Credit’s new context: An economic crossroads

Tim O’Hara: Hello and welcome to BlackRock’s first ever Credit Forum. I'm Tim O’Hara, global co-head of credit. Thank you for joining us. It was early summer when we decided that the unique journey credit investors are currently sharing called for a conference like this. Now with so many of you virtually gathered for this forum, we’re glad to see that you feel the same way.

We are not only bringing together our broad range of experts within BlackRock, but we are lucky enough to be hearing from some of the most influential leaders across the policy world and investment industry. We hope that by leveraging these relationships we will be able to bring diversity of thought and provocative perspectives to all of you on the road ahead.

We’ve organized our forum into four two-part sessions. Each one has a host to lead you through it and moderate the panels. We cap off the conference with a choice of three breakout sessions. As you listen to our speakers, I encourage you to join us in our moderated chat room and to submit questions and vote in the polls you’ll see during the sessions. Now onto our keynote session.

It’s not unusual to open an investment conference with discussions of macroeconomics and geopolitics, but it's hard to think of a time when it felt so essential to do so. It’s also hard to think of speakers who are more qualified to address these two topics. As head of the New York Fed and then US Treasury Secretary under President Obama, Timothy Geithner played a critical role in navigating the global financial crisis. As National Security Advisor and then US Secretary of State under President George W. Bush, Condoleezza Rice was a key participant in the evolution of the global order we’ve come to know and rely upon.

We’re going to hear from these two distinguished policymakers in two segments. In the first, I’ll be interviewing Secretary Geithner together with BlackRock Vice Chairman Philipp Hildebrand, former Chairman of the Swiss National Bank and a former Director of the Bank for International Settlements. In the second, Secretary Rice will have a discussion with Tom Donilon, Chairman of the BlackRock Investment Institute and former National Security Advisor to President Obama.

Now, let’s begin our first segment, the Policy Revolution. Secretary Geithner, Philipp, thanks for being here. For the first question, we’re now eight months, give or take, into a global financial crisis like none we’ve ever experienced. What in your views have we learned and what has surprised you the most about the economic path we’ve traveled? And maybe, Philipp, why don’t we start with you and then we’ll go to Tim.

Philipp Hildebrand: Well, I think what we learned is actually something I learned from Tim during the great financial crisis, that it’s essential to combat a financial crisis very aggressively and immediately when it emerges. And one of the, I think, positive things that has been happening here is that this corona crisis has been a terrible health crisis, an economic crisis with a huge short-term contraction. But, we’ve managed to avoid it from mutating into a financial crisis and that has made all the difference in the recovery path, which is why we believe, you know, in the end the cumulative output loss should be significantly less than what we suffered in the years after the financial crisis.

Tim O’Hara: Tim, what is the thing that surprised you the most about this crisis so far?

Timothy Geithner: Well, I think, Philipp’s right. He’s got it right. I think that the other thing I would say is the most fundamental change has been people have dramatically expanded what they think is the scope for fiscal policy. And, sure, what the central banks did was really important and decisive, essential. But, the defining thing in most financial crisis is what you do with the fiscal arsenal. And in most of the major economies, but even in many emerging market economies, policymakers have raised the ceiling dramatically on what they thought was prudent, that you could do it even in a short-term context.

And I think that’s been – that’s made all the difference. Of course, we don’t what the long-term consequence of that is. We don’t know how you think about defining the remaining room, because more fiscal support’s probably going to be necessary. But I, I'd say that’s the defining difference and I think it’s the defining difference with the crisis in ’08-’09 too, where people, the constraints on fiscal policy were much more binding more quickly.

Tim O’Hara: Yeah. Maybe, Tim, if we could just stay with that for a minute, because you were clearly, like Philipp, one of the people in the cockpit at the time of the last crisis. Maybe just drill down a little bit more on the comparison to ’08. What do you think? What are some of the other differences between now and the ’08 crisis? And then, maybe can you expand a bit on where you think it is that we go from here? As you say, we’ve raised the ceiling on the expectations of policymakers. What do you think is the next phase of that?

Timothy Geithner: Well, we came into the crisis with a much stronger financial sector in terms of the quality of equity, thickness of the equity cushion, the basic funding, and that was hugely consequential. The politics of this crisis were, at least initially, dramatically different from ’08-’09, because all victims were innocent and there was much broader political support for overwhelmingly forceful conference and policy response. That's very valuable. That didn’t exist in ’08-’09 at the beginning and even throughout the crisis.

So, those things are helpful and the combination of those things and the fact that our successors could make use of the architecture we built to backstop funding markets and to keep the financial system funded and stable, they could use that architecture, essentially flip a switch, deploy those set of programs backstopped by a whole bunch more fiscal power. That was very valuable.

I think, you know, where we are today is that, you know, we’re sort of past the initial bank bounce back, the initial resurgence of activity. But growth probably slows from here and we’re still at levels significantly below where we were at the start of the crisis. And the impact across countries and within countries, within societies is, you know, profoundly uneven. It’s going to leave deep scars. Economies are going to face these major challenges how they get resources to whatever the new economy looks like on the other side of this. And you’re going to have huge lasting pressure on what are already pretty dysfunctional political systems in many of the major Western democracies in particular.

