The US Dollar And International Economics With Harvard’s Kenneth Rogoff

>> Jon Hartley: The the Capitalism and Freedom in the 21st Century podcast, an official podcast of the Hoover Institution Economic Policy Working Group where we talk about economics, markets, and public policy. I'm Jon Hartley, your host today. My guest is Ken Rogoff, who is an economics professor at Harvard University, one of the great international economists of our time.

He's also a former IMF chief economist and a chess grand master. Welcome, Ken.
>> Kenneth Rogoff: Thank you for having me. Jon, congratulations on the success of this podcast.
>> Jon Hartley: Well, it's a real honor to have you on. As someone who does international economics in my own work, it's a huge honor and just so excited to have you on and to have this conversation.

1. I just want to start with your early life. And I know you were born in Rochester. You're an undergrad at Yale. You're a chess prodigy and chess grandmaster. I think a lot of people know this. How did you come to find economics? Make your way to grad school doing a PhD in economics at MIT, where you studied under Rudy Dornbush.

I know your first job was at the Fed board. What was the path from there to Harvard? I'm curious. How did this sort of pivot happen from chess grand master to grand economist?
>> Kenneth Rogoff: Well, short version, I decided to go to college, which was unusual. I had more or less dropped out of high school and was living on my own in Europe.

I was doing very well as a chess player. I was rising fast. I was earning plenty of money. I actually earned more as a chess player in real terms than I did as an economist till quite a bit later in life. Although, of course, I think, as you probably know, that says something about the pay of academic economists as much as chessworse.

And it was much worse when I was starting out. So I just decided to go. I just decided not to be a chessworth. Very unusual decision. I am still quite famous in chess for having stopped playing chess and better known for that than you might imagine. How I fell into economics was.

I just didn't know what I wanted to do. I don't know how to. So how did you fall into economics?
>> Jon Hartley: I took a high school class, and that sort of did it for me. And that was kind of.
>> Kenneth Rogoff: So you were a prodigy. You. You were inspired in high school and knew you wanted to do economics and in college already when you arrived?

>> Jon Hartley: Well, it took. I always knew I wanted to do it, but for me, it took a long time, I guess, just in the sense that I knew I always wanted to do it, to get a PhD and so forth. But you know, I spent five years working at Goldman Sachs.

I did a couple master's degrees as well. So it took some time to get there. But yeah, for me, I also wanted to spend some time sort of in the private sector seeing how things in the real world worked. And it's worked out great in the sense that it's informed some research well.

But I take it it's a slightly different path for you.
>> Kenneth Rogoff: Yeah. So when I went to college, I had missed quite a bit, frankly. My high school was very weak academically. It's since go into receivership and don't go into there. But I mean, I'm not sure what I would have learned at my high school either.

But I lagged a lot at Yale and I was doing Russian studies. That, and I was thinking about the environment was an idea. This was in, gosh, you know, the early 70s that I was an undergraduate at Yale. But I had a friend, Jeremy Bulow, he's actually, I think you know him, he's at Stanford.

Who, who he, like you knew, he wanted to do economics from high school. I think he saw Milton Friedman speak when he was 12 years old or something and just knew he wanted to be an economist and was making all the right moves. And he's a great economist, but he was evangelical and he brought myself, John Geanakoplos, who's the Kohl's professor at Yale today, he just roped us both into economics and said, this is something you should do.

And I think what I liked about economics was I, I felt like it was very flexible in what part of your brain you could use. At least in the courses, you know, you could have stuff that was very mathematical. Not that I consider myself great at stuff that's very mathematical, but, you know, I, I was solid and at the same time you could be doing history, which I liked a lot, and on and on.

I mean, one of the wonderful things about economics is you can kind of pick what you're interested in. So I like that. But during the summers I played chess. I stopped playing chess, but I had, I didn't play during the school year, not at all, but I played during the summers and actually kept getting better.

But that wasn't helping me as an economist because at some point it's very helpful over the summers to do something that relates to what your thesis might be, what you're thinking about. So I would say I was sort of a mile wide and an inch de deep as an economist.

I was a very good test taker. I don't think I understood anything that I was taking tests on, but if I just had to memorize something, I could do it. But playing chess in the summers was exciting and fun and I was doing well, but it wasn't maturing.

And then I went to graduate school and I didn't even know what being an economist was. I knew that if you went to law school, you had to work at a law firm in the summers. And I was thinking, I could go to graduate school and I could keep playing chess in the summers.

Boy, was I wrong about that. So when I got to MIT, Adam had happened to be in a great class with people like Ben Bernanke and Maury Opsfeld and Jeremy Bulow and many others. These people were, they lived, you know, their whole 24 hours doing economics and gave them a depth of understanding.

And it wasn't just about doing the homework. It was about really knowing what you're about. I didn't, you know, I, I sort of moved along. I actually dropped out of graduate school because I qualified to represent the United States in the World Championships, which was only every three years.

That, and I did, I played. I didn't do as well as I should have. I think I finished 11th, but I hadn't prepared a lot for that. I was trying to do graduate school. I was trying to chase. I sort of, okay, I can't do both. So I made a decision.

