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

Summary

Harvard economist and former IMF chief economist Ken Rogoff sits down with Dwarkesh Patel for a wide-ranging conversation about why he thinks China is in a deeper crisis than most observers realize, why the US dollar’s “exorbitant privilege” is starting to fray, and why he expects another bout of 10-20% inflation within the next decade as the way the United States lets the steam out of its unsustainable fiscal position. Rogoff argues that China’s leadership transition under Xi Jinping — away from the technocratic, world-class bureaucracy that absorbed advice from outsiders and toward a system organized around political loyalty — has converted decades of overbuilding in housing and infrastructure into a structural drag that may permanently cap China’s economic ambitions. He projects China gains roughly 1% per year on the US going forward, a forecast that is dramatically more bearish than mainstream Goldman Sachs-style extrapolations.

The middle of the conversation is a clinic in Rogoff’s signature theme: financial crises are categorically different from normal recessions. He estimates that the United States is permanently 15% poorer because of the 2008 crisis, that Japan would be 25-50% wealthier per capita without its 1990s collapse, and that the standard Solow catch-up models simply do not apply when financial plumbing breaks. Rogoff and Dwarkesh then walk through the four ways out of America’s debt: default (“not going to happen, we can print”), financial repression (worked after WWII but the financial system is now too important to suppress), austerity (politically untenable), and the path he thinks is most likely — a sustained inflation crisis that effectively cuts the real value of debt, followed by painful austerity. He warns that markets currently have too much faith in the independence of the Federal Reserve.

The final stretch covers AI and macroeconomics. Rogoff makes a counter-consensus argument that AGI will likely push real interest rates UP, not down — driven by huge energy demands, capital-intensive infrastructure buildouts, and the substitution of capital for labor that makes capital more valuable. He cites the TIPS market: real 10-year yields went from -1% in late 2021 to +2.2% today, a “massive” 3.2-point swing. Along the way Rogoff covers the Plaza Accord and the Bank of Japan governor who literally bowed in apology decades later, why he thinks Europe has the most diversification upside as the “team without as many injured players,” why the Fed must keep its single inflation target to remain independent, and why he believes American exceptionalism owes as much to luck as to dynamism — and the luck appears to be running out.

Highlights

”China is digging its way out of a crisis. They might never overtake us.”

“I mean, the 1% per year compression is actually like an extremely bearish forecast… they’re digging their way out of a crisis.” — Ken Rogoff, 20:18

yt-dlp --download-sections "*20:18-21:15" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "china-digging-out.mp4"

”Japan would be 50% wealthier per person without its financial crisis”

“Oh, I think 50% wealthier per person, I think way wealthier. They were richer than the United States around the late 1980s. They’ve moved to the bottom of the rung now.” — Ken Rogoff, 28:08

yt-dlp --download-sections "*28:08-29:15" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "japan-counterfactual.mp4"

”The Bank of Japan governor literally bowed and said ‘I have ruined our country’”

“He gave this speech to officials and he went like this and apologized. You know, very symbolically. ‘I have ruined our country, I did this, I take responsibility.’” — Ken Rogoff, 30:00

yt-dlp --download-sections "*30:00-31:25" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "boj-apology.mp4"

”America’s most likely path: 10-20% inflation to let off steam”

“I think the most likely thing will be inflation… 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.” — Ken Rogoff, 39:00

yt-dlp --download-sections "*39:00-40:00" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "inflation-crisis.mp4"

”AGI is an upward pressure on real interest rates”

“I think AGI and AI are upward pressures on interest rates. The huge energy needs, having to provide all the energy needs. And also, traditionally, when you did a lot of investment, it raised wages. But it’s possible… if you’re really just substituting for workers, it’s making capital more valuable.” — Ken Rogoff, 1:07:10

yt-dlp --download-sections "*1:07:10-1:08:30" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "agi-rates-up.mp4"

”America has been lucky. Our luck is wearing thin.”

“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.” — Ken Rogoff, 1:31:21

yt-dlp --download-sections "*1:31:21-1:32:30" "https://www.youtube.com/watch?v=P2b4TjQa4gk" --force-keyframes-at-cuts --merge-output-format mp4 -o "luck-wearing-thin.mp4"

Key Points

• Xi Jinping replaced technocrats with loyalists (0:48) - The Chinese Communist Party once ran an extremely competent, advice-absorbing bureaucracy; under Xi the system has degraded
• Rogoff warned them in 2016 — to applause (1:48) - At the China Development Forum he called out the housing bubble and over-centralization; top leaders thanked him afterward
• The seeds of China’s crisis go back to the 2010 stimulus (5:42) - Local government debt was an innovation under Hu Jintao; Xi never wound it down
• Real estate is one-third of China’s economy (11:44) - Tier-three cities are overbuilt and depopulating; “the feel of death”
• 45% savings rate, ~50% consumption — the rebalancing China refuses to do (13:13) - No social-security system, no real healthcare safety net for non-state-employees; people save out of necessity
• China gains only ~1% per year on the US going forward (18:00) - Rogoff disagrees with Goldman-style extrapolations; thinks China may never overtake the US in nominal terms
• They’re moving reserves into gold and building new payment rails (22:40) - China holds an estimated $2 trillion in Treasuries via proxies, not the official $1T; building parallel financial pipes
• Europe’s CBDC is moving faster than expected (25:01) - The euro-area central bank digital currency is partly motivated by avoiding US payment-rail dependence
• Financial crises are categorically different from recessions (34:32) - The US is ~15% poorer because of 2008; financial damage doesn’t snap back like normal recessions
• The Plaza Accord was a Japanese mistake, not a US imposition (28:25) - Rogoff changed his mind: financial liberalization done too fast caused the Japanese crash, even though the trigger was 7 years before the bust
• America’s four exits: default, financial repression, austerity, inflation (39:57) - Rogoff bets on inflation followed by austerity; default is a narrative for book sales, not reality
• A US default is impossible — we can print (41:34) - Greece couldn’t because of the Euro; Japan never has; “we’re not going to default, we’re going to inflate”
• Fed independence is more fragile than markets believe (45:00) - Congress and the President have many tools to override the Fed in a crisis or emergency declaration
• Inflation papers had vanished from the AEA agenda for 15 years (54:00) - Until this year; the profession is finally course-correcting after a major intellectual miss
• AGI is an UP pressure on real interest rates, not deflationary (1:07:10) - Energy demand, capital-intensive build-out, capital substituting for labor
• TIPS yields swung from -1% to +2.2% — a massive normalization (1:08:00) - Real 10-year yields are at their highest level in two decades; most of it is normalization, not yet AI
• Rogoff is bullish on Europe as a portfolio diversifier (1:11:11) - Europe is “the team without as many injured players” — remilitarization, latent tech potential, deregulation pressure
• Exorbitant privilege saves us hundreds of billions a year (1:23:40) - On $37T of debt, even half a percentage point of cheaper financing is enormous; sanctions power is part of the dividend
• AI may make populism look like nothing if it arrives fast (1:03:00) - Rapid labor-market disruption could pressure fiscal policy in ways that current populism makes look mild
• Rogoff’s bottom line: America has been lucky AND good (1:31:21) - Quoting chess GM Bent Larsen: “Both” — but Americans forget the “lucky” part

