 Hello and welcome to this morning's discussion of the critical role central banks have played throughout the COVID-19 crisis and on the role that they will play and could play in the months and years ahead. Never in peacetime have central banks acted as lenders of last resort in the manner that they had done in 2020. Interventions to stabilize banking and financial systems have included the setting of negative interest rates upending decades of thinking amongst economists about the zero lower bound constraint that many had believed existed from monetary authorities. The effect of printing of money to purchase financial assets such as corporate bonds has also been unprecedented in scope and scale in some countries. But perhaps the most significant intervention of all has been central banks role of lenders of last and not even last resort to governments and in some cases notably the United States sub-national government entities both states and municipalities. Without these measures there would almost certainly have been a funding for crisis for governments at a time of a health emergency like no other in living memory. The short-term consequences of the failure to act by central banks would have made a bad situation much worse. Yet the longer term consequences of this massive monetary experiment remain to be seen. We'll get perspectives on all of those issues from those who have been central bankers and those close to the world of central banking in different ways this morning. Lest anyone look a scans at the absence of serving central bankers from this morning's lineup we've deliberately made that choice given the extreme caution with which central bankers have to weigh their every word. Hopefully this will allow a less constrained and less constrained and freer flowing discussion. Just before we get into the topic, permit briefly to run through the format and how we'll proceed. I'll shortly introduce William White something of a legendary figure in the economic forecasting community of which I was a part for the decade up to the financial crisis in 2008. Bill will give the opening address to set the scene after which we'll take questions that come from you the audience. So please feel free during his talk to put in your questions via the Q&A function on zoom at the bottom of the screen. All of that should take us up to about 845 and then we'll go straight to the panel for a discussion. The panel includes Dana Adane, Kriakopalu in London, Michael McMahan in Oxford and David Roche in Hong Kong all of whom I would introduce in a little more detail later. But first let's turn to Bill White. Well thank you, thank you very much Dan for the invitation to speak to your audience today. I haven't had any recent contacts with Ireland but part of my family comes from there. I've got one grandfather from Cavern and another great grandfather I'm not quite sure from where but the link is there. The other set of Irish link is that there's a little joke that has to do with Ireland that actually sums up the theme of what I intend to say today and the joke you may have heard about the old fella who gets lost in the winding lanes of Ireland and he wants to go to Dublin and he sees an old man in the field and he says how can I get to Dublin and the old man replies if I were you I wouldn't start from here and that's basically the theme of what I want to say today. I wouldn't if I were you I wouldn't I wouldn't start from here. I want to say a few words about the role that central banks have played in the crisis. Then I want to go on to the question of whether they were right to do what they did on the basis of I wouldn't start from here and then I'll I'll I'll get into the question of the buildup of debt that has been the byproduct of what central bankers have been doing over the course of the years and the really important question of how do we deal with the elephant in the room which is all of these these debts that have been building up so let me let me just pass to those those those themes. The first question and I guess this is appropriate to deal with in the opening statement is what actually did the central bank to do during the pandemic? Well the the first point to make was that we did have a huge problem. When the pandemic struck and it became obvious what the the implications would be for the real economy the financial markets just basically seized up and so what we had was a situation where all the credit spreads you know that represent the quality of the perceived quality of the credits that were being made all the credit spreads widened out the dollar rose volatility went way up the the markets essentially ceased to function and this was sort of a classic kind of risk-off situation we've seen this many times before we saw it in the in September in 2008 very similar classic risk-off except for one big exception and the big exception was that in a classic risk-off situation you find that the US Treasury rates go down and in this particular occasion the rates went up and they went up because even the Treasury market the US Treasury market was ceasing to function which is something we've really never seen before and so the situation was unprecedented and demanded a response and the central banks fortunately came to the rescue their response was was massive and immediate policy rates were lowered the central banks announced their intention to increase the size of their balance sheet in various ways to provide liquidity support the markets the Fed and Fed in particular in cooperation with the Treasury announced a whole host of new initiatives and facilities to provide finance to the private sector all of this stuff was unprecedented particularly the interactions with the Treasury the Fed also announced a whole series of swap agreements to provide dollars to people who were none US