This is just under one hour. Un. [laughter] [no audio] [applause] good evening. Excited to be here with you all thank you for coming. And thank you for hosting this here in your facility. We have a set of questions that we have set up for rob and we will open up the floor and we will ask some questions. From a timing standpoint. Economically we just head jackson hole and Second Quarter secondquarter gdp numbers working a little bit better. From a human and social perspective its an unfortunate time our sympathies and prayers go with the folks in houston. Im sure your comment about some of that later on. Looks get straight get straight into it. We will talk about the u. S. Economy and then we will go to Global Economy and the Monetary Policy lets start off with u. S. Economy. Whats outlook for the next three have in five years . Our own forecast is that for the year 2017 the u. S. Economy should grow approximately two and a quarter not great by historical standards but certainly sufficient in our view to further take slack out of the labor market, slack out of the market and likely drive down the Unemployment Rate and other measures. And we can talk about a number of reasons why gdp growth is more sluggish now than it was 10 years ago, 15 years ago, the number one reason is aging demographics. The biggest headwind for Economic Growth in this country is the fact that our population is aging and workers are aging out of the workforce. A lot has been made to the fact the Labor Participation rate was about 66 today at 63 63 . Our research suggest the bulk of that decline is demographic. It demographic. It gets worse over the next 10 years. We think the Participation Rate is getting below 61 . There are number of other big secular trends, to me it is the most significant and explains why gdp growth is sluggish. There are number of things we can do to deal with this a demographic issue and the things that come to mind are getting more women into the workforce , although that is plateaued. Mproving skills training close the skills gap, there are more skilled job openings. Little skills training and other skills training is key. Yes, immigration is a key part of this. Immigration made up over half the workforce over the last 20 years. The reality is two things drive gdp. Growth in the workforce and growth and productivity. We will talk more about productivity issue but if we dont grow the workforce its going to be very hard to grow gdp. We spent a lot of time doing work on that and talking about the fact that it is controversial, immigration is and distinctive competence of the United States. It is one of the reasons we have been able to grow for many decades. My grandparents were not born here. It may be true for many of you here today. That is the outlook for the u. S. Economy. I think we are in a 2 growth economy i would love to tell you over the next five years its going to go like this, but the demographic trends are going to intensify. We can grow higher, but potential gdp is likely to go lower, not higher. The demographic issue, you often referred to secular trends. We demographic it to gdp, talk about globalization, Technology Enabled destruction disruption. Can you talk about that a little bit . He just said, i talk about aging demographics, that is a big driver of gdp. Gdp isond big driver of globalization. Globalization has taken a lot of different forms over my lifetime. They used to be a lot of shore,ies got moved off lost jobs, etc. That is very true. Today, globalization, the character of it has changed dramatically. I will give you an example. Hadtrade deficit that we with mexico there is a lot of discussion about it, it is an intermediate trade deficit. Our Researchers Show about 70 of goods we import and the United States from mexico are intermediate goods. What is that mean . They are going back and forth across the border. Ande are trade partnerships logistics between manufacturing and other companies here in mexico to have allowed those u. S. Companies to remain more competitive and pill jobs in the United States. In contrast, most of our deficit with china is a final goods deficit. Very different. What globalization means to day you sit think it meant the shoe industry getting moved offshore. Today, more likely it means the integrated supply change and logistics that allow countries to keep jobs, inc. He them from going to asia. It isa big driver, and misunderstood. It gets confused sometimes with Technology Enabled the show disruption, which is a much more powerful driver today. Likely explains many job losses in industries today than does globalization. We have attributed many drop job losses here, it must be trade or immigration. More likely, job losses today have nothing to do with either. They have much more to do with the fact that amazon versus retail, and every other industry disruptive competitors, usually Technology Enabled, it able to drive down costs, improve option for computers and tend to have the effect of limiting Pricing Power businesses today. Most likely, if you have a High School Education or less, you are much more likely to be vulnerable to being squeezed out of your job. Because skills training is not enough in this country. We are not set up for. The next job you make is a much lower paying job. If you have a college education, you are much more able to deal with technology and disruption. We are confusing the two. Why does it matter . If we attribute job losses to coming becauseor of technology, our policy will also be misguided. I actually think we are at the stage in our history ironically , where all the pain and disruption due to globalization, we