markets brace for the friday job's report. and treasuries extend losses. bank -- we take you through the latest as shares climb for the sick straight day. and we are live in washington, d.c.. we speak with christine lagarde later today. this is "bloomberg surveillance." i am here with tom keene. a lot of the focusthis is "blooe

on populism and local growth. and the other headline today is increased debt. that -- hsbc announced francine: and this is what we will focus on at the imf that outside the agenda everyone wants to talk to deutsche bank. matthew isricane taking aim at the southeastern united states. it is on course to hit florida, georgia and the carolinas. almost 2 million people have been urged to evacuate homes. the hurricane is now a category three hurricane. saysresident of colombia the country is close to achieving lasting peace with rebels.

on sunday, colombian voters rejected a cease-fire agreement that would have ended fire with the rebels. in china are pleased with the country's rising global power, but there are concerns about foreign entanglement. visit the results of a survey. they have a favorable view of the u.s. global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. i am taylor riggs. this is bloomberg. thank you. let's look at equities, bonds, currencies. stable markets to look at for the beginning of the morning. a weaker euro and a little bit of a dollar gain. oil churning nearly $50 level. ie wasght jeff curr

outstanding yesterday. -- ling francine: deutsche bank is higher. we know that a lot of focus will be on deutsche bank although it is not on the agenda. came as a surprise to a lot of people when the fine was $14 billion. weopened higher but now, have erased a lot of the games. a big drop yesterday from european stocks, overall. one of the backdrops in the -- thes of the imf is purple line is goods and services.

and the cash takes you down to a substantial account deficit. it is one of the many back stories we have here. itthe last 18 hours or so, debt is pushed front and center with the fiscal report of the imf. francine: and it was only six days ago that we had the report saying that gdp was revised upwards for the u.k. to do withverything debt. you for coming on. concerns outmany there. we have talked about treasuries and monetary policy. what is the one thing that we are not seeing that hurts or scares you? >> the communication by central banks. transitioning from a time where central banks told us they were targeting the size of their

balance sheet. so 2014.feels and the approach now is much to the level of real rates that they prefer. that could be with the fed or the boj with the targeting of the curve. we'll see what the ecp brings out when it meets later this month and in december. but this is a delicate transition. income investors like this because they did not like the pronounced flattening of yield curves. and financials, deutsche bank also likes that. but the currency markets are mixed. can't talk know you deutsche bank specifically. but we are focusing so much on central banks that there is the tok that we are overreacting

the prices and we are missing the next crisis. francesco: right. look, what central banks have done over the next few years is have a pronounced injection of liquidity. with the collateral damage that it has created, if this unravels forkly, we could be set turbulence. washington is full with every hotel room with people who want to maintain control. the ultimate goal of any institution is to regain control. how confident are you that christine lagarde and others can regain control? francesco: there are two sources of uncertainty. one is politics. deliverance,

pleasing the population. that is a challenging scene with things like the brexit referendum. i think from a macro perspective, markets have been relatively well-behaved, we haven't seen inflation coming up . we are at a delicate junction drive upause we should the price of goods and services in the coming months. tom: you should come to washington and filter in your dollar call. the consensus seems to be stronger dollar? francesco: the glide path there will depend on how much inflation japan and the euro area managed to get. if you look at the differential between inflation expectations , against the u.s.,

would you will find is that the u.s. has produced higher thantion expectations other regions. so real rates have gone the way of japan. francine: where do you see treasuries in for-five years from now? francesco: i think we will collide towards 4%. that is the path of least resistance. hsbc'swdy respond to they defined lower for longer up to 2021? a lot of people pushing against that. why would you push against that? francesco: the u.s. has imported a lot of monetary stimulus thanks to the qe policies of the boj. so the curve has been flat and i think the fed will have to compensate as the inflation year picks up more meaningfully. tom: -- ,rancine: francesco garzarelli

thank you so much. he stays with us. coming up later we have christine lagarde right here in washington, d.c. the interview is at 9:00 a.m. in new york. this is bloomberg. ♪

washington with the imf fund meeting. our interview with christine lagarde coming up later this morning. all sorts of economists and strategists wealth join us. we are thrilled with the turnout. in washington and joining me off the plane -- she

survived dulles international airport -- francine. we greet foreigners into the country with dulles international airport. right now, we go to ian shepherdson. jim glass and will join us tomorrow. and there's backstory now because there are three reports before we get to the december meeting. how important is this report? every report is important because everyone has the capacity to spring surprises on us. this one is shaping up to be an ok job support. in not expecting a big move jobs numbers. bearing in mind, wage growth is ultimately the same as what the fed worries that most when they iink about future policy,

think the interest rate risk is still very real. tom: within that is the state of the american economy. we have a different glide path with other central banks. but what is the state of economic growth right now? it seems to be one quarter on and then one quarter off. jpmorgan went to 3% for q3 growth. out of four quarters, i think it will be better. forave had a big drag capital spending in the mining sector. that has pulled down other parts of the economy, as well. and at the same time, numbers are looking better. i am the election expecting to see government spending rising on defense and nondefense. the election.

we haven't had that, we have had one good and one bad. but i think the pickup with unemployment, something the fed is not anticipating. sayinge: stanley fischer it is also up to fiscal to do its part. saying that central banks need the fiscal help for growth. when our government after going to listen to central bankers? ago,a couple of years austerity -- that story is completely over. the u.k. is talking about shifting to more aggressive policies. we will see increased government spending. and there's no question that over the last couple of years, we have seen a real drag from spending. and there is a widespread recognition that this is a

mistake. ours we have reached maximum effectiveness but we haven't achieved the growth that we need. so there is a definite change of mood. unemployment is below 5%, maybe we don't need it anymore? francine: is it as simple to say that austerity hasn't worked, could we have been right all along? ian: yes, it hasn't worked. the growth that we were supposed to be getting when qe started years ago has not materialized. and a big reason for that is the fiscal tightening. and what we've learned is that have a crash when you fragile banking system and balance sheet everywhere, you need more than monetary policy. it can't do its job on its own. i think that will be the lesson that comes through for future. the next time this thing happens, fiscal policy needs to

be more aggressive. it, it justreverse makes it worse. absolutely. ian shepherdson, thank you so much. we are back now with francesco garzarelli. when you look at the natural rate, we have a very low natural rate of interest. is that worrisome because it might reflect more deep-rooted economic problems in the u.s. and the world? francesco: the natural rate has been dropping for the last 15 years. more than that. towe have gone from 405 down barely three. people have pointed out that in the past 6-9 months, the drop has been particularly pronounced.