I would just do economics. But it still took me a long time to sort of mature to really be an economist. I had Rudy Dornbush as my advisor, as many people did. So inspiring. What a larger than life person. We compare him to Orson Welles or something. His love of pies, you know, his love of thinking, his love of debate.

And he drew. He was very exciting. I'd say Larry Summers was very influenced by him. Many of the people I named, he, he was, he was amazing. Stan Fisher was also his buddy. And I think they went running together and did everything together. They wrote a textbook together, and he was on my thesis committee too.

But I still wasn't an economist. And I think I was only in graduate school basically three years, and I just wanted to leave. And I remember Stan Fisher looking at my thesis and saying, chin, do you really want me to sign this? And I said, yeah, I want to leave.

And he did. And I left and I got to the Federal Reserve, which back then was a bit of a backwater compared to what it is today now. The Federal Reserve research department's just amazing. I mean, you know, particularly in macroeconomics, but also in many other things. But back then, it's not something people wanted to do.

And actually Bob Solow and Paul Samuelson both said, what are you doing doing going to the Federal Reserve? I had some pretty good academic offers, not that I had a thing to offer, but they knew I was a really good chess player, and they were sort of willing to make me an offer because of that.

So I got to the Federal Reserve and I was at sea. I frankly would. They give you a lot of time to do your research when you're a new staff member. And I would like lie on the floor in my office. And I had no idea what to do.

It's very hard as a young researcher to figure out what to do. And it took a while, I think. I wrote one paper that was clearly a huge hit about why it was difficult to understand exchange rates. That surprised people a lot with Richard Macy that I would say stood up for many, many decades and even to today.

But the paper that really changed my life was people were worried about inflation in the 70s and what to do about it. Kidland and Prescott had written this very influential paper that Baron Gordon extended, which was trying to explain it as a game theory problem, saying that you'd always be tempted to inflate.

And since the central bank moves second, they're always going to inflate and try to fool people. And the general conclusion was that the only solution, that's what Catalyn Prescott said, was to have a rule. But that really begs the question of if you have a powerful, not just Trump, but a Nixon, Reagan, Lyndon Johnson, you think that's going to stop them if the Federal Reserve has a rule?

No, they have a lot of say. And so because I was in the Fed and I didn't go to the university, I think I got an idea I don't think I ever would have got at a university which was creating an institution that was independent. That was a radical thought at the time.

It became. I think it's still my most famous paper. I couldn't get it published. I sent it to the JP for example, and Barrow said, well, nice math, interesting. But the Fed would just be a veil. If the government wants to take it over, who cares? This is meaningless.

And I got different levels of reactions at different places it got rejected at the aer, it got rejected at the qje. And to make a long this is already a long story shorter. Larry Summers heard of the paper and he loved it and he had become an editor at the QJ and he said I know we rejected this, but please resubmit it.

And so but that paper I worked on really hard. I'd be up in the middle of the night working on it, you know, thinking about things and on chess I did that a lot, but I hadn't done that as an economist. And I mean I think since then I've been like that.

That was, you know, I think that's the moment it was about three years in that I be that I really became an economist.
>> Jon Hartley: That's amazing. And central bank independence especially I guess newly relevant with I guess the question about how whether or not Humphreys executor will be overturned or not and the implications for the Federal Reserve being in an independent agency.

It's an amazing just a career path and clearly that that work propelled you to Harvard where you are now and where you've been for some time. I want to start going through some of your I think key results and big pieces of work. A lot of these sort of encapsulated in various books.

And I want to start with talking about public debt, given that public debt is certainly topical right now. In your 2009 book you cover public debt a lot. This time is different. With Carmen Reinhart, you also wrote a related sequence of papers, the American and the American Economic Review papers and proceedings, the Growth in a Time of Debt.

And there's a related JEP article as well with Vincent Reinhart. And you sort of argue that there's a cutoff for public debt to GDP that's maybe around 90 to 100% or so, after which once a country sort of goes beyond that level of debt as a fraction of gdp, economic growth gets really bad.

And you do this with lots of history. Many countries now, today, many governments around the world, including the US are passing that threshold of 100% of debt to GDP. How do you think about those results in light of ever increasing public debt today and what's your outlook for the US and global fiscal situation?

>> Kenneth Rogoff: So first of all, our 2009 book really didn't have anything about that. What it did have was the first historical data set on public debt. It was a archival discovery that you could do it there since been we we gave all our data sources and the IMF cloned it pretty quickly and some others have so that was something just new.

Nobody had longer term data that, that might make your head explode to think that's true. But it was. The IMF didn't keep it. They didn't. And even, even having OECD countries, those are the richer countries, they didn't keep it going back very far. Long story. So the 2010 paper, which, the first one was just a short weekend conference note, that was what the AEA papers and proceedings were back then.

We, we looked, we didn't say that when debt hits 90%, your growth suddenly slows. We didn't have any statistical test. We just divided debt into buckets over 20 countries and just said the periods where your debt's really low, growth is on average higher than when your growth is.

Debt is really high and between 90% and below 90%. It's about a 1% difference. But the stupid interpretation of that, which some people did, and I would say particularly people like Paul Krugman who would use it as a character, made it sound like when you go from 89 to 90, your growth drops by 1%.