residents who desperately needed dollars for the financial obligations that they'd gotten into so there was a there was a real problem and the central banks absolutely stepped into the gap and and did what what they had to do I think what they did they thought was consistent with their two primary objectives the first of which is to maintain financial stability and the second of course was to maintain price stability and whereas the first problem as I say the malfunctioning of the market was obvious the issue of whether they should have done what they did in order to maintain price stability was a bit more judgmental they basically reflected a judgment that the influence of the pandemic would reduce aggregate demand more than it would reduce aggregate supply and that the pandemic was essentially disinflationary as opposed to inflationary in any event broadly speaking what they did was consistent with what they considered to be their mandate well the second question was it the right thing for the central bankers to do what they did well clearly you can't run a modern economy without a sort of a functioning financial system so in terms of financial stability there's absolutely no doubt that what they did was the right thing to do now having said that there is a longer term problem and it's one that you alluded to I think in your your opening remarks and the problem is that what they did was really just a more extreme version of what they have been doing now in response to other threats you know really going back 30 or 40 years so in some fundamental sense what they did was not was not new it was sort of more of the same and if you go back and you look at the history and I'll do this very briefly you can see this very clearly so in the decades prior to the great contraction of 2008 for example you know what the what the central bankers did was really starting in 1987 you know with the Greenspan put you know there was a thought that the economy was going to turn down because the financial markets were in turmoil the central the the Fed and then all the other central banks reduced interest rates drastically then in 1990 we had the bust of the property boom in Japan Scandinavia the United States Canada central banks responded the same way 1995 we had the southeast Asia crisis and the response was to ease off or at least not tighten when probably all the other indicators said they should have done then we had the LTCM crisis in 1998 the response was these interest rates then we had the MMT the you know the the stock market boom and bust in 2000 the response was to reduce interest rates so by 2008 you know interest rates had really ratcheted down to near zero in in in many countries and then we had the great financial contraction and the response to the great financial contraction was essentially more of the same with one little wrinkle which was at the interest rates at this point it ratcheted down so much over the course of the previous 20 years there's really no place for them to go so then the central banks had to use all of this sort of experimental stuff this quantitative easing and forward guidance and operation twist and all the other stuff and so during the pandemic okay we've had just more of the same but the experimentation has had to continue so we had the interest rates have already ratcheted down to zero or even less than zero we've had QE etc etc so the big experiment this time was really the extension of the support for the financial markets from lender of last resort to market maker of last resort but you can get the pictures that we've got easing easing easing and in an ever more experimental fashion and that then raised the question of well why should we be concerned about more of the same or why should I be concerned many of the other panelists may not be why should I be concerned about more of the same and I think the answer is that we were already seeing before the pandemic that what the central bankers were doing was questionable on at least three fronts one of them and I'll talk about each briefly one of them was that monetary policy was becoming increasingly ineffective in stimulating aggregate demand which is what the central bankers wanted it to do secondly it was showing a lot of unintended consequences and thirdly it was becoming increasingly clear that exiting from this policy of ultra easy money was not going to be easy so let me just say a few words about each of those the question of being less effective my own view is that there is a fundamental inter temporal inconsistency in the repeated use of monetary policy and the reason for that is that each time that you use monetary policy ease it in an in in an attempt to increase aggregate demand you're inducing people to bring spending forward from the future into today but of course when today when tomorrow becomes today you've used up in a certain sense your your your ammunition to spend and your desire to spend more becomes less this is basically what what chairman greenspan was referring to back in the late 1990s remember you talked about the headwinds of debt and that I think is is a fundamental problem and when you sort of say well yeah show me the show me the numbers uh the the numbers are perfectly clear that debt ratios globally under the influence of ever sort of easing monetary policy debt ratios globally have been growing steadily so when you look at the numbers the numbers prepared by the institute for international finance for example you know the the bankers club that indicates the debt ratios at the end of the first quarter this is sort of total corporate debt household debt plus government debt as a ratio of gdp that ratio globally uh was uh 331 percent at the end of two of quarter one 2020 that was 50 percentage points higher than prior to the great financial contraction so if you thought