but i think that has to be put qe at the major central banks have been delivering. so some of that drop in the terminal rate, i think it reflects the policy stance rather than a change in technological progress or expectations. are you surprised on the discussion of debt? we have the red, green and blue book -- i was wrong -- the headline is debt. are you surprised by that? francesco: not really. in europe we are still seeing deleveraging and japan is mixed. but we have been through strong real averaging here in the united states. and we know that is because equities have primarily taken place. companies take advantage of the

low financing costs. and that ties into the debate about whether central banks theld now ring can be in two. tom: right. and softening as you mentioned earlier -- carmen reiner wrote a list during note a few days ago, which is it? the tool of debt? how does it fit into economics? francesco: well, in qe, we have seen mostly the reallocation within the fixed income. so there is demand for greater debt. they can find it through other instruments. of theink this is part policy inclination that we have seen. but that said, if growth doesn't pick up, it will be challenging. tom: critical question.

did central bankers force the debt buildup with their theory? i think they have. i think there has been an attempt to shift prices. this timethe irony of with investors is that people look for bonds with capital gains and equities for income. tom: can i steal that from you? francine: yes. tom: isn't it ironic that is what we're doing here? , we will garzarelli continue. tomorrow, we have a jobs report. after the data, a conversation with william gross. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i am in washington, d.c. with tom keene. we have to focus on the pound. we've learned a lot. primeere you surprised at minister theresa may's intensity? francine: i was surprised by know johnson -- i don't whether there talking to their

own constituents or their own party, but it's very clear that they may be looking at it deal that denies the u.k. of its own access to the eu. and this has them putting pressure on sterling. we are back now with francesco for the imfn d.c. meeting but lives in london, like me. i don't know if this is what we will end up with and i don't know whether this is a negotiating tactic, but do you think we are looking at the u.k. thinking it can live on its own? i think what are starting to sink in is the fact that brexit is going to happen. that is what we've learned over the past couple of weeks, as you mentioned. in and by thinking large we have lived with this

idea that it might go away because other european countries will bring and all of branch to thegovernment or because parliament will change its mind? so i think what's happening in markets is that is to brexit , safety is involved. react todoes the euro u.s. dynamics and united kingdom dynamics? inncesco: the u.k. has moved a way of isolation. because we have weakened against the dollar and the euro. so there is something definitely idiosyncratic. tom: but the real mystery to me is what euro does. francesco: right. are set for this divergent course of monetary policy with the fed hiking as we

continue to ease real rate, i think the euro will depreciate. ,rancine: francesco garzarelli thank you so much. coming up on "bloomberg surveillance," we speak to the international chairman -- great on central banks and will be great on rates. we figure out where he ceased treasuries and how he sees this policy hurting the banks. and later at 9:30 in washington, d.c., we will talk to christine lagarde. this is bloomberg. ♪

tom: good morning, everyone. inoomberg surveillance" washington, d.c.

clearly, it debt is the surprise of this thursday morning. yes, debt we haven't talked about but certainly what we talked about what we had the tantrum in january. tom: we could fran that as the work of the imf -- low rates for longer at hsbc. firstw cup -- but now, word news. taking placeit is in the southeastern u.s.. almost 2 million people have been urged to a back homes before hurricane matthew arrives. it will take aim at florida, georgia and the carolinas. it'll be on the florida coast tonight. the hurricane has been downgraded to a hurricane three category. the third time in three years, the u.s. national security agency is under fire for the way it handles secrets.

a contractor employed by whose allen hamilton has been arrested. three years ago, another contractor, edward snowden, led details on government surveillance programs. and the world's top currency forecasters say the dollar is a by no matter who wins the election. the dollar -- the donald trump economy would drive the dollar higher. clinton win hillary would strengthen the yen because she would likely maintain the status quo. and there is more tough talk -- independent foreign policy because "america has failed us." have treated the

country like "little brown brothers not capable of freedom." a number of terror attacks discourage travelers and the fall of the pound following the brexit vote increased foreign currency costs. global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. i am taylor riggs. this is bloomberg. thank you. world leaders are here in washington, d.c. for the imf meeting. our next guest has attended the meeting for the last 31 years. we are joined by jacob frenkel, the former bank of israel governor. great to have you on the program. you have been around for so many

years here, what has changed? we talk about low growth -- it is a different world and a more uncertain world. jacob: it is a very different world. when we worked on the world economic outlook in the late 1980's, the questions about where will the world go -- we looked at three countries and we knew the answer. japan -- europe and that is two thirds of the world product. but today, the very same three groups just produce 37%. the center of gravity has moved away. where did it go? it went to the emerging markets, primarily in asia. the focus is very different. are not a drags anymore on the economy -- in the 1980's we had that problem with the developing countries.

in the present time, they are an integral part of it. that is one of the elements. important thing is that in the late 1980's, when policy coordination was developed, the role of the capital movement, the capital account, was very secondary. it focused on trade. today, the direction of the world has so much bolder ability. remember i distinctly being at imf through last year and them saying well, we are concerned about the debt overhang. and we are concerned that when the fed rises, the emerging markets will have to withstand this. but problems aside, we are back to square one. yes, you're right.

i'm not sure about square negative -- about square one. in some areas it is square negative and in some areas it is square positive. but we must link the present to the future. something with the process and you get the product and you returned with interest tomorrow -- that is the essence. if any link in the chain is rogan, mainly you borrow or don't use resources properly, or you don't return and pay your debt, that is when the problems arise. ,om: so the heart of the matter the idea with this discussion and the debt buildup of $150 trillion in a mill you of negative rates, they were part of the forecast in chicago?

