Last night I had the pleasure of interviewing distinguished World Bank President Robert Zoellick. Mr. Zoellick told me not to take dollar supremacy for granted. He blasted the Federal Reserve for bungling the asset-price bubbles. He believes that Treasury — not the Fed — ought to be our uber-systemic risk regulator. And he says the U.S. has huge policy choices in front of it.
Here’s the transcript from our interview.
KUDLOW: World Bank President Bob Zoellick, thanks for coming back on Kudlow Report, sir.
ZOELLICK: Glad to be with you, Larry.
KUDLOW: Let me just begin with some news. We’ve had a terrific rally up here on Wall Street. Dow’s up about 150 points as of this conversation. And as you know, in the last six months world stock markets, emerging stock markets, have had a tremendous rally. Is this a signal that the global recession is over and world recovery is upon us?
ZOELLICK: I think it’s a signal that the governments have broken the fall in financial markets and that there’s a lot of liquidity out there. But there’s still a big question about whether the real economy will kick in.
KUDLOW: What are the economics, people at the World Bank — you’ve got a splendid staff, you’ve got a large staff. What are they saying about forecasts for, let’s say, 2010, next year?
ZOELLICK: In general they see a cautious and gradual recovery; concern that there’s not enough demand because the U.S. consumer won’t play the role that it has in the past, so a possibility that developing countries could step in with the right financing. But also some big risks. So for example, if you look at China’s recovery, which has been strong, it’s been fueled by a huge increase in credit that’s now starting to get turned back. So later in 2010 we face additional risks.
KUDLOW: Let me go to your speech today. You gave a very strong speech before the Johns Hopkins International School. And at the beginning, right up top, “US would be mistaken to take for granted the dollar’s place as the world’s predominant currency.” We would be mistaken to take for granted. Let me ask you to clarify, what do you mean by that?
ZOELLICK: Well, it’s something I feel really strongly about, Larry, and I think you do as well. You know, on the one hand, I don’t believe all the stuff about that the dollar isn’t the key reserve currency. It is. You could see people turn to it today because — in the crisis because of a flight to security. But my point is Americans do not recognize that, you know, countries over — all over the world would die for the ability to be able to print money, to issue bonds as freely as the United States has. And as you look at out years, that’s not something we can take for granted. So what that means is coming out of this crisis, the Fed’s policies in terms of making sure we have a recovery without inflation, making sure that you got a good, strong value for the dollar, having a sense that the financial markets, yes, they need to improve the safety and soundness, but they have the depth and liquidity they’ve historically had, those are not going to be easy issues, but they’re going to be absolutely critically for the United States for decades to come.
KUDLOW: If the U.S. dollar continues to decline — I mean, by and large for about eight years, under Republican and now Democratic administrations, the dollar has been weak. If the dollar continues its chronic decline, would that stop world economic recovery?
ZOELLICK: Well, you know, it depends on what else is going on and it depends, you know, how far of a decline and it depends on some of the effects that it has on interest rates. But my point really goes more to the direct interests of the United States. And I took a historical reference with Prime Minister Pitt of Britain saying that while people talk about the great campaigns that won the Napoleonic wars, it was the fact that he restored Britain’s credit that allowed them to fight a 20-year war and pay for a coalition. Now, the larger point there is the United States has been in a unique position in terms of being able to have the dollar accepted as the predominant reserve currency. The euro did a good performance in this crisis, it will be an alternative. I don’t think China’s renminbi is going to move to an open capital account soon. But in the speech I outline why over the next 10 years, 10, 20 years, it will also move to be more of an international role. So my message is whether it’s budget deficits or whether it’s the monetary policies, don’t take the dollar for granted.