1 00:00:00,120 --> 00:00:03,760 Speaker 1: The cash balance is going to be coming down, you know, 2 00:00:04,080 --> 00:00:09,440 Speaker 1: really close to, if not going through the Treasury's sort 3 00:00:09,480 --> 00:00:13,800 Speaker 1: of thirty billion dollar minimum that it has suggested in 4 00:00:13,840 --> 00:00:16,880 Speaker 1: the past. Danger zone. We're going right into the danger 5 00:00:16,960 --> 00:00:21,240 Speaker 1: zone here. 6 00:00:24,480 --> 00:00:30,760 Speaker 2: Default on our debt would produce an economic and financial catastrophe. 7 00:00:31,200 --> 00:00:34,880 Speaker 3: With a default something most everyone agrees would be a catastrophe. 8 00:00:35,360 --> 00:00:38,760 Speaker 1: This is beyond imagination. 9 00:00:45,600 --> 00:00:48,280 Speaker 3: Hello, Stephonomics, here the podcast that brings you the global 10 00:00:48,320 --> 00:00:51,279 Speaker 3: economy this week. There's no getting away from it. We're 11 00:00:51,320 --> 00:00:54,720 Speaker 3: talking about debt, the trillions of dollars of debt sitting 12 00:00:54,760 --> 00:00:57,720 Speaker 3: on government balance sheets around the world. In the past 13 00:00:57,720 --> 00:01:01,000 Speaker 3: twenty years or so, America's government debt is nearly doubled 14 00:01:01,040 --> 00:01:03,080 Speaker 3: as a share of its economy, and we've seen a 15 00:01:03,120 --> 00:01:06,320 Speaker 3: similar explosion in the UK and other places. But we've 16 00:01:06,360 --> 00:01:09,160 Speaker 3: not had a debt crisis. We've not even talked about 17 00:01:09,200 --> 00:01:09,839 Speaker 3: it very much. 18 00:01:10,440 --> 00:01:10,600 Speaker 2: Now. 19 00:01:10,640 --> 00:01:13,640 Speaker 3: That's partly because policymakers had other things to worry about, 20 00:01:13,680 --> 00:01:18,360 Speaker 3: like the global financial crisis and COVID. It's also because 21 00:01:18,480 --> 00:01:21,240 Speaker 3: for nearly all of that time, the cost of borrowing 22 00:01:21,400 --> 00:01:24,679 Speaker 3: and servicing all of that debt was going down. Like 23 00:01:24,800 --> 00:01:30,400 Speaker 3: households who mortgaged, remortgaged, remortgaged again. The debt was growing, 24 00:01:30,760 --> 00:01:35,119 Speaker 3: but thanks to falling interest rates, the payments were coming down. Now, 25 00:01:35,160 --> 00:01:38,720 Speaker 3: as we know, interest rates are going up. Whereas it 26 00:01:38,800 --> 00:01:41,720 Speaker 3: was practically free for many governments to borrow only a 27 00:01:41,720 --> 00:01:44,840 Speaker 3: couple of years ago, now the average rate for advanced 28 00:01:44,840 --> 00:01:49,080 Speaker 3: economies is more like three percent. It doesn't sound like much, 29 00:01:49,120 --> 00:01:52,000 Speaker 3: but from zero to three is a pretty big jump. 30 00:01:52,640 --> 00:01:55,559 Speaker 3: So it's reasonable to wonder whether we need to start 31 00:01:55,600 --> 00:01:59,720 Speaker 3: worrying about all of that government debt again. Indeed, whether 32 00:01:59,760 --> 00:02:02,840 Speaker 3: the presence of that debt is going to make central 33 00:02:02,880 --> 00:02:05,680 Speaker 3: banks more nervous of keeping interest rate costs as high 34 00:02:05,720 --> 00:02:09,600 Speaker 3: as they need to be to defeat inflation. The economist 35 00:02:09,600 --> 00:02:12,760 Speaker 3: Stephen King is worried about that, and I'm going to 36 00:02:12,800 --> 00:02:15,760 Speaker 3: have that very reasonable debate with him in a little while. 