And I think the political challenges that come out of this are probably going to be the defining legacy of this. I think the economic scars are there. I think they’re going to heal. They're going to heal over time. But the real challenge is whether political systems emerge from this with a better capacity to govern or a weakened capacity to govern going forward.

Tim O’Hara: Thank you for that. This session is titled The Policy Revolution, a key element of which is something, Tim, you just referred to, which is really the expanded role of monetary and fiscal policy and to some extent maybe the blurring of the lines between the two. Would like to get you each, maybe Philipp first from a European perspective, to really comment on how effective you think the policy moves to date have been and the degree to which they’ve helped the real economy versus the financial markets.

And I think, Philipp, if we could start with your view on Europe. I'd also like to get you to comment a bit on some of the steps on stimulus in Europe are really pretty potentially groundbreaking in terms of advancing European unity and would like to get your view on that as well. And then, Tim, we’ll come around to you on maybe some US views.

Philipp Hildebrand: Maybe, Tim thank you, three things. You know, one, in addition to all the things Tim just mentioned, I think the other big difference is that we this time around, we really went further into the blurring if you’d like or in some cases even elimination of the sort of frontier between fiscal and monetary policy. We came very close to this during the financial crisis, but this time really you’ve seen the in some cases full monetization, so really the elimination of the boundaries between fiscal and monetary policy or certainly significant softening of these boundaries.

As Tim said, I think it’s not clear yet how we’re going to get out of that again. That's one of the longer-term questions that we really need to think about. I think it was necessary in this case. We needed, given where interest rates were, we needed to do something else and that was essentially what happened as a difference to 2008 in addition to the expanded fiscal policy role that Tim mentioned.

With regard to Europe, I would say in many ways I recall many meetings where Tim tried to convince his European colleagues to do what they’ve just done in variation. But effectively, what we’re now seeing for the first time really is a concerted European approach as opposed to kind of putting together national approaches into a European package.

Just to put a number on this, you know, if everything gets implemented that’s been announced around the recovery fund and the various European initiatives, we’re actually going to have a market with securities underwritten by Europe, so supernational securities, that is going to be as deep and as liquid as the current German Bund market. So, this is a huge change in the way Europe will work and my guess is it will be, seem to be decisive, a decisive moment when we look back at it ten years from now.

The last thing I would say, you can see pretty clearly when you look at the experiences of the different countries here. You know, well-governed countries have done much better than poorly governed countries. You can even see this in where we are in terms of the level of GDP. Germany as, I think as a standout example here is effectively already very close to reaching the pre-COVID crisis level of GDP. And if you look at that in comparison to 2008, it took much, much longer to reach that level again.

So, having robust health systems, having a rapid response on the sort of three instruments of short work relief, fiscal support, and monetary support has proven to be very, very important and makes a big difference in terms of the economic cost of all of this. And you can see this in various ways, not least by how quickly you can reach again the pre-crisis level of GDP.

Tim O’Hara: Thank you, Philipp, for that. That's a great perspective to get. I think, maybe Tim, let’s take it to the US. I, I'd like to get you to share your current thinking on the need potentially for another stimulus package, leaving aside what its chances might be in the current politics. In June, I think many on the call will remember that you coauthored a bipartisan plan on what a stimulus package should look like for a next round. What would you recommend today if you were in the seat still where you were responsible for recommending that package?

Timothy Geithner: You know, I think it’s interesting to note that I think if you, if you’d asked yourself in March what the world would look like with this level of virus persistence, I think we would’ve assumed much greater economic damage than we see today. And, you know, you’re seeing economies come back and people learn to live with this at a level that I think is above expectations.

And but, you know, I still – still, you know, we’ve got overall income well below and activity well below the pre-crisis level and the incidence of the damage is, you know, hugely unequal and we’re going to face still a significant challenge reallocating resources on the other side. And I think for all those reasons, you know, the huge pressure on state and local governments, there’s still a pretty compelling case for another substantial dose of fiscal stimulus.

And the things that are in the air in Washington, even the probability of anything passing seems to be receding. You know, the range of things there, you know, they’re ... sensible and the US can afford it. Probably better to do that than not do it.

You know, I still think that the deep question is how to think about what can central banks do in the absence of that and they’re now at the frontier of what’s possible? Obviously, the Fed could do more. It could, you know, central banks can put a ceiling on rates on the risk-free asset across the yield curve wherever they want fundamentally, at least nominal rates. But that’s not the same thing as putting a ... into the economy.

And could the Fed lower that ceiling below where it is today and could they extend it, you know, to the government guaranteed mortgage market and lower that? Whereas, yeah, they could do that. But, the incremental power of that is pretty limited relative to what you can do on the fiscal side. So, I think the burden still falls overwhelmingly on fiscal policy and a meaningful dose – it doesn’t need to be nearly as large as the first round – would be the prudent step to take in this context.

And then, of course, on the other side of this, again, you’re still going to face long long-term aftershocks. And the US economy, there’s a whole range of things where, you know, it’d be very accretive certainly with these interest rates to go out and finance a much larger level of investment in a range of public goods. That would be a sensible policy approach in the current context.

Tim O’Hara: That's great. Thank you for that. So, we’ve just covered some of the changes in Europe and the US. But, let’s maybe turn to Asia and talk a little bit about China. In Washington, of course, attitudes toward China have gone from optimism to frustration. They’ve changed quite a bit over the last 20 years.