the last decade you know the great financial contraction was a period of deleveraging okay in response to the crisis think again because at the end of that period the debt ratio was 50 percentage points higher than it had been at the beginning and two sort of central elements of it was that a lot of that increase in debt was in emerging markets so that whereas the great financial contraction was really a problem of the advanced countries now this debt problem permeates virtually everywhere so we've got a real issue here with respect to debt and just as an aside i would mention that that debt ratio really at the beginning of this year was two and a half times um what it was in 1980 and government debt has actually now gone back up to the level it was at the end of world war two so without work without the advantage of a war so these these debt levels have now become really worrisome in my mind and um of course the pandemic has just made it significantly worse um and i would mention too that it's not just the quantity of the debt it's the quality of the debt so that um you know we now have the the lowest income emerging markets now have debt levels that have gone back up to where they were prior to the last uh occasion when debts had to be voluntarily reduced um we all know about sovereign debt levels in the advanced market economies corporate debt now it's a huge expansion of triple b and stuff that's just flirting on junk so it's not just the quantity of debt it's the quality of debt so that's one of the things that that that worries me monetary policy has become less effective the second thing is all the unintended consequences okay and and there there's a whole host of them and i'll just go through them very very quickly what one of them is is the threat to financial stability so you know we we think for example now i just mentioned about the intervention of the central banks after the after the pandemic and you sort of say okay well that was terrific and that was obviously designed to increase financial stability and indeed it did the the problem that one faces is what are the longer run implications of what they did and the problem is if you're constantly squeezing the margins of the financial institutions they become steadily weaker over time and you you hear the banks complaining about it growing sense that the banks are not going to lend uh because they're worried about their future capital adequacy uh this is what marcus brunermeyer calls the the the the the interest the reverse interest rate the interest rates go down to the level where they become not expansionary but contractionary uh they also have monetary policy i think is that a big influence on financial markets and on the functioning of financial markets so you look for example at asset prices and i'm thinking particularly about equity prices in the us where it is now clear that monetary policy has been the the driving force between this massive expansion and equity prices in the states where will this all lead what is the potential for a reversal that's a problem we've been observing over the course of the last 10 or 15 years more and more issues having to do with market functioning okay price discovery has basically disappeared in many markets jgbs there's some days there's no transactions in government bonds at all um credit the spreads driven right down to very very low levels uh flash crashes i i could just go on and on and the absence the failure of the us treasury market to function in the spring of this year was just the sort of the denouement that they end of the road in terms of that particular process so that's the first thing about the unintended consequences the second one is i think it leads to a reduced potential over time it reduces aggregate supply so you think about monetary policy is increasing aggregate demand and what i'm saying is it's ineffective over time i don't believe it does that but what it does do over time is it reduces aggregate supply which is the potential of the economy to grow and it does it in two ways um i think it leads to a lot of what hyac would have called malinvestments or bad investments uh of new money and i invite you to think about all of these unicorns that have no profits no prospects for profits we're talking about uber we were netflix tell tesla the list goes on and on of these companies that are not making profits and probably are not going to make any profits over time those are resources that could have been used for some other productive purpose what hyac used to call malinvestments and it's not just the new investments that are malinvestments it's all the old investments so we've been observing now for almost a decade this continuous rise in what they call zombie companies the companies that are kept alive basically by the kindness of the banks and the kindness of the financial markets these are companies that are generally defined as having lived for 10 years but have at least a three-year history of not making profits that are equal to the interest payments that they have to make okay they are zombies and they are not only tying up resources but they're competing in an unfair way with other companies that might have made it otherwise had it not been for the competition of the zombies so we got a real problem here on the aggregate supply side as well the third thing is the exit problem i think it's becoming increasingly clear that we're getting to a point where the central bankers can't do anything other than what they're doing so you observe all of these unintended consequences and you observe the growing ineffectiveness of monetary policy and you say i want out because i'm making things worse not better but what we all know is that the debt levels and all the other imbalances that i've spoken about imply that the central banks can't tighten up because