"China is digging out of a crisis. And America’s luck is wearing thin." — Ken Rogoff

Dwarkesh Patel: Today, I'm speaking with Ken Rogoff, who is a professor at Harvard, author recently of Our Dollar, Your Problem, former chief economist at the IMF. Ken, thanks so much for coming on the podcast. Thanks so much for having me, and welcome to Harvard, which is where we're filming this. In your book, you have a lot of anecdotes of meeting different Chinese leaders, especially when you were chief economist at the IMF. And it seems like you had positive experiences. You met the premier with your family, and he would listen to your advice. So one, how does that inform your view about how competent their leadership is? And two, how do you think they got into this mess with their big stimulus or whatever else you think went wrong to the extent that when you were talking to them in the early 2000s, it seemed like, you know, you were kind of seeing eye to eye or they would understand your perspective. Do you think something changed in the meantime?

Ken Rogoff: Well, I first want to be careful to say they listen to everybody. I mean, the Chinese are way better than we are of sort of hearing a hundred different views. Mine would be one of many, many, many, you know, that they heard. So I was very impressed by the competence of the Chinese leaders. So I actually gave a lecture in their party training school where if you're a mayor, you're a provincial governor, you're any bureaucrat on your way up, you go to this thing, which for them is like Harvard Business School. They really looked for competence. So of course there were various loyalty things, but you meet the leaders. I met a lot of them. And when I was at the school, I met a whole bunch of people. They actually asked really raw questions too. They said things like, I couldn't believe it that they were asking. And I was told, you know, within the school, you're allowed to say anything. So they had the system for a long time. And when you met Chinese technocrats or even, you know, so the mayor of Shanghai or they were impressive. I'm not saying ours aren't, but it's a mix. I mean, I think you know that. And then Xi Jinping has really changed that. So he's been the president since 2013, and he's over time pushed out this system and gone more to loyalists and people who are less technocratic. I actually, probably the most important talk I ever did in China was to what's called the China Development Forum in 2016. It's this giant hall that had most of the top leaders in the party, a lot of the elite of the tech world, Mark Zuckerberg, and many others like that were there. I said, I'm looking at your housing. I'm looking at your infrastructure. It looks to me like you're going in a classical housing crisis problem. Your catch-up is over. Your demographics don't look good. I gave a list of things. And by the way, it looks like power is becoming very centralized in the economy. And I'm a Western economist. You're doing an amazing job. What do I know? But I don't think that would be good for growth. And I have to say, after I gave the talk, I just figured, you know, you only live once. You just have to say what you have to say. The couple top leaders came up to me and said, Professor Rogoff, we very much appreciated your remarks. And I was thinking, you know, oh, no, you know, they're going to put me in jail or something at the end of this. But, yeah, no, I'm less impressed by them now. And I'm worried that, let's say we get into a tangle with... Let me back up. They get in a crisis, which they're in now. I think they're in a deep crisis still. Or somehow, hotter heads prevail between the United States and China, and we get in some kind of entanglement nobody wants. I worry that we're not as competent, and I'm speaking about right now, We have some very good people, but the average quality at the very top, I think, has gone down. And China's not as competent. That's a recipe for having bad things happen.

Dwarkesh Patel: By the way, on that talk, so you mentioned in the book that before you had to clear your talk, and so you gave them a sort of like... watered down version of what you would say. I have to say that that would take gusto to go up to the top party leaders. Were you nervous while you were giving the talk and you're like, oh, it's too centralized?

Ken Rogoff: And I mean, I was pretty experienced by that time. And I frankly never use notes, so the idea I was going to read my speech didn't come to me. And maybe it was a little bit spontaneous. But yeah, I mean, I think I certainly felt at that moment, you know, what am I here for? What's the point of coming to this? Why don't I talk about the elephant in the room? Everybody knows this. I don't know if everybody knew it, but it was clear to me. And I'm going to say it.

Dwarkesh Patel: Yeah. I mean, I think a lot of people in that situation usually... Even though they should, or the logic makes sense, but I think people often don't.

Ken Rogoff: Yeah, I'm a professor. So people who had a big tech company or finance company or all these businesses, most of the other people, they can't afford to do that. I mean, they just... But, you know, as a professor... And I think they know that when they invite a professor, they can't cut your business. They can stop you from going again. They invited me again, by the way. Although the second time, I just talked to a tiny room instead of the big hall. But yeah, no, I mean, I give credit to the Chinese for listening. So you've said that the seeds of their current crisis were sown in 2010 with their big stimulus.

Dwarkesh Patel: But so is it wrong then to blame Xi Jinping for this? It was before his time under Hu Jintao that they did the stimulus that's causing all these problems now, right?

Ken Rogoff: Well, Hu Jintao did it, but they kind of kept it going. So the local government debt, that was an innovation put in in the 2010 stimulus, but they kind of left it going and sort of used it as a stimulus program. Long tangent, but the local governments don't have enough ways to fund themselves, so they were allowed to sell land to start these, fund these construction companies and stuff, get revenue and fund themselves, and they let it keep going. When Xi Jinping came in, I was told he was going to be Ronald Reagan. I had very good contacts in the intellectual spheres in China. Someone who had worked for me when I was chief economist at the IMF. Other people I knew who I really trust. They're really smart and connected. And they're still smart and connected. So I don't want to say their names. But they were telling me... He's going to change everything. This is really the time we're going to liberalize our markets a bit. We're going to do things that we haven't done. And he didn't that much. I mean, and if you look at China's growth, it actually slowed down quite a bit when he came into power. So there are different ways to measure a country's output. because China produces completely different stuff than we do and they use their currency and we produce our currency. Nothing's perfect, but one way to do is just say, what do they report their output to be in Chinese currency? What do we report our output to be in dollars? And let's take the exchange rate, and that's how we compare. And we can look at growth that way. And if you look at growth that way for China, it's been spectacular. It's been very, very good. And it's obviously, you know, they're pulling it out of thin air. But there are these approaches to trying to control for how you really would compare how an ordinary person lives or their measures, how an ordinary firm, you know, gets by. And when you look at those measures, China's growth is quite a bit less. So instead of, say, if you go 1980 to 2012, The official growth rate is almost 10%. This purchasing power parity rate, forgive me for using those words, just over 7%. Then if you look in more recent years, it's really slowed down a lot. Even the official numbers have slowed down. I don't know the number off the top of my head, but it's like 6% or 7% for Xi Jinping, and maybe only 3.5%. They're starting from a very low base. Right. So, okay, I mean, things were going to slow down. It's not all his fault. But I think he's been reluctant to take risks. And I think it's gotten us to where we are, where I think they're in a lot of trouble. They're overbuilt in infrastructure. They're overbuilt in housing. Have you been to China?

Dwarkesh Patel: I was there six months ago. So where did you go? Shanghai, Beijing, Chongqing, Chengdu, Hangzhou, and Amisham.

Ken Rogoff: Oh, so you saw a few of the medium-sized cities, and you probably immediately felt at least a couple of them. I'm not sure where all the new... At least one of them, I think, is the new tech center, and I can't pronounce it.

Dwarkesh Patel: Hangzhou?

Ken Rogoff: Yeah. Yeah, it's a big tech center. But some of the smaller cities, they don't feel like the big cities. Yeah. And 60% of Chinese income is from what they call their tier three cities. I grew up in Rochester. That's like a tier three city in the United States, but you could pick Cincinnati, Liverpool, Rennes. I may not be saying it right in France as an example of a tier three city. And they have invested like crazy. I've been to a few and I've studied the data on a lot. They have amazing roads, amazing real estate, amazing housing. but the feel of death in those cities. And so they were very good at building stuff. The Soviet Union was very good at building cement factories and steel plants and railroads, but that's run their course. And they have other stuff, green energy, AI, electric vehicles, but believe it or not, that stuff's still tiny compared to infrastructure and real estate's a third of the economy by some measures. So I think they're in a lot of trouble now in China and they let it go on too long. But again, I wasn't running things. If you try to change, if things seem to be working and you try to change things, you get thrown out. It's not easy to be in those shoes.