And we actually very quickly wrote things. No, that doesn't mean when you go driving at 55 miles an hour and you go from 56 miles an hour, you're going to crash. But, but cars going really fast on average have more things. We use the example of cholesterol. When Your cholesterol is 199 and goes to 201, it doesn't mean anything.

But on average, if you take everybody with high cholesterol and everybody with low cholesterol, and so I think that result has held up very, very well. There's 15 years of research on it, but there was this whole people just felt, well that you must be in favor of austerity if you think debt is a problem.

And, of course, I should think it's a book by Ezra Klein, I don't know if you've seen it abundance or read it where he's progressive, but kind of comes to the realization that progressives don't understand trade offs. If you want to protect some little dart fish, but it means Los Angeles is going to burn down because you don't get water there, you might think about it and that actually this whole austerity narrative, stimulus good.

We say that very clearly, owing a lot of debt bad. But they couldn't accept the trade off. And so the argument was there is no trade off. It's a free lunch. And that's been made by the modern monetary theory people that you probably mocked on your podcast at one time another.

But it's not that far from secular summer secular stagnation. Certainly not that far from what Blanchard said in his presidential address and many others where they were sort of arguing interest rates are just going to drop and drop. So why are we worrying about this if you never have have to pay the piper, you don't care about debt.

But of course, if you look at a longer history of interest rates, and that's a major theme of my book and my I have an AER paper from August and 2024, Barbara Rossi and Paul Schmeltzing. If you look at a long period, you have these periods where the rates are high, you have these periods where the rates are low.

But there's quite a bit of reversion to mean you always should have expected that. And if you don't mind my just going off on this a second lot longer, this whole notion stimulus is wonderful. We have to have more and more. Anytime you're not doing stimulus as austerity and debt, you shouldn't care if it's high or low.

And it's like I've said to some of them, okay, let's say you think that it's stimulus. They think it's fantastic that you know, the Keynesian multipliers too. I mean, depending on when you use it. And I understand, you know, use it, you need to use it at the right times.

Unlike when Biden used a lot of stimulus during a boom. But on average it's high. It's very good to have ammunition. So I said, well, okay, suppose there's a debt fairy and they wave a magic wand and our debt in the United States, instead of being 121% of GDP, is 60% of GDP.

Just suppose, and the debt fairy says for the next 30 years, knock yourself out, you can do stimulus, an extra 2% a year for the next 30 years. And of course their progressive heads explode because it's so wonderful to be able to do the stimulus. And of course, you know, if they step back a second, what it is is they think it doesn't matter if the debt was 500% or 1000%.

But I mean I think a lot of research shows that's wrong, that the debt interest rate does rise as your debt goes up. So I, I think this sort of perverse era where everybody thought it was a free lunch has now passed. At least you were Goldman on Wall Street.

I don't know about in academics. It's still, there are a lot of people who think this is an aberration, it's going to go back down. But I mean I think that's, that's sort of the central question around US debt today. If you believe that this is an aberration that real interest rates are high and you're not persuaded by the argument that as debt grows the interest rate goes up as the world needs, it's an unfortunate position of needing to remilitarize the interest rate goes up.

Populism makes the interest rate go up a lot of factors. If you're not persuaded by that and you think demographics is destiny, although Ross C Schmaltzy and I look at demographics over longer periods and it just doesn't work for explaining the real interest rate, then you shouldn't care.

But I think we've arrived at this moment where the interest rate has normalized after a long period of a radically declining post Volcker, I mean, the Reagan Volcker period had this huge interest rate rise. So I see the US fiscal situation as very precarious at the moment. Even if we had a normal deficit of 2% of GDP instead of 7 or 8% wherever we're headed.

>> Jon Hartley: I want to talk a little bit more about interest rates and monetary policy. So maybe a little bit more about short term interest rates for a moment. You wrote a book in 2016, the Curse of Cash. You advocated for abolishing paper currency in part. One of the reasons you gave is that it tended to be used in criminal activity or at least higher denominations of banknotes.

And you sort of argued that, you know, it also makes sense in terms of implementing negative interest rates. It makes that easier to do because if there's always this option that you can put money in cash, you can lock in a 0% interest rate. And so I think, I know Sweden sort of largely abandoned paper currency, but I think that's one of the few cases.

I'm just curious, does the recent also maybe the recent backlash against central bank digital currencies not sort of cut against the idea that paper currency maybe should be banned? One of the reasons why I think central bank digital currencies are generally very unpopular. If you look at some of these surveys, people don't want this idea that there's some digital currency.

That's the only option that can sort of be maybe taken away from them. If you had some sort of a malevolent government or dictatorial government. What about, you know, the, I guess, you know, to just sort of make the counter argument in favor of maybe, you know, keeping cash legal?

What about the people who say, you know, the ability to have cash on hand, whether it's under a mattress or whatever, sort of a fundamental freedom meant to sort of check the power of governments. I'm curious what you say to sort of those, some of those counterarguments to those that are sort of in favor of getting rid of cash.

>> Kenneth Rogoff: Well, so my book's a little more subtle than abolishing cash. It is phasing out large notes and then, and over a long, long period and seeing where you stand then. And you know, a huge percentage of all cash is held in large denomination notes. In the case of the United States, about 80%.