if they do tighten up they're going to create the very problem that they're trying to avoid so we've got ourselves into a place where we don't want to be okay or as i said right at the beginning of this presentation if i were you i wouldn't start from here now the question is moving on to the next question why have the central banks done what they've done um i'm going to be sort of i i could be kind and say they've been forced into it by governments governments not doing what they've done but for the moment let me be let me be unkind and say that i think the fundamental problem if the central banks have got an analytical framework uh that just is wrong and i don't know maybe might want to come in and come in on this one uh i think the central banks have made a fundamental philosophical or ontological error that is that all of their models are simplified to the point that they are and they assume that the economy is basically simple understandable and controllable that's the fundamental assumption and it isn't it is not simple static controllable understandable it is a complex adaptive system uh which is extremely hard to understand and even harder to control and that fundamental mistake that they've made has led on to all sorts of other mistakes and just very briefly i think the biggest mistake that they have made has been the relentless pursuit of price stability we have had 30 years of globalization particularly the entry of china slovakia all the previous command and control economies back into the world trading system we've had the baby boom coming through we've had a huge positive supply shock to say nothing of the nothing of digitalization and all that stuff we've had a huge positive supply shock that wanted to push prices down that was pushing prices down that should have been allowed to push prices down and the central banks leaned against it in order to preserve price stability and there's a whole pre-world war two literature on this question that has been totally ignored uh also totally ignored was the the example of history not the history of economic thought history shows there have been many many examples of prices falling because of positive productivity shocks that caused absolutely no problems whatsoever but the leading against that by the central banks because their framework their their their econometric and analytical framework in fact contains no credit no financial system no money all of the problems that their policies were creating were in a certain sense invisible to them so they did what they did and that i think is why we are where we are um the central banks too i would point out their models also assume we'll go quickly back to equilibrium um that is to say back to full employment and when you sort of think about it and i haven't got time to get into it it is pretty astonishing that your analytical framework says really bad things can't happen but they do and it says if they do happen you'll come out of it very quickly and 10 years later you don't and they're still pursuing the same policies so there's some interesting questions that we can get back into the last question i want to deal with and now very briefly is the question of where to from here because we got this big problem of the debt overhang which is the elephant in the room uh doing what we've done is you know again kicking the can down the road it becomes increasingly um improbable and undesirable if you've got a big debt problem there's only four ways to go one of them is austerity and it doesn't work for countries okay it works for hug souls but it doesn't work for countries the kanesian paradox and thrift look at greece if you want to see the implications second thing you can do is you can increase real growth to pay down the debt over time uh unfortunately it's a kind of oxymoron because if you've got all of this debt as headwinds it's not going to work and i would also add in the globalization demographics all the stuff i've just talked about is having increased real growth all that stuff is going into reverse to say nothing of climate change so and adaptation to climate change so faster real growth is not going to be this not a silver bullet the third thing you can do is financial repression uh basically you combine more inflation uh with keeping the interest rates down and this is what was done quite successfully after world war two my contention would be that this is not going to work um or it might work too well so that against the backdrop of the debt what's much more likely i think is we'll have debt deflation to worry about you know the back to the 1930s so getting inflation is going to be hard if you do manage to do it against the backdrop of fiscal dominance and the printing of money to support government debt the thing if if inflation starts to rise it could very quickly get out of hand the world is highly the economy is highly non-linear unlike the models we've seen this many times before in latin america it could very quickly get out of hand so i think that way of doing things is is a dangerous way to do things and then you're left with the last and i'll finish with this the last of the things that you might do and that is restructure all those debts and we should be thinking much more seriously about that i was pleased to note martin sandu and the ft two days ago or three days ago had a whole article about it i some of us have been saying this now for years the oecd the bis the imf the group of 30 all of these people have been saying for years now we need much more attention to orderly resolution of debt problems our administrative and our judicial procedures are totally inadequate whether it's to do with private non-financial debt financial debt or sovereign debt above all the procedures are totally inadequate and we should be spending a lot of time on it so the