Dwarkesh Patel: When I was in China, we visited a town of half a million people outside of Chengdu, so one of these tier three cities. And arriving there, I mean, the train station is huge. Compounds are huge. Even when you're driving around, like a movie theater is this like humongous complex. Yeah. And I realized things are bigger in China. I was used to that because I'd seen these other cities by that point. But I just thought, I've seen cities of half a million people. I live in a city of half a million people in San Francisco, right? This just doesn't seem proportionate to the size of the population. And then we visited a Buddhist temple that had been built recently as a tourist site. And it was ginormous. You would go through one little shrine, and then behind it would be an even bigger structure, and then another one. Concentrically for, I don't know, eight turns. like it would take you probably 10 minutes to drive through this thing. And there was just nobody there. It was like me and three other white people.

Ken Rogoff: No, it's very much that feeling. And the young people don't wanna live there. I have a lot of young people here as students and I run into people. They don't wanna live in these towns and the jobs aren't there. I can't criticize them for trying that. If you'd asked me in 2005, Should we try to encourage people to go out to the Rochester's and the Liverpool's and the Ren Francis? I would say, yes. You know, there's too much in the big cities. There's overcrowding. Look what happened to San Paolo. Look what happened to Mumbai. But, you know, I would have been wrong. I mean, that these forces are very powerful. So a lot of their growth and what they call their GDP is this stuff. And so they're having to reorient and, you know, I mean, people just aren't that flexible. It's like when AI comes and puts everybody out of jobs, when construction jobs are gone and when all these indirect things are gone, it's not that easy to move everyone.

Dwarkesh Patel: If it hadn't been for financial repression, and suppose all this investment had been done through purely market mechanisms, would things have turned out much better? I mean, even today, say today China gets rid of all financial repression. They save a lot, right? So this money has to go somewhere. Are there enough productive opportunities to soak up all these savings? Or could there have been in the past, like... If they get rid of financial repression, is this problem solved or could it have been solved? Well, what everyone's told them forever is their saving rate and investment rate are astounding. It was higher before, but it's still maybe 45% or something, their consumption rate.

Ken Rogoff: Ours is pushing 70. European countries are a little more temperate, but they're in the low 60s. Their consumption is very low. They have some wealthy people that you saw when you go to the marquee cities, but a lot of China is living on like $200 a month kind of incomes. You could give them money. You could let them consume instead of exporting it. They've been very reluctant to do that. I mean, so you could do things to encourage consumption. You could... Actually, even just changing their exchange rate policy to allow it to appreciate more at times would make imports less expensive. They have been very reluctant to do that. That's what everyone tells them. That's certainly what I said in 2016 also. The ticket to getting people to spend more is to provide more security than they have. So first of all, there's nothing like our social security system. You need to save your old age. There's nothing like our health system. If you work at one of the big state-owned factories, they give you healthcare. But otherwise, you're on your own. They're not allowed to invest abroad. I mean, it goes in waves, but they're not allowed to put their money abroad. So they're trying to be careful about all of that and not do things suddenly. There's nothing to do overnight, but fundamentally, if you're looking at China and say, what's wrong? It's that the consumer isn't spending enough. And what's happening right now is worse because housing prices are collapsing. That's the only thing they really let people save in. You could either save in a bank account, which... You got a crummy interest rate or a house. They're going down. So people are cutting back. They can dig their way out. There's no magic bullet to make them grow at 5%, which is, by the way, the official number, but I don't think they're anywhere near that. I mean, there's no simple thing, but the general thing would be to try to rebalance investment and consumption. Going back to your point about is purchasing power parity the right way to compare

Dwarkesh Patel: or is nominal the right way to compare? I think in the book you say the nominal comparison of GDP is better because you can't buy Patriot missiles or oil with purchasing power parity dollars. But if we're trying to compare the strength of the two countries, the relative strength, especially in a military context, if they can build ships for much cheaper and munitions for much cheaper and they had to pay their soldiers less, Isn't that actually more relevant if we're trying to figure out who would win in a war? So shouldn't we be actually looking at the fact that they have a bigger PPP economy than us as a sign that they're actually stronger?

Ken Rogoff: Yeah. So, I mean, in the book, I'm talking about your geopolitical power, where if you're going to give money to somebody, what's it worth and how much they can use it? No, but you're absolutely right. I mean, they just crush us in shipbuilding. It's partly because they build commercial ships and there's a lot of symbiosis between commercial and military. I think they're 50% of the global shipbuilding market. For us to build a new aircraft carriers takes years and years and years, incredible expense. And I mean, I think one of the mistakes we're making about trying to build everything ourself, let our allies do some of this. The Koreans are really good at building ships. That's another place we could be importing from. You're right about the soldiers. They're paid much less. They have a lot of advantages in a conflict against us. We're way ahead in your department, tech. And that is our advantage at the moment. If that were to dissipate, it would certainly hurt.

Dwarkesh Patel: What is your projection? So right now, I think their nominal GDP per capita, sorry, GDP is 75% of America's or something like that.

Ken Rogoff: Yeah, in dollar, what we call the market terms, yeah.

Dwarkesh Patel: What's your projection by 2030 and by 2040? The ratio.

Ken Rogoff: So I didn't realize it was as high as 75%. I thought it was a little lower. I was actually going to say 75% in 20. I mean, it's at one point in 20, 24 is around two thirds. But it's really volatile with the exchange rate. The dollar's really high. So when the dollar's really high, it makes us look bigger. I think they'll gain about a percent a year on us, maybe. I don't think they're going to grow way faster than the United States. Wait, that means you think they will actually never have a bigger economy than us, or at least in the- It'll take a long, long time. So we're talking about the absolute size. They have four times as many people. But yeah, I mean, there were these projections by Goldman Sachs, by many others that we'd be like Canada is to the United States pretty soon. And I think, like all these extrapolations, that proves wrong. Which brings me to, I think, a big topic, which is a lot of people will look at some trend, whether it's growth in something, AI, China. Yeah, I was about to say. Yeah, and they'll look and just project it into the future. And I think economists at least consider ourselves terrible at that. When you go back and look at any of these commissions that were supposed to figure out what was going on, and they happen periodically. Maybe Brookings, its institution, puts one together, maybe the government does. And it's just my former colleague, the late Dick Cooper, had a whole list of these. So it is very hard to know, but my gut instinct is what's happening to China is what's happened to Japan, what's happened to Asia, what happened to the Soviet Union, where we have a more dynamic economy. We're not perfect, and maybe we're screwing it up right now with all the tariff wars and the globalization. But we have this dynamism and creativity that other places, at least other large economies, just can't replicate. They can build stuff. I mean, the French have better high-speed trains than we do. I hope you don't ride on the train from Boston to New York. I mean, it's nicer than it could be, but it's no high-speed train. You mentioned China. Oh my gosh, their high-speed trains are just incredible. They're good at that. But the really creative stuff, I don't want to say, I mean, there's some amazing Chinese companies, but let me say the US is really good at it. And we've kept that in our DNA. And I think that's very important to preserve it.

Dwarkesh Patel: I mean, the 1% per year compression is actually like extremely bearish forecast because even people who are pessimistic about China will say, oh, by 2040, they'll be like 150% or 125% of US nominal. I think it'll be bigger, but it'll only be slightly bigger. And so the fact that you think even by 2040, they won't have caught up is actually very bearish.

Ken Rogoff: I think they're digging their way out of a crisis. The idea... Right now, we know their prices are falling. And it's not because they're inventing stuff really fast. We know that interest rates are being pushed to zero. All these symbols of there's a demand, demand's been crushed and the economy is not doing well. So I would say historically, they have given numbers which are accurate on average, as best as we can tell. I think that's gotten less and less true in the Xi Jinping era.

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Ken Rogoff: I don't I don't think they're going to do it suddenly, but just on very crudely on their reserves, they're definitely moving more and more to gold. it doesn't help necessarily to move into euro or canadian dollars because they might side with us but they're you know doing what they can to diversify i don't think they've diversified into crypto yet i had a student do a paper on that but you know who knows what they are doing very concretely is not just what are they holding that's the big fact everybody looks at they officially hold a trillion dollars in treasury reserves. The estimate a student of mine did in a nice paper, and I think others agree with, is more like $2 trillion. They hold a lot indirectly through proxies. But the other part of it is just the whole financial system runs through the United States, what we sometimes call the rails or the pipes of the system. So your bank gets a purchase and my bank gets that I'm going to get a credit. How does that take place? How does it take place? And we're in different countries. The United States just disproportionately controls that. And that they can't live with. They could live without their $2 trillion for a little while, but they can't live without being able to pay suppliers and countries. So they're working hard on developing their own payments mechanisms. Russia actually did quite a bit in preparation for the invasion. And we see China doing that. Maybe they're selling treasury bills. We don't know exactly. I would advise that to them if I were a Chinese economist talking to them. But I don't think it's gonna be something they'll do suddenly because maybe Trump will bring down the markets and then there's nothing to save, but they don't wanna be the ones to bring down the markets and they cause a global crash.