Tim, I want to direct – start this discussion with you. Maybe not everybody on the call knows that not only do you have your long treasury experience with a lot of work in Asia, but you also spent time growing up in Asia. So, you’ve got a perspective, both from your personal and professional experiences, on Asia and on China.

I guess what I'd like to do is maybe get your perspective now as someone working in private equity at a firm that’s been very active in China. How do you think about how China policy, China, the China relationship impacts your stance toward investment in China in your business and also the impact on the investments that you have in the rest of the world as you kind of look at the China question going forward?

Timothy Geithner: Well, you know, China faces on its own, even without the greater tension of the United States, you know, China faces a, you know, pretty compelling challenging mix of tough economic problems. You know, it’s got slowing labor force growth, shrinking labor force growth ahead. You know, it’s the easiest gains in productivity and conversions are sort of behind them.

You know, it came into the crisis with a big legacy of excess inefficient borrowing. It’s still got a pretty inefficient capital market. And, you know, it’s a tough, tough set of challenges for them ahead as you try to get per capita income growth above and a sustained level where it is today.

And that, those challenges are made harder by the greater tension with the United States. It still, though, is a – and even with this, you know, this wave of, you know, this – I would say a modest recalibration in how the Chinese think about the role of the state in the Chinese economy. I don’t know, whatever you want to call it, state capitalism or whatever. You still have a very large private sector. You have a huge amount of innovation. It’s a very competitive market in many sectors of the economy and it’s a very large economy. And even with the slow growth that’s forced by lower labor force growth and productivity growth, it’s still an economy growing relatively fast.

And the range of, I don’t know, you could say the level of returns available in that market over the long period of time are likely to be pretty compelling if you can invest selectively. And I think that the, from the investment perspective, which is the least significant part of the challenges we all face in the world where China and the US are having a tough time trying to figure out what they – how they treat each other, how they live with each other, how they coexist peacefully, the investment, it’s, you know, you can invest around the leading edge of the technology tension and the trade friction just because the breadth of opportunity there is still so large.

Quality of property rights is getting meaningfully better in China despite perceptions and the Chinese government is still, again, even with this, you know, an economy where the state still has a major role in the allocation of resources, China is still moving towards a somewhat more open stance to capital and competition in many sectors, because they think that’s essential to getting growth on a sustained basis strong enough to help ... more generally. So, definitely a complicated, scary road ahead for the world. I mean I think Henry Kissinger said last summer we’re in the foothills of a new Cold War, most dangerous period in international relations since the eve of World War I. A very bad trajectory in both countries.

But the – China’s proven itself very competent at managing a very tough set of economic challenges in the near-term and both countries have, you know, huge incentives to avoid major conflict and to find some way to coexist together. That's not to leave you hopeful and optimistic about it. But I think that, you know, you have to assume that this messy, dangerous world we live in with the US and China is going to be a persistent feature of the world for our lifetimes. But, we have to learn to live with that and find a way to navigate, you know, that tough set of challenges ahead and not – how should I say – you know, not assume that it’s going to be easy.

Tim O’Hara: Thank you for that perspective. I guess in markets and in macroeconomics lately, inflation has been a big discussion. And Philipp, through your BII group, you just published a piece on the possibility that the markets may be under-appreciating the risks to higher inflation. I guess given we’ve got two former central bankers, would like to get your views on the risks to the market of inflation, either can we get it high enough or might it get too high? And maybe, Philipp, we could start with you maybe elaborating on some of what it was that we published earlier this week. And then, Tim, get your take on it after that. So, Philipp?

Philipp Hildebrand: Sure. Well, let’s first of all, you know, if we just see where we are. If you look at five-year, five year forward inflation expectations, that’s a long, long way out. They’re basically at let’s say one, 1.8% or so CPI, pretty much not very far away from where we are now or where we have been for quite a while.

I would also it’s people have gotten so used to us having difficulty reaching these inflation targets that it’s kind of assumed that that’s the way it’s going to be forever. We are coming out of a, in many ways a decade long demand shock that has led to one of the weakest recoveries ever and therefore to, you know, very persistent disinflation throughout the world. So, it’s human beings tend to project what they see. So, just from that perspective alone I think we need to worry about underestimating inflation risks.

Now, when you look at it a bit more closely, you can see – and this relates to what Tim just said – you know, we are going to see a reordering of globalization. It’s not going to disappear for all the reasons that Tim mentioned. But, as he also said, we’re going to have a different kind of global economic system. I think that seems pretty clear to me.

There is a reordering of global supply chains I think and COVID has accelerated this. Larry Summers put it quite nicely recently in his usually kind of very creative way to say we’re going to just in time to just in case. I think that’s a nice way to kind of summarize what’s happening. We’re building in a lot more resilience. We have to build in a different geopolitical, you know, context where at a minimum you have confrontation between China and the US, hopefully not outright conflict as Tim said, but certainly confrontation. Strategic cooperation has been replaced in a sense by strategic confrontation.

We have the shift towards sustainability which I think is very persistent. It’s very serious. It’s here to stay. All of these things, if you think about it in simple economic terms, in my view will basically raise production costs. So, it won’t take very much to have a different inflation environment and the fact that we’re all thinking that what we have today is what’s going to be there forever I think makes it even more likely that something changes.