last comment the patient had preconditions before the pandemic arrived and those preconditions are going to make it hard for us to get out from where we are if we do turn to restructuring debt it's going to have huge political implications and reflections along these lines are going to call the competence of central banks into question we have to start thinking about the kind of things that i've just been talking about central banks are going to have to speak a lot about what they did and why they did it and and and how in part the governments themselves are culpable the central banks have been using all of these macro potential instruments that gets them into the how can i say the areas of competence of regulators the more they go into financing government debts particularly with quantitative easing the more they're getting into the realm of of physical policy and not just monetary policy so we've got some huge challenges ahead and from the political perspective the governments or sorry the central banks are going to find that it's going to be much more difficult to maintain the quote-unquote independence that they had in the past life in the future for the central bankers is not going to be the same as it was in the past so i'm sorry i've gone over a little and i apologize uh many thanks for that bill i'm sure you haven't cheered many people up this morning um but uh you've raised a really large number of very important issues which um i think we'll be thinking about for for quite a while um could i just start with your perception of the central banking community more generally that up to the great financial crisis um there was a sense of almost smugness among central bankers and maybe for good reason there was a feeling that they had done their job very well they had maintained price stability and the economies were growing reasonably well and that they had really got it right in terms of macroeconomic management uh then the great financial crisis hit and some central bankers that i knew were in a complete state of shock just did not expect this didn't see it coming um didn't know what to do um but despite that it doesn't seem as though there has been as much change to emerge from that shocking period uh amongst the central banking community is that a fair comment to make or would you just elaborate on how you see the consensus mindset among central bankers 12 years on from that event well i i think dan you're absolutely right and you know i i gave a paper jackson hall i think in 2003 with my colleague uh claudio boreal in which we talked about sort of the orthodox way of looking at things this is prior to the great financial crisis which basically said we've done a terrific job everything the great moderation everything looks a great what you worry and we were saying but underneath the surface and really i was saying then i'm sad to say more or less what i'm saying what i was saying today under the surface these problems are really building up and of course they materialized in the financial markets in 2008 now i have said earlier on that i think the central banks have continued doing what they're doing in part because they've they've they've they've continued to maintain uh to believe in the usefulness of their old analytical frameworks and i've said i think that's not true to be more charitable the central banks found themselves in a very difficult situation because in 2008 they had to do what they did to to support the financial markets just as they did during the great pandemic and they and they did a great job then but what happened was that almost immediately fiscal policy which had been expansionary turned contractionary and all the regulatory stuff was directed not towards resolving the problems that were already there in 2009 and 2010 the regulators turned to crisis prevention and sort of putting in new regulations that would make sure there was no future crisis well what that meant was that both fiscal policy and regulatory policy were in contractionary mode and it left the central bankers as the only game in town and in a certain sense they were sort of pushed almost politically into doing what they did because nobody else was there to do it so they continued to do what they did and whether which of these two motivations was the more important you know the being wedded to the old analytical framework or the sort of the the quiet quiet sort of political and social pressure to do what they did i don't know but the bottom line was that they basically kept on doing what they were doing for another decade and what i would have said was they should have been addressing the debt restructuring problem and recognizing that their own policies had played a prominent role in leading to the crisis they should have been addressing that stuff 10 years ago good so folks questions and comments are welcome at the bottom of your screen you'll see a q and a function where you can type them in uh do identify yourself um if you can please that will be good coming to your point about orderly debt restructuring um bill is there such a thing as orderly debt restructuring on a large scale yeah you mentioned economies the non-linearity in economies we saw during the uh the european sovereign debt crisis how the move towards restructuring or the fear of the restructuring of sovereigns uh led to really disproportionate impact for the wider eurozone economy and indeed wider further afield and then ultimately a financial you know one person's financial liability is another person's financial asset and you start writing down financial assets in in in a large way and maybe it can't be done or in an orderly way you weaken the balance sheets of those who hold those assets and you end up with a domino effective of banking and business failures is is that not a real risk of of using debt