Dwarkesh Patel: What is the alternative rails they would build? look like? Are they buying oil from Iran and RMB? Will other countries that need things from accept that? In 2030, what is their goal?

Ken Rogoff: Absolutely. There are a lot of countries in Africa, Latin America. Some of them are almost client states of China that they can force, but they sell. Iran, of course, sells a lot of its oil to China, even when there's sanctions. They're moving in that direction. It's not just about the what you invoice, the payment. It's how do we acknowledge it? How do we clear our books? That's what they're working on. And it's coming. I mean, the Europeans are working on it too, by the way. Europe is not happy with the situation. They're actually forming a central bank digital currency that's moving quite a bit faster than I thought it would be. And that's actually one of the reasons that they're doing it for international payments. Okay, so let's talk about Japan, which you also cover in the book, or their crisis.

Dwarkesh Patel: And you blame the U.S. 's pressure in advance of their crisis on the Japanese to raise the value of their currency, the actions by the Bank of Japan. Zooming out, how much of the crisis is not caused by things like that, but just the fact that high-tech manufacturing as a shared world output was becoming less important? There's demographic factors as well. And so something like this was sort of bound to happen to Japan, even if there wasn't some big crisis that preceded it. South Korea's GDP per capita isn't that high either. So... at least in comparison to the U.S. So yeah, how much of this is like actions taken by specific actors versus... I mean,

Ken Rogoff: South Korea has had a crisis in 1983 and 1997. I mean, they haven't been crisis-free, by the way, that they're... Well, there are a lot of factors. The demographics would be the most obvious one. The rise of China, the rise of not just China, Korea, other competitors. So Japan invented this business model that I think a lot of countries have duplicated. The business model was export-led growth. And the thing that maybe most people wouldn't think about in that is it creates competition. Most countries aren't as big as the United States, and there aren't as many different firms trying to do the same thing. And of course, we have trouble with competition here. I mean, sort of famously in Mexico sometime, there were two or one telephone companies, two bread companies, two taco companies. It's very hard not to let monopolies sit, use their political power. So how do you get around that? And the thing that Japan did that was really pretty innovative, Germany did it, I think to some extent also, was in the export sector. You are competing with the world, not just with other companies. And that creates this innovation, this creativity. And Japan did really well with that. But over time, others imitated it. And, you know, sort of took, were building some of the things that they were building. So that's part of it. The aging is part of it. But I think the financial crisis is a very big part of it.

Dwarkesh Patel: And what is a counterfactual? So suppose that crisis hadn't happened. How much wealthier is Japan today than it might have been?

Ken Rogoff: Oh, I think 50% wealthier per person. I think way wealthier. That's where they started. I mean, it depends on which measure you use. By the market exchange rates, they were richer than the United States late 1980s. And even if you use the more complicated measure, They were richer than any European country, than Germany, than France, than Italy. They've moved to the bottom of the rung now. And I think the financial crisis, okay, it wasn't the only thing, but we... It's a long story, but I think we effectively force them to move faster to open up and deregulate than culturally and politically they were ready to. And I give that as an example of something in the book where I changed my mind, where I had looked at that for a long time afterwards, because going back to 2005, that's long after the Japanese crisis. I would hear from Zhang Xiaomin, who was the president of China that I met, we're not going to let this happen to us. There's no way. We were discussing, I thought, maybe they shouldn't have such a fixed exchange rate. I said, well, that's what the United States said to Japan, and look what happened to Japan. And I didn't push back that much to someone like that. You talk to other people, but I heard that from many people. And I used to think, well, how can that be? Because all of these things, there's this thing called the Plaza Accord in September 1985, where we push them to make their exchange rate more. And I used to say, well, you did that in 1985. I mean, the crisis happened, Reinhardt and Carmen Reinhardt, my co-author on many things, we date the crisis in 1992. It's seven years later. And I think I continued to think that, but I would say over the years, and particularly in recent years, I'm thinking I was wrong. These things unfold slowly. Crises don't happen overnight. They deregulated and it worked, but they didn't know what they were doing. And I think this was... a huge mistake by Japan to agree. And I actually, someone who was at a 10th anniversary of the Plaza Accord held in Tokyo, the person who was the head of the Bank of Japan, and I apologize, I'm 72 years old and I'm forgetting the name exactly, so the head in 1985, and he gave the speech to officials and he went like this. and apologized very symbolically. I have ruined our country. I did this. I take responsibility. And again, he told that too when he read my book. Financial repression's bad. But financial liberalization needs to be done gradually. And if you do it too quickly, you get a crisis. That's many crises caused by that. Asking somebody who obviously doesn't know the details at like a high level,

Dwarkesh Patel: how would you explain to a novice, like basically... How could a country be 50% less wealthy than it otherwise might have been simply from financial crises? Because whatever they could have otherwise produced, why can't they still not produce it? A country is like, they're producing a bunch of things. Why are they producing 50% less things because of a financial crisis a couple of decades ago? Well, their case is very unusual, although having a number like 10% or 20% is very typical.

Ken Rogoff: In fact, one of my professors at MIT was teaching us the Great Depression, and he said, here's how to think about the Great Depression. We were going like this. It's hard to do without a blackboard. But then he says, you know, then we get here, we go like this, and then we're going like this. We never got this back, you know, that happened. But there's a lot of economic models where you, you know, solo catch up or some- Yes, yes. But what happens with the financial crisis, particularly in Japan, is it sort of blew up their business model. So for example, maybe China wouldn't have overtaken them so quickly if they had been able to borrow and their financial markets were working better and they were more adroit. Their consumption collapsed and Japan didn't quite know how to deal with it. We were much more brutal in what we allowed to happen than Japan, but we got out of it pretty quickly. I don't quite know where we got back to where we were, but we got out very quickly. They have a very consensus society. They don't want anyone to be in bad shape. And their struggle with this, I think, held them back for a long time. Okay, maybe 50% is too much, and I should say 25 or 30%, but a lot better shape than they have been.

Dwarkesh Patel: Just to put it into context, what do you think the counterfactual wealth of America looks like without 2008 today?

Ken Rogoff: Boy, that's a good question, and I'm hesitant to, because I probably have some paper giving a number for that, and I might say the wrong thing. We certainly cumulatively lost a lot. And it led to this political crisis that caused us to lose a lot more. So, I don't know, probably 15% lower. That's a lot. A lot, a lot, a lot lower than it would be because we had all this dynamic, which we're living in right now, is still an echo of that financial crisis. Now, mind you, you're asking about our national income inequality matters and would we have done other things? And I don't want to... In some ways, the... The 2008, 2009 crisis was a condemnation of the system and people could see it and maybe led to some healthy cleansing, but I think it led to a lot more damage than healthy cleansing. I think this updates me towards the view that financial crisis are even worse than I think.

Dwarkesh Patel: It isn't just this bad thing that happens and you recover. If there's 15% lingering even after, what, almost 20 years, then I think they're just like, oh,

Ken Rogoff: wow. You're losing a lot of cumulative growth. I mean, look at Greece today or Portugal. Yeah. You kind of get back to where you're having a positive growth rate, but you're not picking up. They're very different than a normal recession. And actually, in a normal recession, you go down and then back up. The United States had thought it was immune to financial crises. We really hadn't had one since 1933. And a different book that came out in 2009, I mostly write papers, but this was a book with Carmen Reinhart. It was called This Time is Different. where we had some papers published in advance, and we said, no, they're different when you have a financial crisis. It lasts way longer. The slowdown is way worse. And we were mocked when we were saying that. I think the New York Times had a two-page spread saying how ridiculous everyone thought this was. We could have proved wrong, and maybe if we'd done things better, we would have, but it is the norm. There's a few exceptions, like Sweden got out in a year or two, but normally they really are different than a normal recession.