Mentions

Companies

• Goldman Sachs (18:20) - Made bullish forecasts that China would surpass the US “like Canada to the United States”; Rogoff thinks they’re wrong
• WorkOS (21:09) - Sponsor; powers OpenAI, Anthropic, Perplexity enterprise SSO
• Vercel (21:09) - Mentioned as a WorkOS customer
• Scale AI (35:50) - Sponsor; their SEAL safety leaderboards mentioned
• Merrill Lynch (1:11:11) - Produced a video Rogoff did with Zbigniew Brzezinski on international diversification

Products & Technologies

• TIPS (Treasury Inflation-Protected Securities) (1:07:54) - Real-yield benchmark that swung 3.2 points from -1% to +2.2%
• Central Bank Digital Currency (CBDC) (25:01) - Europe’s CBDC is moving faster than expected; partly to bypass US payment rails
• Gold (22:40) - China is increasingly diversifying its reserves toward gold, away from dollar assets
• Bitcoin / crypto (22:40) - China hasn’t moved into crypto reserves yet; crypto regulation is “overrun by politics”
• Gemini Live (1:01:15) - Sponsor; voice + video + screen-share tool Dwarkesh used to fix admin settings
• Plaza Accord (1985) (28:25) - The exchange-rate agreement that Rogoff now views as a Japanese self-inflicted wound
• Federal Reserve / TIPS / Fed funds rate (45:00) - Independence framework Rogoff helped build the academic case for
• Bank of Japan / financial repression (37:31) - Holds an effective 30T-equivalent in debt; the Japan playbook the US can’t copy
• Brexit (1:19:31) - “Democracy gone amok”; should have required a two-thirds vote
• CBO / UK Office for Budget Responsibility (1:16:13) - Examples of fiscal authorities; UK’s is more independent than the US version

People

• Xi Jinping (5:42) - Promised liberalization, delivered loyalty-focused governance instead
• Hu Jintao (5:57) - Launched the 2010 stimulus that planted the seeds of the current crisis
• Jiang Zemin (28:33) - Personally told Rogoff “we’re not going to let this happen to us” about Japan’s mistakes
• Carmen Reinhart (29:50) - Co-author of “This Time Is Different”; Rogoff’s principal collaborator on financial crises
• Ben Bernanke (42:17) - Princeton classmate; Rogoff credits him with the financial-crisis-amplification thesis
• Milton Friedman (42:43) - The original “Great Depression was a money supply problem” diagnosis Bernanke later refined
• Jerome Powell (45:00) - Fed chair; Trump tried to fire him before the Supreme Court intervened
• Donald Trump (45:39) - Bashes the Fed; would be served by a recession scapegoat
• Scott Bessent (47:00) - Treasury Secretary; “tech titans” Rogoff knows have suggested putting him in charge over Powell
• Steve Miran (1:25:08) - Trump’s CEA chair, former Harvard PhD student; argues exorbitant privilege has hollowed out US manufacturing
• Daron Acemoglu (1:07:10) - Cited for showing AI can either raise or lower wages depending on substitution vs. complementarity
• Ezra Klein (40:25) - “Abundance” makes the point that austerity language pretends debt has no costs
• Bent Larsen (1:31:21) - Chess grandmaster, Bobby Fischer’s chief rival; quoted on lucky-vs-good
• Charles Kindleberger (1:25:08) - MIT mentor; called the US “bankers to the world”
• Charles Mann (1:28:07) - Author of “1493,” cited for Ming-era silver-for-goods comparison
• John Maynard Keynes (1:04:58) - “Renaissance person”; the human-behavior insight that founded modern macro
• George Osborne (1:16:13) - UK Chancellor; created the Office for Budget Responsibility
• Mark Zuckerberg (1:48) - In the audience for Rogoff’s 2016 China Development Forum talk
• Recep Tayyip Erdogan (52:05) - Turkey’s president, the cautionary tale of central-bank-firing macro

Surprising Quotes

“I had heard from many people. ‘We’re not going to let this happen to us, there’s no way… look what happened to Japan.’” — Ken Rogoff, 28:33

“The Federal Reserve says it’s very independent. The Supreme Court recently ruled Trump couldn’t fire Powell. I think they’re dreaming.” — Ken Rogoff, 45:00

“If AGI came that fast and that big, it would make the populism phenomenon that we’re facing now seem like nothing.” — Ken Rogoff, 1:03:00

“Brexit is an example of democracy gone amok. What a dumb idea.” — Ken Rogoff, 1:19:31

“I quote a chess player, the great Bent Larsen, 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.” — Ken Rogoff, 1:31:21

Transcript

Dwarkesh Patel: 0:00 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.

