will commodities continue to theapse, consider china commodity privet. michael spence of new york university will talk about inflation. good morning, everyone. this is "bloomberg surveillance. " from their headquarters in new york. it is tuesday. i am tom keene. with me is vonnie quinn. vonnie: i think you need music when you say that. we had deutsche bank saying that there was a better chance of landing a man on mars before a normalization would happen. tom: i knew you would get a map to damon into this with the movie "the martian" out. vonnie: a 0% yield from

yesterday, the first time ever. tom: right now, we need to go to the bloomberg first word desk. the rain ending in south carolina, but floodwaters are rising. it may be weeks before state officials decide which are washed out roads and bridges are safe. deathst 13 storm related in the carolinas. the committee wants american troops to stay in afghanistan. lawmakers were asked the u.s. commander if president obama should changes plan for recalling u.s. troops. there are 10,000 at afghanistan, that will drop to 1000. a hearing days after a u.s. coalition headed a husband who. russia's deputy foreign

minister is a establishing a no-fly zone, saying that would highly syria's sovereignty. admiral said volunteers might enter the fight. goldman sachs says the fed may not raise rates until 2016 or later. areeconomist says they forecasting a december rate increase. a slowdown in output and unemployment may prompt the central bank to hold off. a rarity before a new york inky's playoff game. ticket prices for the wild card game against houston are the least expensive since 2012. the average price is $780, 40% less than the national game in chicago. they areink it is cool playing the astros.

houston and new york are an odd combination. vonnie: the final mets game was on sunday. how many innings did you last? three or four? vonnie: 4.5. tom: what is the difference between baseball and cricket? vonnie: a whole culture. don't get me started. up the are ripping script. what is the difference between baseball and cricket? vonnie: cuba and australia. tom: i have no idea what she just said. any number of things to look at today. the future, negative 10 earlier. i will wander down to the vix. if it is below 20 it is a big deal. 19.5, we are back to normal, not complacency or a good feeling, but what a difference in the vix , the 10 year yield recovering

almost completely from the debacle a few days ago. thedollar to brazil, brazilian real is under 4. a sigh of relief in emerging markets. we will look at that in the foreign exchange check. let's get warmed up for a discussion with professor spence. spirit of america from world war ii, the volatility acquired figure out's, as we our macroeconomics. we go up to and percent or so. all in gdp growth with inflation. we go now with the great moderation. there is really no -- more concerning. obviously, that was an outlier. nominal gdp, when michael spence is on the set we give him as much time as we can. prize,u get your nobel

all are forced to a pine of our collective future. michael spence of nyu left his gift bag in stockholm. he has avoided nobel guruitis like the plague. fed call out into 2016. the news of the moment. with your huge skepticism of our ability to forecast. it is an economics of humility. are we getting humble as we stagger forward with our monetary policy? think we are.i we forecasted growth higher than it came in for almost anywhere in the world. i think we are living in an environment that is extremely complex and hard to figure out. tom: there is a new

globalization. is it a different globalization? different from and you wrote your book on the convergence of societies? .rof. spence: yes it is more interconnected in many ways. it is also tied together in a short ofeflationary the demand/investment trap. we all seem to be in it. it is affecting everyone. tom: one of the great themes is the shift of fiscal stimulus. no one is for it. vonnie: they say they are for it, but no one is implementing it. they are trying in japan, but it has been difficult. the fact that we can forecast what will happen -- that we can't forecast what will happen with growth, can we forecast things like qe? will we see more qe from japan? prof. spence: that is a good guest. guess. most think we are too heavy on monetary policy and two light on

investment and structural reforms that would affect product to the long-term growth. warned me about forecasting -- it is likely to change quickly in the near future. vonnie: you cannot change the lack of political will. prof. spence: there are 2 things. there are countries that are seriously constrained fiscally. a sort of block. there are other ones that it is more of a matter of perception of reality. when you add them together -- feet with breaking news. we have a deal that is a transaction. sadie miller is to reject avi's in formal offer last week. other headlines out with it said down 2.8%is moving

in london. professor spence, this goes back to be tied to go back and forth of companies in global finance with a strange thing -- money costs nothing. what is the level of distortion we are living in in our economics, finance, and investment? high.spence: it is pretty you mentioned before that the global economy is levering up rather than the reverse. a useful mckinsey global institute study documents that. that is not the direction we want to go. we do not want to create additional demand by levering out. brazil andou look at china, they blended public leverage with private leverage. which is of the greater concern? prof. spence: it depends where you are. in china, the corporate leverage, the business leverage is the most.