there a value to a negative rate strategy? to go below the zero balance? the arguments are solid. intol say that going or stayed with-- very low rates is very costly. it is costly because we focus all our discussions about the cost of normalization -- i would like to focus on the cost of delaying organization. you encourage risk-taking. absolutely. companies and firms, instead of investing in equipment, -- tom: your value, besides your

research, you have led so many institutions. is going to beon the adult in the room to break this cycle of misallocation? or do we wait for the market to do it with a tantrum? one of the problems -- i'm giving you an indirect answer -- one of the problems we have had in the recent years has been that there always has been one game in town. monetary policy has been overburdened. i would like to find a solution by which new policy instrument or which new musical instrument should join the concert joe and create the harmony? tom: there you go.

let me go to the morning must-read now. reinhard, but this time it is different. here is a scathing note on what we need to do with greece. to imagine ault sustained revival of greek growth without another round of haircuts -- about being an adult -- official creditors now hold most of the debt. it is time to place greater emphasis on debt restructuring." we have heard this from paul the core and others. will this be a topic at these meetings? will be.m sure it because how do you wind down the extraordinary leverage? when you look at a debt problem, it is in good enough to say, let's find mechanisms to reduce it.

is, what willon happen the morning after? plan to concede for the next debt problem? do you have a solution for the current problem, it is extremely important and it will distinguish between a good and bad solution. francine: this goes back to what you are saying about a lot of ceos buy back shares instead of focusing on investment. radical idea, a the fact that the negative rates are low rates and affect our psychology. so what you can do is bring them up and it will help with inflation? jacob: i like it. like talking about important variables.

this is fine. it is good for a very short term. look in japan. his governor kuroda started courageous and experimental , he had to be bolstered otherwise he would be hanging there. olivier blonde charred, the smartest guy in the world. to say we coverage need to aggressively reflate and push inflation to 4%. and he got killed for that. is that we are jacob: talking about in 2016? jacob:i hope not. let me just say that the logic of raising the inflation target actually, i got going much

earlier because it is midday in europe. real interest rates have declined all over the world. of reasons.y -- weple started to say need to have a higher nominal interest rate. realo we do this if interest rates went down? that is where we need an inflation component. all over the world, lower productivity. don't why don't we asked the question of, how do we raise -- francine: because no one knows. jacob: everyone knows that

productivity requires innovation, mobility, a flexible economy. tom: we will come back and talk about this. jacob frenkel is here with us with jp international chairman. ,oming up this morning christine lagarde from the blue, green, red book. this is bloomberg. ♪

tom: oh, the pain.

the mets. they could not generate runs. was better than good. they move on in baseball -- this is a wildcard which is a one-off game. baltimore losing -- tom: this is why struggle. no idea what you are talking about. he's from texas, it makes it even more confusing. frenkel,re with jacob working on international economics. the conundrum of the day, how to spur investment. dynamics seem to be in order except for the dysfunction of the lack of investment. why is that? it is clear that in order

to promote growth, you need to invest. in order to have investment, you must have confidence in the future. because investment means you forego something today for the future. so item number one is to make the road from the present to the future is paved. but also the math and theoretical framework. how can you be in public office --chair yellen is an example and say -- jacob: that is what the challenge is all about. you wait for all the dust to settle. clear the next window and start

looking for them. thatoint of the matter is most of the problems today are things that cannot be solved. ist of the debate today themed around what the central banks should do and it is completely unreasonable. am: i think london is almost merchant city. has been clear about the oddity we live in. thatine: the problem is london is now the poster child of -- i don't know what to call it -- anti-globalization? 3-4 massive elections in europe, the election here, and there is the risk that we could become more anti-global.

that makes the name of the game completely different. jacob: and it is a major, major challenge. globalization was viewed as a good thing and frankly, it is a good thing. suddenly, globalization has a bad name. ?nd what do we mean is there anyone who believes that closing a window would give you better air? nobody. , we haveling is focused too much saying that open trade is good. sayit is not good enough to potentially, the economy is better. of opening to

trade, it is a fiscal issue and the responsibility of the government to make sure we are planned. are we responsible with the cheap cash out? making the rich richer? you are talking to the firefighter who is at the fireplace and then is being asked -- they will save the world in a big crisis. the problem is that this is unconventional monetary policy. but after eight years of unconventional monetary policy, one begs the question -- what is conventional? that is why whenever one can , should exit and hopefully, will exit -- meaning continuing with the pass of raising rates -- this will be good for the world.

the extraordinary overburden on monetary policy. francine: jacob frenkel, nothing like having you put the markets back in place. today, a later conversation on the british economy after brexit. this is bloomberg. ♪

tom: good morning. we are in washington this morning. our conversation is coming up. jacob frenkel is here with us now. pastnd i talked about the to this crisis of 2007 that we are still living in. what i find interesting is that so much of the world is looking at economics in a vacuum as opposed to linking it into the banking system. meeting something to be aware of with the realities

of good banks, less good banks and ugly banks? jacob: it is indeed the case. the role of the financial sector has become more important. but i want to mark this in a specific way. of interestent rates that are low or negative impacts specifically and adversely specific sectors -- insurance companies, pension systems, inking systems. now, if this environment takes place for a long time, it necessitates a new business model. and owned to clarify up. questiono, there is no that there is an environment with a negative impact on this,

the most important channel to reach monetary policy, transmitting the effect to the economy. you weaken the effectiveness of monetary policy. and rather than the only game in town being monetary policy, you also weaken the other channels? coordination -- all of these are attempts to internalize differences from across the world. do you worry about a recession or the next crisis? where would it come from? crisis is come from the financial sector. when you have a vulnerable financial sector, that gets the

wrong way. there are two characteristics. -- if youts quickly lose confidence about the future , the future becomes the present. fragile. francine: jacob frenkel, thank you so much for joining us. we will talk about brexit. and christine lagarde is coming up. this is bloomberg. ♪

