Gita Gopinath has spent the last several years inside the room where the world’s monetary plumbing gets fixed — or doesn’t. As first deputy managing director of the IMF and, before that, the Fund’s chief economist, she worked on sovereign debt restructuring, followed Argentina’s disinflation up close, and built her academic reputation on ideas like dollar dominance and the dominant currency paradigm. Now back at Harvard launching a new Global Economics Lab, her conversation with Tyler ranges from why exchange rates don’t adjust the way models predict, to what stablecoins really cost, to whether AI’s growth dividend will show up on schedule.

Tyler and Gita discuss why trade balances are only weakly related to real exchange rates, before turning to Argentina, Milei’s fiscal discipline, the peso, and dollarization. Then they discuss whether economists got the euro wrong; whether trade imbalances with China are really the problem; stablecoins, CBDCs, and the Treasury market; and whether AI will ease the debt burden, cause stagflation, or transform economics itself. Finally, they turn to her family’s Kerala roots: why the state keeps electing communists, the relationship between matriarchy and social indicators, single-sex education, and what she’s building next.

COWEN: Now, Scott Sumner argues we shouldn’t be worried about trade imbalances at all. We don’t worry about them across American states. A lot of the EU has a pretty big current account surplus. Not many people are worried about that. Yet when it comes to China, the talk is all about trade imbalances. Scott argues that’s more of a political project than an actual economic argument. Do you agree with Scott or not?

GOPINATH: I would agree with Scott along the following lines, which is that the trade imbalance in and of itself is not something that we should be focused on. I think what we care about is welfare, and welfare involves jobs and consumption, what’s inflation, purchasing power, and so on. People do not wake up in the morning saying, “Okay, my current account deficit is too big, or my current account surplus is too big.” If all of your policies that were delivering good outcomes for your country were to bring along a deficit or a surplus, that’s perfectly fine. There are lots of good reasons to be running deficits and surpluses we know. There’s nothing that tells you that you shouldn’t.

The problem arises when you have policies that countries have in place that are inconsistent with any kind of a balanced growth model, and they manifest themselves in that trade deficits and surpluses. This is what I’m saying as an economist.

Now, of course, from a politician’s perspective, there are other arguments for why they would point to it. What we have seen historically over and over again is that whenever you had these increases in these deficits and surpluses, you’ve had trade wars or calls for protectionism. That’s what happened during Reagan’s time, 1980s. That’s what led to the Plaza Accord and then all the adjustments that followed after that.

Then you also do worry about the possibility of crises. The Great Financial Crisis was preceded by growing imbalances. There was a sense in which all this big savings glut. All this money flushing around. All these large surpluses and deficits were part of the problem. Now I would say where we are now in this third wave of concern about imbalances.

To be clear, it’s not the imbalance itself. As an economist, I would say that it’s not the imbalance in itself. You don’t wake up and say, “This is what I’m trying to prevent. I’m trying to prevent us from having a deficit. I want us to have balanced trade.” I think that’s bad economics.

COWEN: Say China is channeling what would have been wage income into investment, and that’s plausibly the case. Now, it may be politically unstable in the sense that we Americans object to it, but that’s not an argument per se, right? We have a choice as to whether or not we should object to it. It doesn’t seem that rigorous to say, well, this will cause another financial crisis like 2008. There’s just not real evidence for that. Scott Sumner would say, “Let’s just be happy we have cheaper goods. We send them paper. We get back stuff and go our merry way.” Why is that wrong?

GOPINATH: A few things. Firstly, I could go into these differences between trade deficits and surpluses versus what I would call sectoral imbalances, or the fact that China’s running a big manufacturing surplus, which is different from a trade surplus itself, or that it has big EV production. What we do recognize, again, is that we do a pretty bad job in moving or helping workers that have lost their jobs in certain sectors.

COWEN: We’re at full employment now or very close to it.

GOPINATH: Again, we’re at full employment right now, but we’ve had this period of time when we had communities that were deeply affected by—not just trade—automation was a big part of it too. We don’t do a great job in terms of getting people back into jobs, and that can affect, depending upon your ideal welfare function for the country, if you care a lot about those people, then obviously in that case, that’s something that should matter in your policy decisions.

In the case of China, I would say firstly that, in both the case of the US and China, we’re very far from the world where countries are doing good policies, and this is all about comparative advantage, and this is all about this would be the outcome we would have in a world where every country was doing the right policy. We’re very far from that.

China’s surpluses are a reflection of things going wrong in China. It’s not a reflection of strength in China. It’s a reflection of weak consumption. It’s a reflection of misallocated resources going into different sectors. They did that with their property markets. Now they have a huge property market problem that they haven’t been able to fix in five years. They have this now with other markets, including EVs and the other sectors. They have the problem with inflation being too low.

They’re trying to do so called anti-involution policies, bringing companies together and telling them, “You’ve got to keep prices higher than what you’re doing right now.” This is not the world where they’re playing good policies, and this is all comparative advantage, and this is the outcome that we see. I wouldn’t push the argument that this is, “Oh, we should be just happier with cheaper goods from China.”