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Ken Rogoff: Typically, you have a crisis of some sort when your debt is high, your political system, your politics are inflexible. We've checked those boxes. And you get hit by a shock you weren't ready for. You get caught on your back foot. It depends on what the shock is. It depends on how we react. The way Japan reacted was they used what we call financial repression, which basically stuffed debt into every insurance company, pension fund bank. The central bank holds almost 100% of GDP in debt. I mean, we think we have a lot. actually don't know the number off the top of my head of the Fed, but I want to say $7 trillion. They would have the equivalent of $30 trillion. I mean, so they've done this. It's not the only reason they haven't grown, not by any means, but it's not good for growth. So that's one option. I think for the United States, that's tough. We just are very market-driven. We, if our financial system had that kind of pressure put on it, it would be worse than when they did it for Japan. And a lot of people lend to us. We can't do that to them. We can't force French insurance companies to hold US debt. We can just force US ones. So I think the most likely thing will be inflation, which only lets off steam. because inflation sort of pulls the, it's like a default. And I'm not talking about hyperinflation. I mean, 10, 20% inflation over a period. We just went through that. That actually knocked about 10% of GDP off our debt. We might need more next time. So it lets some steam off But if you're still spending too much and you haven't fixed anything, you're back in the problem. That's what's going on now. We had some steam let off, but it wasn't enough. But I think when it happens again, markets will be very unforgiving about it. They will look at us and say, you are not to be trusted. And so it'll raise the interest rate more. Our debt will build up faster. And I think at that point, You know, there's this saying about Americans that's attributed to Winston Churchill, we always do the right thing after we try everything else. And I suspect we will try other things. Yeah.

Dwarkesh Patel: So just for the audience, there's four ways we could get out of the debt. We could default, which you don't think is likely. But really good for my book. Well, I mean, already you timed this one so well. I'm only shorting the market when your next one comes out.

Ken Rogoff: I get a new wave.

Dwarkesh Patel: Yeah. Financial repression. I guess you could actually cut the deficit or inflation. And you say, well, if there's another round of inflation, then after that.

Ken Rogoff: There'll be what everyone calls austerity, which, by the way, this word austerity, the progressives use whenever you just ignore debt building up and spend whatever you want. And austerity is when you don't do that. I mean, I think Ezra Klein's book actually makes the abundance, makes the point that there are costs and benefits to a lot of things. And this austerity language is pretending there are no costs to having your debt be higher. There are only benefits. So yes, that's what everyone else has to do. And we've gone longer than most without doing it. If it's going to be a financial crisis, I know financial crisis are this bad. Inflation crisis. So whether there'll be a financial crisis of the private sector and the public sector bails out the private sector. So the government, we're not going to default. We're going to inflate or do financial repression or... you know, baby steps, austerity, you know, something. We're not gonna have a crisis like Greece had it. That's just wrong. But inflation's not pleasant. Why wouldn't we? Because we can print money. I mean, we can honor our debts. We just never have to default. Greece was using the Euro And didn't have control.

Dwarkesh Patel: But Japan was using its own currency and it didn't default.

Ken Rogoff: They had a financial crisis, not a debt crisis. So they never defaulted on their government debt in that period. I'm not sure if they ever did in our... Oh, yeah. No, I'm sorry. They did in World War II, of course. Japan defaulted on its government debt in World War II. That's an interesting story. But no, it was a financial crisis they had. So financial crisis is making your banking system not work. Lending to innovators not work, lending to dynamic companies not work. Ben Bernanke really wrote at the time sort of a thought piece about this. He didn't really have numbers. He conjectured that was why the Great Depression was so bad. Milton Friedman, one of the great economists of all time, looked at the Great Depression. He said, you didn't print enough money. You tighten the money supply too much. Ben came along 50 years later or something, 25 years later. He was a classmate of mine in graduate school, and I had the office next to him at Princeton. He came along and wrote this amazing paper, again, just a thought piece, which is not a typical economics paper, where he said, If it was just you didn't print enough money, eventually wages and prices would adjust. Yeah, maybe it wouldn't happen in a year. Maybe it wouldn't happen in two years. But the depression took 10 years. How can that be? And he made this conjecture that there's been a lot of subsequent work showing, again, there's debate about this. Let me be careful. But I certainly view the weight of evidence saying financial crises are really bad. which has led us to the situation in the United States where we've gotten a little happy-go-lucky about bailing everyone out. I would describe Treasury Federal Reserve policy today as, when in doubt, bail it out, because they saw what happened. But as your financial sector grows, I mean, that will lead to a problem someday. It did, of course, in the Silicon Valley Bank and continues to have echoes of that. But I think an inflation crisis is more likely than a financial crisis, although these things are very hard to predict.

Dwarkesh Patel: You say in the book that... We didn't outgrow our World War II debt. What happened instead was that financial repression after World War II and then the inflation of the 70s made what our debt to GDP ratio then should have been like 70 something and it was like 20 something instead. And of course, we had inflation recently. So do you think there's some irrationality in the market for U.S. government debt already, given the fact that we can forecast what's going to happen here? They can read your book and say that inflation is going to go up and the debt they're holding will be worth less. They can look through history at what's happened. So do you think there's just some irrationality in terms of what people are doing? I think number one is they have too much faith in the independence of the Federal Reserve.

Ken Rogoff: So the Federal Reserve's been this amazing institution that has evolved. And it has been sort of the guardian of having, we can argue about if it's the right inflation or not, but having low inflation. And the Federal Reserve insists it's very independent. The Supreme Court recently ruled Trump couldn't fire Powell. He's the head of the Fed. I think they're dreaming that there are so many ways Congress and the president could override the Fed, particularly if they declare there's some kind of wartime or war on pandemic situation.

Dwarkesh Patel: Yeah, though I wonder if from the politician's perspective, the independence of the Fed gives them some sort of way to pass the buck that they're actually happy about. So they'd be like, oh, I'd love to do this irresponsible thing, but I can't because the Fed is out of my hands.

Ken Rogoff: No, that's for sure. So that's why Trump bashes the Fed. It's not the only reason he does, but he bashes the Fed. I think he actually disagrees with them, but he feels bashing the Fed if there is a recession, which... There might be. He'll blame the Fed for not lowering interest rates. It sort of depends. If we run into this world where interest rates start creeping up, The 10-year rate right now, I didn't look in the last minutes, but around 4.5%. That's not index. The index one's about a little over 2%. The 30-year rate's around 5%. I think those are going to drift up. And that makes mortgage rates go up. It makes student loans go up. It makes car loans go up. Business loans go up. And it's painful. And there's sort of a question at what point that pain starts being real. And then particularly, I mentioned I thought this would be catalyzed if we're hit by a shock where you can somewhat take back independence temporarily from the Fed. I think it's easier to do than people think, and given that I think shocks are going to happen, maybe AGI will bring us a shock that we don't imagine that people trust that too much. I mean, Fed independence, I love. I actually wrote the first paper on that of why you should have an independent central bank back when there were virtually no independent central banks. I was a pawn at the Federal Reserve. I'm talking my book to say it's a great idea. I don't mean my book book, but my human capital. I like to say that the Federal Reserve fights for its independence every day. I hear senators and people like that say they're idiots. I hear people in Silicon Valley tell me they're idiots and we should bring them under the treasury. I used to hear that just from progressives. And now I heard that recently from some tech titans that Scott Besson, he's the treasury secretary, is smarter than Powell. Why don't we let him run things, et cetera.

Dwarkesh Patel: They could. It does seem like the Fed works really well as it exists now, right? It's like independent. There's people, as you say, who criticize its actions. But... On the whole, it seems like a reliable institution which makes smart calls. They can be wrong, of course, but it seems just so much more competent than much of the rest of government. And if you wanted to replicate how the Fed works, if you wanted other parts of the government to work this way, is there something we could do? Or is it just like maybe it's more so a human capital problem rather than an independence problem? Like bankers and economists are really smart. And I don't know if you could replicate that in the... education department or the agriculture department or something? Well, one of the things the Fed has is a simple barometer that everybody sees.

Ken Rogoff: They don't really see it, but they see gasoline prices. It's probably how they decide what inflation is. But they have just this simple barometer. Mind you, particularly in recent years, progressives have wanted them to solve inequality, social justice, the environment. But they have one barometer that they kind of control over the long run, not in the short run, but over the long run. So that makes it a little easier to say you wanted us to have low inflation. Whereas so many other things the government does is they might be making everybody better off, but they're making some people more better off. Maybe some people are not better off. And it suddenly becomes very political. Nobody elected the Fed. So it's harder to make those decisions. I'm obviously a technocrat or a side with technocrats. My students are technocrats. I think way more things should be like that. Right.

