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Gita Gopinath was an academic at Harvard. She was known within the racket. We all knew that. But found immense acclaim as the former deputy managing director of the International Monetary Fund. She brought an academic gravitas to it that was just absolutely wonderful. As they do, they wanted her to stay at IMF. She had to return to Harvard. Professor Gopinath joins us in this time of international turmoil. Gita, thank you so much for joining this morning. What was it like, your first day back at Harvard? You go from Georgieva and 400 PhDs telling you what to do at the IMF. What was it like in front of the kids at Harvard the first day?
Hi Tom. I always miss speaking to you. So it's great to kick off with this kind of a question that I don't usually get from anybody else. This is great.
What was it like? I mean, Stanley Fischer says that Samuelson used to throw chalk. What did you do with the dumb students after the fancy people at the IMF?
It's actually been going great. I am enjoying very much being back at Harvard. And it also helps to be able to speak a little more freely than one does when you're at the IMF. So I'm enjoying this moment a lot. And also, I love working with the students and getting back into research, and something I did miss.
Well, that's where I wanted to go. The research of say Rudy Dornbusch back ages and ages, or Ken Rogoff and others, is there is a cycle to financial upset, a cycle to financial contagion with the private credit percolation, and again, a war is tangible. Are we at another inflection point where we see crisis in finance?
The troubles with private credit were actually there even without the current war in Iran. We were seeing signs of distress in terms of loan defaults. I mean, this has always been an incredibly opaque sector. And when we worried about where we could see another crisis coming around the corner, it was about this huge growth in non-bank financial institutions that now own over 50% of the world's assets, and especially, you know, private credit, private equity, hedge funds, which are highly leveraged and valuations that are stretched. So it is a combination that really can get, you know, things can get pretty tenuous if we have major shocks of the kind we're looking at right now. And as the IEA said, we've just had the biggest oil shock in history. And you know, thankfully our economies are not as dependent on oil as it was in the 1970s, and therefore we could weather more of it now than we did back then. But this is a huge major event to the global economy.
I want to bounce off what you were just saying about the war and its effect on the global economy, because even a long war, would that have a limited consequence for global GDP, or will there be longer-term damage done?
A lot depends upon how long oil prices stay high, right? It had come down to around 85 yesterday, and now then it shot back up to 100, and now hovering around 96. So, you know, coming into 2026, the assumption was that 2026 would be a year when oil prices would average $65 a barrel, right? I think in the best case scenario, we're looking at it averaging now $75 a barrel, which just from the oil channel shaves off about 1 to 2 percentage point global growth. But if this continues, and I don't think this requires, we're not talking necessarily that everything gets sorted out in a week, but if this continues well past a few weeks, and we're looking at now average for the year hitting 85, now that's beginning to shave off like 3 percentage point to global growth, 4 percentage point, and global inflation starts going up by 50 basis points, 60 basis points. So this needs a solution relatively soon. Otherwise, we're all looking at countries around the world dealing with, many countries dealing with stagflationary shocks.
What about emerging economies? They would be vulnerable here to persistent high energy prices, right?
Emerging markets have, especially the ones of course that are importers. I mean, other countries who are exporters benefit from the higher oil prices, but the ones that are importers, and these include, you know, India, many of the East Asian economies, of course China also is a big importer of energy, though they have big strategic reserves so they're kind of a little more insulated. But yes, so they tend to be importers. They also are much more energy dependent. Their economic output is much more energy dependent than the rich nations of the world are. And we've also seen the dollar appreciate. So it's a combination of oil prices going up and the dollar appreciating, and that's leading to really scarcity. I mean, we're seeing rationing in many emerging countries around the world. It's not just you can simply pass through very high oil prices.
An exceptional day for Bloomberg Surveillance. Edward Morse was with us earlier. Charles Caner of Newberger Berman as well. And now we're honored with Gita Gopinath with us, the former International Monetary Fund deputy managing director, holding court at Harvard Economics after her sojourn of public service. Gita, I look at where we are, and my answer is currency is the litmus paper of the system. Are the traditional dynamics of foreign exchange in play now, or is there a new regime we have to get used to? I think this episode has told us that the traditional regime sustains.
There have been a lot of questions about the dollar's dominance and whether we've seen some sort of financial decision-making shift sufficiently in the world that things are going to behave differently. But what we saw right at the onset of the war, when there was a huge spike in uncertainty, was that the dollar strengthened relative to pretty much all other currencies in the world. Capital flows to emerging markets, you didn't see a whole-scale reversal, but you saw lesser flows going into emerging markets and their currencies depreciated. The US stock market held up better than other countries also because, I mean, frankly, US being a bigger net energy exporter makes it less of a stagflationary shock for the US than for many other countries in the world.