On top of it, we now have a pretty significant change in terms of how the central banks see their monetary policy frameworks with this make up strategy where you try to make up for all the time that you’ve been undershooting the inflation target and that will, I think, have significant impact on inflation expectations, which has been, you know, the most important driver of inflation or of prices. And so, I put all this together and it leads me to think that we are very likely underestimating the inflation risk. That's not to say that this is going to happen very quickly. But, as we think longer-term as investors, I do think we have to think about a world where we’re going to have a different inflation outlook than the one we’ve been so used to during this decade of basically as in a permanent demand shock with very low inflation.

Tim O’Hara: Tim, I – and thank you, Philipp, for that. Tim, I see you nodding as Philipp is speaking. Did you want to? I'm guessing you might be in broad agreement with him. But, what’s your take on whether markets might be underappreciating the risk to higher inflation?

Timothy Geithner: You know, I think this is I think the foundational assumption underpinning many asset markets is this view that rates stay low forever. Part of that’s because the expectation people think inflation stays low forever. And I think, you know, it’s true that most of the forces that produced this long secular decline in interest rates and kept inflation very modest, most of those forces are still in place and some of them are accentuated by the pandemic. On the other side of it, you have things fiscal Philipp mentioned, and then you have this, the sort of unknown effect of what this massive increase in public sector borrowing and massive increase in central bank balance sheets means for how people think about term premia, risk premia, inflation risk, currencies.

So, I think that it’s always good for people to be wary when you see conventional wisdom harden on an expectation that something that seems, looks exceptional to us today continues indefinitely. And I think it’s good to worry about the other side of this.

Tim O’Hara: Thanks for that. Maybe we’ll come to one last question here, which I think, as you’ve touched upon with things like fiscal policy and the roles of central banks, we’ve seen the pandemic driving deep change in economics, in policy, and in central banking. We’ve also seen things like this, the faster adoption of technology, the pressure on transportation and leisure industries, the pressure on state and local government budgets.

What changes and maybe we’ll start, Tim, with you. What of these changes that are coming about from the pandemic do you think will be the longest lasting? And if you’ve a role on – if you’ve got a view on what role governments might play in helping manage that change, what might that be?

Timothy Geithner: You know, I know we all tend to look at the world in this, over this last six months and think that we can see the like mix in headwinds and tailwinds that cut across different industries and people seem pretty confident. And you can see in equity markets how people price the range of things that everybody believes are certain today, which is digitalization, work from home, less demand for office, less density, all those kind of things people think are obvious and compelling.

And, you know, most of that must be right. And I think that, I think, you know, again, I think the big challenge for governments is how not just to heal the scars left by the major economic damage in the wake of the pandemic, but how to help economies adjust so the world is going to be on the other side of this. And I think to do that you need to, obviously you have to get incentives right for capital allocation to capital labor. But you also need to have some sustained support from fiscal authorities and central banks.

And I think that the, you know, the big risk, again, is that you just see a further deterioration of the quality of policymaking, quality of judgment capacity of political systems in the major Western democracies to make sensible choices. The big is you have that. And the risk is that you see the will to provide a supportive macro framework on fiscal policy, you see the will for that fade too early. And if it fades too early, then that process of readjustment of resources is going to be – is going to take longer, going to be harder, and that political costs, political pressures on systems are going to grow. And the risk is you get caught in a longer period of dysfunction and paralysis.

Tim O’Hara: Philipp, which of those impacts or anything else do you think will be the longest lasting from this crisis?

Philipp Hildebrand My guess is the one thing we’re going to have to wrestle with for a long time is the kind of inequality effects of these crises that you get and that, you know, in some ways the policies that we then execute in response to these crises appropriately but they do tend to have the effect that they can accentuate some of these inequality effects. Most vulnerable parts of our societies, you know, will get hit in any kind of crisis and we’ve now seen two very different crises and it’s clear that that’s been the case in both of them. And then, if on top of that you have this effect that the policy response that you require to combat the crisis then can contribute to making the inequality problem worse.

I think this is a real challenge. I, you know, I don’t think we have answers to this. The answer certainly cannot be not to respond appropriately. I think that’s one of the things we’ve learned. In many ways it’s sort of the essence of, Tim, your book. Don’t worry about that. And I think that’s right. But we do have this problem and you can see it in our political discourse, in politics, and we’re going to have to become innovative I think in terms of finding ways to respond to this in our democracies.

And some of it may, you know, come back to being more innovative around fiscal policy, because I don’t think we can simply accept this kind of inequality effect permanently every time there’s a crisis. That will significantly undermine our democracy. So, if we care about democracies and the rule of law, I think we need to wrestle with this question of how these crises and the response mechanisms to it affect inequality.

Tim O’Hara: Secretary Geithner, Philipp, thank you for those insights. Among other things, you’ve given us a fresh sense of the truly global dimensions of the pandemic and its consequences.

That sets the stage well for a conversation I'm greatly looking forward to between BlackRock’s Tom Donilon and Secretary Condoleezza Rice. Again, thank you, Secretary Geithner and Philipp. And now Tom, over to you.