It's $100 bills. And of course that's compared to when I wrote the bill. The hundred dollar bills is like a $75 bill now thanks to all the inflation. So that's good. I argue that a huge percentage of this is used to evade taxes. And I think that's true.

And a lot of the people that are really angry about it want to evade taxes. They think they shouldn't have to pay. And okay, I don't want to have, you know, infinitely high taxes, but when some people aren't paying taxes, people with the same income who don't have a cash business do have to pay taxes.

I, I think that, you know, we, we absolutely, the privacy issue is absolutely an issue. But I think into the foreseeable future, if you had tens and twenties, like, what are you planning on doing that requires you to have $100,000 in cash? And I think we can debate that, but it's like, you know, there's, there's again a trade off in the privacy question.

I was criticizing progressives before. I think I'm criticizing conservatives now. Privacy is a right up to what point? Like Is it your right not to pay taxes? Is it your right to do major, you know, violations of the law and a few thousand dollars, who cares? And you know, I think, I think it is a question of whether we arrive at some kind of digital currency that people can use that provides some privacy.

And crypto is definitely expensive for the government to trace. And crypto competes heavily in the underground economy. Now I have papers on this and I talk about it a lot in my book. In fact, you know, the dollar, the underground economy is probably 20% of global GDP. Again I have another paper on that and again do surveys of it.

And the do that's a big part of the dollar. The, the paper currency dollars market is the underground economy. And the dollar is losing in that already, that there ways crypto is more efficient. So you know the privacy issue, it's a question of balance. Where do you want to strike things?

So on the negative interest rates is a different topic. You actually don't need to abolish cash. You don't even need to change anything to have net negative interest rates. And the Europeans and the Swedes didn't go this route. They didn't, they didn't do it the right way. And you can have very negative interest rates by having an exchange rate between cash and bank money and having the exchange rate depreciate over time.

So if you're holding cash, the value of it when you take to the bank, the bank, meaning the Federal Reserve goes down over time whereas your bank money where you're getting a negative interest rate doesn't go down. So that idea has actually been around since the 1930s. I discuss it in the book.

But in general, if interest rates we are getting at the zero bound and we were to get in another situation where we really wanted to use monetary policy to stimulate the economy. But I think negative interest rates have just not been tried. You have to have the legal changes.

But we have very negative real interest rates obviously. I mean that happens all the time. German bonds have had negative interest rates more from the market than ECB policy. So I think it's an open question. In fact we have a review coming up now of the Federal Reserve.

After every five years it does a monetary strategy review. I don't know if you're, are you following that by the way?
>> Jon Hartley: So absolutely, absolutely. It's talking about at length at the Hoover Monetary Policy Conference just last week.
>> Kenneth Rogoff: And so what do you think about what they did in 2020, the asymmetric policy?

>> Jon Hartley: Yeah, the flexible average inflation targeting thing is, in my mind it was built for the prior 10 years, in the era of being at the zero lower bound. And the biggest struggle in the minds of I think some central bankers was trying to get inflation above 2%.

And at the time that was seen as a huge issue. Now with sort of a few years of way higher than 2% inflation, I feel like maybe there's going to be some calibration away from that. And it was asymmetric, and there's Bernanke's sort of temporary price level targeting idea.

Yeah, I mean all, all very interesting questions, but yeah, I think, I guess there's a good question about, I mean it's very interesting that the Fed never went negative. And my understanding is that Bernanke did so not to disrupt money market in general money market funds, but the ECB did go very negative and I mean to a point in the sense that they were constrained by I guess this fact that there's still.

>> Kenneth Rogoff: They hadn't dealt with cash, they hadn't dealt with preventing from people from hoarding cash, which the ideas I have and the other ideas I talk about would. So they never. And because they hadn't dealt with it, it made the negative interest rates less effective because everybody knew they couldn't.

There still was a lower bound. It just wasn't the same. Well, I mean, I think, I think if we run in that situation again and at least a lot of people your age doing research don't agree with me and think interest rates are just going to go down and down and down and we haven't seen anything yet.

I mean, I think you have to think about negative interest rates and we have to rethink that. It would involve making some, I think fairly minor institutional changes to be able to accommodate it. So if they don't do that, if you don't do that, it causes all kinds of distortions.

But if you do that, it's seamless at least. I mean, I, in my, and so I was a discussant at the 2020 and they didn't, I actually spoke at your Hoover Monetary Conference and they let, they welcomed having me talk about negative rates. But the Fed was like, please don't, you know, like.

But what the policy they came up with was a disaster in the end. And I think they were influenced by it because they didn't feel they had a tool for what happens if interest rates fell low. So we can come back to that. But I, I regard that As a very live issue, not near term.

Because I agree the inflation we've had the last few years has sort of disabused anybody of the idea that inflation's always zero. But it certainly could come back.
>> Jon Hartley: I agree. I mean, I do think that there's a lot of controversy and, and need for retrospection when it comes to flexible average inflation targeting or, or even forward guidance.

I mean, how useful is forward guidance now when you know, we're no longer at the zero lower bound? And so it's at least for now.
>> Kenneth Rogoff: But I thought everything they did at the Fed was kind of meaningless. So first of all, forward guidance. And Larry Summers has said that, I've said it too, but Larry Summers has said, I say in my book, but Larry Summers said it very eloquently, that the only people who are listening to the forward guidance is the Fed.