in china, business and public is mixed up in the enterprise sector. it is hard to separate. that they i think have lots of problems -- a budget problem and a serious loss of confidence in the government and reform momentum. tom: if a clear markets in finance, the interest rate, are the reasons we are struggling because we do not have a real interest rate or a correct interest rate to observe in brazil, turkey, china, and indonesia? it is an artificial rate, isn't it? prof. spence: it is an artificial rate. it makes it more difficult to growthe a balanced path, because they can have ridiculous rates. they tend to rely on it, they make it themselves in an exposed

position. vonnie: when would be the right time for the federal reserve to raise interest rates? would one increase make a major difference? as ayou would look good governor. can we start that rumor now? won'tspence: it probably happen. there are 2 sides. one small interest rate on the fundamentals doesn't make that that muchrent -- it difference. what is tying people up is the signaling. that is different. my straight answer to your question is -- tom: trying to finance normality. so adamantrogoff about raising rates? hauntsar of being wrong them, doesn't it? it does, and it haunts central banks. if they raise rates and we are in a fragile situation and

turning down, they do not want to be in that position. so, there is an asymmetry in the degree of caution they are experts in causing finance to predict the tale of the distribution moving over into 2016. tom: we have so much to talk about across -- and we will devote an entire section to his comments on china. what a treat for you tomorrow, six :00 p.m. in hong kong, dubai, and london. 6:00 a.m. tomorrow, doubter, morse, and less coverage of citigroup. they are on speaking terms. tobias lusk of which -- tobias vkovich. 6:00 a.m. new york time, citigroup on bloomberg

surveillance. stay with us, good morning. ♪

tom: good morning. "bloomberg surveillance" in new york. we need to look at her first word news from bloomberg. here is guy johnson in london. : far-reaching implications for facebook. the european union high court decided a data sharing deal between the u.s. and eu is invalid. they say it does not adequately protect the privacy of citizens. have been pushing facebook.

this deal goes back 15 years. in germany tomorrow, volkswagen must give the government a plan for fixing diesel powered vehicles. one of the vw's options is the replacement of cars. they must regulate at this worldwide. the scandal has up to 11 million --s with emissions tr tricking equipment. dropping 1.8%. the ranks of the jobless to 2.7 million. it surprised economists. they are talking about this being related to the slowdown in china. we haven't started talking that the impact of vw. let's bring hans nichols into that story. how vulnerable is germany right now? we have frankfurt's which seem

to be conflating. hans: the order numbers are down. want .8% on the negative side. they expect to 0.5% growth. the july numbers were revised downward. are the better part of two years we have been talking about data from various institutes. rarely does the market to move and we get excited about factory numbers, it is a lagging indicator and unpredictable. a lot of people look at the numbers because they are looking at the headwinds the german economy is facing. in august it was china, september -- of volkswagen. finally, the numbers are showing it. these are not good predictive numbers. there are data series that may be better at predicting. the problem is you have a german economy that is humming along. wages are going up. the germans are feeling good about life despite the headwinds

there are economy is facing. hans: that is reflected in the ego numbers. vw has been in lockstep. anddisappointing figure, this was on the margins, was unemployment. the number of jobless increased when it was expected to go down. the unemployment rate did not change, 6.4%. are wondering, when is germany going to blink? this may be the first indication it is blowing in? -- it is blinking. professorng with spence is the distortions out there. tell us about the german public as they live with negative interest rates. what is that like?

hans: there are two things. concern there is a real estate bubble. there is a lot of concern about that, especially in the big cities, munich to the greatest extent where real estate is the host expensive. everyone is wondering when the other shoe will drop. the weak euro helps germany extort their way out of things, and they have had success. the weak euro puts the question underpaid.orkers a lot of german exporting giants would not have a competitive advantage. vonnie: the weaker euro and the consumer, it is down 7% on the basis points. how are germans actually feeling? hans: their purchasing power in germany has not changed much. cbi has not moved much. there is not deflation. they have not had meaningful wage increases you would expect to see if the currency was in the exportth strength of the surplus. after this point of the german workers have taken it.

it is a challenge. they are trying to work through it. tom: thank you so much. to the shocking images we saw of air france management caught in a mob of a labor strike with some of their employees. we will have highlights from an interview with former deutsche -- with the former deutsche bank ceo. we speak about the future of deutsche bank and baking in europe and america. that is exclusive to germany -- exclusive to bloomberg. stay with us.