Ken Rogoff: 0:11 Uh, thanks so much for having me, and welcome to Harvard, which is where we’re filming this.

Dwarkesh Patel: 0:17 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. They would listen, you met the premier with your family and he would, like, 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: 0:48 Well, first I want to be careful to say they listened to everybody. I mean, the Chinese are way better than we are at 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 I could not believe 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 the what’s called the China Development Forum in 2016. It’s this, you know, giant hall that had most of the top leaders in the party, a lot of the elite of the tech world, Mark Zuckerberg and, you know, 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’s 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 oh no you know are they 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 was thinking about right now we have some very good people but the average quality at the very top I think’s gone down and China’s not as competent, that’s a recipe for having bad things happen.

Dwarkesh Patel: 4:22 By the way on that topic, so you mention in the book that before that you had to clear your talk and so you gave them a sort of like watered down version of what you would say. Um 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 and…

Ken Rogoff: 4:34 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: 5:05 Yeah I mean I think a lot of people in that situation usually don’t even though they should or the logic makes sense but I think people often don’t.

Ken Rogoff: 5:12 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 bid 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.

Dwarkesh Patel: 5:42 So you’ve said that the seeds of their current crisis were sown in 2010 with their big stimulus. But so is it wrong then to blame Xi Jinping for this? It was you know before his time under Hu Jintao that they did this stimulus that’s causing all these problems now, right?

Ken Rogoff: 5:57 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 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. You know, this is really the time we’re going to liberalize our markets a bit, you know, we’re going to do things that we haven’t done.’ And he didn’t that much.

Dwarkesh Patel: 7:21 Yeah.

Ken Rogoff: 7:22 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.

Dwarkesh Patel: 7:54 Yeah.

Ken Rogoff: 7:55 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 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, you know, for using those words like 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% and they’re starting from a very low base.

Dwarkesh Patel: 8:40 Right.

Ken Rogoff: 8:41 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- I think they’re in a lot of trouble. They’re overbuilt in infrastructure, they’re overbuilt in housing.

Dwarkesh Patel: 8:59 Have you- have you been to-

Ken Rogoff: 9:00 I think he’s been reluctant to take risks and I think it’s gotten us to where we are where I- I think they’re in a lot of trouble. They’re overbuilt in infrastructure, they’re overbuilt in housing. Have you have you been to- I was there six months ago.

Dwarkesh Patel: 9:01 So where did you go?

Ken Rogoff: 9:02 Shanghai, Beijing, Chongqing, Chengdu, Hangzhou, and Anshan.

Dwarkesh Patel: 9:09 Oh, so you saw a few of them, the medium-sized cities. And you probably immediately felt, at least a couple of them, I’m not sure where all the… at least one of them I think is a new tech center and I can’t pronounce it. Hangzhou?

Ken Rogoff: 9:22 Yeah, yeah, it’s a big tech center. But some of the smaller cities, they don’t feel like the big cities. 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 is 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’re, you know, have amazing roads, amazing real estate, amazing housing, but the feel of death, you know, in those cities. And so they were very good at building stuff, that the Russia was very good, the Soviet Union was very good at building cement factories and steel plants and railroads, but that they’ve run to the… that’s run its 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 is 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, you know, not easy to be in those shoes.

Dwarkesh Patel: 10:34 Hmm. 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 just like a humongous complex. 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? Things are just… 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 like ginormous. You would go through one like little shrine and then behind it would be an even bigger like structure and then another one, concentricly 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: 11:44 No, it’s very much that feeling. And the young people don’t want to live there. I have a lot of young people here as students and I run into people, they don’t want to 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 Rochesters and the Liverpools and the Rennes, Frances? I would say yes, you know, there’s too much in the big cities, there’s overcrowding. Look what happened to São Paulo, think what happened to Mumbai. But, you know, I would have been wrong. I mean, that the—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, the 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: 12:43 If it hadn’t been for financial repression, and suppose all this investment had been done through, um, you know, purely market mechanisms, would—would things have turned out much better? I mean, even today, if like say today China gets rid of all financial repression, they save a lot, right? So this money has to go somewhere. Would it—are there enough productive opportunities to soak up all these savings? Or could there have been in the past, like if they got rid of financial repression, is this problem solved or could it have been solved?

Ken Rogoff: 13:13 Well, what everyone’s told them forever is their saving rate and investment rate are astounding, and I—you know, it was higher before, but it’s still maybe 45% or something. Their consumption rate, ours is pushing 70, European countries are a little more temperate, but they’re in the low 60s. Their consumption’s very low. Uh, they have some wealthy people that you saw when you go to the—the marquee cities, but a lot of China’s living on, you know, 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—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, you know, make imports more—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, you know, more security than they have. So first of all, there’s nothing like our social security system. You need to save for 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 know, you’re on your own.

Dwarkesh Patel: 14:39 Right.

Ken Rogoff: 14:40 They’re not allowed to invest abroad. I mean, they’re not allowed—I mean, they have—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. Um, there’s nothing—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, and you could either save in a bank account which you got a crummy interest rate—

Dwarkesh Patel: 15:12 Right.

Ken Rogoff: 15:13 —or a house. They’re going down, so their people are cutting back. I— they can dig their way out. There’s— 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— there’s no simple thing, but the general thing would be to try to rebalance saving, investment, and consumption.

Dwarkesh Patel: 15:38 Going back to your point about, is purchasing power parity the right way to compare or is nominal the right way to compare? You say 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 have to pay their soldiers less, isn’t that actually more relevant if we’re trying to figure out who’d 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: 16:23 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 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 carrier is like you know 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 ourselves— 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, you know, they’re they’re paid much less. It’s you know we— 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: 17:23 What is your projection? So right now I think their nominal GDP— sorry, GDP is 75% of America’s or something like that.

Ken Rogoff: 17:34 In— yeah, in dollar in— what we call the market terms, yeah.

Dwarkesh Patel: 17:38 What’s your projection by 2030 and by 2040, the ratio?