And it ties their hands. The market pays zero attention. And the flat and the thing of average price level targeting, well, okay, but when the Fed overshoots with high inflation, where's the low inflation that makes up for it? I mean they forgot about it the second it happened.

It's not credible. Political economy matters at the Fed and it's not credible. I thought while we're at it, I thought quantitative easing after the financial, initial wave of the financial crisis ended was absolutely a bad idea. Like it's just smoke and mirrors because the treasury owns the Fed.

The Fed is buying the Treasury's debt with the one hand, it's issuing short term debt with the other hand, which the treasury owns. And it just gets really nonsense, and I think led just to some distortions in markets. But in some sense there was, you know, this feeling that they wanted to do something.

And the Fed's still paying the price for that today.
>> Jon Hartley: Yeah, I mean, I guess there's some argument, you know, I've done some work a number of years ago just like an event study looking at, you know, the announcement effects at least of quantitative easing, announcements of regular, you know, Treasury MBS purchases and so forth and in across countries when emerging market central banks aren't doing this during COVID too.

And I think there is some case being made that means 20, 30, 40 basis points of an effect on the 10 year which I guess is simulative and I totally agree with you that.
>> Kenneth Rogoff: So you would get the same effect by having the treasury do what the Fed did.

The treasury could just issue more short term debt and less long term debt, it's not really a monetary policy.
>> Jon Hartley: Absolutely, in fact I have a separate debt management paper called Does Government Debt Management Matter? And it kind of makes the case that maybe the treasury should be issuing more short term debt.

If there's all this demand for short term safe assets, maybe the treasury should be doing that. Anyways, separate discussion, but I think the biggest challenge to me just, and I think it's maybe more of a political economy challenge which is like the quantitative easing. It's just something that the Fed can't seem to get rid of in the sense that anytime basically potential markets and banks adapt to this new environment and then when they try and run down the balance sheet, you hit something like the repo crisis of 2019, suddenly they revert back.

And so maybe if there was the right kind of communication and the right strategy, this could be done, I mean maybe a Fed chair, Kevin Warsh would do something like that. He's been very critical, very consistently very critical of this sort of non emergency lender, last resort type of quantitative easing and just buying Treasuries and remaining mortgage backed securities as well.

And so maybe, but I think it would require certainly an incredible amount of resolve in the face of, you know, pretty significant, you know, market disruptions to see it through. And maybe that will happen, but we'll see. I want to get to your, I.
>> Kenneth Rogoff: Just want to say that's an example of where your background at Goldman Sachs and I have students who work a couple years ago.

It's very helpful to understand that kind of issue because you, it's really institutional and understanding markets. It's not just about, it's hard to express it with just math, you really need to have a textured understanding of markets.
>> Jon Hartley: Absolutely, and this adaptation thing that goes on too, it's very complicated in the sense that how markets sort of like certain things and latch onto them.

And it's kind of how I guess some of these markets and the prices reflect that. I want to talk a little bit more about your new book that just came out this year in 2025 called Our Dollar, Your Problem. A lot of it's on-
>> Kenneth Rogoff: Came out on May 6.

>> Jon Hartley: So it just came out and a lot of it's on the status of the US Dollars of world reserve currency, which it's been since the Second World War. And some of it is also a retelling of your own personal experience in international economic policy, you're the IMF chief economist.

You spent a lot of time at places like Jackson Hole and many other places around the world. I'm curious, what are some highlights of the book in your mind? And what are your general thoughts on the dollar reserve currency status? Another topic that's very popular right now.
>> Kenneth Rogoff: Yeah, so I did weave in personal experiences with world leaders, policymakers.

It's not a memoir, it's just a little bit, I think chess is in there quite a bit. Just I wanted to give, first of all, put people in the moment, I was there, I was a Yale student in the early 70s, and we were being taught in our under first year course.

We were being taught in more advanced courses, I took advanced macro. We were being taught that Russia was going to catch up and if they didn't, they'd be 80% the size of the US they would occupy a big part of the world. I mean, the idea that we were going to be, you know, occupy all those countries would become free and Russia wouldn't become an equal power.

That was not what people were thinking, and I sort of go over that. I also mention that my skepticism about it, not from any deep understanding of economics, but I had lived in Yugoslavia. That's the former Yugoslavia, which has Croatia, Serbia, Bosnia, Herzegovia and Montenegro and a couple other countries.

I lived there and a long time and they were supposed to be more successful than the Soviet Union. And the chess players were actually worshiped there. That was fun for me because that's certainly not the case in the United States, and they were privileged. And then I go visit their apartment, which they just so thrilled, like they won the lottery to get this apartment.

And it's little bigger than a bathroom, but in a bathroom plus a kitchen maybe. Well, they don't have plumbing in a lot of these things and with cement walls, colorless, and they think they're at the Ritz Carlton living in it. And just I don't think we should ever believe it, but we did.

And so, and then I get the Japan, goodness, you mention. And we talked about Rudi Dornbusch. I was working my first job at the Fed and Rudy Dornbusch was so engaged about what was going to happen with Japan. They were, I mean, he, I'm not saying that he believed this, but he was concerned, if they would pass us, he would call me all the time to think of what the Fed was thinking.