Dwarkesh Patel: But if you wanted to do that, suppose you get called by the Pentagon tomorrow and you said, we want to run the Pentagon like the Fed. What do you tell them to do? Right.

Ken Rogoff: Well, I was going to say the Pentagon, I'm not speaking of the current Pentagon, but let's just up till now, I haven't looked closely. That's been run pretty darn well. I mean, the military is pretty efficient. There are people who tell me, okay, Elon Musk can take a payload into space at 15% or maybe it's 1 15th of what NASA does. Why don't we let Elon Musk run the Pentagon? And there may be something to that. I think to some extent, and maybe I'm defending them too much, but... you never know where the next blow is gonna come from. It always looks like a lot of your stuff's wasted, you built up, but your enemy is looking at what you have. Where are you weak? Where are you strong? So I wouldn't have picked them as the obvious thing, but let's say crypto regulation would be a good example of why don't we have something more independent? Instead, you well know what's happened. It's been overrun by politics. In fact, we have this, there's this huge thing going on right now I don't know how it's going to play out where the Fed's been protected, though not as much as you think, but Trump's got to the Supreme Court and been told he can fire the head of any agency. And I assume by inference, he can also fire anybody at any agency. So I think that's a terrible mistake. I mean, I think we need to have independent agencies. And you have an evaluation process. They answer to Congress. They go off in the wrong direction. You try to fix it. But to just have everything switch every four years is very worrisome.

Dwarkesh Patel: Before Trump, maybe for intrinsic reasons, maybe because of norms, it was really hard to fire people anyways. And that didn't produce remarkable competence across the government. Yeah. So actually, let me see if I can consolidate some of the things you mentioned. Maybe it's really important that there's, maybe we should structure more of the government that, you know, if you're running this department, you have this one target that's similar to the Fed's 2% inflation target, and that's all you have to do. Don't worry about anything else. I do think it's impressive, even, so the fact that the Fed has avoided the mission creep, it seems like every institution in the world does fall into mission creep. Companies, government departments- Oh, they haven't avoided it.

Ken Rogoff: I mean, they were under incredible pressures- I mean, it's changed, but I talk about this a little also in my book that you go through the working papers and the research at the various federal reserves, and it's all about inequality, environment, social justice. You'd be strained to find papers about monetary policy during that period because they're under pressure. So part of being independent is bending with the wind. But they've managed to keep their core competency, their core setting monetary policy independent. No, it's been amazing, but it is a constant fight. You can go to a country like Turkey where... I don't know what the inflation rate is today, but it hovered up towards 100%. And Erdogan, he's the president of Turkey, would be firing the head of the central bank every year. Every time they tried to raise interest rates, he would fire them. And you can find other countries like that. So we've been lucky, but you can't count on that continuing.

Dwarkesh Patel: Apart from the political pressure problems from the outside, Watching as you do, as you were mentioning, that your younger colleagues or the people writing the working papers at the Fed or the younger economists are writing about these other issues like inequality or climate change. Even from the inside, basically, given what the younger people in this profession care about, do you still expect... whether you want to call it the competence or the focus or whatever word you want to use, that to just decline by default given the new generation.

Ken Rogoff: No, no. I mean, this was a wake-up call. So there was a paper at, maybe it was a blog at Hoover did, of looking at the most used words in our big annual meetings. There was this thing called the American Economic Association meetings. Everybody goes. And they took all the abstracts and the titles for 15 years. And the word inflation had not appeared until this year.

Dwarkesh Patel: But why are you optimistic about when they get in charge?

Ken Rogoff: No, but there's an intellectual market. This was a huge miss. And there's an intellectual market for figuring it out. So one of the good things about the American university system, at least in the sciences, I'll speak of economics, is that okay, things drift off, but if it's way wrong, and they were certainly way wrong about inflation, I believe way wrong about interest rates and debt, there's some rebalancing. And we have a very... competitive system of publishing. We have a seminar system that's just ruthless. There's a debate around it. It's not settled and maybe I'm wrong and they're right, but it's definitely getting debated. Whereas 10 years ago, I think I was like a lone voice in the wilderness saying that these things might happen again. I would teach inflation to my students. And they'd sit there patiently, and it was like I was teaching them the music of Fred Astaire or something, and they go, okay, that 21st century, the internet can never happen, or I teach debt. And if I have foreign students, they're all having problems. I mean, so they raise, but the Americans, we can just do whatever we want, but it's changed.

Dwarkesh Patel: So going back to the future problems, potentially, if we do go the financial repression route and not the inflation route, how bad will that be? As you were saying, look, after World War II, we had financial repression, but that was when we had the highest growth ever. On the other hand, China and Japan, it seems like a lot of their problems might be caused by... the misallocation of capital caused by financial repression. Do you have some intuition about how much we could screw ourselves over with that route as opposed to inflation?

Ken Rogoff: We'll start with World War II, but it's never just one thing, obviously. There are a lot of things. World War II, first of all, financial repression was easy. The financial markets had been destroyed by the Great Depression. World War II became something of a command and control economy. And I will say there's a lot of interesting papers about World War II that Americans just work really enthusiastically. I mean, there was real patriotism in the production. I'm not saying we're not now, but they were able to have people fill these factory jobs that we probably can't even fill today. So, as we emerged from World War II, we had all the soldiers came home. That's a huge growth lift. And we didn't manage it perfectly. We actually had quite a bit of inflation during that period. But it was... So... The financial markets as you grew up and as young people know them today, they didn't exist back then. But the world has changed a lot.

Dwarkesh Patel: Does that mean that U.S. growth would have been even higher after World War II if we had just kept the government debt or figured out some other way to deal with it, but we had let financial markets develop earlier?

Ken Rogoff: Maybe. I mean, we didn't have any financial crises for a long time because they were very repressed. And oftentimes, when you get a financial crisis, it's exactly when somebody comes along and says, I know, I can make us grow way faster. Let's just take away all the rules and regulations overnight. That happened in one country after another. And it works until you blow up. So, I mean, you'd have to say that by and large, it was managed rather well. We grew, the rest of the world grew. It took time for private markets to develop. I mean, a thing I should have emphasized, our debt was very high after World War II about what it is now. But there was nothing else. There wasn't all this private debt. That had all been defaulted on. I'm slightly being hyperbolic, and maybe it was 50% of GDP altogether, everything else. State and local debt had been defaulted on. Now it's bigger than the federal debt by a wide margin. So it was sort of a different world to putting in financial repression now when that's a big part of our business models, the financial sector.

Dwarkesh Patel: And just to make sure we've completed the concrete scenario, so basically your prediction is there will be some crisis, some surge of inflation, then there will be austerity, and then what happens? Is growth really slow afterwards because government can't spend as much? What do the next few decades look like in your world?

Ken Rogoff: Yeah, I mean, I think it'll be quite a wake-up call for Americans and having to do an adjustment under difficult circumstances. Most likely, we just got hit by a shock. We'd like to borrow a lot. The bonds are going up faster than they did the other times we did, and we're not able to do as much. It's not the end of the world. During the European debt crisis, that happened 2010 to 2012, mostly. Yeah. The Europeans raised their retirement age, almost everybody. They didn't do it right away. They did it like 10 and 15 years out. And there's stuff you can do. So I want to be careful to say it's not like the end of the world, but pretty unpleasant. I think it will go across the whole world because the world's very dollar-centric. I think it will not be good for our franchise of... The dollar being so used everywhere will maybe first, but as other countries use it less, our interest rates will be even higher. So I'm an academic and I'm not particularly looking to put my ideas forward by being maximally hysterical. But hysterical is definitely in the realm of possibility here. And nothing's in the realm. I mean, what I say is more likely than not, actually, not that it's not definitely going to happen. We could have growth. We could have a whole lot of high skill immigration. We could make changes. There are lots of things that could go well.

Dwarkesh Patel: On the growth thing, Europe's growth has been pretty bad after 2010. Japan obviously has had pretty bad growth after their crisis. So why will we be in a different position if we do have this kind of crisis? Why will growth continue opase?

