Bloomberg Audio Studios, podcasts, radio, news. This is an honor. My book of the summer, Within the Game, is Kenneth Rogoff of Harvard University. Our Dollar, Your Problem. And what's so great is the academics of Rogoff is so much the same, but at the same time different from the prodigious abilities of Richard Clarida of Columbia University at PIMCO, the former vice chairman of the Fed. We're honored that he could join us here this morning. The dollar is weaker. Our audience just simply sees Euro 116, the yen 143. There's a crisis of confidence. The Wall Street Journal in an editorial today skewers — that's the right word, folks — skewers the president on his trade policy. If it's our dollar, your problem, whose problem is it this morning to see the dollar at the precipice?
I think there are a couple of things here. First, in agreement, you know, Ken is remarkable and it's a fantastic book. The dollar is a reserve currency. People hold it because it's a store of value. It's useful in trade and financial markets. It delivers privileges to the US: lower borrowing cost, but more importantly, the ability to borrow a lot more. Tom, I do think we want to put this in context. I don't see, and I don't think Ken does based upon what he's written, I don't see the dollar losing that status in the next, say, five or ten years, simply because there's no viable alternative. But that doesn't mean the dollar is ever higher and ever stronger. So even a dominant reserve currency can have higher and lower value, and we may be in a period in which the dollar is trending down, not just against the euro, a lot of currencies.
When you were at Columbia, did you work with Hyman Minsky? Was he before you?
Uh, yes, Hyman Minsky was before.
He was before you. You were the — not Mundell.
Mundell, and I was with Professor Mundell, but not Minsky.
I know this is sacrilege, but how does Richard Clarida link every central bank wants gold into our dollar confidence? And frankly, over to a June 18th meeting, Clarida. I've never said this, Clarida, on gold.
Well, let me say this. I'm following this pretty closely because the purchases in the official data, the purchases of gold are large and they've been picking up. I'll share an anecdote with you. I was in Asia ten years ago seeing a very sophisticated official investor, official institution investor. And we were talking about gold even then, this is like 2014, 2015, and that was in the context of QE infinity. And I said to him, well, why invest in gold? You can buy an inflation-indexed security. It gives you a hedge against inflation. And he looked at me and he said, gold doesn't default. And so I don't think the US is going to default either. But certainly we have seen that allocation, and again, talk about back to the future. I mean, central banks have been holding gold as a reserve for hundreds of years. And so we're sort of getting back into that mindset.
So Paul, if gold doesn't default, like a gold wedding ring and a divorce, is that a default? Do you want to comment on that? No. No. Thank you. Rich, as a professor of economics at Columbia, when you have your class or your module on tariffs, how do you present tariffs to your students?
Great question. Well, throughout most of my career, which dates back to the 1980s, tariffs have really not been front and center. So I haven't — I actually typically did not teach on tariffs. I have brushed up on, if I were to teach it, how I would teach it. And what's interesting, if you look at NBER working papers, there have probably been a half dozen working papers in the last six months on tariffs, and in the previous forty years there were one or two, zero. So it is an interest picking up. But the short answer is, tariffs of the scale and scope that we're talking about now in the US are something we haven't seen in decades, and they have implications for the economy across the board. They generate revenue for the government, they divert some trade into the US, they onshore some investment. And so to actually take tariffs at the level that we're seeing now, say 10% seriously, is a pretty complex modeling exercise with a lot of moving parts. So I'll leave it at that.
So as we think about it here, we haven't seen rising inflation. No, we haven't seen materially slower economic growth. We see a lot of the surveys, like the University of Michigan and so on, cite some concerns, but we haven't seen it in the hard numbers. How do you think about the hard data versus the soft data, which is something that we've now been introduced to?
Great question, and let me just say upfront, you have to acknowledge that in the last four prints, the January print was ugly, but February through May in the CPI have been coming in much better than expected. A lot of folks, including me, thought we would begin to see some of the tariffs show up in the CPI report we got yesterday because it's for the month of May. And in the month of May, the government was collecting a lot of tariff revenue. And it did not. And as you mentioned, the economy seems to be holding in at roughly trend growth, the labor market holding in. So, so far, so good. What it does tell me is, at minimum, we're not seeing in the data that US companies are using the tariffs as a reason or excuse to raise prices preemptively. We may see that once tariffs go into effect more broadly, but yeah, so far, I think you have to acknowledge the US economy is holding up quite well.
The former vice chairman of the Federal Reserve System, and a good conversation here with Richard Clarida this morning, always with Columbia University and of course PIMCO as well. Trotting out yesterday — I'll give the FT credit, I can't remember quite where I saw it — is the John Edwards chart of two Americas. It is breathtaking on consumption: 70%, 69% of GDP, whatever, 50-something percent I believe is upper decile. It is shocking what — upper quintile — it is shocking what the bottom third is not consuming in America. Does Clarida economics work in the polarity of the American consumer? Are we so bipolar, a barbell if you will, that the normal Fed talk doesn't work?
Tom, it does work. But you have to recognize that, as I think I've said on this show before, I think the simplest way to think about it is that two-thirds of Americans live in a home that they own, and around that percentage directly or indirectly own stock. So if you own your house and you own stock, you've had a great run for five, you know, fifteen, twenty, thirty years. But if you don't own your own house, you don't own stock, you've been falling further and further behind. And that's at least a third, maybe more, of the country. That is a factor in terms of the nuts and bolts of how the economy functions, how monetary policy is transmitted. So yes, Clarida economics works in this world, but it only works if you acknowledge the divergence in those two parts of the economy.