37 00:02:16,639 --> 00:02:20,320 Speaker 3: But before that, we have to talk about the unreasonable 38 00:02:20,360 --> 00:02:24,079 Speaker 3: debt debate raging in Washington, for whether the federal government 39 00:02:24,120 --> 00:02:27,000 Speaker 3: should simply be able to borrow more to pay its bills, 40 00:02:27,480 --> 00:02:34,720 Speaker 3: also known as raising the debt ceiling. I'm delighted to 41 00:02:34,840 --> 00:02:38,320 Speaker 3: get the latest and some of the broader implications from 42 00:02:38,520 --> 00:02:42,120 Speaker 3: two of Bloomberg's stars in the US White House, reported 43 00:02:42,200 --> 00:02:46,160 Speaker 3: Josh Wingrove and our senior editor Chris Anstey, who's been 44 00:02:46,600 --> 00:02:49,720 Speaker 3: overseering and steering a lot of our coverage of this 45 00:02:50,520 --> 00:02:56,720 Speaker 3: never ending or we hope eventually ending debt ceiling saga. Josh, 46 00:02:57,040 --> 00:03:01,320 Speaker 3: we're obviously talking in the middle of the day on Tuesday. 47 00:03:01,520 --> 00:03:05,120 Speaker 3: There's always a possibility that peace will break out before 48 00:03:05,240 --> 00:03:11,119 Speaker 3: this episode reaches people's ears. But sort of briefly, where 49 00:03:11,120 --> 00:03:15,560 Speaker 3: would you say we were in this saga over raising 50 00:03:15,600 --> 00:03:16,640 Speaker 3: the US debt limit. 51 00:03:17,240 --> 00:03:20,320 Speaker 4: Well, it's tough to say on an hour by power basis, 52 00:03:20,360 --> 00:03:24,359 Speaker 4: but right now, the mood music is good. McCarthy and 53 00:03:24,400 --> 00:03:28,200 Speaker 4: Biden met Monday, and of course they've given up the 54 00:03:28,240 --> 00:03:30,520 Speaker 4: sort of clown car approach where they were piling a 55 00:03:30,520 --> 00:03:32,840 Speaker 4: bunch of people into the room, and now they've sort 56 00:03:32,840 --> 00:03:35,440 Speaker 4: of narrowed down to Biden and McCarthy to try to 57 00:03:35,480 --> 00:03:38,360 Speaker 4: hash out a deal that's a similar model to what 58 00:03:38,400 --> 00:03:42,520 Speaker 4: they did under the Trump administration. And so the question 59 00:03:42,640 --> 00:03:45,080 Speaker 4: is going to get something that McCarthy can sell to 60 00:03:45,440 --> 00:03:50,240 Speaker 4: his people in a way that won't jeopardize not only 61 00:03:50,760 --> 00:03:53,680 Speaker 4: the potential deal itself, but whether he remains a speaker 62 00:03:53,760 --> 00:03:57,000 Speaker 4: or not. And that's the real ax factor here, is 63 00:03:57,000 --> 00:04:00,160 Speaker 4: that McCarthy's footing in his own party is not all 64 00:04:00,200 --> 00:04:01,800 Speaker 4: that strong, and that doesn't give him a lot of 65 00:04:01,880 --> 00:04:04,920 Speaker 4: wiggle rooms. So the brass tax of it are right. Now, 66 00:04:04,960 --> 00:04:07,880 Speaker 4: both parties agree that the US deficit is too big 67 00:04:08,000 --> 00:04:10,400 Speaker 4: and that the debt is on a track to push 68 00:04:10,400 --> 00:04:13,480 Speaker 4: something near fifty trillion total in the next ten years 69 00:04:13,560 --> 00:04:16,880 Speaker 4: or so, but they disagree completely on how to address that. Democrats, 70 00:04:16,920 --> 00:04:19,600 Speaker 4: of course, think that revenues need to catch up. 71 00:04:19,800 --> 00:04:21,640 Speaker 3: When you say revenue tax increases. 72 00:04:21,800 --> 00:04:24,880 Speaker 4: Taxes, yeah, Democrats want to talk taxes on corporations and 73 00:04:24,960 --> 00:04:28,920 Speaker 4: high earners and the wealthy. Republicans want to talk spending cuts, 74 00:04:29,320 --> 00:04:31,560 Speaker 4: but generally not on defense, which of course is a 75 00:04:31,680 --> 00:04:33,520 Speaker 4: huge line item. So if you try to make big 76 00:04:33,560 --> 00:04:36,279 Speaker 4: cuts without touching defense, you're cutting deep into other things. 77 00:04:36,360 --> 00:04:38,479 Speaker 4: So that's the standoff ring. Now, they both think the 78 00:04:38,480 --> 00:04:41,000 Speaker 4: depthsit is too big, but they both have completely opposite 79 00:04:41,000 --> 00:04:41,600 Speaker 4: ways of addressing. 