And at the Fed, we're in the 80s, nobody talked about China, we thought Japan was taking us out, Japan had higher, by some measures, per capita gdp. Its stock market was worth more than the United States, incredibly, its real estate market was worth more than the United States, even though it's a tiny island.

And I go over these, I worked at the Central bank of Japan for a while and go over these moments where we did not know what was going on. And I think there are ways we got lucky to rise as far and by that I mean to just be so dominant that we ultimately became I think the economics of this, of course, has only one currency, network effects.

There's nothing else to say. The politics sure as heck doesn't have that, that the Chinese, they're going to break away, and when they break away, Asia is going to break away. And that's been going on since 2015, they're forming their own networks and pipelines and clearing. And the Europeans don't like it either, so the it's not that there's a Canadian dollar with all due respect to Mark Carney, or an Australian dollar, nobody cares about them.

But there'll be a few tripolar system, which back in 2005 was the consensus in academics that we were going to have a tripolar system. And what happened the last certainly the ten years after that was a shock. Well, Europe had the global debt crisis, China didn't move away from its peg.

And so what I argue in the book, Fast Forwarding a lot is we lose some space to crypto and the underground economy, but we're going to lose market share to the renminbi for 100% sure, because they can't live with us. I mean, even if Trump is enforcing it, where other sanctions and the Europeans will also expand.

So there the yeah, there are these network effects, but pushing back against this is these other effects. And if you look at what central banks do, which is what my favorite measure with Reinhardt and Ilsitsky, it's been in retreat for 10 years, probably the centrality of the dollar.

>> Jon Hartley: Well, I'm curious though. So I have a paper published in Economics.
>> Kenneth Rogoff: You kindly said it to me.
>> Jon Hartley: Yeah, it's titled De Dollarization, not so Fast. And it basically just gathers these same measures of the dollar that we're used to seeing before. And Barry and others have published with older data.

And so if you look at, you know, these measures of the dollar, you know, fraction of dollars in central bank FX reserves, the denomination of bonds, FX transactions or trade invoicing, you updated through Covid and through the Russian invasion of Ukraine, the $sas hasn't declined whatsoever through those sort of pretty big international events.

And, you know, there's also the freezing of the Russian FX reserves and all these things. So I guess, you know, like, sure, you know, the dollar share of FX reserves is down from the early 2000s. A lot of people like to show some of those charts just starting in 2000 to today.

But it's actually been at lower points, say like in the, in the 90s.
>> Kenneth Rogoff: But that's because it felt. That's because it, it fell after Bretton Woods. I mean, the 70s was a big decline in the dollar share of everything, which my book discusses why, given our debt situation and challenges to Federal Reserve independence, I am sort of expecting a 70s light maybe period now, which will also, you know, accelerate this.

But, you know, it hit it. It sort of fell because we were screwing up. And then as we became more stable, it arose. But I think the rise from the 2000s was very surprising given where the trends were. That's why people point to that.
>> Jon Hartley: I guess I'm just curious just to make a counter argument in favor of just dollar dominance sticking around for much longer than maybe we think.

I mean, if you look at like, say that the share of FX reserves in the Renminbi that's actually fallen since the coven, Russian invasion, Ukraine, but other currencies like, you know, Canadian dollar, Australian dollar, New Zealand dollar, those are, are strangely ascendant. I mean, I'm just curious, when you think about in the past, what's led to the end of a currency as a reserve, as reserve currency, as a world reserve currency, it's typically like a land war on home turf.

Like, you know, the UK and World War II and their experience there. I'm just curious, but you.
>> Kenneth Rogoff: You don't have, you don't have to have the end of it to be losing market share. You, you Typically almost the norm is there are few currencies that are used.

I mean, the Spanish peseta was on top, but even after the Florin took over, the Spanish peseta was everywhere, even into the, the British pound was, even after World War I was still C.O. equal to the dollar. There is a political economy. If you just do a model, you want to have one currency, it's hard to come out with another thing but that such a model has no political economy.

And the thing that is unacceptable for a lot of the world is the information flow that goes through the United States because everything's in dollars. A huge percentage of information on transactions of all types we can see. And I think a lot of the world objects to that.

If you, if you didn't have that, maybe. But for, you know, for China, it's, it's just unacceptable. And they're going to, I don't know what you people say at Hoover, but people I talk to in Washington, I mean everybody thinks China's going to blockade Taiwan, that that's just coming.

And of course we're going to have a big trade war and of course we're going to do sanctions. And in my estimation they have 2 trillion in dollars indirectly and they're, they're, you know, they're going to want to be bailing out of that and they're looking to. And it's not, it's not just about what, how they hold reserves.

That's by the way, I sometimes compare these things you're doing to like the, I know it's politically incorrect, but the blind met nine blind men touching an elephant and they each touch different parts and see completely different things. They're very small pieces, which is why I like what central banks are doing with their exchange rate stabilization as a portmanteau measure.

Why do central banks need to feel they need to stabilize against the currency? Why is it their reference currency? They're aware of dollar liabilities, they're aware of, you know, how much dollars are used in their economies or other currencies. And by that measure it's pretty striking how it's gone down since 2015.