. . ♪ tom: it is a low growth longer

interest rate era as i.m.f. and world bank open, the backdrop has exhausted policy and political populism. prime minister may speak, do uropean people listen? in brussels this morning. and a conversation with christine lagarde in her world awash in debt. good morning, everyone, this is "bloomberg surveillance" live from washington this thursday, october 6, with me is francine in from london. francine: good morning. tom: you come in after the fire of the speech. how surprised was the united kingdom by your speech yesterday? francine: it depends whether you were for it or you weren't. we need to understand what her negotiation tactics are but it was clear she was speaking to a constituency. and there is a school of thought the government has become strong levers and don't

know what it means for london and the financial system. tom: let's get to our first word news in new york with taylor rigs. taylor: hurricane matthew is taking aim at southeastern united states and is on course to hit florida. and it could be on the atlantic coast tonight and 2/3 have been urged to evacuate their homes. the hurricane has been blamed for 16 deaths in the caribbean and is now a category 3 hurricane with winds up to 120 miles an hour. in poland, lawmakers have rejected a total ban on abortion. the proposal led to a wave of protests three days ago. legislation also would have set jail terms for women who ended their pregnancies for birth prematurely. they say he abandoned the ban because it might lead to a backlash. the's of colombia says the country is close to achieving a peace with the rebels. juan manuel santos met with leaders trying to salvage four

years of peace talks. colombia voters rejected a plan aimed at fighting five years with the rebels and santos is trying to come up with a quick, political solution. german regulators investigating deutsche bank ties with italy's bank came upon new revelations. deutsche bank has been indicted for colluding with the italian bank to hide their losses. deutsche bank actually mismarked 37 deals with other nks like it one it did for monte paschi and deutsche bank said there was no connection between the deals. bloomberg, powered by more than 2,600 journalists and analysts in more than 20 countries. i'll taylor rigs. tom: commodities in the market now and we've had more exciting days recently. futures deteriorate the last hour and we missed that, negative five the euro comes in from a 112, oil churning and next screen, if you would,

please. and the idea of the vic is good and two year high great at for -- at 0.83 and silver can't decide what to do. deutsche bank pulls back from the enthusiasm an hour and a half ago. francine: quite a twist and turn when it comes to deutsche bank. the industry group you find the most, stock europe 600 down 0.3% and does seem today on the markets the focus is firmly back on the fed as there is more speculation an interest hike is imminent and also filters through the dollar and against the yen, 103.58. tom: let's do a shoutout to stephanie flanders, june 23, late at night, i was a tourist in london and surfed around political television of the united kingdom and looked at

one, two, three, four different choices and ended up on i-tv with stephanie flanders of jp morgan giving the economics into politics and found your conversation that evening by far the most informative and my first question from a distance of america is what have you learned about brexit from that evening to where we are right now. stephanie: i think there was something i was concerned about in the days after that vote and the way that it was interpreted, particularly the fact it was interpreted rightly or wrongly as a vote against immigration and particularly the lack of control of immigration coming from europe. because it seemed to me quite clear that in that environment, whether it's been kicking for the elites and the establishment, the financial services industry was unlikely to do very well politically from that and might not end up with a very good deal. and i'm afraid we're having -- sometimes you want politicians to be clear and others might prefer them not to be clear.

we've had a lot of clarity from the conservative government and teresa may that she's looking for pretty much a hard brexit and will not put the single market before that migration. tom: i did a chart, stephanie, of sterling, 100 years, $5 a pound in 1934 and to harold wilson and the migration from 971. do you use pound sterling as the ultimate brexit method? stephanie: it's the way people are discounting the risks of an ever harder brexit. you think the last few months, whatever price huh for sterling there was a certain probability maybe priced in we wouldn't lead and it was all a terrible dream. i think that probability you have to bring down quite a lot. tom: can you go to sub-1.21 sterling? stephanie: relative to the last 20 years or so we have more than two standard deviations and feels like it's always

possible you'll undershoot but feels like the kind of level -- tom: we can't do that in five hours. francine: there's no pulling back. is this not a negotiation tactic? we also think we understand from teresa may insiders they're not looking at an interim deal and would be hugely damaging for trade. stephanie: there's been mixed messages because the treasury of phillip hammond said he's not ruling it out or ruling it in. the positive scenario that people are -- the bright side people are looking on in the city is this is all about building political credibility for teresa may around that goal of reducing immigration and being absolutely solid in the goal for brexit no matter what and then one assumes as you get closer to 2019 and we're really going to leave the e.u., the intolerable choice of not having a transitional arrangement, goods getting

stopped at the border and all this seemingly crazy stuff, the fact that seems so crazy will make it seem like a natural choice to have a transition arrangement and she'll have credibility in saying that because she's been so hard in this period. that's what the hope is anyway. francine: what will the city of london look like when we reach there? there's a time line issue because there's no assurance for the nationals they can stay in the u.k. at this point and people saying they're being used as bargaining chips. if you're a c.e.o., you need to decide now if you're investing or not. stephanie: one of the questions raised that is the most worrying for the financial industry and for highly skilled, advanced companies across the services sector is is very hard line of visas and putting pressure on employers and naming and shaming employers for the number of foreign workers that they have. can you imagine devising a scenario, some kind of arrangement for financial services and other services and we'd make our own way and lose

some things but maybe gain in other things. but if you can't be sure of having that global elite teresa may was not positive about her speech yesterday coming into london and helping companies be world leading companies will be a question mark. tom: stephanie flanders with us with much to talk about at these meetings at the international monetary fund. later our conversation with christine lagarde. too much to talk about. right now what is striking is the amount of global debt but more to speak with christine lagarde with. from washington, this is bloomberg.

dd fran: francine: these are live pictures, a little glum.