Ken Rogoff: No, it's going to cause a pause in growth. I mean, the main reason debt crises happen is we don't have an automated system of working it out. Like when the stock market crashes, okay, it's painful, but you're looking around for who got hurt. But when you have debt crashes, we take five years, 10 years to figure out who owes what. It's that process of allocating the losses that causes problems. And that, by the way, is why so many people thought China's fine. You know, the president will just tell everyone what it is. And that turns out to be not as true as they thought.

Dwarkesh Patel: Last week, I was trying to fix some admin settings for an important software tool that we use here at my podcast. And I just couldn't figure it out. I tried talking to different LLMs. Of course, I tried checking their docs online. It's one of those tasks that should take two minutes, but then you check back 30 minutes later and you still haven't finished it or made any progress. I finally figured out what to do by chatting with Gemini's Live API. I started a voice chat with Gemini, I shared my screen, and I talked through what I was trying to do. It showed me what to click, guided me through a few pages of settings, and 90 seconds later, I was done. It was like having a remote coworker who knows a lot about everything, and you can just tap them on the shoulder and get them to help you with your task. Often, LLMs aren't helpful in day-to-day tasks because it's clunky to give them all the context stronger problems. Gemini Live's combination of voice, video, and screen sharing made it helpful to me right away. Gemini Live API is now available in preview for developers to build real-time conversational experiences. You can try it out today by going to ai.dev, click stream, and start talking. All right, back to Kenneth. Is it possible to believe both that AGI is near and that America's fiscal position is untenable? Like, what do you mean by saying AGI is coming? Any job that can be done purely through computers is automated. So white collar work, the work we do even, is automated within 20 years.

Ken Rogoff: I mean, anytime you get a big productivity boost, it's fantastic. And it comes quickly. And yes, that can solve problems. I will say that historically, there have been lots of times when countries have had good growth. even higher than their interest rate, and they still get into trouble because fiscal policy is not mechanical, it's political. I mean, how much do you spend? Who wants what? It's not an arithmetic question. Let me say this another way. Nobody ever defaulted or had high inflation because of arithmetic, because they couldn't pay, because you couldn't have called in someone to know what to do. They do it because of these political pressures. And I think if AGI came that fast and that big, it would make the populism phenomenon that we're facing now seem like nothing.

Dwarkesh Patel: If AI is going to be massively deflationary, if it makes all these goods so much cheaper, should we be printing a bunch of money to still stick to 2% inflation? Or does that not matter anymore?

Ken Rogoff: We certainly can run monetary policy the same way. So you don't automatically get deflation just because some goods are going down. do things to increase demand so that there are upward pressures on the final prices. Even if the AI workers are not demanding anything, you can put a lot of demand so the firms charge a lot. And not just for the services that AI is replacing, their raw minerals and all the materials that go in. Fundamentally, when you have productivity, it makes it easier for the monetary authorities, the Federal Reserve, to deliver low inflation and good growth. That's what they're trying to do. It makes their job easier. And I think it takes the pressure off them somewhat to inflate because things are going pretty good. And so there aren't the same pressures.

Dwarkesh Patel: Right. But should they be trying to fight the deflation at all? In that world, because we need inflation to root out of the rentiers. We've got to fight downward. Rage rigidity, but now the AIs have all the jobs, so you don't need to worry about that. There's a bunch of biases that humans have, which to get rid of, we need inflation. Do we even need that in the world with AI?

Ken Rogoff: Okay, that is a very good point. Frankly, Keynes founded modern macroeconomics. And he was an incredible Renaissance person, just having sort of both sides of the brain. And one of these insights he had that just transformed things. And before, we just used these what we call general equilibrium models. Demand, supply, prices moved to keep them into line. And Keynes was looking at the Great Depression and he said... prices should be coming down. And they're not. And why aren't they? And that's really a cornerstone. And at the end of the day, it's mostly human behavior. It's mostly workers. So if you have these docile AI workers, well, they're not workers, they're just, you know, if you have firms that are willing to let the prices fall, you certainly can do that. I mean, we're still going to have some human workers. I don't know. But I guess a question on what monetary policy should be is, do you think interest rates are going to go up or down? we had deflation last time from this demand deflation which is what happened after the financial crisis and the pandemic interest rates went down i mean my intuition here is that interest rates would be needing to go up real interest rates real inflation interest rates and then deflation's not such a problem you just don't need to let them go up as much when we were in the Interest rates went to zero, basically. It's a whole other line of discussion, but they felt they couldn't lower them into significant negative territory. They're sort of paralyzed. There's this deflation or too low inflation. Monetary authorities thought they knew how to create inflation, but that's always been by cutting interest rates lower. When they've hit a bottom, they don't. I have a whole book about negative interest rates, but a whole other thing. But if we're imagining interest rates to go up, it's not much of a technical, real interest rates, inflation. It's not much of a technical problem. You just let the interest rates go up a little less so that you're not getting deflation.

Dwarkesh Patel: Do you expect interest rates to go up? Because one factor, obviously, is you want to invest in the future. The future has so much more potential. Another is maybe you want to consume more now because you know you're going to be wealthy in the future anyways. You might as well start spending as much as you can right now. I think AGI and AI are upward pressures on interest rates, so lots of crude reasons.

Ken Rogoff: The huge energy needs, I should have asked you about that first, having to provide all the energy needs. And also, as you say, traditionally when you did a lot of investment, it raised wages. But it's possible, and there's economists like Dara Nassimoglu have shown it can go both ways. It's not difficult to show it can go both ways. If you're really just substituting for workers, it's making capital more valuable, like you just even invest more. So with what the pressures on monetary policy, a little bit depend on that. In principle, it makes life easier. If it did push the interest rate down to zero, there are interesting questions around that, but maybe your audience might not be that fascinated by them as I am.

Dwarkesh Patel: Well, let's talk about it a little bit. If we expect interest rates to go up because of AI, what should the government be doing right now to... Be ready for that. Should they be locking in 100-year bonds at the current interest rates? Because they're only going up from here.

Ken Rogoff: So I'm going to get to it. But just where we are, I had been arguing interest rates today. I mean, I follow this all the time. And maybe a lot of people who listen to you don't. But inflation-adjusted interest rates. And I want to pick... there's a 10-year bond that's indexed to the inflation rate that our treasury issues. Inflation index is only about 10% of our total debt, but there's tax stuff and it's not perfect, but it's like a pretty good measure of what we call the real interest rate. And it had gone to like minus one at one point after the pandemic at average zero for about 10 years between 2012 and 2021. And it's higher now. And that is, for a macroeconomist, the biggest question in the world because it affects asset prices, it affects risk, it affects volatility. So the question, I regard it as just a normalization. I think that's something that was likely to happen. If you were to go around, talk to my younger colleagues or to other places, there's quite a debate about that. There's a lot of people who think, We're getting old. We're not inventing anything. I know you're just debating against that, and good for you. But I tend to think interest rates are more likely to go up than down going forward. And I'm talking about these long-term interest rates, not what the Federal Reserve does. It just sets the overnight interest rate, the market setting these long-term interest rates. I think they're more likely to go up. But I think AGI is only a piece of it. I think that the debt's rising everywhere, the remilitarization of a lot of the world, needing to deal with climate change. Eventually, if we're not dealing with climate change, we're dealing with climate disasters, growing populism. geopolitical fracturing, many things. I tend to think interest rates are going to go up, but not just for the good reason that we've gotten more creative and everything's going to be better.

Dwarkesh Patel: You say in the book that you expect a rebalancing from U.S. equities to foreign equities. U.S. equities have been outpacing foreign stock for the last couple of decades, and you say you expect there's a change or there's some rebalancing. What is it that causes that? So what I think I say very concretely is that when the dollar's really high,

Ken Rogoff: you should expect the euro to go up. And I feel strongly about that. Like when my first important paper was about exchange rates, that's why the book's about exchange rates. And when Japan's really weak or when the dollar's really strong, very hard to predict exchange rates, but then it is. So I think the euro will do well. There's a lot of room to catch up in Europe. So I actually think I'm kind of nuanced in what I say in the book because Trump hadn't been elected yet. But I say if Europe seems to be under pressure to remilitarize, I was aware that Harris was probably going to cut the U.S. defense budget. So that would put pressure on them. remilitarizing would actually be good for the euro. It would be good for technology in Europe. It would give them more geopolitical power in the system. But yeah, I do. Now, I have to say, just so your listeners can calibrate this, my first book was a very mathematical book called Foundations of International Macroeconomics. And in theory, you should diversify. You shouldn't put all your money in the United States. And I did a video with Spigniew Brzezinski, Mika Brzezinski's father for people who don't know who he is, but he was Carter's Kissinger. I did a video with him that Merrill Lynch produced, and it was about why international diversification could be good. And one thing I need to say was very, very limited. I feel quite fine about what I said. I wasn't doing any consulting at the time. I just did academic work. I didn't do speeches. I didn't do consulting. I talked to central banks a bit, but I didn't do anything for money, but I did get paid for this. It circulated half a million copies of it, of this. And a lot of my friends teased me and said, you would have made a lot more money if you just hadn't followed your own advice. So, you know, and I could think of plenty of other examples like that. But yeah, my instinct is that, you know, this idea that the, what is it, our US premium just should get bigger and bigger and bigger. These things have some regression to mean. Maybe not with AI all being in the US. I don't know.