80 00:04:41,640 --> 00:04:46,000 Speaker 3: Almost never a government say borrowing is too low, but occasionally, 81 00:04:46,080 --> 00:04:49,800 Speaker 3: very occasionally. By now, probably half the world, anyone who's 82 00:04:49,880 --> 00:04:53,640 Speaker 3: kind of politically interested has probably had a lesson in 83 00:04:53,680 --> 00:04:59,560 Speaker 3: the US debt limit. But just for those who haven't Chris, 84 00:04:59,680 --> 00:05:03,080 Speaker 3: and he just remind us why this somewhat odd, So 85 00:05:03,120 --> 00:05:07,800 Speaker 3: many would say completely stupid debt ceiling debate exists at all, 86 00:05:08,120 --> 00:05:13,080 Speaker 3: and does any other country manage its government? Is total 87 00:05:13,080 --> 00:05:14,840 Speaker 3: government borrowing in quite the same way. 88 00:05:15,440 --> 00:05:18,560 Speaker 1: So the US debt limit history actually goes back to 89 00:05:18,720 --> 00:05:22,599 Speaker 1: World War One, and in the event, it was actually 90 00:05:23,360 --> 00:05:27,960 Speaker 1: designed to make it easier for the Treasury to issue debt. 91 00:05:28,680 --> 00:05:31,960 Speaker 1: It used to be that every time the Treasury wanted 92 00:05:32,000 --> 00:05:35,760 Speaker 1: to sell a bunch of bonds, it needed congressional approval. 93 00:05:36,040 --> 00:05:38,640 Speaker 1: So in nineteen seventeen they came up with, oh, let's 94 00:05:38,640 --> 00:05:41,640 Speaker 1: set an overall limit and then the Treasury can sell 95 00:05:41,680 --> 00:05:46,760 Speaker 1: whatever it likes within that limit. It's only in recent 96 00:05:46,839 --> 00:05:52,000 Speaker 1: decades that it's become a bitter partisan battle every time, 97 00:05:52,600 --> 00:05:57,080 Speaker 1: or almost every time it comes up. Denmark also has 98 00:05:57,560 --> 00:06:02,240 Speaker 1: a debt limit that was introduced in the early nineteen nineties, 99 00:06:02,680 --> 00:06:07,400 Speaker 1: but the Danish Parliament essentially sets the limit so high 100 00:06:07,440 --> 00:06:12,560 Speaker 1: that it doesn't really impose kind of any binding any 101 00:06:12,640 --> 00:06:18,880 Speaker 1: binding parameters. And then Australia, ironically it was a left 102 00:06:18,880 --> 00:06:22,320 Speaker 1: of center party that introduced a debt limit after the 103 00:06:22,360 --> 00:06:27,600 Speaker 1: global financial crisis. They thought it would help them develop 104 00:06:27,640 --> 00:06:33,800 Speaker 1: a reputation for fiscal probity after stepping up spending during 105 00:06:34,400 --> 00:06:37,400 Speaker 1: the financial crisis, and then it was a right of 106 00:06:37,440 --> 00:06:40,360 Speaker 1: center government that got rid of it in twenty thirteen. 107 00:06:40,560 --> 00:06:45,159 Speaker 1: So we're basically the only country that has this bitter 108 00:06:45,279 --> 00:06:51,400 Speaker 1: partisan showdown most times it comes round to raising the limit. 109 00:06:52,040 --> 00:06:54,800 Speaker 3: Well, thank you, Chris for that historical perspective and the 110 00:06:54,880 --> 00:06:58,400 Speaker 3: amount of the energy that you've expended getting all that information. 