Tom Donilon: Thank you, Tim, and I'm delighted to be here today to participate in BlackRock’s Global Credit Forum. But it’s an especial privilege for me today to be here today with Secretary Condoleezza Rice and really appreciate Secretary Rice joining us. It’s just it really is such a privilege for us to be here today with one of our nation’s most admired and respected leaders.

So, welcome. Welcome, Secretary Rice, to our forum today. And we’ll – I think consistent with the way I know you do things, we’ll dive right into the questions and the substance here for today. But, again, thank you very much Condi for joining us today.

I wanted to start with a couple of general questions. So, we meet today, we’re having this discussion today at a time of really unprecedented challenges in many ways, simultaneous crises in the health sector, economic crises, a real crisis around social justice and the police conduct in our cities.

Thanks, Tim. And I'm delighted to be here today to participate in BlackRock’s Global Credit Forum. But I am especially delighted to be here today with Secretary of State Condoleezza Rice. It’s a privilege to be with you here today, Madam Secretary, and it’s a great privilege for our whole gathering today to have you here with us to discuss current geo – the geopolitical and policy landscape, just a great privilege to be here with one of our nation’s most admired and respected leaders.

So, again, welcome very much, Secretary. It’s really great to be with you here today. So, why don’t we dive right into our discussion today?

We are in in many ways unprecedented times. We’ve got multiple simultaneous crises facing the country. We have a pandemic, a global pandemic. We’ve got an economic crisis. We have real concerns being expressed in the country about racial justice. And this is all leading up to a highly consequential Presidential election, which will take place in just a few weeks from now.

So, let me ask you to do both a little historical reflection and also looking forward. How does the current crises and, indeed, set of crises compare to previous ones that you've had to address? And looking forward, what do you see as the most important geopolitical and policy challenges facing the next …? So, a little bit of looking backward, a little bit of looking forward for us to take advantage of your crisis management experience and your analytical views on what the next President’s going to face. Thanks, Secretary.

Condoleezza Rice: Thank you. Well, thank you very much. And Tom, we sat in the same chair in the White House. And so, you know that at times like this the challenge is to recognize that you’re dealing with short-term consequences, but they are in fact going to have very long-term effects. And I think this crisis is no different.

If I think about the way that the kind of two big crises were handled when I was First National Security Advisor and then Secretary, the two big global crises, 9/11 and then, of course, the great financial crisis of 2008-2009, what’s really striking is the degree to which everybody seemed to understand with those crises that they couldn’t be contained within borders. Right after 9/11, we got some of the most dramatic efforts toward cooperation that I think the world has ever seen, even for instance going to the United Nations and getting resolutions that allowed countries to track terrorist financing across borders, the Proliferation Security Initiative, which allowed countries to stop suspicious cargo as a result of intelligence from another country.

And then in 2008-2009, I’ll never forget President Bush convening the G20 at – in Washington in November of 2008. And so, there was a sense that we were all in it together, that the international system had to respond. And, in fact, the first call, important call that President Bush made about the financial crisis was actually to Hu Jintao, because of Chinese holdings in the United States, just to make sure that none of us were going to engage in predatory policies.

So, there was a sense these are common problems. Fast forward to where we are now, and you see I’ll just call it the revenge of the sovereign state. It’s my PPE, my population, my travel restrictions, my border restrictions, and there’s a sense that the international system, the international organizations have been somewhat sidelined.

And so, I think one of the problems that the next President will have, whether it’s a reelected President Trump or a newly elected former Vice President Biden, is to think about how this has changed the character of international cooperation and how we get back to it. This has been going on for a while. We can talk about the kind of attacks on globalization that were out there long before this happened. But this has certainly sealed the sense that we have to think in more nationalist terms and that has huge implications for an international economy and an international order that in a sense we had come to take for granted.

Tom Donilon: Yeah. And one of obviously the – a key building blocks of this international order that’s emerging out of COVID concerns the United States and China, the most important relationship in the world. It’s become quite quickly in the – you look at the scope of time intensely competitive. A set of intense rivalries have emerged between the United States and China really across a range of dimensions, including not just economics but technology and finance and dissent aspects, geopolitical aspects generally. And there’s a much more confrontational stance being taken by the United States, and also, I think by China. Indeed, it feels like there’s been a rethink on US/China policy in both countries.

How do you see this playing out? Because, again, this is the – this is kind of like the two key pillars of the international order going forward here. How do you see it playing out and what’s your view on how US/China relations are set to move forward?

Condoleezza Rice: Well, when I think about the source of this, I have to say that it’s been building for a while. And let me characterize it as disappointment. As you know, for decades the narrative about China was that we could integrate China more fully into the international system. That would be good, particularly for the international economy.

China was actually admitted to the WTO ahead of schedule before a lot of its policies and laws conformed to WTO standards. One of the challenges I had was to try to explain to the Russians, so when I was Secretary of State, why China was being fast-forwarded into the WTO and they weren’t. And you had to say, well yes, it’s true that your policies and your laws on say intellectual property are advanced than China’s, but China’s economy really matters.

And so, there was a sense that we should accelerate the integration of China into the international economy. Now, I would argue that a lot of that worked very well. They lifted 500 million people out of poverty. There’s no doubt that for a while China was one of the engines of economic growth in the international economy. They were once the low cost of labor provider. People were able to assemble and manufacture there. The global supply chain included China in major ways.