Ken Rogoff: 17:43 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 at one point in 2024 it’s around two thirds. But the— it’s really volatile with the exchange rate. The dollar’s really high. So when the dollar’s really high it makes us, you know, look— 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.

Dwarkesh Patel: 18:08 Wait, that means you think they will actually never have a bigger economy than us, or at least in the—

Ken Rogoff: 18:13 It’ll take a long, long time.

Dwarkesh Patel: 18:15 So we’re talking about the absolute size, they have four times as many people.

Ken Rogoff: 18:20 But, yeah, I mean there were these projections by Goldman Sachs, by many others, that, you know, we’d be like Canada is to the United States pretty soon. And I think, like all these extrapolations, that proves wrong.

Dwarkesh Patel: 18:33 Which brings me to I think a big topic, which is a lot of people will look at some trend, whether it’s, you know, growth in something, AI, China—

Ken Rogoff: 18:45 I was going to say, just timing in AI.

Dwarkesh Patel: 18:47 Yeah, and they’ll look and just, you know, project it into the future. And I think, 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—

Ken Rogoff: 19:00 And they happen periodically, maybe Brookings 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 happened 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, you know, New York. I mean, it’s nicer than, you know, than it could be, but it’s no high-speed train. You mentioned China, they’re—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—that’s we’ve kept that in our DNA, and I think that’s very important to preserve it.

Dwarkesh Patel: 20:18 I mean, the 1% per year compression is actually like an 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,’ so the fact that you think even by 2040 they won’t have caught up is actually very, very bearish.

Ken Rogoff: 20:37 No, 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’s 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.

Dwarkesh Patel: 21:09 When Vercel first started working with massive enterprises like GitHub, eBay, and IBM, they realized that these customers couldn’t even begin using their platform without single sign-on. So what did Vercel do? Well, they could have decided to build it themselves, but that would take months, and plus they’d need a bunch of other features like SCIM, RBAC, audit logs, and much more. Instead, they reached for WorkOS, the platform that makes apps enterprise-ready. With WorkOS, Vercel was able to ship SSO super fast and continue their hyper growth. And they’re not the only one. Today, WorkOS powers over a thousand top companies, including AI giants like OpenAI, Anthropic, and Perplexity. If you’re a startup, time is your most precious asset, and WorkOS is like a time machine that lets you get to enterprise-ready faster. Learn more at workos.com. Going back to the subject of your book, will there so people who are trying to predict whether when and how China will invade or blockade Taiwan will look at satellite photos of different docks and see how many ships are there so they’ll look at military preparedness. From a monetary perspective, are there signs that we could be watching for? For example, if they think that a lot of their American dominated assets will get sanctioned or they won’t have access to them, could we see them liquidating them or would there be any sort of preparations that we could see on the monetary side that would let us know that they’re doing something which something big that they’re preparing for?

Ken Rogoff: 22:40 Well, 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 into 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, you know, 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 when 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— 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 going to be something they’ll do suddenly, because you know, they, maybe Trump will bring down the markets and then there’s nothing to save. But they don’t want to be the ones to bring down the markets and cause a global crash.

Dwarkesh Patel: 24:46 What would the alternative rails they would build look like? Are they buying oil from Iran in RMB? Will other countries that they need things from accept that? What is the, in 2030, what is their goal?

Ken Rogoff: 25:01 Well, so 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 like a lot of its oil to China even when there’s sanctions. And they’re moving in that direction. It’s not just about what you invoice the payment in, 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. And that’s actually one of the reasons that they’re doing it, for international payments.

Dwarkesh Patel: 25:46 Okay, so let’s talk about Japan, which you also cover in the book or their crisis. And you blame the US’s pressure in advance of that 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 share of 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 US. So yeah, how much of this is like actions taken by specific actors versus—

Ken Rogoff: 26:30 I mean South Korea’s 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 it’s sort of famously in Mexico sometime there were, you know, 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, and 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, uh, 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’s part of it, but I think the financial crisis is a very big part of it.

Dwarkesh Patel: 28:02 And what is it counterfactual, so suppose that crisis hadn’t happened, how much wealthier is Japan today than it might have otherwise been?

Ken Rogoff: 28:08 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 around, you know, 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, I think the financial crisis and what, okay, wasn’t the only thing, but we, uh, you know, it’s a long story, but I think we effectively forced 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, um, where I had looked at that for a long time afterwards because, you know, going back to 2005, that’s long after the Japanese crisis. I would hear from, uh, Jiang Zemin was the president of China that I met, ‘We’re not going to let this happen to us, there’s no way,’ you know. Uh, we were discussing, I thought maybe they shouldn’t have such a fixed exchange rate, and he said, ‘Well, that’s what the United States, you know, said to Japan, and look what happened to Japan.’ And I, you know, I didn’t push back that much to someone like that. You talk to other people, but I, I heard that from many people. And, um, I used to think, you know, well, how can that be? Because all of these things, there’s this thing called the Plaza Accord in September 1985, where we pushed them to make their exchange rate more. And I used to say, ‘Well, you did that in 1985, I mean, the crisis happened…’ Reinhart and Carmen Reinhart, my co-author… …many thanks. We date the crisis as 1992, it’s seven years later, and I think I continued to think that, and but you know, I would say over the years and particularly in recent years I’m thinking, I was wrong. You know, 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, I think this was a huge mistake by Japan to agree. And actually, um, someone who was at a 10th anniversary of the Plaza Accord held in Tokyo, had the, 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 this speech to officials and he went like this and apologized. You know, very symbolically. ‘I have ruined our country, I did this, I take responsibility.’ And again, I thought, you know, I mean he told that to you when he read my book and, yeah, you know, 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.

Dwarkesh Patel: 31:25 Asking as somebody who obviously doesn’t know the details, at like a high level, 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 if whatever they could have otherwise produced, why can’t they still not produce it or, you know, like 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 decades ago?

Ken Rogoff: 31:57 Well, their case is very unusual, although having a number like 10% or 20% is very typical. 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 during the Great Depression.

