SFC Outlook 2024｜Thomas J. Sargent: Both global and China's economy will look like 2023 in 2024

南方财经全媒体记者施诗 广州报道

In the final meeting last year, the U.S. Federal Reserve signaled that a nearly two-year battle against inflation is finally coming to an end in a long-awaited policy pivot. When it comes to the Fed cutting interest rates in 2024, it's not a question of "if", but a matter of "when" and "how many".

However, many economists take a cautious approach when making predictions. Thomas J. Sargent, the winner of 2011 Nobel Prize for Economics and professor of New York University, told SFC reporter in an exclusive interview that predicting interest rates is really hard. “Central banks deal with uncertainties all the time,” Sargent explained, “they are doing technically sophisticated things.”

With the Fed expected to cut rates in 2024, many predict a strong year for the economy. But Sargent believed the coming 2024 U.S. presidential election is adding uncertainties to international trade. In Sargent's opinion, Donald Trump and Joe Biden - two most likely candidates for the race - agreed on subsidies and tariffs, which are bad economics. He believed the support for free trade among U.S. political elites has declined. “The election doesn't make me optimistic,” Sargent told us, “I hope I’m wrong.”

Despite uncertainties facing the global economy in 2024, Sargent made his prediction, “for better or worse, I think the global economy will look a lot like 2023.”

Predicting interest rates is hard

SFC Markets and Finance: What's your predictions of the Fed policy in 2024? Will they begin to cut rates?

Thomas J. Sargent: What they would say is they don't know. And I would say, I don't know. Here's the reason. And one thing that people who participate in capital market know that it's very hard to predict either interest rate or stock prices. And there are mathematical statistical reasons. The basic reason is if I think stock prices are going to go up, and everybody else thinks that they would already make them rise right away. So, the stock prices are a consequence of a whole bunch of people smarter than I am, trying to predict that. And they trade. It's very hard to predict future stock prices, whether they'll go up or down. That's a fact. And the same thing with interest rate. But they are asked to indicate what they think the interest rate that they supposedly set. And they'll actually say, we don't know. But if you turn on an artificially intelligent machine learner, they'd tell you the same thing. It is just very hard to predict. Several economists live in China have a brand-new paper about how to predict inflation. And they use advanced machine learning. It's interesting how they do it. They're trying to improve estimates of inflation. And I'll give you a hint, they use stock prices. They don't use the conventional. But it's very hard, they are world-class. It's very hard to predict inflations. And because of that, predicting interest rate is really hard. 

SFC Markets and Finance: Like you said, the Fed always say they don't know about the future. Do you believe their judgment? Do they really don't know the future?  

Thomas J. Sargent: Do I believe them? Yeah, completely. I know a lot of the people who work at the Fed and who are there, and I pretty much know what they know. And in particular, they use models, they use statistics. (and) they deal with uncertainty all the time. They're in a funny situation with the press, because they've gotten themselves in a situation where they talk to the press a lot. And the press doesn't want technically sophisticated things. They're doing very sophisticated things. They're talking about game theory. They're talking about very abstract things in dynamics. It's they use some of the math that physicists use. And the strange thing is that it's actually a beautiful thing. The person in the street does not expect himself to understand physics. They don't go to a physicist. And physicists don't have news conferences where they explain relativity. but a great thing about economics that everybody deals with economics every day of their life. They decide what to buy, and they have their own theories, and they do understand a lot about their own self. So, they think they know as much as the Fed Chairman or the head of the Central Bank of China. They're more interested (in the Fed policy), but it kind of makes communication more difficult, more challenging. I know the people who do spend a lot of time talking about how to communicate, and how to simplify. And my guess is every central bank does that. But anyway, it's interesting.

SFC Markets and Finance: So would you like to give me a number? How many times will the Fed cut rates?

Thomas J. Sargent: No, no idea. They don't either. If you're a person that can read faces, some people can read faces like my wife can read faces. If you watch them when you ask, if you ask a Fed member that, and you watch their face, you'll see. Unless they're good poker players, they will (be like) "I wish you hadn't asked me that, because I don't know".

Global economy in 2024 will look a lot like 2023

SFC Markets and Finance: Looking ahead, how do you think about the global economy in 2024?