we know a lot of the financial heads actually -- the german financial heads are here in d.c. so it does seem we're focusing at the i.m.f. on growth and central banks and the overhang but we're talking about deutsche bank and the other banks. german banks regulating the ies with italy's monte paschi. deutsche bank actually mismarked 37 deals with other banks like the one it did for monte paschi. deutsche bank said there was no connection between the deals. we're joined by bloomberg news finance editor and was one of the original editors that broke the deutsche bank news many years ago and has a unique insight to what's going on and also with us here in d.c., stephanie flanders, the chief market strategist. talk me through what we've learned about deutsche bank in the last 24 hours.

monte we've learned that paschi had a clear idea for window dressing. similar deals for other intentions were struck by the german bank with clients, 30 other clients and deutsche bank itself had used an accounting treatment that wasn't what the regulators determined should have been used for those types of deals. francine: what is the one thing we've learned from d.o.j. there is definitely been more people coming out and saying this is not a systemic risk and what deutsche bank problems are an investigation and is a risk and we're hearing inside the d.o.j. the huge $14 billion fine is not what was expected a couple months before they tried to reach the celtment. guest: we know there was an initial test of $14 billion and it wasn't entirely clear. but some clarity to where the number moves to, there's

concern about the potential effect on the bank and the bank's capital in particular. the bank has said clearly it's comfortable from a liquidity standpoint and analysts are saying the same and it's the hit to capital a larger fine than expecting might cause. tom: what is the state of urgency right now, uni credit has been flat since july and deutsche bank has its own soap opera and 10 other banks that i don't know. what's the state of urgency to get european banking fixed? elisa: if you look the a the markets the risk metrics tell us there's a high degree of urgency. but of course there's a lot of moving parts. you know, in some instances it's the litigation and clarity on litigation that effectively holds off any decision on what measures to take. in other instances, it's try to figure out how to move to -- remove bad debt off the books

and what is happening in italy. it will take months before the laws that were passed were finally resulting in coming off those books. tom: help us with the leadership of the italian government now, not only mr. renzi but other institutional officers, what is their to-do list for october? elisa: the to-do list is the referendum weighing on the government now and until that referendum is over, we'll see very little. tom: wonderful. thank you so much. elisa from the london news bureau. stephanie flanders with us right now from jp morgan. before madam lagarde we're expected to speak to john lipsky, former i.m.f. managing director. thrilled to catch up with him and we'll do that on bloomberg radio this morning. from washington, this is bloomberg.

>> bloomberg surveillance, brought to you by volvo. tom: good morning, everyone, from washington. in meetings of the international monetary fund. we're in our news bureau in washington down new york avenue from treasury. a good number of blocks. and over on the other side of n.w. there is an i.m.f. building that will be most interesting this morning. francine: a 10-minute walk. tom: with debt front and center you never know what the story will be. it's certainly the buildup and we'll get to that in a moment. robert rubin from another time

and place, he's the co-chair of the council on foreign relations, secretary reuben, the fundamental challenge in america is re-establishing a willingness among congress to engage in principle compromise across policy and political divides to make difficult decisions and to focus on facts and analysis while recognizing that politics will always be involved. with us is stephanie flanders of jp morgan who has sat at the national portrait gallery in london and looked at that gorgeous room of the big portrait of israeli and gladstone. that's what we want to happen and it's gone, isn't it? stephanie: i think they used to fight pretty tough as well. tom: at least they got it up and done is the rumor. stephanie: i was working in the u.s. treasury when he was secretary and in retrospect it was a golden age for the treasury and for principled compromises. of course i would say that but it's a time they managed to

have a budget deal that was actually reducing the deficit. and i think there were people in rooms in congress willing to do what they were saying in that quote, willing to actually come together and reach compromises, even if you had lots of noises often part of it, ultimately you'd get a deal done and so few people now are willing to do that in washington and the power also has come out of treasury, come out of that policymaking. tom: the two of you take it to continental europe, populism. will it become more like the fractious capitol hill? francine: you look at the capital, they want more federalism among a restricted number of countries. stephanie: it's interesting because you talk about debt being the number one issue but if you look at the i.m.f. world economic outlook, i was struck by the fact they put number one as one of their risks is the political dynamic, anti-globalization sentiment and we're certainly seeing that in europe and it coalesces a

bit around migration. so much of it comes out of growth and i just worry that politicians now have very little political capital to do what's needed to get the growth which might actually start to turn this political dynamic. francine: is there anything the bankers can address this? stephanie: i think they need to be helping to underwrite potentially financially but in terms of their political capital government efforts to invest in growth. you know in germany it's not right to talk about public investments or spending but if you frame it as a growth conversation, a long term growth conversation and a long-term more inclusive prosperity type vision, i think that could help. but mario has been talking about that for a long time and said politicians need to do this stuff and we need more supportive fiscal starts. francine: the problem is what, we don't have politicians that are strong enough in place or we don't have politicians that

understand enough about economics? stephanie: we don't have economies that can function despite dysfunctional politics. that's the great thing is the economy managed to do quite well despite the dysfunctional situation. tom: at deutsche bank a expert emphasizes the financial instability. are you writing or thinking the same way that there's something out there that could lead to instability. stephanie: we have more debt globally but where it is reassuring because it's a public sector balance sheet and not so close to the household sector which tends to be really what triggers the deep recessions if you have a problem with debt to do with mortgages and consumer stop spending. i do think we are reaching a new point with the monetary policy where people accept pushing down long-term interest creates and flattening the yield curve. tom: we've hardly talked about negative rates in the first half of our coverage. it's not the negative rates but

the diffusing of negative rates across society hasn't happened. stephanie: meeting sniff yields is what i'm worried about, long term interest rates. we saw the bank of japan talk about capping the 10-year. i think we're getting that in europe. deutsche bank, a lot of these banks have their own problems but share with other european banks a really hard time trying to make any money. if you're going to make it very hard for banks to make money and to rebuild their balance sheet, then you're going to make it hard for the economy to have a decent recovery. francine: how do they cap that 10-year yield? stephanie: we have to discover whether it's a capital ceiling or a target. the commitment is to say that we will buy or sell no matter what we need to buy or sell to keep it at zero. you're right. you can't really keep it a floor because they can't sell a unlimited number of bonds. but i think it's an interesting step because it basically says look, we recognize flattening the yield curve is not what anybody wants. we actually want ultimately a

