00:49:38.039
if the price in the of the of the car in

00:49:35.159 --> 00:49:39.838
the UK was $9,000 and I could buy the

00:49:38.039 --> 00:49:41.318
car in the US for $8,000 I would

00:49:39.838 --> 00:49:42.719
probably buy it in the US in practice

00:49:41.318 --> 00:49:44.480
there are difference between the two car

00:49:42.719 --> 00:49:46.358
on but that tells you that's the kind of

00:49:44.480 --> 00:49:48.920
thing that the real exchange means is a

00:49:46.358 --> 00:49:51.279
relative price of goods okay but the way

00:49:48.920 --> 00:49:52.798
to go from that is you have to multiply

00:49:51.280 --> 00:49:54.559
the nominal exchange rate times the

00:49:52.798 --> 00:49:56.880
price because that converts it into the

00:49:54.559 --> 00:49:59.839
same currency as the price and then you

00:49:56.880 --> 00:50:03.318
can compare them that's

00:49:59.838 --> 00:50:05.480
idea so let let's stop here and we're

00:50:03.318 --> 00:50:07.960
going to continue talking about open

00:50:05.480 --> 00:50:11.079
economy next week so next on Wednesday

00:50:07.960 --> 00:50:15.920
what I'm going to do is a review of of H

00:50:11.079 --> 00:50:15.920
ISL MPC and and and growth