Thomas J. Sargent: For better or worse, I think it will look a lot like 2023. That's a pretty good answer most of the time. I'm being honest. That's what the evidence says. If you could kind of go back? Let's say in December 2019, if you asked me that, I would have said that. I would’ve been really wrong. But why? Because of huge, unexpected shock that we never thought of. Maybe we thought about something. Unless there's something like that, either a really good shock or bad shock, that's kind of it. Now are there shocks to worry about? Sure. You could think about lots of shock story on it.

SFC Markets and Finance: What will drive the growth in 2024? What will be the key engines?

Thomas J. Sargent: Same thing they've always been. So, scientific discoveries, practical implementation, people both imitating and innovating. A lot of growth comes from imitation like you can see that in individual scientific work. Somebody takes a new idea. It's 95% combining old ideas and one really nice new one. Opportunities for trade within a country. The principles that why people like international trade are the same reasons they like trade within a country. There's some regions that produce some things better than others. 

Support for free trade among U.S. politicians has declined

SFC Markets and Finance: The U.S. will have an election in 2024. How will the election affect international trade?

Thomas J. Sargent: I'm not hopeful about that. The reason is, very sadly, the two political parties, Trump and Biden, agree on many things and lots of things they agree on are bad economics. They agree on trade, subsidies and tariffs. The campaign will say I'll raise tariffs bigger than you. No you won’t, I'll raise them bigger than you. That's not good. So, the support for free trade among our political elite has declined. That's not good for my country and it's not good for (everyone). Nevertheless, there's a lot of support for free trade in the business community. Business men and little citizens like me, I like free trade. Because everything you see here. Absolutely. Everything was made in China. My shirt, my tie, my coat. My watch and so on. When you impose tariffs, now I pay more and I pay them.

SFC Markets and Finance: We pay more for many U.S. stuff.

Thomas J. Sargent: But look, this is a good example. Who do I pay before the tariffs? I paid the manufacturer and the worker and the entrepreneurs who made this. Afterwards I pay them, and I pay the U.S. government for something that was made here anyway. And it protects inefficient people who want to produce the same good in the United States. We're never going to produce these. Steel and aluminum, neither ways. So, it's an old story. It's the truth. That’s the sure thing. I also learned if you get to be old. I learned a Chinese proverb yesterday, which I love. "30 years east of the river, 30 years west of the river.” What that means is that these progress and social things are not always straight up. There's the return of the old ideas that didn't work so well and we forget that they didn't work so well. My country used to be a high tariff country. And it took a lot of people to say no, we should be a low tariff country. Now we kind of forgot what the reasons. So that's why I think that dimension of the election doesn't make me optimistic. I hope I'm wrong.

The Greater Bay Area is remarkable and vibrant

SFC Markets and Finance: You visit Hong Kong, Shenzhen and Guangzhou, all these cities belong to the Greater Bay Area. How do you think about the Greater Bay Area?

Thomas J. Sargent: There's other things, Macao. I think it's remarkable and vibrant cities, the amount of innovation. It's very innovative companies like DJI. Companies I didn't even know that they were in China let alone (Shenzhen). But I bought a DJI drone about 8 years ago. In the U.S. I didn't even know where it came from, but I know it's made in Shenzhen. Phones and all sorts of things. I'm interested in history. So, Guangzhou interests me a lot and it has a really interesting history. Hong Kong has an interesting history. Like America, it was a British colony. It was a British colony for longer. But long before that it was Chinese. So, Shenzhen is an experiment. To an economist, Shenzhen is an amazing thing but just to see it now.

Chinese chip industry is on the rise

SFC Markets and Finance: So finally, would you like to make prediction of China's economy in 2024?

Thomas J. Sargent: No. It'll look a lot like 2023. That's what any of my friends who are economists will know what I'm doing. There's a really good statistical model of GDP growth. It's called a geometric random walk with growth, continuing to grow about the same rate. You'll be shocked. It's hard to beat that prediction.

SFC Markets and Finance: Which industries will have more opportunities in China?

Thomas J. Sargent: I don't know. I have some ideas, they're probably not good ones. I think one thing is that the U.S. is helping the Chinese chip industry because there's restrictions. It's just no question. If we put these subsidies and restrictions on chips anywhere else, the other countries are going to (develop). I think it's really foolish and the U.S. chip manufacturers think it's foolish. What's going to happen? It's going to subsidize. It's going to incentivize and promote R&D in chips in other places. China is one of them, other places too. China is especially interesting because it has lots of good engineers. It's got companies that entrepreneurs who know how to organize engineers. Ten years from now, if you ask me about chips. All the chips in my saying that would be made in China. They'll probably be pretty good too.

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