But there was also a belief that China was then going to play by the rules so to speak, that China was going to be a net provider to the international economy. And instead, we got intellectual property theft and we got the privileging of national champions over foreign competition and whole elements of the Chinese economy did not open to foreign competition. And it’s why when President Trump came in and said we have to deal with Chinese industrial policy, it was popular across bipartisan lines, because there was a sense that China had not lived up to its obligations.

So, I would call it disappointment. But disappointment isn’t a policy. You then have to move on to say what are you going to do. And I think there, Tom, the problem for the next President is that this is a – China is the other big factor in the international economy and it’s a big factor increasingly in geopolitics. And it takes nuance to confront China when you must, for instance over issues of freedom of navigation in and around the South China Sea and to do that safely so that we don’t have an accident between our forces.

It takes nuance to say we’re going to continue to speak up for human rights. What is happening in Hong Kong is not acceptable. It is shredding the notion of one country/two systems to which China signed on when Hong Kong was transferred from British rule. We have to challenge on issues having to do with technology and whether a Huawei really belongs in the secured networks of our partners.

But we also have to recognize that there are some elements on which cooperation is going to be important. So, climate change it’s going to be important to cooperate with China. North Korea, we still need Chinese cooperation. So, it requires an ability to triage, if you will, between where we have to compete and even are going to be in conflict and where we want to find sources of cooperation. And frankly, we don’t do nuance very well. So, I'm a little bit concerned as to whether we could pull that off.

Tom Donilon: Yeah. From a historical perspective, and you lived through and, indeed, helped manage the US policy towards the end of the Cold War to end the Cold War successfully. Are there analogies that are useful? Is that a poor analogy to the Cold War? Is it, as you say, is it just different, just more complicated, just not the kind of obviously kind of split between the United States and the Soviet Union where there was no real economic relationship? How do – is that a useful analogy or do you think we should dismiss the comparison to the Cold War, and it needs to be thought about anew?

Condoleezza Rice: I think we need to dismiss the analogy to the Cold War. You just mentioned a really big difference. The Soviet Union never accounted for more of its GDP in international trade than about 1%. So, that was an isolated economy.

China is a major factor in the international economy. It’s when you think about trying to decouple China and the international economy, we’re seeing the complications of, for instance, a TikTok and trying to do that. So, there is nothing that compares in terms of the economic relationship.

I would also argue that that was a much more ideologically grounded competition. It really was the competition of two systems. The Soviets thought of it that way. We had our liberal democratic system. They had central planning and they imprinted it on whole parts of the world, like Eastern Europe.

Now, we may get there with China. There are some who say that the Chinese are pushing a kind of technocratic authoritarian capitalism and that they’re pushing that as a model. But there’s nothing that looks like the systemic approach that the Soviet Union took to the imprint of its ideological preferences on unwitting and unfortunate clients in places like Eastern Europe.

And I think the final big difference is that so far, the military competition is rather more limited. It’s more limited to the Asia-Pacific and surrounding areas. That's still dangerous. But, it’s not the nuclear competition that we had with the Soviet Union, nor do we have two standing alliances.

Now, I would say that there is one thing that we should take from the experience of the Cold War. Play to your strengths. The United States has allies and friends.

I did a talk for the National War College a few, a couple of years ago and they had there all of the allied military officers. Forty-nine countries were represented in that room. And so, who are China’s friends? Not Japan. Not South Korea. Not Australia. Not a growing friend like India.

And so, one thing that we can do, we’ve managed somehow to make some of our friends angry. It’s actually hard, Tom, you know this, to make the Australians mad. We’ve managed to do that somehow.

So, play to your strength with the allies. Don’t say with the South Koreans a little bit of disagreement around burden sharing might blow up the whole alliance. The other thing we have to play to our strength is our strength of innovation is broad. It’s across broad bases. It happens in universities. It happens in companies. It happens in startups. Trying to dictate American innovation in areas like AI and quantum computing to try to keep up with the Chinese and their, quote, national plans I think would be a mistake and it will lead us to do things like tell universities that they cannot have Chinese students or post-docs in their labs and that will blow up.

One of the most beneficial relationships going all the way back to ... and the end of World War II between open US universities and a sense that knowledge doesn’t have boundaries and the US government. And so, playing from our strengths, not trying to out-China China is actually one of the lessons from the Cold War.

Tom Donilon: That's interesting. Thanks. Thanks for that. That's really terrific. It feels though like for the next President this is a long-term project. It feels like given the complexity, Secretary Rice, that you’ve outlined, the multidimensional nature of it, the domestic as well as the international elements of it, that this is going to be on the next President’s plate for the full extent of his term and probably the term of successors beyond him.

Is that the feeling you get, that we’re at the frontend here of working through a multidimensional problem and we shouldn’t expect there to be some sort of, you know, resolution or definition to the relationship that just emerges overnight?

Condoleezza Rice: Oh, we’re definitely in a long-term game here. And by the way, it’s a bipartisan one. The anger at China about how they handled COVID, the sense that they did cheat on the rules, this is bipartisan. I don’t think you're going to have a difference here, whoever inhabits the White House.

But yes, and by the way, Beijing is at the center of it. Remember that, for instance, on Hong Kong, when they passed the national security law, many people thought, okay, now they’ve passed the law, now they don’t have to really act on it. But it’s been quite the opposite. They’ve been arresting people under the national security law, including human rights lawyers and activists. So, Beijing is pushing the envelope too and that’s going to make it difficult on the next President.