are at the point were globalization is in fact, an opportunity for greater growth in this country. To integrated supply Chain Logistics or growing the workforce through immigration that, in fact, the thing we attribute many of these losses to requires more skills training and other policy prescriptions. Its very critical when it comes a trade, immigration, skills training Infrastructure Spending that we get this diagnosis right , because if we get it wrong where its confused we will make decisions that will actually cause us to grow slower. More slowly. Right now the last comment a lot of small towns and and texas has a lot of them they are struggling because they are losing population. One of the reason is cultural, the kids do not want to stay in those towns and want to go to houston, dallas, new york, l. A. People in issue is this country because of aging population. With each warring other to attack people. Texas is winning the war. We are. We are attracting people. Losing states are losing people and thats what ruralthe city versus issue worse. Diagnosis get this right, not just for Monetary Policy but to inform policymakers so we make good decisions from policy point of view generally. My concern right now is we may be confusing the diagnosis of what is going on. Lets talk about the debt situation. There is debate about whether we should raise the debt ceiling on arts, whether we do or we dont the fact of the matter is , we have a lot of debt. And especially when you factor in the unfunded future entitlements is at 46 trillion. What changes are needed here . I call this the end of the debt super cycle. What do i mean by that . Whether we are conscious of it or not to most of my lifetime and im getting a lot older we older, through most of my lifetime, we in this country when we have a downturn or economic weakness we basically increase our debt to gdp often to stimulate more growth. We didnt call it increasing debt, we call it spending, but the net effect of it was that we leveraged up to stimulate more growth. As derek just said, we are at the end of the road here. Public debt, public government, about 70 of gdp and entitlements that we said 46 trillion. It is not a surprise with this polarization in dc and more partisan and all that, but there is one of the thing going on. It is not a surprise we have not seen fiscal policy in about eight years. It is because we are highly leveraged. People in d. C. Know it, the capacity and you are seeing it play out in all of these debates with health care, tax reform and all that. Why is it so hard . One of these issues as we are very highly leveraged and were very aware of it, we dont have a lot of room to increase gdp debt. That is why it has been Monetary Policy, not just in the United States, but most of the western world. It has been mainly Monetary Policy. Banker, and you would think im fond of the Monetary Policy. Policy is Interest Rates and use of our Balance Sheet. It is not Structural Reforms. What is the example of Structural Reforms . Skills training, immigration , and Infrastructure Spending would be in the mix. We are at this stage of our development where Monetary Policy alone will not do the trick, but will highly leveraged the challenge. Had you make other fiscal and Structural Reforms so that we can grow greater because Monetary Policy alone has a role to play. It alone cannot deal with these big secular drivers we just talked about. I think it is good for a central banker to say that. We have an Important Role to play but we need broader policy. Eight year after the crisis it is time for broader Economic Policy if we are going to grow faster. Wise is so critical to the debt that we grow faster . You say what is bad about 2 2 . It would not be a problem if it were not so highly leverage. Nominal gdp is what Services Debt. What Services Debt of a company . Pretax income. You needed to service debt. Gdp is our income. If you grow slowly we will get more leverage, particularly as we age. I think we have to find ways to grow faster we have to restructure the debt or likely both. That is the big challenge we face. Derek the good news is mr. Kaplan just trying to cheer you up. [applause] households are in great shape. The good news is, 2007 household sector was highly leveraged. And debt togdp income was historically high. We did not notice it that much because that to asset values looked totally reasonable. But asset values for prices were very high. Weh the last eight years have gone through a painful eight or nine years red has slowly deleverage. The incomes of grown and they have an increased debt. Now the household sector is in decent shape. From a balance point Balance Sheet point of view. That is why i am pretty confident, while 2 and two at a quarter percent might not be what we hoped for, i am pretty confident that there is a good underpinning to our gdp growth. The trick is now, that is great, how do we grow faster . Derek what about the stock market . As a banker you probably cannot speculate on the stock market. Mr. Kaplan it is looking good. Derek are we headed higher, or are we facing an impending crash . Mr. Kaplan we were joking around before. In my previous career i was in the stock market. In this job, not so much. [laughter] mr. Kaplan i make a few observations. It occurs to me, i will say some antiseptics things here. The difference of whats happened in the markets, we went from rates are low but they will probably go up, to rates are low, and i wonder when they will go up, to rates are low and they are going to state below. It is based on expectation of rates. The reality is, why are rates so low . It was