Dwarkesh Patel: 32:25 There’s a lot of economic models where you, you know, Solow catch-up or this empirical—

Ken Rogoff: 32:29 No, yeah, yes, but what happens with the financial crisis, particularly in Japan, is it sort of blew up their business model. So for example, they, maybe China wouldn’t have overtaken them so quickly if they had 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, we were much more brutal in what we allowed… had 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, you know, 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: 33:26 Just to put it into context, what do you think the counterfactual wealth of America looks like without 2008 today?

Ken Rogoff: 33:33 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 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, you know, would we have done other things? And I don’t want to in some ways 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.

Dwarkesh Patel: 34:32 I think this updates me towards the view that financial crises are even worse than I think. Like, 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 that’s just like, oh wow.

Ken Rogoff: 34:47 Yeah, you’re just losing a lot of cumulative growth. I mean, look at Greece today or Portugal. You kind of get back to having a positive growth rate, but you’re not picking up. They’re very different than a normal recession.

Dwarkesh Patel: 34:59 And actually, in a normal recession you go down and then back up.

Ken Rogoff: 35:04 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 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, you know, this was. We could have proved wrong and maybe if we had done things better, you know, 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.

Dwarkesh Patel: 36:00 …is running out. So major AI labs like Meta, Google DeepMind and OpenAI, all partner with Scale to push the boundaries of what’s possible. Through Scale’s data foundry, major labs get access to high quality data to fuel post-training, including advanced reasoning capabilities. Scale’s research team SEAL is creating the foundations for integrating advanced AI into society through practical AI safety frameworks and public leaderboards around safety and alignment. Their latest leaderboards include Humanities Last Exam, Enigma Eval, Multi-Challenge, and Vista, which test a range of capabilities from expert-level reasoning to multi-modal puzzle solving to performance on multi-turn conversation. Scale also just released Scale Evaluation, which helps diagnose model limitations. Leading frontier model developers rely on Scale Evaluation to improve the reasoning capabilities of their best models. If you’re an AI researcher or engineer and you want to learn more about how Scale’s Data Foundry and research lab can help you go beyond the current frontier of capabilities, go to scale.com/dwarkesh. So you say in the book that you expect there to be another spike in inflation within the next decade, and also the fiscal position of the United States it doesn’t seem sustainable. If we go forward 10 years, 20 years, when we do hit this, when the piper comes calling, what actually happens? Is it going to be some acute crisis like happened in Greece? Are we going to have some sort of lost decade kind of thing like Japan? What- what will happen?

Ken Rogoff: 37:31 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. I actually don’t know the number off the top of my head of the Fed, but I want to say seven trillion? They would have the equivalent of 30 trillion. I mean, so they’ve done this. It’s not been—it’s not the only reason they haven’t grown, not by any means. But it’s not good for growth. It’s… um… 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. What? 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. I mean, 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, there’s the 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.

Dwarkesh Patel: 39:57 Yeah. So just for the audience, there’s four ways we could go down on the debt. We could default, which you don’t think is likely…

Ken Rogoff: 40:05 But really good for my book.

Dwarkesh Patel: 40:07 Well, I mean already you’ve timed this one so well. I mean, I’m shorting the market when your next one comes out.

Ken Rogoff: 40:14 I got a new way.

Dwarkesh Patel: 40:15 Financial repression, I guess you could actually cut the deficit, or or inflation. And you say, well if there’s another round of inflation, then after that there’ll be what everyone calls austerity.

Ken Rogoff: 40:25 Which by the way, this word austerity the progressives use whenever you just ignore debt building up and spend whatever you want and austerity’s when you don’t do that. I mean, I think Ezra Klein’s book actually makes the abundance, makes the point that there are benefits, you know, 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 yeah, you can… that’s what everyone else has to do and we’ve gone longer than most without doing it.

Dwarkesh Patel: 41:03 If it’s going to be a financial crisis and financial crises are this bad…

Ken Rogoff: 41:07 Inflation crisis. So whether there’ll be… a financial crisis is 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 going to have a crisis like Greece had. That’s just wrong.

Dwarkesh Patel: 41:32 Why wouldn’t we?

Ken Rogoff: 41:34 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: 41:44 But Japan was using its own currency and it didn’t default.

Ken Rogoff: 41:49 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 Two, of course Japan defaulted on its government debt. that in World War II. That’s a… that’s an interesting story. But no, it’s the financial crisis they had. So financial crisis is making your banking system not work, a 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. When Milton Friedman, one of the greatest economists of all time, looked at the Great Depression, he said, you didn’t print enough money. You tightened the money supply too much. And 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. And he came along and wrote this amazing paper. Again, just sort of 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, you know, made this conjecture that, you know, 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: 44:03 Hmm. You say in the book that we didn’t outgrow our World War II debt. Uh, 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. Um. And of course, we had the inflation recently. So do you think there’s some irrationality in the market for US government debt already given the fact that like we can forecast what’s going to happen here, they can read your book and say that inflation’s going to go up and their, 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?

Ken Rogoff: 44:38 Well, I think number one is they have too much faith in the independence of the Federal Reserve. 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 says 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: 45:21 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, which they’re actually happier about. So they could be like, ‘Ah, I’d love to do this irresponsible thing but I can’t because the Fed, you know, it’s out of my hands.’

Ken Rogoff: 45:39 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 minute, but it’s around 4.5%. That’s not indexed. The indexed 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. But, um, 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, you know, I’m talking my book to say it’s a great idea. I don’t mean my book book, but you know, my human capital. But it’s, you know, I like to say that the Federal Reserve fights for its independence every day. And I hear senators and people like that say they’re idiots. I hear people in Silicon Valley tell me they’re idiots, and you know, 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 Bessent—he’s the Treasury Secretary—is smarter than Powell, why don’t we let him run things, etc. They could.

Dwarkesh Patel: 47:52 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 system. I have this 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. Um, and if we wanted to replicate how the Fed works, if we 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.