111 00:06:58,440 --> 00:07:00,960 Speaker 3: I don't think it will be wasted year's time. We'll 112 00:07:00,960 --> 00:07:03,560 Speaker 3: be asking you exactly the same questions when it comes 113 00:07:03,600 --> 00:07:07,719 Speaker 3: around again. But I mean, like any negotiation, I guess 114 00:07:07,760 --> 00:07:10,920 Speaker 3: it does obviously come down to the levels of mutual 115 00:07:11,040 --> 00:07:16,679 Speaker 3: trust and respect. And we know that there's issues certainly 116 00:07:16,720 --> 00:07:19,600 Speaker 3: between the Republican side and the Democrat side, But as 117 00:07:19,640 --> 00:07:23,200 Speaker 3: you suggested, Josh's also within the Republican caucus in Congress, 118 00:07:23,760 --> 00:07:27,960 Speaker 3: there's some question marks about the level of trust. And 119 00:07:28,000 --> 00:07:29,760 Speaker 3: we saw that back at the start of the year 120 00:07:29,800 --> 00:07:32,720 Speaker 3: when it took how many attempts was it to elect 121 00:07:32,800 --> 00:07:34,880 Speaker 3: the leader in the first place, the speaker in the 122 00:07:34,880 --> 00:07:41,560 Speaker 3: first place, So that already suggested that McCarthy didn't have 123 00:07:42,040 --> 00:07:46,440 Speaker 3: a lot of support to fall back on. Would you say, 124 00:07:46,840 --> 00:07:49,200 Speaker 3: you know, having watched him, having watched this play out 125 00:07:49,280 --> 00:07:51,320 Speaker 3: over the last few months, Josh, do you think his 126 00:07:51,400 --> 00:07:54,240 Speaker 3: position is weaker or stronger now than it was when 127 00:07:54,240 --> 00:07:56,880 Speaker 3: he was finally given that role of speaker. 128 00:07:57,800 --> 00:08:00,240 Speaker 4: I think it's stronger because he passed a bill, and 129 00:08:00,280 --> 00:08:02,760 Speaker 4: that was a question that really was up in the air. 130 00:08:02,920 --> 00:08:05,640 Speaker 4: Biden said, no talks until you come up with the budget. Now, 131 00:08:05,720 --> 00:08:08,160 Speaker 4: McCarthy came up with a bill. It's not really a budget, 132 00:08:08,200 --> 00:08:10,800 Speaker 4: but it's close enough. And they thought, look, if this 133 00:08:10,840 --> 00:08:12,920 Speaker 4: guy can't even get his act together to do a 134 00:08:12,960 --> 00:08:15,480 Speaker 4: budget or a bill, then he's in a weak position. 135 00:08:15,520 --> 00:08:17,760 Speaker 4: But he got one passed and that sort of strengthened 136 00:08:17,840 --> 00:08:22,400 Speaker 4: his footing to come into these talks. That bill includes caps, 137 00:08:22,400 --> 00:08:25,040 Speaker 4: it raises the dead ceiling. It also has no chance 138 00:08:25,080 --> 00:08:25,920 Speaker 4: of passing the. 139 00:08:25,920 --> 00:08:28,280 Speaker 3: Senate because you need the Democrats to come along. 140 00:08:28,400 --> 00:08:31,400 Speaker 4: That's right, that's right, that's right. So right now McCarthy 141 00:08:31,400 --> 00:08:33,440 Speaker 4: has a bill that is completely dead on arrival in 142 00:08:33,440 --> 00:08:36,160 Speaker 4: the Senate. Biden has a budget that is completely dead 143 00:08:36,200 --> 00:08:38,520 Speaker 4: on arrival in the House, and the question is how 144 00:08:38,559 --> 00:08:42,079 Speaker 4: they chop that together into some kind of deal. As 145 00:08:42,080 --> 00:08:43,120 Speaker 4: the clock takes down here. 146 00:08:43,559 --> 00:08:45,320 Speaker 3: I mean, sticking with you, Joorsh for a minute. I mean, 147 00:08:45,320 --> 00:08:47,280 Speaker 3: if you were just thinking, how is this likely to 148 00:08:47,320 --> 00:08:49,680 Speaker 3: play out a few months ago, knowing what you knew 149 00:08:49,679 --> 00:08:53,720 Speaker 3: about McCarthy's position, but also the likely position of President 150 00:08:53,760 --> 00:08:56,600 Speaker 3: Biden in the administration, is it sort of shaping up 151 00:08:56,600 --> 00:08:58,319 Speaker 3: broadly as you would have expected. 152 00:09:00,040 --> 00:09:02,040 Speaker 4: So with the caveat that no one knew when the 153 00:09:02,160 --> 00:09:07,040 Speaker 4: so called X state is, and for the unfamiliar, lucky you, 154 00:09:07,760 --> 00:09:10,840 Speaker 4: the X state is. Of course, that's the prediction of 155 00:09:10,880 --> 00:09:14,440 Speaker 4: when Treasury's extraordinary measures will run out. In other words, 156 00:09:14,480 --> 00:09:18,640 Speaker 4: the bank account runs dry and default is now imminent. 