at 209 the last i looked. Driver two main drivers of the 10 year treasury. Ne is prospective gdp growth expectations of future gdp growth is the primary driver of the 10 year. The secondary driver, which is global liquidity, a lot of global liquidity has been created by central banks, including the fed. That is why we should improve our Balance Sheets as improve reducing our Balance Sheet. I think the main reason is prospective future growth being weak. The market has gotten ahead and it will stay lower. As a central banker, i do not worry as much as people might think about elevated valuations. Historically corrections alone, they dont mean create a Systemic Risk. What does mean create a Systemic Risk is the elevated evaluation at elevated level of debt. Healthy real estate values, maybe we have way too much leverage associated to finance it. Had veryhy the fed has tough we have had very tough macro credential policies, regulatory policies. Over the last fee years, they have been tamping down commercial real estate exposure of banks as a percentage of the total cap. I personally think there needs to be regularly really for midsize banks. I think for big banks, we have been very well served by very tough macro credential policies. That explains why the market evaluations are more elevated trade that alone you could argue is too high and low. Me isrt that worries excess debt building up alongside it. Right now we took a snapshot. I think it is still manageable, but i think it is probably not the time to be weakening macro prudential policies, especially for big banks. We should be giving regulatory relief to Small Midsize banks. High valuation and good macro potential policies probably go together. If we learned everything anything from 20072008, we have health evaluations, low rates and regulatory loose policies and we paid the big price for it. Derek monitoring the yield curve is critical. I watch the yield curve for the last many years. I look at the yield curve i look at it for a few reasons. Aredo we know when we accommodative or restrictive . There is a theoretical concept always in my mind when i think about Interest Rates. That is called the neutral rate. You will not find it on your bloomberg screen. It is a theoretical rate, it is the rate that we are neither accommodative or restrictive. Ok . The curve is instructive. There are a lot of things we at. The 10 year treasury tells you something about what the neutral rate might be. My own view is the following, the neutral rate today, the much closerrate is to two and a half percent than it is to 3 . If you asked me 10 years ago i would say it is closer to 4 or 5 . Why is it so much lower . Prospective growth driven heavily by aging demographics and slow workforce. The fed at 100 125, which is where we are is accommodative. I dont think it is as accommodative as people think. I watch the yield curve to learn what the market is saying about perspective growth and prospective rates. That reinforces that the neutral feds fund rate, where we settle out ultimately over the next x is closer to two and a quarter, two and a half because of sluggish prospective future growth. That is what the yield curve is telling us. Derek lets move to the Global Economy. What are the three or four major risks you see in the Global Economy . Which countries or regions due to the monitor in the fed when you consider policy . Lets jump around the world really fast. Europe is doing better and going faster, but that is in the context of less than 2 gdp growth. Yes they are doing better, but they have a lot of the same high debt to gdp. Issues, theructural same issues we do. That is europe. Canada have their own issues. Mexico actually has very good demographics. Canada has aging demographics like us. Mexico has been through a lot over the nap last number of years with weakness and energy and then worry about our trading relationship. Their currencies have been all over the place. A lot of volatility and they brave their own fed funds rate multiple times to try to find inflation. Theyre the one country in the world that does have inflation and they are trying to get control of it. Then we go to asia. Asia is a source of growth for the world. A better demographics, better government and the gdp accepts. The biggest part of asia is china. In asia, iran up business for my firm in asia in the middle of my career. The character of china and its impact in the world has changed radically. It is dramatically bigger. The way it has grown, it will grown this year. It will grow this year six and a half percent gdp. I could have told you that six months ago and i could tell you six months from now. The reason is, the way they do that is a target gdp level then they use debt increasing their own debt to gdp. Either Infrastructure Spending or spending on state owned enterprises to fill the gap. They basically doubled that to gdp and china. Unlikely to be sustainable. Itn i look at Global Growth, is better, that is good news, except part of that being better is China Growing 6. 5, 6. 7 . Theetty confident that world will have to get used to China Growing more slowly. There will not be able to keep using increasing debt to gdp to simulate gdp growth. We have to get used to their gdp floating down. Ofy are now a big percentage Global Growth. The good news is, for lots of reasons, i think emerging markets are more stable. I think Global Growth picture looks better. Getpt we should just comfortable with the idea that part of that Global Growth is china. I think it is likely that chinas growth will need to drift lower because they will need to stop increasing debt to gdp to achiev