restructuring on a large scale to to bring the debt burden down i think it it has i think you're absolutely right and it's got huge implications for the central banks and the question of the extension of doing what they have been doing but in the context not of trying to stimulate aggregate demand but rather in terms of obtaining financial order at a time when fears of debt restructuring might be leading to disorder so there's going to be a very interesting interplay between all of these various factions as we move forward and i totally share your your concerns that we are back again if i will i wouldn't start from here that the markets might very easily be spooked into some kind of disorderly reaction but i think that this thing has to be done in one form or another in a certain sense i mean for a an irish audience i don't know whether you remember andy andy cap whether he's still in the papers but you know where's where's the rent spent if you can't pay it the creditors can't pay the debtors sorry the debtors don't pay the creditors don't get paid and they know it so the the the responsibility of central banks to to lean into that situation i think is going to be a great one but having said that one hopes that one what the underlying process will be one of trying to do this in as orderly a way as possible because if you just simply said let it you know let it rip disorderly debt reduction that is to say everybody trying to get out and in the end of course the debtors are still trying to trying to pay on terms that become increasingly impossible to manage you don't you don't want to look into that particular of this a discussion that i've had with people in tokyo over quite a long period of time but and it's recently come up in a european context some some people around the italian government have been raising it and that is that central banks simply tear up the iou's that they've purchased particularly sovereign sovereign bonds and that is the way to resolve the problem well i wish you know i i've i've thought about that and in the european context it's a bit more complicated but and i don't profess to truly understand the it's been a while since i've looked at the t accounts in europe let's just put it that way but broadly speaking i think this is all a bit of a hoax frankly because when you think about the consolidated balance sheet of the government which includes both the governments and the central banks in effect all that's happening is that the central banks are buying in all of this long-term debt okay and um what they're what they're what they're paying what they're doing is they're paying for it with an increase in the deposits held at the central bank so in effect all they're doing it's a huge debt management operation they're just buying in long-term debt and replacing it with the shortest term debt there is which is overnight money at the central bank and in so far as the relations between the governments and the central bank are concerned it's all just pure pure you know to say we forgive your debts it's all pure accounting because all the profits of the central banks which is the interest that they receive in the government debt they remit back to the governments you know after they've done their own expenses they remit back to the governments so to forgive the debt it's just basically to say don't pay us the interest and we won't pay you the interest back so it's it's just a wash this whole thing is just um it's it's not only a delusion it's a dangerous delusion because you're replacing long-term debt okay at least that you've you've got the debt out there for 20 or 30 years with overnight money at the central bank which is callable so I maybe there's something I'm missing but I don't I don't get it I've talked about this with well I don't get it well we'll definitely it's a subject we'll pick up in the next round with the other three speakers for sure can I go to the questions they're starting come in now can I go to Ronny Downs um he asks if central banks can't keep doing what they're doing indefinitely what sort of event or shock would precipitate a disorderly unwinding all of the collective incentives seem to be in favor continuing on the path we're on is Brexit a potential catalyst here for example thank you well I've become in in recent years a great advocate of complexity economics which is basically saying let's start off with the assumption that the economy is a complex adaptive system and there's many many of these systems both in nature and society and there's huge lessons to be learned from looking at these other disciplines if the economists were only prepared to do so one of them is that if the system itself is unstable anything can trigger a problem so you say to me what might be the trigger the answer is it could be anything in a certain way you know when we looked at the US in 2008 we you know in retrospect it was the housing bubble that did it but when you look back at it I mean it could have been could have been anything else I mean the european crisis could have started significantly earlier had circumstances been a little bit different so anything could trigger this thing off at the moment I guess what I worry about the most although the the central bankers have thus far held it off is corporate debt I mean there's been a massive increase in corporate debt much of it is triple B which is right at the edge of junk if some of this stuff gets downgraded to junk then of course a lot of pension funds and others can't hold it anymore so the selling could get started that worries me a lot dollar shortages of dollars you know by people who really need them to roll over their obligations in dollars and whether they can get them because in the end the only people that produced the only person who produces dollars is mr fed and there are various reasons