A satanic list of inflationary factors

Katie Martin (0:00)

Listeners, for one of our shows to wrap up a fun 2025, we want to answer your questions. So email us, unhedged at ft.com. What do you want us to answer on the show? I can promise you we will do our best.

Pushkin. We're nearly there, listeners. This year, warts and all is nearly over. It's been a ride. Probably the biggest thing to take away from it in terms of high finance is the huge shock to the system that came in the early part of Donald Trump's second presidency. He blew apart the global alliances we've all grown up with and made very serious people question whether the dollar could remain the glue that holds the whole system together. Today on the show, we're asking was that outbreak of nerves in April just a blip? Is it business as usual? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, and today I'm joined, yes, by that fella in New York, Rob Armstrong. But also we have snagged a serious thinker about markets to help us unpack this question today, none other than Adam Posen, president of the Peterson Institute for International Economics, and way back when, a rate setter at the Bank of England just up the road from here. Adam, it's a real pleasure to have you here. Thank you for coming in.

Adam Posen (1:33)

Thanks, Katie, and to you and Rob for having me.

Katie Martin (1:36)

Listeners, if you get confused, Adam is the one who knows what he's talking about, and Rob is doing that loud American thing from down the other end of the line.

Rob Armstrong (1:45)

Well, I should mention to the audience that there's actually someone else here in the studio with me.

Katie Martin (1:52)

There is?

Rob Armstrong (1:52)

There is. I am joined by Taco the Reindeer, which takes a little explaining. So as you know, I coined this phrase, taco, Trump always chickens out, which may be relevant to our discussion today. One of our colleagues on the audio team was walking down the street, and saw a little wooden reindeer, tapped together out of bits and bobs of Christmas trees, with a little name tag around her neck with the word taco on it.

Katie Martin (2:24)

That's beautiful.

Rob Armstrong (2:24)

And she's sitting at my side. And you know, it's like, you make up some dumb phrase in an economics newsletter, and before you know it, Yeah. Christmas tat.

Katie Martin (2:33)

following you around forever.

Adam Posen (2:35)

You have manifested the perfect toy.

Katie Martin (2:39)

Adam, I don't think anyone's made any Adam Posen toys, but tell us a little bit about the Peterson Institute. Like it says wise things about important issues, but what is it?

Adam Posen (2:49)

Wow, I didn't realize I was going to get free ad placement. Thank you, Katie. The Peterson Institute is a nonpartisan, non-profit think tank, and we are basically the intellectually honest pro-globalization people. Most of our fellows are people who spent careers, got a PhD, did some research, and then went into public service or government work, at least temporarily. People like Olivia Blanchard or Maury Obsfeld, who were chief economist at the IMF, after academic careers. Then there's people like me who before joining the think tanks, spent time in central banks.

Katie Martin (3:26)

This has been a really big year for the sorts of stuff that you think about. I know that earlier this year, April, May time, you were one of the more vocal people saying, okay, this bond of trust that's existed for decades between the US writ large and markets and finance is creaking. Why isn't it snapped?

Adam Posen (3:46)

I think it has. I think it just hasn't fallen apart yet. I think there's a difference. So imagine you've got two things tethered together and they've been settling into the mud for years. And the tethers snap. And so they start slowly easing away. But until something comes that really pushes them apart, you don't see it. And I think this is a good analogy for markets, that maybe there has been a change in the behavior of the dollar.

Katie Martin (4:14)

Yeah.

Adam Posen (4:14)

You know, the dollar occasionally now is behaving like an EM with interest rates going up when the rate goes down on bad news. Yeah.

Katie Martin (4:21)

So it's more like an emerging market currency or sterling or something like that.

Adam Posen (4:24)

And that the dollar people, serious people, it's often wealth funds, pension funds, international reserve managers are hedging dollar exposure. China, of course, has really moved a huge amount of assets, trillion plus out of dollars into gold. So there's a lot of changes, but it makes sense, frankly, and I never expected otherwise, that you sort of loosen the tether, you loosen the anchoring, but something big and bad has to happen. And then when there is that bad thing happening or that crisis or something, which could be generated by things within the US, that's when you start to see the break. Putting it differently, we've spoken about, we've used the phrase decentering of the dollar. So it's not that the dollar is sold off for cratered, it ceased to be a reserve currency, but it's less, fundamentally less central and therefore less stabilized than it once was.