IL50: Why Central Banks Are Losing Control of Inflation ft. Manoj Pradhan

**Manoj Pradhan** (0:01)
And that has implications, not only for where interest rates will have to go, not only for how central banks will have to think of inflation, but also for the size of balance sheets, which is a huge question with the incoming chair wash. I think it's a very, very complicated situation for central banks in the future.

**SPEAKER_2** (0:20)
Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.
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**Kevin Coldiron** (0:54)
Welcome, everyone, to Top Traders Unplugged. My name is Kevin Coldiron, and I'm host of the Ideas Lab series, where we talk with authors of new books that help us understand the global economy and where it's headed. Our guest today is Manoj Pradhan. Manoj is founder of the economics consultancy, Talking Heads Macro.
He previously worked at Morgan Stanley, and he is the co-author of a new book, The Unanchored Central Banker, Demography, Fiscal Instability, and an Erosion of the Central Bank's Inflation Fighting Ability. Now, if you're a long time listener, you'll remember that he was also a guest here exactly four years ago to talk about his book, The Great Demographic Reversal. In that book, he predicted that a reversal of several long-standing demographic trends was going to result in higher inflation, a pressure toward higher interest rates, and growing fiscal deficits. Since then, many of those themes he identified have intensified and have become part of the mainstream economic discourse. So if you listen then, you are ahead of the game. And if you're listening now, you're also going to get a head start in understanding why central banks in the future are going to struggle to contain inflation. Manoj, thanks so much for joining us. And welcome back to the Ideas Lab.

**Manoj Pradhan** (2:14)
Kevin, pleasure to be here. I enjoyed the conversation the last time. Looking forward to this one.

**Kevin Coldiron** (2:19)
Excellent. Well, I do want to mention that this book and your previous book are co-authored with Charles Goodhart, the well-known and very well-respected economist. So it's important to say that. Let's start today, if we can, by just reviewing a few of the themes from your first book. So we can kind of set the stage for people.
Now, in that book, you identified important demographic trends related to baby boomers, women entering the workforce, and China being integrated into the global economy. I was wondering perhaps if you could just summarize what those trends were, why they were so important to the world that we've been living in, and then we can talk about how they're changing.

**Manoj Pradhan** (3:05)
Well, first, top marks for memory. It's fantastic. Absolutely right. Those three forces and the zest they created for globalization, essentially created what we call demographic sweet spot.
The result of those three things was an abundant supply of labor, particularly from China, that lowered the cost of labor.
They moved capital away from the Western economies and into China to take advantage of domestic cost advantages there. And by reducing the desired capital in the advanced economies, particularly the United States, which sets the interest rate, you were able to bring down not only the cost of producing goods, goods inflation, wages, and therefore nominal interest rates, but also the real interest rate, because ex-ante investment falls relative to savings in the West, real interest rates are set off that. And so the equilibrium interest rate also comes down. And the result was really a world-wide positive labor supply shock and a boom, the kinds of which we really hadn't anticipated before coming from a source as big as China. So you had this fantastic period in which central banks literally had tailwinds that they had never seen before. You had falling inflation, the falling inflation and interest rates allowed people to borrow, it made people more willing to lend, house prices did very well. Even if you had large increases in government spending, because interest rates were falling so much, the cost of financing that debt was extremely low. And as you can see in a positive labor supply shock or a positive supply shock, growth does very well, inflation comes down, what's not to love. And one of the key features of that landscape was because central banks were able to help generate an environment in which the incumbent government found it easy to get reelected. The governments themselves were more than willing to give central banks as much independence as they needed.