Ken Rogoff: 48:29 Well, one of the things the Fed has is this simple barometer that everybody sees they don’t really see it but they have a feel they see gasoline prices is 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 uh 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 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 you know or I side with technocrats my students are technocrats. I think way more things should be like that.

Dwarkesh Patel: 49:33 Right. But if you wanted to do that, so 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?

Ken Rogoff: 49:42 Well I was going to say the Pentagon, I’m not speaking of the current Pentagon but let’s just up until now I haven’t looked closely. That’s been run pretty darn well. I mean it’s the military’s 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 you know run the run the Pentagon and there may be something to that. I think to some extent and maybe I’m defending them too much but uh you never know where the next blow’s going to come from. It always looks like a lot of your stuff’s wasted, you built up but your enemy’s 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 uh crypto regulation like would be a good example of why don’t we have you know something more independent? Instead it’s what I you well know what’s happened it’s been overrun by politics. In fact um 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… accord and been told he can fire the head of any agency and I assume by, you know, inference he can also fire anybody at any agency. So, I just, 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. Uh, they go off in the wrong direction, you try to fix it, but to just have everything switch every four years, very worrisome.

Dwarkesh Patel: 51:27 It was interesting though because before Trump, maybe for intrinsic reasons or maybe because of norms, it was really hard to fire people anyways, and that didn’t produce remarkable competence across the government. Uh, 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—

Ken Rogoff: 52:05 Oh, they haven’t avoided it. I mean, they were under incredible pressures. Uh, obviously it’s changed, but uh, I talk about this a little also in my book that you know, 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. So, but they managed to keep their core competency, their core setting monetary policy uh, independent. No, it’s been, it’s been amazing, but it’s a, it’s 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 they just, you know, 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, you know, you can’t count on that continuing.

Dwarkesh Patel: 53:10 Apart from the political pressure problems from the outside, uh, 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, um, even from the inside basically, given what the younger people in this profession care about, uh, 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: 53:44 No, no, I mean, this was a wake-up call. So, uh, 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’s this thing called the American Economic Association meetings. Everybody goes, you go to— And they took all the abstracts and the titles for 15 years and the word inflation had not appeared until this year.

Dwarkesh Patel: 54:08 So why- why are you optimistic about when they get in charge?

Ken Rogoff: 54:10 No, but you know, there’s an- 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 academic- American university system, at least in the sciences, I’ll speak of economics, is that okay, you know, 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, um, there’s- there’s some rebalancing and- and I’m- we- we have a very competitive system of publishing, we have a seminar system that’s just ruthless. So, you know, they’ll- 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, you know, the music of Fred Astaire or something. And they’d go okay, that’s, you know, that 21st century, the internet, you know, can never happen. Or I teach debt and if I have foreign students, they’re all having problems, I mean, so they raised, but the Americans… Oh, we can just do whatever we want, you know, and- and um, but it’s changed.

Dwarkesh Patel: 55:34 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. So do you have some intuition about how- how much we could screw ourselves over with that route as opposed to inflation?

Ken Rogoff: 56:02 Well, we’ll start with World War II, but it’s never just one thing, obviously, there are a lot of things. So 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 worked really enthusiastically. I mean, there was real patriotism in the production, I’m not saying we’re not now, but they were able to keep the- 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, you know, growth lift. And we didn’t manage it perfectly. We actually had quite a bit of inflation during that period. But it was uh… so the financial markets as you grew up in, as young people know them today, they didn’t really exist. didn’t exist back then. But you know, the world has changed a lot.

Dwarkesh Patel: 57:05 Does that mean that US growth would have been even higher after World War II if we had just like kept the government debt or figured out some other way to deal with it, but we had let financial markets develop earlier?

Ken Rogoff: 57:17 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, we but we didn’t, 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. There wasn’t, I’m slightly being hyperbolic and maybe it was 50% of GDP altogether, everything else. Local state and local debt had been defaulted on. You know, now it’s bigger than the federal debt by a wide margin. So it’s sort of a different world to putting in financial repression now when that’s a big part of our business models, the financial sectors.

Dwarkesh Patel: 58:25 And just to make sure we’ve completed the concrete scenario. So basically, your prediction is there’ll be some certain there’ll be some crisis, some surge of inflation, then there’ll be austerity. And then what happens? Is is growth really slow afterwards because government can’t spend as much? Like what yeah, what what do the next few decades look like in your world?

Ken Rogoff: 58:49 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, I mean, it’s not the end of the world. During the European debt crisis, that happened 2010 to 2012 mostly. 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 you they 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, you know, I’m an academic and I’m not particularly looking to put my ideas forward by being maximally hysterical, but hysterical is definitely possible. In the realm of possibility here, and nothing’s in the, 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-skilled immigration, we could make changes. There’s lots of things that could go well.

Dwarkesh Patel: 1:00:20 On the growth thing, Europe’s growth has been pretty bad after 2010. Japan obviously had 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 apace?

Ken Rogoff: 1:00:34 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 not—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. Uh, 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: 1:01:15 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 around your 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-what do you mean by saying AGI, any-any job that can be done purely through computers is automated? So white-collar work, the work we do even, uh, is automated within 20 years.

Ken Rogoff: 1:02:39 I mean, anytime you get a big productivity boost, it’s fantastic. If it comes quickly and yes, that can solve problems. I will say that historically there’ve 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. All right. How much do you spend, you know, 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: 1:03:33 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: 1:03:46 Um, we certainly can run monetary policy the same way. So you don’t automatically get deflation just because some goods are going down. You can 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, there are raw minerals and all the materials that go in. You know, 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: 1:04:40 Right. But should they be trying to fight the deflation at all? In that world, because, you know, we need inflation to like root out the rentiers, we’ve got to fight downward wage rigidity, but now the AIs have all the jobs, they 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: 1:04:58 Okay, that, that is a very good point. Um, 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 move 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 worker—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 up or down. When 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.

Dwarkesh Patel: 1:06:27 Yeah.