c.p.o. curve because that would suggest we're looking at faster inflation and faster growth in the future. francine: what's the chance of a recession the next three years? stephanie: if you look at any of the standard models we or others have it's high, over three years, probably 80% depending on where you are. and that's my worry about europe in particular is that you're making that slow progress back to 2% inflation and the economy is doing ok. do they have time, though, to really replate enough before the next recession or all these problems frankly will all come back and we'll worry about the same thing. tom: we mentioned robert rubin and you worked with summers as well. help us with stacular stagnation and we don't hear that phrase at the i.m.f. and they don't want to bring it up, do they? stephanie: the other risk they highlight is we fall in a stagnant demand he can will inreup. -- he can t wall

balanceibrium. we don't have a lehman crash but we all fall in a lower growth, lower inflation environment and that's an issue. tom: stephanie flanders, thank you so much. francine, we have a lot to talk about here to set out the morning and end the distraction of a jobs day in america. tomorrow, philippe hillenbrand joining us tomorrow afternoon and before that we have lagarde and others. francine: a lot of european newsmakers and the commissioner and you and i have done the i.m.f. a number of years and we know there's an agenda and what the i.m.f. funds talk about and we know people speaking in the corridors. what i'm interested in is what the main chapter is. last year it was saudi arabia in lima, peru, this year it feels like it's the bank and deutsche bank. tom: i migrate down new york avenue past the presbyterian church and have to go past the

hay adams hotel, should i stop for breakfast? francine: you don't have time, we have radio, tom. how fast do you eat? tom: we'll eat fast as well. we're here in our washington news bureau, i'm running over to the i.m.f. and continue our coverage. francine will hold court here and do it again tomorrow as well. later today, christine lagarde with us. a spirited conversation not only stephanie flanders mentioned the lack of demand, they lead with that within their report. but certainly this morning their fiscal analysis is a world awash in debt. we'll do that later this morning. from washington, this is bloomberg.

francine: beautiful new york. we're in d.c. this is the picture. i think there's a chrysler building. tom keene can't help me out with the landscape but perhaps there are two people who can.

we'll get more from the inch m.f. and more on world growth and negative rates but first let's get to the news with taylor rigs. taylor: hurricane matthew is a $15 billion threat on its way to florida. almost two million in florida and the carolinas have been urged to evacuate their homes. the hurricanes have winds up for 115 miles an hour and could be near the florida coast tonight. and it could cause $15 billion in damage. the hurricane could leave more than a million people without power. for the third time in three years, the u.s. national security agency is under fire for the way it handled government secrets. an n.s.a. contractor blood by booz allen hamilton has been arrested and told investigators he took home digital files containing highly classified data. and edward snowden from booz after led the u.s. exposing u.s. programs.

rog rigo is seeking an independent foreign policy because, quote, america has failed us. the philippines secretary has said the u.s. treated the country as little brown brothers not capable of true independence or freedom. there is concern that british prime minister teresa may has changed the conservative party's attitude towards corporations and it has taken pride in being pro business and spoken about a number of corporate practices she wants to end and the message seems to be the government will disappoint businesses hoping to retain access after the u.k. leaves e.u. top forecasters say the dollar is a buy no matter who wins the election. donald trump's victory would drive the dollar higher against emerging market because of his protectionist trade policies. but a hillary clinton win would strengthen the dollar against the yen because she likely would maintain the status quo.

global news powered by more than 2, 600 journalists and analysts in more than 120 countries. sticking with politics. francine: let's bring in megan murphy, our washington bureau chief with stephanie flanders and the chief market strategist. megan, thanks so much for joining us. protection policies for donald trump. what's the policies? megan: we like the word protectionist and it must be donald trump's trade policies and is putting the manner in a light way and we have someone that would recommend 50% tariffs on goods to china and someone who says they'll build a wall to mexico and charge people for remittances that come across the wall to make them pay for the wall. what i think the markets and what we have found fascinating is have they priced in this risk of a donald trump presidency and come late to the markets we think. whether hillary clinton will maintain the status quo is another matter and someone who

flip-flopped on major trade deals and i think what the market is pricing in is we have no idea what's going to happen. francine: it's fair to say markets are quite inefficient at pricing unexpected political events. is this an unaffected political event or not? stephanie: what's more troubling and goes back to whether you're a protectionist and something less coherent. if you have a clear idea what you're going to do, that would be one thing. there's a debate about even if you knew what he was going to do if you say for sure he's going to have a very expansion fiscal policy because that's all he'll agree with congress, big tax cuts and public infrastructure he's talked about and negative on trade. what does it mean for the dollar? probably other things equal. maybe the dollar would rise because that would be talking about higher interest rates. and you'd be worried about the rest of the world with the trade scenario and do people buy or sell treasuries on the back of a trump victory? you know, we have this whole situation we saw in 2008 where

you remember when there's a big panic in the world, america is a safe haven, you buy treasuries and buy the dollar even if the panic, even if the source of the crisis is actually the u.s. megan: he talked about a fad being a political interest for the state. you have someone who is very orthodox in some of the things he believes in terms of what he'd do in terms of fiscal treasury policy and in terms of fiscal structure and tax reform. some of the things the conservative party or republican party always wanted to see but you have this other wing which is different to their core principles including trade deals and how we approach the world and how we deal with countries in a way of how we're going to actually facilitate economic and trade. stephanie: and a consistent start to anything is the real question. megan: he'll spround himself with great people. francine: brexit is canny because they're forecasting a

