Former IMF chief economist Ken Rogoff on the next financial crisis and the future of bitcoin

  • Economist Ken Rogoff thinks the biggest concern for markets is the Fed raising rates more than the markets expect which he says “absolutely could happen.” Rogoff says quantitative easing unwinding is a non-event. He says what worries him most is Trump undermining the independence of the Fed.
  • Rogoff believes cryptocurrencies will eventually be regulated and issued by the government. He thinks they will follow the same trend as standard coinage and paper currency where the private sector invented it, but the government regulated it and took it over.
  • Rogoff says that people should be paying attention to the low volatility index. He is optimistic but he hasn’t seen complacency like this since 2006.

Business Insider’s Sara Silverstein spoke with former IMF chief economist Ken Rogoff at the World Economic Forum in Davos, Switzerland. Rogoff is the author of “The Curse of Cash” and is a professor at Harvard University.

Sara Silverstein:So one of the things that you’ve been talking about here is the panel that you were on is about the next financial crisis. Do you think that we’re headed for another financial crisis?

Ken Rogoff:Well broadly speaking, I think we’re coming out of the last financial crisis and some of the pessimism that had been going on- at least in the academics – was the secular stagnation; we’ll never grow again.

Demographics, slower productivity yes, but some of it was the cloud of the financial crisis. Eight to ten years is the norm after a deep systemic financial crisis. That said – I don’t think I’m as complacent as the average here. I can’t remember when it was this complacent – maybe in 2006. But that doesn’t mean we’re going into another financial crisis.

I tend to think the big move that markets might not be expecting – and I’m not saying it’s going to happen – but that would really, you know, knock people back is if interest rates started rising faster than the markets have built-in. And I don’t mean it’s because the Fed goes crazy or the ECB goes crazy.

I mean it’s because maybe the US and Europe start growing. Maybe they start investing again. Well, that will be good for the pockets of growth, but there might be other places – Italy maybe Japan – that aren’t growing so well, have a lot of debt, and you could get problems that way. Obviously the stock market could fall – I mean obviously – I don’t think that in itself causes the same kind of problem. The people here really wouldn’t like it, but I don’t think it’s such a big deal. And then there’s China. I mean, I think if you’re going to look at a “this time is different” story at the moment, of course it’s China very hard –

I hope you’re not in danger there from the snow falling.

Maybe it’s China where the housing prices are booming; debt is very high. It is different because it’s one big organisation; they say they can act very quickly; they can stamp out the problems. But I tend to think they could have trouble maintaining their growth without some kind of big bump.

Silverstein:And what do you think the probability of a financial crisis is?

Rogoff:Low – I mean outside of China – if one’s going to happen it’s in China. I don’t think it’s particularly high. Of course, that’s probably a leading indicator it’s going to happen tomorrow. But a recession – Oh, that’s another matter. I mean a recession in – certainly a 15 or 20 per cent chance for 2018. And I’m optimistic for my baseline.

But stuff happens, and, you know, that I don’t think you can get any lower than that.

Silverstein:Is there any policy issue that you think is concerning enough that could cause at least could wreak havoc on the economy?

Rogoff:You know, the thing honestly that worries me the most is that – while President Trump’s coming here – and I think a lot of people – part of the reason they kind of ignore him – is, you know, they say, “Well, he’s left the Federal Reserve alone.”

I think maybe the investor’s attach too much weight to the importance of the Federal Reserve. You know, if the Fed’s OK, we’re not going to worry about this other noise. And I wish he had reappointed Janet Yellen, but Jay Powell is excellent- the person he picked. And the people that he’s nominated have been pretty good technocrats. It’s been pretty reasonable. But let me tell you – if the stock market falls 20% – and I’m not saying it’s going to – but it wouldn’t take much to have it fall. It just, you know, went up a lot, so it could fall. And if there’s inflation this year – and I think there will be with the output gap closing; with the fiscal stimulus – and the Fed’s going to say, “I’m sorry. We don’t look at the stock market. We look at prices. They’re going up. We have to start raising interest rates.” And then if Trump starts undermining the independence of the Federal Reserve – and I don’t know if he could keep his hands off in that situation – I think that would really scare the daylights out of investors. And you might see a very big movement in that case.