Dwarkesh Patel: Is it because you're predicting, like, does the S&P keep growing at 8% but foreign equities do even better? I'm just going to safely say foreign equities doing better than dollar equities. But not because the growth in the US equities slows down, it's just that they do even better? Or is it that US equities slow down?

Ken Rogoff: I mean, look, you have a lot of friends who spend all their time doing this, and I wouldn't pretend to. I hold a very neutral portfolio because I talk to policymakers and world leaders even on occasion, and I don't want to be someone who's talking about regulating Bitcoin and owning a lot of Bitcoin. not to pick a random example. And so I wouldn't regard myself as great at this. But yes, I think there's a case for international diversification, particularly into Europe at this point, because they have so much potential catch up. Just as in, I think, California, where you're from, there's a little bit of dim awareness that it might be overregulated and you might do things differently. I feel that's happening in Europe.

Dwarkesh Patel: If you look internationally, if you had been betting on ketchup, I wonder if you could backtest it. Because there's some intuition, well, if you're poorer than the frontier, it makes sense that it would be easy for you to ketchup. There's another intuition that if you've been persistently behind the frontier, there must be some deep endogenous reason why you...

Ken Rogoff: Yeah, no, you're absolutely right. So, for example, Asia has a lot more governance problems, I would say, on the whole. And there's a reason that their price earnings ratios are lower because you don't trust the governance. You're right. You're right. I mean, so that's fair. And I mean, a lot of people are just betting on that. I think Europe's not so hopeless that it can't pull it together. I can make the comparison. I'm a basketball fan. The Boston Celtics just got crushed by the Knicks just before taping this. Part of it is our star, Jason Tatum, was injured. Well, you may not have gotten any better Europe, but if somebody's hobbling the United States, and I do think that's going on to some extent now, you do better. Yeah. Is there some institutional reform we could make that would get us out of this

Dwarkesh Patel: political equilibrium for a second where both parties, when they're in power, are incentivized to increase the debt and there's no institutional reform? check on that proclivity.

Ken Rogoff: There have been a lot of people tried this with, for example, having what are called fiscal councils. And I did a paper once with Julia Pollack, who's a brilliant economist. You can look her up when she was an undergraduate about fiscal councils. That was quite a while ago. And a number of countries experimented with it. But it hasn't worked. The country which has done the most with this is probably the United Kingdom. George Osborne, when he was chancellor, set up this fiscal authority where the big thing they did was they made predictions. So the government doesn't get to make different predictions. And you don't have to go by their predictions, but they got to say whatever they think. Our CBO does not get to do that quite the same, our Congressional Budget Office. They're very good, but they are constrained to believe what Congress tells them. Congress says, we're putting in this tax cut, but it's going to go away after 10 years, or we're doing this policy, it's all going to change. They're forced to use some of the parameters, whereas the one in the UK is more independent. You know, there are lots of complaints about it, but that's a very poor man's fiscal authority, just somebody that says, this is what your deficit looks like. The same thing as our Congressional Budget Office does, but with more independence. It helps. But I think it has to go to our electoral system, right? Our campaign financing. Do we have term limits?

Dwarkesh Patel: But you think that would help? I mean, I think, if anything, if you are longer in office, you might have a sort of more long-term incentive. I mean, to the extent that a lot of the deficit problems are caused by populism, I don't know how much campaign finance will help. I don't know.

Ken Rogoff: Maybe you're right. I don't have a magical solution to this. It's all over the world. Nobody's finding a particular great solution to it. The only encouraging thing is these things go in waves, and so maybe this one will end. But we're certainly in a really difficult situation right now where... Somebody asked me, if you were a Republican president or something, what would you do? What problem would you face? And the biggest problem is that in a few years, there's going to be a Democratic president. They're going to do exactly the opposite of what you want it to do. That's the same thing for the Democratic presidents. How do you have some continuity? How do you have policies put in place that the public can rely on? We've done well in the United States in some ways because our government's been kind of weak and hasn't been doing stuff. And the private sector can kind of work around it. I'm not saying it's perfect. There are lots of things we should do. But yeah, I don't... Look, this is out of my paycheck, so to speak.

Dwarkesh Patel: You're the former chief economist of the IMF. Well, all right. If it's not your job, who's already...

Ken Rogoff: No, no, but as an economist... No, I mean, these are very political... I mean, I think Brexit's an example of democracy gone amok. What a dumb idea. Maybe, I won't say, I don't know if Brexit was right or wrong. Okay, I will know in 50 years. But you shouldn't be able to do it with a simple majority vote. You should need like, you know, a two-thirds vote or something like that. There are a lot of, I hold government department here with people specializing in what we should do. And actually, I think there are experiments. Washington state experimented with different voting choices. Maine did. There are these ideas out there, but we're sort of a long ways from converging on anything.

Dwarkesh Patel: If you think people are underrating how big the debt issue is, are you especially long countries which have a low debt to GDP ratio like Australia or Norway?

Ken Rogoff: Well, it's not the only thing going on in the world. Your data is just one thing. Countries like certainly Australia and Canada are examples. They are what we call commodity exports. They know... that sometimes the sun shines and sometimes it's a dark winter. They don't quite sell oil, but they sell some coal, natural gas and some oil. They know things move around. They know they need to save for a rainy day. Norway is just like in a whole nother league. Yeah, I mean, there are lots of factors to whether a country is going to do well and the lower debt countries have less of a problem. But Canada, Australia are commodity exporters and face very volatile income streams, so they tend to be more nervous about debt. By the way, they have a lot of housing debt in Canada, for example. That's been a big problem. But I'm bullish on the United States. I mean, don't misunderstand me. I'm not saying everyone should leave the United States and go to Canada, although my wife thinks that sometimes, but for other reasons. I have to mention when I was playing chess in the late 1960s, I was living by myself in Europe, and Nixon got elected, and I felt about Nixon the way I think a lot of people in your generation, or at least the millennials, think about Trump. And I didn't want to come back to the United States, so there are a lot of people who talk about that, but I think the United States is great. But I think countries which are smaller, they're not the reserve currency. They don't have access to these deep pockets of domestic and foreign borrowers. And all those countries fit into that framework. They need to be more careful.

Dwarkesh Patel: Do you think we were put this exorbitant privilege that you talk about? Is it possible that... One way in which it's bad for us is that it allows or incentivizes us to take on more debt than it's wise to. And especially if it's not a permanent advantage we have that, you know, like... When you're at the top, you take out this cheap debt, and then over time you lose your reserve status, or it weakens at least, and you have to refinance that debt at higher interest rates. And so in the short term, you're incentivizing this behavior, which is not sustainable in the long run. So... Is there some political economy explanation for why this is bad for us?

Ken Rogoff: Yeah. I mean, I've heard that argument, but I basically think it's great for us. It's not just the government. It's all of us borrow less. And do we wish we were paying higher interest rates? I mean, probably most people who are getting a mortgage right now feel like our interest rates are plenty high. They don't need to see them higher. I think the exorbitant privilege, there are some drawbacks we don't need to get into, but it's basically incredibly fantastic if you owe $37 trillion, as our government does, to be paying half a percent to a percent less. We're talking hundreds of billions of dollars. our ability to see what's going on everywhere. A lot of what our spying does is using our exorbitant privilege and the dollar network. Our sanctions, I mentioned I was in my teens at the end of the 1960s. I didn't want to come back. One reason I didn't want to come back was the Vietnam War was pretty terrifying. I had many friends get drafted, their brains got fried by heroin, even if they didn't get killed. And sanctions, I'm not saying that We solved all our wars with sanctions. But make no mistake, we have used that in place of military intervention a few times. So that's been great. And I think losing that and not appreciating how important that is, is a terrible blunder that we might be making right now.