tom: someone say it is michael spence's china. good evening to all of those in asia. all is always beautiful. it is recently especially attractive. bloomberg radio, our first word asia in the first weeks. we hope you give it a try. the must listen, bloomberg markets, the most influence was a cornucopia around the world. in london the x ceo of deutsche bank anshu jain spoke. he stepped down in june. he sat down with shaun nichols about emerging markets.

mr. jain: it is not as bad as the asian crisis in the late 1990's. not aign in deference is lower. look at the emerging market culprits if you want an area of concern. they borrowed a lot of money. the crisis we have seen a 50% jump in the borrowing by in dollars, hard currency. a lot of that came from emerging . some of these corporate have hedged it, that can be defined. others may be playing a carry game. you borrow in dollars, and best domestically into the banking system. i think we will get stress. ex-deutsche was the bank ceo.

michael spence, nobel laureate guest, you agree there will not be a crisis like the 1990's? prof. spence: that is the best to guess. there is risk in the global economy and financial systems on the downside. you do not see a huge amount of upside potential. maybe india will surprise on the upside. for the most part, i think that is right. this is the idea that all of our listeners and viewers think that the gains have gone to the plural kratz. bank aren is a big taking an big profits. is that a fair statement? it is a gilded age and they put plutocracy?- and a area ofence: in that growth patterns, my view is that it is a condemnation of

structural change, technology, globalization, and so one -- along with successes that vary from country to country. tom: we will talk about risking china with professors spins. the most influential summit, i will speak later morgan stanley and standard life investments. this will be very interesting. they share on the commodity cycle and what they will do about it. vonnie quinn, tom keene, and guy johnson. good morning. ♪

tom: bloomberg surveillance. let's get your top headlines from the bloomberg first word desk. annie: south carolina gets

break. the rain is tapering off. floodwaters will keep rising in parts of the state. some towns are like islands after the rain storm washed out roads. at least 13 deaths in the carolina are blamed on the storm and high water. not haveople do drinkable water. president obama clear the way for emergency aid. a message for budweiser. the brewer has rejected a takeover offer from anheuser-busch. some shareholders were looking for an offer in the $110 billion range. no word on if they will make another offer. a roller coaster ride for glencore shareholders. shares fell 8% today in london, following yesterday's 21% gain. -- $1.35. a

tom: headlines right now. manufacturer beat with lots of dollar extortion. michael spence, i do not want you to do an accounting exercise, but i have seen numbers for foreign exchange adjustment. i want to say that i have never back to thearkens 1990's. it is 11%? it sees the quarter. how much is a strong dollar beginning to amend and adjust american business and americans themselves? it is a big deal. prof. spence: it affects earnings, and competitiveness, eventually, on the tradable side of the economy. vonnie: and of the revenue, the estimate was for the $2.4

million. it is close to the earnings-per-share which was larger. they're looking for a decrease of 7%, that did not happen. bankingt looks like earnings. i did not vonnie: drink enough vonnie: pepsi last quarter. deceleration toward snacks and carbonated beverages. tom: the leadership of the chairman ceo was out the door last night. it is a tenuous time for companies. sales dropped for the fourth straight year over year decline. vonnie: a pivotal story. low to mid level single commodity inflation. are in pepsi-cola, nobody does it as well as bonnie. we will talk to michael spence about something complex. it is bad to do in the 6:00 hour of the morning. that is types to risk.

professor spence won the nobel prize. he thought about the unseen, the things that are not out there which leads to silly mathematics , including type two risks. this is a way to talk about the on known unknowns. what is the on know -- of the unknown unknown that is there now? prof. spence: none of us can really figure out what it means in a world dominated by monetary policy with interest rates this low. where is it taking us? we do not know the end again. vonnie: the idea is that it is taking us to a better world with more demand. and better growth eventually. prof. spence: that is the theory. the best i can tell, monetary policy in the united states has elevated asset prices. a huge amount to generate demand. it did not stimulate investment.