So we'll see. I mean, I, I, you know, I, I don't, it's certainly possible that we'll stick around, but I would say just easily we could drop down to where we were in 2005.
>> Jon Hartley: I guess I had just a few sort of lightning round questions here and want to talk more about exchange rates specifically.

I mean, I guess one, on the topic of China, do you think it was a mistake by the IMF to add China and other to the SDRs in 2015, knowing what we know now or.
>> Kenneth Rogoff: Well, I mean, you want to try to bring them in, you know, as Lyndon Johnson said, you want them inside the tent, pissing out instead of outside.

And that has been the effort of policy. It has not entirely worked. But that was, that was, that was what I did. And by the way, we wanted their money like the IMF wanted the Chinese to give more money. The Chinese have not given that much more money, but they're sort of courting them and they may need them more given the Trump administration.

>> Jon Hartley: It's interesting and on the World bank side of things too, it's interesting how much they've managed to hold on as a recipient as well, which is hard to understand.
>> Kenneth Rogoff: Yeah.
>> Jon Hartley: Given that they're much richer than the typical World bank aid receiving country. Yes. There's lots of geopolitics there to say the least.

So I guess I just want to get back to, I guess some of the more academic questions about exchange rates and really in international economics. And really, I guess my question is what kind of progress do you think we've made? Made in international economics and especially, you know, with understanding exchange rates in the past, say 20 years or so to, you know, 20, 30 years.

I mean, PPP works over generally long horizons, maybe not small over short horizons. You've done some work on this. It covered interest rate parity. It's something that's I think taken the, at least the asset pricing macro finance literature by storm in the past 15 years just because it stopped working post global after the global financial crisis and all this bank reg.

That prevented banks from sort of continuing to do this arbitrage. But you know, we've got all these other exchange rate puzzles, a lot of which you've documented, say with Maurice Amsfeld. Things like the consumption correlation puzzle. Why is consumption less correlated across countries and output? Or there's the back of Smith puzzle why is the correlation between consumption real exchange rate zero.

Have we made any progress in international economics in your mind or is it slowed in some way?
>> Kenneth Rogoff: What's very tempting of someone of my age to say, we thought of everything a long time ago and there's nothing, but I don't think that's true at all. I think we actually live in a golden age of international macroeconomics.

So, first of all, there is quite a bit of progress in thinking about exchange rates, but I'll come back to that. But would you judge finance by how well finance economists can explain the level of stocks, you know, or what they do? No. I mean, there's a lot of other topics international.

So, for example, financial crises. No one enclosed economy macro was working on financial crises. That was an international topic. And people thought, it happens in other countries. And when the financial crisis happened, the international economists had way more to say the closed economy macro economists didn't have the right forecast.

They didn't understand things. And I'm talking about the Fed. Most macro economists, if you went to the big conferences, just got it wrong again and again and again. I don't want to name names, but I think those of us in international were all over this and, you know, we understood that.

Another topic, sovereign debt. It is quite remarkable that we haven't had sovereign debt crises so much recently. It's kind of incredible. Of course, by saying this, I'll probably make one happen and I think, okay, there'll be mistakes. I actually think we are about to have financial crises again in the next decade, given the higher real interest rates and the greater volatility.

But I think progress in international economics has actually been a factor in why that hasn't happened and how you should denominate your debt, particularly how you should regulate your banking system if you want to not have debt crises, how you what where the role of reserves is. And then on a really deep question, I consider the deepest question in international economics is why do countries repay their debt?

So I've worked on this a lot. The late John Eden did a seminal paper with Mark Gursovitz about this. And there's actually been a lot of thinking about this and progress about how to think about it. And I would say my take on it, and there's a nice book by Manuel Amador and Mark Aguiar and many, many papers on this, but I get a takeaway.

And Mark Aguiar, I think Jeremy Bulow and I wrote about this in the early, early 90s, but Mark Aguiar sharpened it tremendously. The basic idea being that if you're a country and you want to borrow, don't let, don't allow them to write contracts in New York courts, make them write contracts in their own courts.

And if you're a lender and you want to lend to Argentina and you want to trust the Argentine court, more power to you. But then if Argentina wants to default, they can do it in a jiffy. I mean they just do whatever they want and that way countries either don't get money or which for most of them would have been good.

Borrow money to use unproductively or they develop the legal infrastructure and such. I promise to get back to exchange rates. So I mean I think there's much more to be said. But first of all, the issue that the exchange rate plays a different role than we thought maybe 20 years ago, certainly 30 years ago when I had my book with Ozfeld, that its main role is between traded and non traded goods and there's, we have that in our book but there's much less role across traded goods because so much is either denominated in euros, dollars or renimbi starting to.

And not in your own currencies. And then of course there's the Clark medal when a couple years ago to Oleg at Skokie who has these beautiful papers with Dimitri Mukin and I don't know that I agree with everything. I don't wanna oversell it, but they try to. They, they basically argue that there's a lot of noise in exchange rates.

There's a lot more noise because of all the post financial crisis regulations, which is exactly why covered interest parity doesn't hold anymore. The, the banks aren't allowed to arbitrage it away. And they argue that in fact having a floating exchange rate is not as useful as people thought.