157 00:09:18,800 --> 00:09:21,400 Speaker 4: And the prediction had varied. Frankly, a lot of people 158 00:09:21,400 --> 00:09:24,360 Speaker 4: thought we might have more time until July or even August, 159 00:09:24,840 --> 00:09:26,920 Speaker 4: and that's what kind of left this on the back burner. 160 00:09:26,960 --> 00:09:30,160 Speaker 4: But tax revenues have been such that the deadline looks 161 00:09:30,200 --> 00:09:32,280 Speaker 4: a lot sooner than we think. And now, of course 162 00:09:32,280 --> 00:09:35,600 Speaker 4: Treasury Secretary Yellen morning as early as June first, maybe 163 00:09:35,960 --> 00:09:38,360 Speaker 4: in the days or a very small number of weeks 164 00:09:38,400 --> 00:09:41,480 Speaker 4: after that. So yeah, it's been playing out, but it's 165 00:09:41,760 --> 00:09:43,240 Speaker 4: playing out in a way that they thought that this 166 00:09:43,360 --> 00:09:45,800 Speaker 4: plane had a lot more runway than it has, and 167 00:09:45,880 --> 00:09:47,359 Speaker 4: so now they're sort of scrambling. 168 00:09:47,559 --> 00:09:50,400 Speaker 3: Yeah, and actually, I mean you mentioned previously, you know 169 00:09:50,440 --> 00:09:53,760 Speaker 3: the importance of having a deadline, but also we talked 170 00:09:53,800 --> 00:09:56,839 Speaker 3: about trust. How urgent you think this is to fix 171 00:09:56,960 --> 00:10:01,280 Speaker 3: depends on whether you believe the Department of Treasuries estimates 172 00:10:01,320 --> 00:10:04,480 Speaker 3: of when the money is going to run out. Janet Yellen, 173 00:10:04,520 --> 00:10:07,200 Speaker 3: the Treasure sector has said early June, which was earlier 174 00:10:07,200 --> 00:10:13,720 Speaker 3: than many expected. Christ do Republicans believe her? Do you 175 00:10:13,960 --> 00:10:15,319 Speaker 3: believe her when she says that? 176 00:10:15,880 --> 00:10:22,119 Speaker 1: I think one thing that gives some credence to Yellen's 177 00:10:22,160 --> 00:10:28,080 Speaker 1: timeline is that independent analysts on Wall Street who pour 178 00:10:28,360 --> 00:10:33,440 Speaker 1: over the daily cash balance figures from the Treasury out 179 00:10:33,480 --> 00:10:39,400 Speaker 1: every afternoon, do say that the cash balance is going 180 00:10:39,440 --> 00:10:45,120 Speaker 1: to be coming down really close to, if not going 181 00:10:45,240 --> 00:10:49,880 Speaker 1: through the Treasury's sort of thirty billion dollar minimum that 182 00:10:50,000 --> 00:10:54,960 Speaker 1: it has suggested in the past in that early June period. 183 00:10:55,040 --> 00:11:00,160 Speaker 1: So we see, for example, Alec Phillips at Goldman SACKX, 184 00:11:00,280 --> 00:11:05,280 Speaker 1: Lou crandle Att uh writes an eye Cap Morgan Stanley's 185 00:11:05,320 --> 00:11:09,280 Speaker 1: economists uh are all saying, uh, yeah, early June is 186 00:11:09,360 --> 00:11:12,400 Speaker 1: really a danger. Well, some of them have called you 187 00:11:12,400 --> 00:11:15,959 Speaker 1: know the old uh top gun term the danger zone. 188 00:11:16,000 --> 00:11:19,920 Speaker 1: We're going right into the danger zone here, uh, And uh, 189 00:11:20,080 --> 00:11:24,480 Speaker 1: you don't want this cash balance so low that you 190 00:11:24,520 --> 00:11:30,760 Speaker 1: know there is an unexpectedly uh poor day for revenue inflows, 191 00:11:30,800 --> 00:11:35,760 Speaker 1: an unexpectedly big you know, amount of obligations coming due, 192 00:11:35,840 --> 00:11:39,120 Speaker 1: and you go negative, and then you can't uh make 193 00:11:39,240 --> 00:11:42,440 Speaker 1: all of your uh all of your scheduled