donald trump win. what about this poll with donald trump? megan: here's the thing we have to think about with the polls when we look in the wake of colombia in the recent referendum is american polls are very different in that we have so much more data. for example, when you're pulling out a binary question you don't have the history. with the american polls you can look at how people have voted and what they've done and turned out. the issue is, is he appealing to a certain segment we've not identified and that's -- francine: that we're not polling? megan: right. and is he really going to take bernie sanders supporters? is he going to pull out people who haven't identified themselves as republicans and people who are waiting and who have this angst about their future and economy and who change over for reasons that pollsters have not identified and we haven't been able to sample. she's showing a lead, and st. louis is on sunday and could be another game changer. we'll see and all be out there. what we'll have to find out is

whether we're accurately measuring how much people feel about the economy, about their future and about the message. francine: with a about ohio? megan: he looks strong in, five points up and he's really tapped into this sentiment of people who feel displaced and feel like the manufacturing, the sort of working class jobs they had are no longer there and they no longer can see the same future they have for themselves. he's been able to mobilize that. his ground game is terrible compared to hers. it will be about turnout and letting the message resonate to the voters. francine: when do the markets take notice? stephanie: everyone is saying now. but the trouble is even if you did take it seriously what exactly are you going to do? you have to be brave on how the markets will react not only in short term but medium term as well. francine: say donald trump becomes president of the united states is it safe to say stocks fall? stephanie: does that risk go in

the u.s. or leave the u.s.? normally it means going into the u.s. you do have a situation. even the polls, they're pretty close. francine: thank so you much. jp morgan asset management, stephanie flanders stays with us and thanks to megan murphy, our d.c. bureau chief. stay with bloomberg for the latest on u.s. politics and join mark halperin and john hellmann at 5:00 p.m. in new york and 5:00 a.m. in hong kong. this is bloomberg.

francine: this is "bloomberg surveillance." heading over to the i.m.f. headquarters is tom keene to start radio 15 minutes from now. we'll be talking brexit and the

i.m.f. let's get to news with taylor. taylor: goldman saks retirement plan is pulling millions from advisors according to a person familiar with the matter. cooperman spent two decade at goldman and has been accused by the s.e.c. for insider trading. he denied any wrong dugse and told bloomberg they are awarding the government for bad behavior prment it's another blow to samsung involving the galaxy 7-s phone and blamed for smoke that led to the evacuation of a southwest airlines flight in kentucky. u.s. regulators are investigating. samsung began replacing the phones last month because a battery caused it to overheat. the one on the plane was a replacement for the one recalled. disney says attendance at its new amusement park in shanghai exceeded expectations coming after a media report the park was attracting about half the crowds analysts had expected. their reports said disney

guests complained about high prices and long waits for some rides. that's your bloomberg business flash. francine? francine: coming up shortly it's bloomberg go with david westen, jonathan farrell and alex steel. jonathan, you're in new york with a great show packed with mohammed. jonathan: and bloomberg mma taking place. it's a takeover with yourself and tom keene coming up later ith madam lagarde. and everything is ok wasn't the message from may. and it will be interesting to see what the chancellor has to say and he'll be sitting down with our editor and chief. looking forward to that. and catching up with mohammed delorian on the bond market. francine: seems the last three days the pound has been getting a beating. the danny is not pulling his punches after the u.k. prime minister teresa may challenged

mark canny's policies and it was tweeted his stupid comments threatened the independence of the bank of england and should keep quiet. danny is a troffsor at dartmouth and joins us now. still with stephanie flanders as well. danny, great to have you. you're a little punchy on twitter and you always are. what teresa may was talking about was the fact loose monetary policy has bad side effects. that's fair. danny: well, there have been some side effects but across the board economists reacting to that. i was just reading in the daily telegraph today, phillip booth and the institute of economic affairs and andrew as well as my good self have criticized. phillip booth had it well and said central bank independence was hard won and should not be compromised by the government. teresa may should simply keep out of it. obviously there are concerns

about the effects on particular groups. we'll deal with that with fiscal policy but as we say, the independence was hard-won and she should really keep away from it and go and sort things out fiscally. the worry in the u.k. is we haven't heard anything from the government at all and basically the only show in town has been the bank of england and unfortunately that's has had a positive effect on the market and think that's a very bad thing for her to do playing silly games, hopefully down the road we'll see implufmente. -- improvement. francine: do you so assume the chancellor will disappoint when he unveils his autumn budget? danny: absolutely, i do. we've heard this week a very small announcement saying we'll have a few billion pounds spent on new housing and most of that was old money. the story i could say endlessly is how long will that take to have an effect, a year, maybe two years. essentially you need action now

and i've been calling for a 5% cut and the reason for that is they could do it at midnight and in six months time if you don't need it, you can turn it back again. but we're sitting here doing absolutely nothing and actually the one group that's doing is the bank of england and the government criticizes them. i think it's made a really bad start. market are not going to be very convincing. i suspect they'll have a lot of trouble convincing people today he has any clue what he's doing. francine: is that fair, fair criticism, stephanie flanders? stephanie: i'm trying to defend teresa may here. you can read her speech. i share some of the concerns about the prime ministers talking about central bank policies. but you could read her speech and it's actually making the same point that mark carney would make and mareo draggy would make in that central bankers can't do everything and the longer we continue with the extreme policy, the more there are negative side effects and we ought to be thinking of other policies to support demand and includes primarily fiscal policy which by the way

doesn't have the same kind of redistributive question marks monetary policy has brought. it's better for poor people we didn't have another great depression but if you're going to support the economy, you can -- it is probably more of a -- in terms of being progressive versus regressive, it's probably more progressive and better for the lower half of the income scale to do that through fiscal policy within limits. i think you can read her as being part of a broader debate about where does the policy go from here? i'm not sure it's about the short-term stimulus as danny is talking about but how we invest for longer term growth if we are in this lower growth environment, the potential growth is lower now not just in the u.k. but across europe and in the u.s., what can governments do to boost that? and in that context, actually public investment, the stuff that does that a while to come on stream looks fairly good. i wouldn't be quite as harsh on her comments and depends how