corporate investments are at an all-time low. they are spending cash pools by having dividends. i think it is a policy mix to have the on monetary policy. that the central bank must think the same thing. tom: they agree with michael spence that they are being burdened by holding up this system? prof. spence: exactly. within the idea that the risks that are out there, doing the right or wrong thing, in 2010 you wrote an essay on trying to do the right thing and being earnest and proper and getting it wrong. is washington getting it wrong with overregulation in the spirit of trying to do the right and getting in the way of modern capitalism? they spence: to be fair, do not agree on fundamental

things about managing the fiscal side and so one. they are lockstep discussing that. they are facing a degree of complexity that is abnormal. that said, i think we are missing opportunities to balance this policy response. vonnie: you mentioned the corporate sector. shareholders are buying back shares, increasing dividends, they do not have to. they could invest? prof. spence: they could. there is discussion about whether this is not a missed opportunity. , worrying where your stock is next quarter, and so on. vonnie: how do you incentivize corporations to invest if they are unsure about the future and do not see other authorities doing anything to increase demand? prof. spence: part of the answer corporate leaders have

launched a movement to shift the time horizon out in the long-term. we will not be in this position forever. the rest of it requires a complementary policy response. there is macro economic and regulatory uncertainty. deterring --tial and deterring investment. into a are eight years crisis. no one is calling all clear for society. there are 2 americas. there are 2 italys and irelands. have you seen that in your study of history, a partition of society, or is this something new -- our new partition? prof. spence: it is not new. in the british industrial revolution, there were 2 societies. trails dickens wrote about it. when you have -- charles dickens

wrote about it. and you have transitions like that, in our case it is information technology and globalization, you get a long transition. tom: david brooks in the new york times, i will feature this in the next hour, they wrote about michael spence. said that there is a liberal arts, a value to philosophy, he took a philosophy degree in challenge the concrete challenges of our life. are we to certain in our tech ocracy that we need to know more? prof. spence: i think that is right. you need to come out of your education broadly defined. your family, church, college, etc., with a grounded set of values that informs what you do

regardless of where you are. we have tipped a little bit. tom: your graduate education at stanford university, you had 1000 tackle to members at any given time. is that is where -- is that where you developed hatred with the philosophical society? did you ever throw anything at john taylor? prof. spence: i never did. vonnie: except arguments. you have written about the sharing economy, productivity, and the difficulty of increasing productivity. do see the lack of productivity as transitional or a permanent phenomenon? prof. spence: i do not think it is permanent. this is a thing we do not know. i think that a combination of to the increasing characteristics of digital technology and so one will eventually see it. it is hard to see it in the transition.

in the last 15 years, since 2000, we have taken all of them middle income manufacturing jobs, essentially, out of the economy. manufacturing is growing like a weed in america, but the jobs did not grow, they declined. big productivity -- where did those people go? answer is that they went into lower productivity domestic service jobs on the non-trade side of the economy. tom: we will come back and talk about fair trade in china. boy, do i get a lot of mail on that. trade with secretary clinton. coming up on "bloomberg surveillance" we will talk about trade and the new agreement. china the nation's experts. i have surveillance goosebumps.

i have michael spence and eswar prasad, and vonnie quinn. ♪

tom: breaking news in the saga this isvolkswagen -- something. they will delay or cancel nonessential investments. to do thaton't like under any circumstances. ] freezes on capital expenditures. i've looking at the stock off of the bloomberg terminal. comment as hans nichols follows this in germany. it is time for our single best chart. michael spence with a discussion on china leader. looking at imports and the price, there's something different. if you look at anything, it is units and price. declinespence, unit and global slowdown -- this is disinflation,on/ price decline.

a different kind of decline? prof. spence: it is. a dangerous situation. 2 things, a reflection of the struggle that we have of the right kind and enough demand in the global economy. germany has a high savings rate, you can see it in china. constrained domestically and on the tradable side by demand. in the united states, or we are closer to hitting our short-run productive potential, it is everywhere. everywhere, it is about balance sheet of adjustment. blows across the income statement. combining that statement with the need to stop investing. and emerging markets don't seem to clear their balance sheets of bad will as quickly as we do. will that lead to a protracted new mediocre? prof. spence: that is true in a lot of countries.