Silverstein:And do you think there’s already more inflation than we’re seeing in the inflation numbers?

Rogoff: No.You know, I mean I don’t have any special information. I do hear that about China – inflation’s much higher than people see. No, I wouldn’t necessarily say that. But I do think this year it will go above two per cent.

Silverstein:OK, yeah, that would do something. And you’re not worried about QE unwinding and that being the cause of interest rates rising?

Rogoff:QE unwinding is a non-event. Quantitative easing if your audience doesn’t know what it is, they don’t want to. I don’t think it actually did that much one direction and I think it didn’t do that much in the other. It’s the raising interest rate. That’s what I think we should be worried about.

Silverstein:Great, and two years ago, you wrote a book “The Curse of Cash.” And a lot of the premise of that is getting rid of big bills in large part to reduce the amount of tax evasion and criminal activity and a lot of people might think the solution then would be something like a cryptocurrency. But you actually addresses this in your book two years ago. Can you explain why you don’t think bitcoin is the solution to the hundred dollar bill problem?

Rogoff:No, it’s certainly bitcoin – it is a solution if you’re wanting to launder money or tax evasion. I think the government will eventually have to regulate it severely and I think someday will issue its own digital currency.

We have to remember the private sector invented standardised coinage, and then the government eventually regulated it, took it over – different times different places. Same thing with paper currency – private-sector invented it, government regulate it, took it over. What makes you think it will be different? And that bitcoin evangelist say, “no, no, no; this is Libertarian. They will not touch us.” I’m sorry when it comes to the monetary system, the government makes the rules. You cannot win the game. If they’re not winning, they will change the rules. That’s what will happen here.

Silverstein:And is that what you think that ten years from now looks like – is that cryptocurrency will exist, but that the government will have taken over?

Rogoff:Well, I think the government will have a much bigger hand in regulating. We will see a new generation that’s used for transactions, but not anonymous transactions. That’s where I think the government really has to step in. There’s some great technologies here, but I think it’s a little bit like with the internet, which they say, but it’s a little bit like internet 1.0. And we will see at some point a cryptocurrency 2.0, which is not crypto, it’s not anonymous. But substitutes for debit cards, credit cards, cash, makes electronic transfers more secure. I think there are a lot of ideas out there. They’re also a lot of people who are rushing to cash in on the craze and just trying to make money. We see it here at Davos. They have quite a presence.

Silverstein: And this might be a hard question to answer, because it’s hard to understand exactly where all the value in bitcoin comes from and it’s already come down a lot. But how much of the value do you think will be lost if it loses anonymity and it loses its libertarianism?

Silverstein:So not the whole space, but bitcoin in particular?

Rogoff:Yeah like bitcoin in particular, I think it’s much more likely to be worth $US100 than $US100,000 ten years from now. I don’t think it’s going to zero, because they will be places like North Korea, maybe even Russia that, you know,” you have all sorts of financial sanctions on us. We’re not benefiting from the system. We’re going to let people launder money.” So I don’t think you’re going to wipe it out. I think you will have governments use it. But in the mainstream government, it’s not going to be legal in banks; it’s not going to be legal in retail transactions unless it’s not anonymous. And bitcoin, you know, it’s funny just the energy that it uses, but it’s the anonymity that’s really the problem.

Silverstein:And last question, just generally speaking what do you think that people are missing the most when they’re talking about – I mean when you’re looking at financial crisis or the markets and everything here the conversations that people are having?

Rogoff: One thing in general, the volatility index, the complacency index is phenomenal. I’m optimistic, but I’m not this complacent like this group. And if I had to put my finger on the thing which really would have people jumping off bridges, it’s interest rates going up faster than you think. It absolutely could happen. They’re at historical lows and a lot of papers show when this happens, you know, sometimes they go up. It will hit art, it will hit the stock market, it will hit the housing market – not necessarily the end of the world, but in the places that aren’t getting fast growth, it’s going to hurt.

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