Tom Donilon: Right. Thanks. Well, we could talk about China for a long time, but we have global investors in our discussion today. I wanted to move beyond the great power relationship between the United States and China to the developed world. COVID has put enormous pressure on the developed world. Emerging markets have, obviously, more fragile healthcare infrastructures. They’re – a lot – a number of them had difficulties in their financial balance sheets coming into the crisis. And it’s, again, it’s a backdrop of what has been extraordinary success in poverty eradication over the last 20 to 30 years globally and we could see a challenge to that. At least that’s, I mean that’s certainly my view.

I wanted to get your view on how we should be thinking about the impact of COVID in the developing world on the emerging economies in which so many of our investors have interests.

Condoleezza Rice: Well, obviously, when there’s a problem in the global economy there are problems for emerging markets. And so, to the degree that there’s a global slowdown, things like commodities prices, for instance, that very often these are countries that are heavily dependent on commodities.

I will say this. There is an interesting phenomenon which we don’t fully understand. Maybe it’s just the lack of testing, but maybe it’s younger populations. But, in some of these countries they’ve actually not been hit as hard as in the developed world and their healthcare systems, many of which by the way were built to help us do AIDS relief and then sustained through several Administrations, have actually served them well.

I was talking with Ellen Johnson Sirleaf, the former President of Liberia, and she talked about how these networks with tribal chieftains and the like telling them how to deal with the crisis had actually helped them. So, the younger population, some of the ways that they dealt with this may actually help them get through this health crisis better than some have done in the developed world.

But there’s no doubt that their economies will be very much strained by this. It’s going to be dependent on, as I said, whether you really are commodities – you're heavily dependent on commodities or not. Some of them had huge economic kind of populist underpinnings early on. Look at a Brazil, for instance, or Mexico with populist Presidents coming who were already frightening off business investment and the like.

So, it’s a mixed picture I would say, but there’s no doubt that these economies are going to have a tougher time recovering in line with global economic recovery. And I’ll just make one other point. We’ve been talking about international cooperation earlier. How this vaccine, if we’re fortunate enough to get one, how it’s distributed is also going to be a big question. And since it will be formulated and developed in the developed world, are we going to find a way for equitable distribution of life saving vaccines in the way that I think we actually did relatively well with the pharma companies and others to think about the pandemic saving drugs like AIDS, really.

Tom Donilon: Yeah. That's interesting. You know, Secretary, it’s going to be a great set of research questions for your students and researchers at Stanford as to how some countries did well and how some countries did less well through this, through the crisis. I just think it’s going to be a rich – don’t you think it’s going to be a rich area of research and a lot of lessons will be learned as to

Condoleezza Rice: Absolutely. One that we should take on with a lot of energy, because maybe it’ll teach us something about the next time around.

Tom Donilon: Yeah. And on that, before we go to the next topic, I wanted to just ask you to maybe reflect on one of the really – a tremendously successful initiative of President Bush 43s Administration was PEPFAR and the United States led global effort against AIDS, as you said still lives today and has tremendous impact. What are the – any reflections on lessons as we go into this next phase of on the vaccine, which is, you’re right, it’s going to present tremendous problems with not only manufacturing but distribution and distribution to the entire global population. Tremendous challenges going forward which is probably going to take a lot longer than we think. Any lessons from the George W. Bush Administration’s AIDS efforts?

Condoleezza Rice: You need a partnership. You need a partnership between civil society, some of it faith based. You need a partnership with those who are going to be providing the drugs as they did the antiretrovirals. And you need a partnership with governments in these developing countries to mobilize their civil societies. Some countries that are tribal, for instance, they found tribal leaders very helpful. You need to have in some ways low tech ways of delivering. We had clinics that would then – people would get on a bicycle and go out and deliver the antiretrovirals.

And so, one of the great things is Debbie Birx, who is on the President’s, you know, a very prominent member of the President’s Commission on the AIDS, sorry, on COVID. She was the ambassador for AIDS relief for the Obama Administration. She knows this story well. And I hope that we are working with the Gates Foundation and others to try to help civil society, the pharma, and then local governments and civil society to figure out how we’re going to do this. But, the first thing is going to be that countries are going to have to get out of their kind of nationalist, my population first and we ought to really try to think out how to reach the most vulnerable first.

Tom Donilon: Yeah. And what was really obviously essential, it goes almost without saying, was in that case then it feels like it’s going to be essential. In this case, it’s US leadership. The world –

Condoleezza Rice: Absolutely.

Tom Donilon: – you and I both know does not organize itself around these hard problems. I think that’s really a kind of a fundamental lesson, don’t you think, in kind of these cross-national/trans-national problems?

Condoleezza Rice: Absolutely. And we talk about the international community. There really isn’t any such thing. There are a lot of member states. Somebody has to motivate, organize, inspire, and lead and that has been for more than 70 years the United States.