to doubt his capacity and his will to do so up until now of course the Fed has done absolutely the right thing but I have worried for a long period of time about countries that you know might need dollars that can't get them in South Africa Turkey China even internally Jay Scott has written a whole book about Dodd-Frank and the way in which it should constrain the Fed's ability to deal with crises domestically Janet Yellen herself has publicly sort of said she's worried about it up until now the Fed has been allowed to do whatever it wanted to do that it felt it needed to do but of course just recently we've had Secretary Mnuchin basically try to close down some of those Fed facilities because they have and so he wants to sort of take the take the money as it were reduce the contingent liability because it makes his budget situation look better but you all know from the European situation remember when Mario Draghi said we'll do whatever it takes and trust me it will be enough he never had to do anything because he said he would do something and he had the right to do it now there's an interesting question with you know the Fed says we're going to support the markets in various ways and mr Mnuchin has said well certain of those ways are now going to be constrained will that make a difference I don't know will brexit make a difference it'll be a no deal will be a big thing but it'll be a big thing for Britain will it be a big thing for the entire world I go back again to my complexity stuff anything could trigger off instability in a system which is fundamentally unstable and that's why we have to start focusing on how can we go about restoring stability and in some way or another the debt issue is going to have to be dealt with Conor McQuiria has two questions in fact he raises the issue of the global savings glut he wonders is the problem in is the problem we're facing a world more to do with poorly developed financial markets in Asia not dealing with the same savings glut rather than with central banks in the western world and he also asks picks up on your point about the pre-world war two literature on inflation the positive supply shock shocks of the industrial revolution pushing prices down he asked could you expand a little on the lessons of that literature and what it would have implied for inflation targeting during the first decade of this century with the emergence of China and the positive supply shocks that you mentioned well let me start with the let me start with the second one the supply shocks in in a sense it's it's it's a very simple thing I mean the the literature basically says if you've got productivity increases what we know is that over time real wages have to go up real wages are wages over prices w w over p and then the question is well to get real wages up you let the w go up in the p stay constant or do you keep the w constant let the p go down and um there have been many many instances you know thinking about the 1880s anyway there's a whole literature on this stuff um that when the p went down it didn't do any harm you know so we have this this this myth as it were about deflation is terrible deflation is not terrible it was terrible during the 1930s but the literature seems to indicate it was it was actually a unique event historically most examples of deflation of being periods of rapid productivity growth that drove down prices um and the lower prices were basically what allowed ordinary workers to increase their real wages and purchase all the stuff that was being produced by the increase in productivity so it the the whole thing sort of added up and it wasn't a terrible terrible event um and uh there's quite a literature on this I mean some of my colleagues at the BIS uh have written a couple of papers on this at Claudio Borio and uh Andy Falardo so people can go back and take a look at that um sorry remind me now what was the what was the first question the first uh it's just very off the screen so there was a savings club the savings club question um particularly in Asia on the the uh under development of Asia let me be another renegade you know having said I don't understand um writing off the government debt uh I don't understand the savings club either uh to to me um it's a retreat again into a kind of pre war well well an unwelcome retreat into pre war literature because when you think about it it basically says we're at full employment uh we've got the intersection of the investment function the savings function and uh if you've got excess savings well you know then sort of bad things happen um but to me what this totally ignores is Keynes you know the the whole idea of the Keynesian revolution was that the interest rate is not determined okay by the intersection of the investment and the savings function it is determined really by in the literature the LM function what does the central bank do in response to the situation in which it finds itself or what did the financial markets do and income becomes the thing that equilibrates uh savings with investment that to me is the essence of the Keynesian revolution so to say there's a savings slide it's just to say that there's forces acting to reduce demand below supply and then the central bankers have responded by doing what they've done and I guess my contention now and it's one that in light of the pandemic an increasing number of people seem to be saying is that we we actually should have been using fiscal policy if there's a shortage of demand we should have been using fiscal policy because that's got fewer and it's more effective over time and it's got fewer unintended consequences than the use of monetary policy so I guess I go back to your the questioner and basically say I really reject the starting point which is to look at it from an s s equals i you know pre Keynesian model