Ken Rogoff: 1:06:29 And it’s a whole another line of discussion, but they felt they couldn’t lower them into significant negative territory. So 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. Well, when they’ve hit a bottom, they don’t. So I have a whole book about negative interest rates, but a whole another thing. But if we’re imagining interest rates to go up, it’s not much of a technical real interest rates, inflation adjusted, it’s not much of a technical problem. You just, you know, let the interest rates go up a little less so that you’re not getting deflation.

Dwarkesh Patel: 1:06:54 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 anyway, you might as well start spending as much as you can right now.

Ken Rogoff: 1:07:10 I think AGI and AI are upward pressures on interest rates. So lots of crude reasons. The huge energy needs—I should have asked you about that first—you know, having to provide all the energy needs. And also, as you say it, you know, traditionally, when you did a lot of investment, it raised wages. But it’s possible, and there’s economists like Daron Acemoglu have, you know, 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 it’s with what the pressures on monetary policy, a little bit depend on that. In principle, it makes life easier. If it did push things down, 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: 1:07:42 Well, let’s talk about it a little bit. I mean, 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, for, I don’t know, should they be locking in a 100-year bond at the current interest rates because they’re only going up from here?

Ken Rogoff: 1:07:54 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 the 10, there’s a thing called the TIPS market, Treasury Inflation-Protected Securities. So these are bonds where the government pays you whatever inflation is plus an interest rate. In 2021, late 2021, that interest rate was minus 1%. You gave the government $100, they gave you back $99 worth of purchasing power. Today, it’s plus 2.2%. So it’s gone up 3.2%, which is massive in that market. Now, most of that isn’t AI, yet. Most of that’s just because we went from a period of crazy low interest rates that weren’t going to last. But if you’re asking me, does AI put further upward pressure on it, I’d say yes. An air bond that’s indexed to the inflation rate that our treasury issues. Inflation index is only about 10% of our total debt, but, you know, and it’s not… 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 and 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, um, 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, uh, we’re getting old, we’re not inventing anything… I know you’re just debating against that, and good for you. But, you know, the… 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, that just sets the overnight interest rate, but these… 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, uh, 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. Uh, growing populism, uh, geopolitical fracturing, many things. I tend to think interest rates are… 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: 1:10:54 Mm. You say in the book that you expect a rebalancing from US equities to… um, to foreign equities. US equities have been outpacing foreign stocks for the last couple of decades, and you say you expect this to change or there’s… do you see some rebalancing? What is it that causes that?

Ken Rogoff: 1:11:11 So, I think I say very concretely is that when the dollar’s really high, you should expect the euro to go up. And I feel strongly about that. Like when, uh, my first important paper was about exchange rates. Uh, that’s why the book’s about exchange rates. And, uh, 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, you know, the euro will do well. There’s… 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… Europe seems to be under pressure to remilitarize. I was aware that Harris was probably going to cut the US defense budget, so that would put… pressure on them, remilitarizing would actually be good for their 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, I do. Now I have I have to say just so your listeners can calibrate this, I once, you know, my my first book was a very mathematical book called Foundations of International Macroeconomics and, you know, in theory you should diversify. You shouldn’t put all your money in the United States. And I did a video with Zbigniew Brzezinski, Mika Brzezinski’s father for people who don’t know who he is, but he was Carter’s 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 made to say was very, very light, you know, 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’s 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 the what is it? Our US premium just should get bigger and bigger and bigger. You know, these things have some regression to mean.

Dwarkesh Patel: 1:13:43 Maybe not with AI all being in the US? Is it because you’re predicting like does the S&P keep growing at 8% but foreign equities do even better or is it that the US equity slows down? It just that they do even better or is it that US equity slow down?

Ken Rogoff: 1:13:54 I mean, look, you know, you you 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 policy makers 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. I mean, I just you know, 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. There’s some just as in I think California where you’re from, there’s a a little bit of dim awareness that it might be over-regulated and you might do things differently. I think I feel that’s happening in Europe.

Dwarkesh Patel: 1:14:51 If you look internationally, if you had been betting on catch-up, how I wonder if you could backtest that because There’s some intuition, well, if you’re poor then the frontier, it makes sense that it would be easier for you to catch up. There’s another intuition that if you’ve been persistently behind the frontier, there must be some deep endogenous reason why you…

Ken Rogoff: 1:15:11 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. But, uh, you know, sort of, uh, I think Europe’s not so hopeless that it can’t pull it together. I’d make the comparison, I’m a basketball fan, uh, the Boston Celtics just got crushed by the Knicks, uh, as we were just before we were taping this. And, you know, part of it is our star, Jayson 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 to some extent now, you know, you do better.

Dwarkesh Patel: 1:15:48 Yeah. Um, is there some institutional reform we could make that would get us out of this political equilibrium we’re stuck in, where both parties when they’re in power are incentivized to increase the debt and there’s no institutional, um, check on, um, that, that proclivity?

Ken Rogoff: 1:16:13 There have been a lot of people tried this with, for example, having what are called fiscal councils. And, uh, I have a, did a paper once with, uh, Julia Pollock, who’s a brilliant economist, uh, you can look her up, uh, when she was an undergraduate, about fiscal councils. That was a, quite a way 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, uh, 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 necessarily have to go by their predictions, but they got to say whatever they think. Our, 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, uh, more independent. Uh, you know, there’re 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, uh, but I, I don’t, I think it has to go to our electoral system. system right or campaign financing, there, do we have term limits?

Dwarkesh Patel: 1:18:05 But would that 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.

Ken Rogoff: 1:18:18 I don’t know. 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, you know, somebody asked me, you know, if you were advising, 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 wanted to do. And it’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, you know, 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 that. I’m not saying it’s perfect, there are lots of things we should do, but yeah, I don’t, look, this is, you know, out of my paycheck so to speak.

Dwarkesh Patel: 1:19:27 You’re the former chief economist of the IMF. If it’s not your job, whose?