Tom Donilon: Yeah. I'm going to shift our discussion if I could to more domestic-focused, a couple of issues. And over the last few months we’ve obviously issued an extraordinary expression of concern in the country about racial justice in the United States and police conduct in the United States along with those expressions of concern. Again, as someone who’s really thought deeply about our democracy, has written about our democracy, spoken about it for many years and understands government as well as anybody and one of our premier leaders, I just think it’ll be terrific to get your thoughts on how we got here with respect to where we are in terms of the racial situation, particularly in our cities, and the associated police conduct, how we got here and how can we go forward? What would you advice be to the next President coming in on January 20, 2021 as to how he should tackle the problems that we’ve seen emerge so visibly during the course of 2020?

Condoleezza Rice: The first thing they have to do is acknowledge that race is a very deep wound in the United States. It comes from our birth defect of slavery. Tom, my ancestors were slave owners and slaves. My DNA’s 40% European. That just shows how incredibly deep and visceral race is in America. It’s different than ethnicity, because it comes out of the experience of Europeans and Africans coming to this land together, one group enslaved, and it’s marked us going forward.

But, when I hear people say we’ve made no progress, that’s not true. I grew up in segregated Birmingham, Alabama. When I was a little girl, if a black man was killed by a policeman it wouldn't have been a footnote in the newspaper. And so, that people go out and protest it now after the horrific death of George Floyd is a sign of progress.

When we say there’s no progress, it both dishonors those who really did work hard for that progress and it, by the way, tells us, well, why bother, because if we haven’t made any progress in 200-plus years, we’re not going to make any progress. Well, we have.

So, what do we need to continue to do? We do need to continue to work towards not a color-blind society. That's too hard. We will see color. But where color doesn’t challenge you to say I know this about you because you are black, where we can pretend that we’re color blind. And, by the way, each and every one of us, I know people talk about systemic racism and, yes, one of the things that changed from the time I was a kid in Birmingham was people protested, but they also had a legislative agenda around civil rights.

They went to the courts. Thurgood Marshall and NAACP went to the courts practically every month from the 1930s to win court cases. So, we have to mobilize the machinery that we’ve got. We have to use the institutions that were given to us by our clearly flawed founding fathers. But nonetheless, they gave us institutions that can help us get there.

And then, the final thing is each and every one of us has to ask what can we do personally? It’s fine to talk about big change. But, you know, one of the things that I'm most concerned about is just the lack of opportunity, particularly for minority kids who are poor, and our school system and what it’s doing to them.

And so, I would say to each and every American don’t treat this as something that’s out there or over there or somebody else’s responsibility. Three hundred million declarations of what I'm going to do would get us quite a bit toward a more perfect democracy.

I would just finally say this. I was really happy that our friends were in the streets across the world in solidarity. But, you know, I wanted to say to them look in the mirror. One of the hardest things to do is govern over diversity, govern over difference. And while the United States is clearly imperfect, we are not alone in that regard and we have made some progress and we need to acknowledge that.

Tom Donilon: Thanks, Secretary. Let me conclude with a question, hopefully on a more hopeful note. We’ve had – we’ve gone through and discussed a number of the challenges that the country faces and that the next President will face, regardless of the election. I wanted to ask you, you know, as someone you’ve got the great privilege of living and working on college campuses for a long time. You were a provost at Stanford. You’re now back at Stanford. What do you tell people about public service? What do you tell people about the high levels of partisanship and how we’re going to go forward in the country?

I wanted to get kind of an insight for our colleagues here of your interactions with young people, because you’re – you’ve spent your life devoted in large part to public service. And are you dismayed about where we are? Are you encouraged? And what do you tell a student or a researcher at Stanford who comes up to you and says, Secretary Rice, given everything that’s going on in the world today, what can you – what do you have to say to me about whether or not I should pursue a career or part of my career in public service given everything that’s going on in the country in the year 2020?

Condoleezza Rice: Our great friend George Shultz, who will turn 100-years-old in December, sometimes wears a tie and it says democracy is not a spectator sport. And that’s what I tell my students and my colleagues. You get the democracy that you work for. And, yes, I know it’s difficult and it’s partisan and the way that we get our news these days where I can go to my cable news channel, to my aggregator, to my websites, I actually never encounter anybody who thinks differently. When I finally do encounter somebody who thinks differently, I think they’re either stupid or venal and that just fuels our sense that we belong in tribes, not in one America.

And so, I say three things to my students. The first is please do public service, because if not you, who? In a democracy you don’t have an option to simply opt out. Now public service, national service, it doesn’t have to mean you work in the federal government. You can work for a local government. You can volunteer on a campaign. You can go into the civil society sector. But work for the common good.

The second thing that I say to them is remember that you are enormously privileged. I don’t care what color you are. I don’t care what gender you are. You are. You’re enormously privileged, and so go and help somebody who has less than you do, and you will absolutely never ask why don’t I have, why don’t I have, you’ll say why do I have so much?

And the third thing that I say to them is don’t contribute to the polarization by refusing to acknowledge and talk to those who think differently, because then you become part of the problem. And what I'm encouraged about is that this generation is the most public-minded that I’ve ever taught. They’re in a hurry and I will say to them sometimes let’s learn something before we try to lead. But they believe they’re going to change the world and I do too.

Tom Donilon: Yeah. Well, that’s great. Secretary Rice, thank you for a terrific conversation. It’s really been a great privilege for me, and I know for our colleagues around the world. Really great to see you and thanks for your insights today. Really appreciate it.

Tim, that concludes our conversation and back over, back over to you. Great.