you read them? francine: what did we learn about brexit the last 10 days and what does it mean for b.o.e.? we may be importing more inflation than we thought a couple weeks ago [ danny: the bank has had a positive effect and my suspension they'll have to continue to react and the data has been quite good. in 2008 we didn't get hard data for a year. i agree with stephanie, actually. the reality is what we saw and we is is a turn saw the bank of new england was prevented from raising rates and the fiscal stimulus and boost in economy taking the strain on fiscal things would allow the bank of england to raise rates and is a very versal of austerity but we are in difficult days and my suspicion is that they're going to have to act because they

can't afford to have a really bad piece of data and the story from executives and c.e.o.'s and the story from nissa instead a toyota on cutting back on investment suggest that stephanie is right, you need to do fiscal things and you probably need to do monetary policy things. but they're so slow they have to do something now. francine: are you not positive carney will stay on the bank of england when his turn is up? danny: let's see how things go. he's really been the adult in the room and acted fantastically well. et's not talk about him going. that would be destabilizing and have bad effects on the market. because he's calming things. i've been critical but in the last six months has been a great british hero and we should do everything we can to make him stay.

stephanie: the mood music, so much as it is, he might be staying longer than the five years he originally agreed and we'll wait and see. it's true we've had a lot of turnover in the highest echelons of the u.k. policy-making elite in the last few months and it would certainly be better for stability. francine: stability is good especially in this kind of environment. danny, what would you be voting for at the next m.p.c. meeting if you were still a member? it's unclear we had some strong economic data, pound weakening ahead of the b.o.e., how does it deal with it in the next six months? danny: well, i think -- i'm not sure that you have to go immediately. they signaled in the minutes they'd like to go, various embers have signaled it. you wait until the inflation meeting and probably go then. i don't see the risks of acting or cutting data to .1 against not moving. they always can revert it and they signaled the market pretty

much is expecting it. yes, there have been slight moves of the business confidence data but the concern is they clearly appear to have learned from their inaction in 2008, and the best line to say about this is get your retaliation in early. there's not going to be any cost at all of actually cutting now. the costs might be that you just don't cut when you should have. i would probably -- i'd wait and see what the forecast is. but i would probably be voting for a cut this time around, leave q.e. where it is and go to .1 and say we're watching things but we're concerned about investment and employment. francine: is there danger they go too soon? stephanie: they made a commitment they show clear signal in the summer and was right for all the reasons danny says and the risk was all on the other side of not doing enough, not on the side of doing too much. but i think actually many

people in the markets are now reducing their expectations of another rate cut and we have this broader debate about how helpful really is it for rates just to go lower and lower. i'm not sure it's so clear cut for the next decision. francine: thank you both. dartmouth professor danny blanchflower and stephanie flanders of jp morgan asset management. coming up later today on bloomberg television, the u.k. chancellor phillip hammond will join our editor and chief for a conversation on the british economy after brexit. that conversation 10:00 a.m. in new york and 3:00 p.m. in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." we're live in washington, d.c., capital city. if you're just waking up, tom is heading over to the i.m.f. to start radio. i'm losing my voice because i'm so excited of being here. it was the airline that actually is making me struggle. this is a picture to the dollar climbing to a one-month high against the yen on the fed rate cuts. and the bullish policies are building as bonds beat those in the u.s. by the most in the three years. we'll have plenty more on

foreign exchange throughout the day as we speak to christine lagarde a little bit later on. president obama meanwhile has just written an essay on the economic challenges world leaders need to focus on and he says as appealing as some more radical reforms can sound in the abstract, breaking up the biggest bang for, it steeps tariffs on imports and the economy is not a distraction and can't be redesigned wholesale and put back together again without real consequences for real people. stephanie flanders is with jp morgan asset management. the president goes on to talk about inequality and focuses on productivity. the biggest concern is there is no way at this moment in time to fight inequality so we don't have more extreme politicians coming in. stephanie: i think what he's particularly highlighting is the need to have a broader definition of economic success because we kind of went for straightforward to g.d.p. growth but if that's not equally shared, or at least more equally shared if people feel like they're not

benefiting from economic success, you do have things like brexit. i think a lot of the arguments about the economic costs of leaving the e.u. and the u.k. didn't ring true or didn't seem very concerning to people who hadn't benefited from the economic success that was supposedly now going to be put in question. so i think it has a real resonance what the president is saying. when it comes to productivity, this has been a long term struggle and the u.k. is in a weaker position than many countries. the upside of that is we've gotten people in to work and had big growth in employment relative to most countries in europe. what's come with that is lower productivity because we have more people in work making the same amount of stuff, roughly speaking. that's sort of what the broader agenda is to make sure we're encouraging investment, public and private investment and giving opportunities to people across the income scale. if you go to different parts, whether it's ohio or deprived parts of the u.k., they've got a lot of employment compared to what they had before but they have a lot of the same social

problems they had in the 1980's or early 1990's. francine: are we measuring productivity wrong? stephanie: we're sort of probably missing it but there's nothing to say we don't have a productivity problem. afraid that's not happening. francine: great insight from stephanie flanders who is with us for the hour of jp morgan asset management. bloomberg go is up next on bloomberg television and "bloomberg surveillance" continues on radio. tom keene is live from the i.m.f. meetings and later on tom and i will bring you a great conversation with christine lagarde, the managing director of the i.m.f. at 9:30 a.m. in new york and 2:30 p.m. in london and a half an hour after that we speak to phillip hammond. this is bloomberg. ♪

>> a very warm welcome.

i'm jonathan farrell alongside avid and alix. in the f.x. market, here's the story for you. eight days of yen weakness. dollar yen, 1.03. and 10-year yield back up to 170. al i can: here's what you need to know. we are one day away from a key appointment for the fed, the september jobs report. ahead of that, we'll get the weekly readings on jobless claims in 90 minutes. deutsche bank indicted to conceal the italian lenders' losses, and dozens of others on its own books, according to an audit commissioned by germany's regulator. separately, the c.e.o. is expected to attend the i.m.f. meetings in washington this week. and the british chancellor, fill i am happen owned, is coming to wall street to sa