Ken Rogoff: 1:19:31 No, no, but as an economist, no, I mean, these are, these are very political. That I mean, I think you Brexit’s an example of democracy gone amok. What a dumb idea. Maybe I, I won’t say I don’t know Brexit was right or wrong. Okay, I mean like we’ll 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 whole government department here with people specializing in what we should do. And 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: 1:20:20 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: 1:20:32 Well, it’s not the only thing going on in the world that your debt is just, you know, one thing. Countries like certainly Australia and Canada are examples, they’re what we call commodity exporters. They know that sometimes the sun shines and sometimes it’s a dark winter. They know 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’s just like in a whole another league. Yeah, I mean there’s lots of factors to whether a country’s going to do well and the lower debt countries, you know, have less of a problem. But Canada, Australia are commodity exporters and face a very volatile income stream 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 you know everyone should leave the United States and go to Canada, although my wife thinks that sometimes but for other reasons. Um I’ve had 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, you know, pockets of domestic and foreign borrowers and all those countries fit into that framework, they need to be more careful.

Dwarkesh Patel: 1:22:25 Hmm. 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 this is not a permanent, 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 in this, is there some political economy explanation for why this is bad for us?

Ken Rogoff: 1:23:08 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. And I think the exorbitant privilege, there’s some drawbacks that we don’t need to get into but it’s basically incredibly fantastic. If you owe 37 trillion dollars 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 you know… I was you know, 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: 1:24:39 Hmm. 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 and the like 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 like getting away with something? Or you know…

Ken Rogoff: 1:25:08 So just to note, the United Kingdom’s not the reserve currency. They’re not the dominant currency. Used to be, you know, 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 we were- 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. Uh, 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 uh, Charles Kindleberger, who wrote one of the great books on uh, crises. I had him, you know, as a- as a professor at MIT. He called us bankers to the world. He said, yep, we’re running this deficit, we- they’re, you know, 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- the fact the dollar’s use- very liquid in the markets. So you’re, let’s just say a Silicon Valley firm and- but big enough to issue debt internationally. I don’t know if any Silicon Valley firms ever issued debt, but if you did, you know, in an inter- 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- it’s been fantastic. This is something that’s been debated. Uh, Steve Miran, who was a Harvard student, Harvard PhD, uh, he is… made an argument that’s quite clever. He’s the head of Trump’s Council of Economic Advisers. Very smart guy. He’s made this very clever argument that because everybody loves our currency, it makes us less competitive in everything else. It’s partly hollowed out our manufacturing, and that’s terrible. I mean, there’s always a little bit of truth to that. First of all, our 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. Uh, 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 in the and the price. So, you know, on the whole, it it perform- 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 that’s the core of our so-called exorbitant privilege.

Dwarkesh Patel: 1:28:07 There’s a really interesting book by Charles Mann called 1493 about how during Ming 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, you know, like enormous amounts of real goods that were exported from China. And so from the Spanish perspective, they’re getting like, you know, shiploads and shiploads of real goods. All they’re giving up is this medium of exchange. I don’t know. I I don’t know how analogous it is to this situation.

Ken Rogoff: 1:28:46 No, uh, 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 rate- they’re holding treasury bills, not holding dollars. And it’s, yeah, it’s fantastic for us. We definitely, uh, 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, uh, I actually hadn’t read that book and that’s a that’s a great example. I I knew they were using silver, but I didn’t- that number’s bigger than I I knew than I’d heard.

Dwarkesh Patel: 1:29:44 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 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, Um, 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: 1:30:09 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 are all holding dollar debt, using dollars. They were much bigger than even the British pound was when the sun never set on the British Empire. And uh, 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 I think definitely to some extent we’ve been lucky. We talked about Japan. I think China made a big mistake with um 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 I think the thing Americans forget is we have have been lucky at a lot of times. I worry our luck is wearing thin. Uh, so I quote a chess player, the great Bent Larsen, 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: 1:31:58 Well it’s a very scary kind of luck, um, 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 of that, in general, it’s easy for a country to get get itself in a rut. Um, it’s sort of like the Fermi estimate thing, um, of the fact that you don’t see other alien civilizations is actually very scary because it it seems it suggests that there’s some kind of filter which makes it really hard to sustain a civilization going, yeah.

Ken Rogoff: 1:32:29 Yeah well, uh, I hope not, uh, but uh, we’ll uh, we’ll see. But it’s it’s certainly been amazing how the dollar’s done and how the US has done and I hope we continue. But we’re taking a 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… 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 getting rid of the— having the president be able to get rid of all the independent agencies. 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’d get paid. And I think we were more exceptional than most about that and, you know, 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 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 and I showed it to academics, I showed it to financial people, showed it to tech people, they said you’re nuts, you know, like they didn’t want to think about it. And I don’t know if I’m right, and— but I think we’re thinking about it.

Dwarkesh Patel: 1:34:13 When I was in China I met up with some venture capitalists there and they were like quite depressed, in general. And even founders say 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: 1:34:38 Oh no, they’re— they’re— 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 ten years that they’re going to stay in trouble.

Dwarkesh Patel: 1:34:53 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. I appreciate your patience and educating me on this topic.

Ken Rogoff: 1:35:04 No, it’s a— honor to be on your famous podcast. I heard from so many young people when I told them I was talking to you, they were, ‘You’re with Dwarkesh? Just fly back from Europe, do whatever you need to do to talk to him.’ So 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: 1:35:27 The honor’s mine. It was— it was great to be able to travel here and speak with you. I hope you enjoyed this episode. If you did, the most helpful thing you can do is just share it with other people who you think might enjoy it. Send it to your friends, your group chats, Twitter, wherever else, just let the word go forth. Other than that, super helpful if you can subscribe on YouTube and leave a five-star review on Apple Podcasts and Spotify. Check out the sponsors in the description below. If you want to sponsor a future episode, go to dwarkeshpatel.com/advertise. Thank you for tuning in. I’ll see you on the next one. Today I am talking with Ken Rogoff, who is a professor of economics at Harvard University and the former chief economist of the IMF.