Fascinating debates here. I don't, I have thoughts about that where I think fixed exchange rates like Saudi Arabia has or Hong Kong has, very, very dangerous. But no, I actually think, I actually think it's been a very exciting period. You're at Stanford, the project that Matteo Maggiore, Jesse Schrager and Brent Naiman oversee of the Big Data Initiative has huge progress on understanding how things are denominated, what people are holding the home bias puzzle.

There have been a lot of great theses and international, so no, it's been, it's been a golden era I think. And if you continue in international economics, and I hope you do, I, I think you'll find it's, you know, continue to find new things that are exciting to work on.

>> Jon Hartley: Absolutely, I wanna talk about, I guess one other. This is the last question, you know, perhaps a new puzzle and that is what I'd say is the relationship between tariffs and exchange rates. And many have written on this in the past long ago when tariffs I guess were a bit higher, Paul Krugman, I think Rudy Doornbush and others, obviously President Trump recently enacted some universal tariffs on many countries that aren't targeted on just a few goods, as many tariffs in the past have been.

And but, but generally speaking across the board on all goods from, well, it's not.
>> Kenneth Rogoff: Services, just goods, which is an issue in itself.
>> Jon Hartley: Right, but to the surprise of many, the US Dollar fell in response to the universal tariff announcement on April 2nd, rather than increase, which is sort of what would be predicted by theory and other past empirical evidence from say maybe smaller tariffs.

And typically the idea is that exchange rates were kind of this shock absorber and that trend is basically continued. So when there have been big tariff pauses announced, say I think it was April 8th when the deliberation day tariffs were paused for 90 days or the China tariffs being paused on May 12th, the US dollar rose significantly.

And so that's sort of contrary to what theory would predict between tariffs and exchange rates. How would you sort of explain this in your mind if there's sort of some initial thoughts that you have on this sort of imperial.
>> Kenneth Rogoff: Well, certainly looking at the 2018. Well, let me back up.

So for the recent case, we knew they were coming. So to sort of look at what happens when they're announced, you have to separate, you know, what was unanticipated. But I'm sure you must think this too. I mean, the big effect was they seemed really incompetent. I mean, I am not somebody who has, has this knee jerk reaction to anytime Donald Trump says something or proposes something, it's terrible.

I think he has, you know, he's very crude and doesn't necessarily articulate things in the best way or most like an economist would want. But I think he's right about quite a few economic things. Let me limit it to that. But on tariffs, I mean, a lot of what he said is just illiterate.

The whole idea that current accounts are terrible for the United States, that running a deficit is terrible, as opposed to looking at, as, you know, subsidizing us for all this time. His idea that we can industrial, we can get great manufacturing jobs back. Hello. You know, machines may get the jobs, but people sure as heck won't.

Not many. Well, our manufacturing has actually increased in recent years, but it's not because of tariffs. It's because we've had good robotics and our factories have been able to do that. But farming in the 1970s, the farming was fading. If you go back, of course, you know, 100 years, everybody was in farming or 150 years.

And all the TV ads in the election were saved. The farmer. They had people, you know, in farming. Well, we're, we're a giant in agricultural, but there are no jobs. And that's, that's future of manufacturing. Okay. There are national security issues, but that's got, that's just got nothing to do with, you know, bringing jobs back so narrowly.

On your tariffs question, I think people, I, I mean, I think it was just. He was incredibly incompetent. I mean, with you, I mean, he just seemed stuck on this terrible idea. It's not the tariffs that are terrible. If he just, you said, just put in universal. He just put in 10% tariffs, we could work around that, especially if he cut other taxes.

And yeah, some. I would have preferred a VAT tax to terrorist, but yeah, okay. But the problem was all this, you know, art of the deal. UK has to have free speech. You can go on and on with these crazy demands. So that's what happened. And so when people see him retreat, they say, we have Trump one, who was a pragmatist, and not Trump two, who seemed like an ideologue about this.

That's what they're looking at is this competence question.
>> Jon Hartley: You don't think it's maybe like, I guess, a policy uncertainty thing or, or just, I guess maybe some reallocation out of the U.S. it's a very strange fact that I think that exchange rates are moving the way they are and the dollar would rise, I guess, in response.

>> Kenneth Rogoff: I'm not your basic Trump derangement syndrome person. I teach at Harvard, but I'm one of the 3% of faculty who. I consider myself a centrist, but I would identify at Harvard as conservative. But on this one, just the faster he can retreat on this policy, the better.

It's, it's not. Uncertainty is a very generous way to put it, but it created a lot of uncertainty. You don't know what the tariffs are going to be. You're sending a ship, you know, from one place to the other. You don't know what the tariff is going to be when you get there.

So if they can settle it, even on 20% tariffs, it'll be a big step forward. And I think the markets just encourage when they see Trump the pragmatist, which means on this case claiming victory, saying he meant it all along, but basically doing course correction, which I think is one of his good qualities, is being pragmatic when things don't work, adjusting.

And I hope that's what we're seeing here.
>> Jon Hartley: Okay. I really want to thank you for coming on. This has been an amazing conversation.
>> Kenneth Rogoff: Thank you. Well, thank you for having me on. And again, congratulations on the great success of this podcast. Great to be on it.

>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast, an official podcast of the Hoover Economic Policy Working Group where we talk about economics, markets and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.