example.uld be a good it is true in europe to some extent. japan was famous for not clearing its balance sheet. it is a ubiquitous problem. the united states is an outlier with the speed to which we respond. exceptionalismn -- the idea that there is something different about ourica that we clear markets and have a launch in progress. you see an american technological progress? prof. spence: absolutely. i think that the protect his productivity increase in potential in this wave of digital technology coming at us is enormous. the trick is to adjust the structure of markets the way the labor market works, the human capital stock, and all of the things to match. vonnie: people want to spend

more on services. tom: right now a discussion on germany and the crisis with volkswagen. guy johnson, what do you see? y: it makes sense on a number of levels. looking at a difficult situation. it is not able to make car deliveries. people are not buying the cars. they're not taking the cars that they ordered. the cash flow through the middle of the year dell is something that you may need to think about. vw asedit markets, with well. it makes sense that vw may be cutting back on nonessential investments. cost cutting seems to be the first knee-jerk reaction that many companies go through in this process. that is part of which you were talking about in the last hour. in: looking at volkswagen

america, they say the diesel is lousy and it is another troubled car company, explain to our american viewers what volkswagen means in size to germany and london. guy: let's start with london. is, anden was, it probably will be in the future a massive issue were of corporate debt. it is almost a bank in itself. you cross into the finance industry. it is in the u.s. and europe as well. many people finance their vehicles. in terms of its impacts in the german and european economy, all , fromy across the country spain and eastern europe, and germany, the car industry represents seven percent of the german economy. a huge concentration risk in one particular industry which races at -- reaches across the

country. when you stop spending money on a quick basis, that has an instant ripple effect across the german economy. guy johnson in london as we see distressing news from volkswagen. we will continue with michael spence. tomorrow, a very special surveillance." the first time these three people have been in the same geography. live at six with us :00 a.m. on the set in new york city. how extraordinary? tomorrow, stay with us, "bloomberg surveillance." ♪

tom: good morning. more breaking news on vw. help me out. coming in. is security rating is the highest priority. -- ie: they investigated the 20,000 employees saying the financial damage is not foreseeable. pricingnot know if the

confidence, but china has been affected by the crisis. tom: we will continue on china and a moment. teachers, negative three years. vonnie: california is the fifth right to dialogue. governor brown signed the legislation that let's terminally ill californians into their lives with the help of a doctor. the world bank says that we are closer to eliminating extreme poverty by 2030. the world's population living on less than $ 2 per day will fall. it is the equivalent of insider trading in the multimillion dollar world of fantasy sports. an employee of draft kings mistakenly released data before the third week of nfl games.

he won money by playing at a rival site. both companies have released statements. tom: this will end ugly. i invested 200 and $56 and one $3.1 million. if i did that in this business i would be in jail. i don't to get it. i don't know how it started. vonnie: who regulates the fantasy industry? won a fan dual it would be deflate-gate in my wallet. we have michael spence. he is focused on china. it is the china pivot. good for a what is professor and gone there numerous times to observe the modern china.

related to the great historian jonathan spence, i read "the making of modern china." what is the new modern china? prof. spence: an economy that is looking like ours. cities, you would think that you were in an advanced country. the service industry is developing. people have relatively high incomes and are comfortable. they have normal problems, the real estate bubble and things we are familiar with. a lot of that poverty reduction was china growing. i mention the benefits we have seen from poverty reduction. guy johnson? guy: my question is straightforward. how dependent on credit growth is the new china? that has been the driver thus far. main spence: there are 2 drivers.

the response. investment, which they turned to when they needed more demand. and credit. ony have run out the string credit, and one hopes that they know it and will not rely on it any order, especially in the anshu jainrea, where said they are in the danger area. if they push investment too hard to they will be in the economy. they need to exercise discipline and led the household sector and conception phil in the gap. it may take time. trilemma that the any global economy and has in that economy. trying to have its own possible trinity. prof. spence: it is starting to have its own trinity. it has a foreign policy,

aggressive economic policy, the silk road, the ai ib, the interim is a rationalization -- the internationalization of the rnb. devaluation did not go well. now an appreciation. do they understand the power that can come as they manipulate their currency? prof. spence: that is an interesting question. the chinese currency, by market standards, was overvalued for almost one year. billion inp $315 reserve holding it up, then decided enough was enough. they dole is why did that? the most likely answer is that they were internationalizing the renminbi. michael spence at new york

university. guy johnson, thank you. report right now. it is quiet in the markets. a vanilla report. emerging markets are doing well. stay with us, bloomberg, good morning. ♪

stephanie: we could be in for more volatility. : goldman sachs as the fed may not raise rates until next year. stephanie: happy tuesday morning. it is our second day on bloomberg "go." i'm stephanie ruhle. david: welcome. the most: this is influential conference. let's break down the interviews. jeff smith. that's break it down. bob dry filled, we have