Dwarkesh Patel: This is a very naive question. And I know you address it at length in your book, but just to get a very like... I'll ask the question in the most straightforward way and then you can explain what's going on. How should I think about the fact that we are basically giving the rest of the world pieces of paper and we're getting real goods and services in exchange? Like, sure, there's this, at the high level, you can say that they're getting this liquidity or they're getting this network and that's what makes it worth it. But like, I don't know. Are we fundamentally getting away with something?

Ken Rogoff: So just to note, the United Kingdom's not the reserve currency. They're not the dominant currency. It used to be 100 years ago. They're not. And they look a lot like us with big current account deficits. They're one of the countries. That's why Trump was able to strike a deal with them because they weren't really running a surplus against us anyway. They're over-financialized even much more than we are. So... The core of the benefit we get is actually that we borrow safe assets, if you want to call our debt safe, and we invest in risky stuff. And that's Charles Kindleberger, who wrote one of the great books on crises. I had him as a professor at MIT. He called us bankers to the world. He said, yep. We're running this deficit. They're holding a lot of our treasury bills. We are making money hand over fist. It's sort of the same thing as the equity premium, where you hold stocks, not always, but on average it's better than holding bonds. So that's been very good, having the fact the dollars use very liquid, the markets. So you're, let's just say, a Silicon Valley firm, but big enough to issue debt internationally. I don't know if any Silicon Valley firms ever issued debt, but if you did, some firm, and you're issuing debt. people will buy it because it's in dollars. If you're the same firm in France, forget it. They don't want to hold euros. And even if you promise to pay in dollars, they're not happy about it because your income's not in dollars. So it's been fantastic. This is something that's been debated. Steve Moran, who was a Harvard student, Harvard PhD, he has made an argument. It's quite clever. He's the head of Trump's Council of Economic and Violence. Very smart guy. He's made this very clever argument that because everybody loves our currency, it makes us less competitive than everything else. It's partly hollowed out our manufacturing, and that's terrible. I always like a little bit of truth to that. First of all, the dollar goes like this, so it's not always high. Second of all, I mentioned the United Kingdom's kind of in the same boat. We're good at a lot of things. We're good at tech. Tech makes the dollar stronger, make no mistake. We're good at biotech. We're good at agriculture. We're good at a lot of things that make the dollar high. And if you're good at these other things, it's harder to be good in manufacturing. It bids up the cost of everything and the price. So, you know, on the whole, we're performing this banking function. That's really the big thing. This has gone on for really in the 50s, the 60s. It's gone on for a long time. And that's the core of our so-called exorbitant privilege. There's a really interesting book by Charles Mann called 1493 about how during Ming

Dwarkesh Patel: Dynasty China in the 17th century, they kept issuing different paper currencies and it was super unstable. And so people in China wanted a reliable medium of exchange. And so like tens of thousands of tons of silver from the New World, from the Spanish. would be exchanged for enormous amounts of real goods that were exported from China. And so from the Spanish perspective, they're getting like you know, shiplows and shiplows of real goods. All they're giving up is this medium of exchange. I don't know. I don't know how analogous it is to this situation.

Ken Rogoff: No, there are countries like Ecuador and others that dollarize. They literally use the dollar and they need the dollars. Right. And we're able to have them hold dollars. It's not silver, but, you know, we print it and they pay very low interest rates. They're holding treasury bills, not holding dollars. And it's, yeah, it's fantastic for us. We definitely, pay less on our debt because of that. And that's a fascinating example you bring up. I mean, actually, the Chinese invented the printing press. They invented paper currency way before the Europeans. But then, you know, what do you know? They kept printing a lot of it and had a lot of inflation. And I actually hadn't read that book. And that's a great example. I knew they were using silver, but I didn't. That number's bigger than I knew, than I'd heard.

Dwarkesh Patel: Final question. A big part of your book discusses the different countries which seemed at different times to be real competitors to America. You talk about the Soviet Union, Japan, China today. And we've discussed why they didn't pan out. And we can go into the details on any one of those examples. But big picture... Is there some explanation that generalizes across all these examples of why America has been so competitive or why it's been so hard to displace?

Ken Rogoff: So it's not just that we've stayed on top. We've just gone like this. We have, remember, after, you know, in the 1970s, Europe actually peeled away from the dollar block. But the rest of the world started globalizing. China globalized, eventually the Soviet Union, and the dollar just colonized all these places. They were all holding dollar debt, using dollars. That was much bigger than even the British pound was when the sun never sat on the British Empire. And so it's been amazing and surprising, I think, to people like myself if you read what everyone was saying at the time was just that it kept going up, that our share of everything kept getting bigger and bigger. And I think definitely to some extent we've been lucky. We talked about Japan. I think China made a big mistake with sticking to the dollar so long. Europe should have delayed bringing Greece into the euro because their crisis wouldn't have been so bad. So I think we've been fortunate by blunders, by our opposition. We've done some good things. But I think the thing Americans forget is we have been lucky at a lot of times. I worry our luck is wearing thin. So I quote a chess player, the great Ben Larson, who was the number two to Bobby Fischer when I was playing. And he was asked, would you rather be lucky or good in a chess game? And he said... Both. And I think Americans forget, they know we're good. And we are good that we've talked about the dynamism, this secret sauce that we have so far. But I think we've also been lucky if you ran it all again, it didn't have to go the same way.

Dwarkesh Patel: Well, it's a very scary kind of luck because if it's so easy for these other countries to make some mistake that causes them to totally fall behind, it should update you in the favor that, in general, it's easy for a country to get itself in a rut. It's sort of like the Fermi estimate thing of the fact that you don't see other alien civilizations is actually very scary because it suggests that there's some kind of filter, which makes it really hard to keep intelligent civilization going.

Ken Rogoff: Yeah. Well, I hope not, but we'll see. But it's certainly been amazing how the dollar is done and how the U.S. is done. And I hope we continue. We're doing a lot of things right now. I don't think Trump is the cause of the dollar being in gentle decline. That's just wrong. I think it would have happened with Harris winning. But he is the president at the moment and things like Liberation Day. And I've talked to tech people who think it's just brilliant. I understand that. Okay, we can debate it. I'm happy to debate it with them. We look at the rule of law. Okay, I'm sitting at Harvard University. Naturally, it feels that way. But also, we talked about having the president be able to get rid of all the independent agencies. It used to be if you were a foreign investor, you invest in the United States, you thought you'd get your money back. Maybe the stock would have gone down. Maybe the real estate you bought would have gone down, but you get paid. I think we were more exceptional than most about that. It's in doubt now. There's not any question. When I was telling people about the book, and the book's about a lot of things besides exorbitant and privilege, the whole arc of the US, but I was telling them, I don't know, I'm looking at the numbers, I'm looking at what China's doing, I'm reading about Europe and their central bank digital currency, I think we're going downhill. I showed it to academics, I showed it to financial people, showed it to tech people, they said, you're nuts. They didn't want to think about it. I don't know if I'm right, but I think we're thinking about it.

Dwarkesh Patel: When I was in China, I met up with some venture capitalists there, and they were quite depressed in general. And even founders say that it's hard to raise money. And I was asking them why, and they said that Investors don't want to invest because even if you invest in the next Alibaba, who's to say the government doesn't cancel the IPO?

Ken Rogoff: They're in trouble. I think Europe has a bright future in this context of being the team that doesn't have as many injured players. But yeah, China, it's not going to be forever, but I think five or 10 years that they're going to stay in trouble.

Dwarkesh Patel: Okay, thank you so much for sitting down with me and also answering all my, I know I'm sure there are many misconceptions and naive questions and so forth, so I appreciate your patience and educating me on this topic.

Ken Rogoff: No, it's an honor to be on your famous podcast. I heard from so many young people when I told them I was talking to you. You're with door question. Just, you know, fly back from here. Do whatever you need to do. I'm glad you were able to come here. And no, it's really been really interesting. And I'm glad to learn more about everything you're doing.

Dwarkesh Patel: The honor is mine. It was great to be able to travel here and speak with you. Thank you for tuning in. I'll see you on the next one.