payments. Do 194 00:11:42,559 --> 00:11:47,240 Speaker 1: the Republicans believe Yellen? I think there is a swath 195 00:11:47,440 --> 00:11:50,960 Speaker 1: of them that don't, uh, that think that this is 196 00:11:51,520 --> 00:11:54,680 Speaker 1: in fact, don't even think that going past X date 197 00:11:55,320 --> 00:11:59,520 Speaker 1: is particularly damaging. Uh think that the the Treasury, at 198 00:11:59,520 --> 00:12:02,719 Speaker 1: the end of the day, they could just delay payments 199 00:12:03,120 --> 00:12:07,680 Speaker 1: selectively on a few accounts and it wouldn't be a 200 00:12:07,679 --> 00:12:13,840 Speaker 1: big deal. So that's a dynamic that has made that 201 00:12:14,040 --> 00:12:19,040 Speaker 1: very slim majority that McCarthy has in the House so 202 00:12:20,160 --> 00:12:21,720 Speaker 1: dangerous this time around. 203 00:12:23,520 --> 00:12:27,080 Speaker 3: Well, our US chief economist Stana Wong has estimated the 204 00:12:27,120 --> 00:12:30,000 Speaker 3: impact on the economy of a prolonged standoff where the 205 00:12:30,559 --> 00:12:34,640 Speaker 3: federal government actually had to live within its means suddenly, 206 00:12:34,720 --> 00:12:39,559 Speaker 3: I mean, and have big cuts in spending, and that 207 00:12:39,600 --> 00:12:41,680 Speaker 3: would cause a big recession. But we know there are 208 00:12:41,760 --> 00:12:44,160 Speaker 3: quite a few more steps they can take on the 209 00:12:44,240 --> 00:12:47,760 Speaker 3: way to those kind of measures. Obviously they don't want 210 00:12:47,800 --> 00:12:50,760 Speaker 3: to talk about the sort of stockgap tactics that they 211 00:12:50,840 --> 00:12:53,240 Speaker 3: might employ. But Chris, what kind of things do you 212 00:12:53,240 --> 00:12:56,280 Speaker 3: think would come first? I mean, would you think they'd 213 00:12:56,320 --> 00:12:59,200 Speaker 3: be rather than actually miss a debt payment, which would 214 00:12:59,240 --> 00:13:02,440 Speaker 3: be symbolically important for global markets, are they more likely 215 00:13:02,520 --> 00:13:05,520 Speaker 3: to stop I don't know, salaries for federal workers. What's 216 00:13:05,559 --> 00:13:06,080 Speaker 3: your sense? 217 00:13:06,920 --> 00:13:13,439 Speaker 1: So the universal assumption on Wall Street, among the ratings agencies, 218 00:13:14,120 --> 00:13:19,800 Speaker 1: investors probably more broadly, is that the Treasury would prioritize 219 00:13:19,920 --> 00:13:24,679 Speaker 1: payments on Treasury securities that it would not end up 220 00:13:24,760 --> 00:13:31,320 Speaker 1: defaulting on bonds. And you know, it's another kind of 221 00:13:31,400 --> 00:13:36,439 Speaker 1: key category to think about is social Security recipients. There 222 00:13:36,440 --> 00:13:42,760 Speaker 1: are sixty million odd beneficiaries in the Social Security program 223 00:13:43,240 --> 00:13:48,120 Speaker 1: that get their checks every month. Really hard to see 224 00:13:49,080 --> 00:13:54,600 Speaker 1: those stopping now, as you suggested, Stephanie, Treasury sector Yellen 225 00:13:54,720 --> 00:13:59,840 Speaker 1: has been you know, adamant that you know there that 226 00:14:00,080 --> 00:14:03,959 Speaker 1: everything is at risk, uh, you know, trying to uh, 227 00:14:04,000 --> 00:14:06,079 Speaker 1: you know, if you just think of game theory, her 228 00:14:06,160 --> 00:14:11,760 Speaker 1: interest is, uh is in trying to uh showcase how 229 00:14:11,840 --> 00:14:15,199 Speaker 1: disastrous going past X date is in order to put 230 00:14:15,480 --> 00:14:19,640 Speaker 1: pressure on Congress to actually raise or suspend the limit. 231 00:14:20,120 --> 00:14:20,560 Speaker 2: Uh. 232 00:14:20,640 --> 00:14:23,120 Speaker 1: But at the end of the day, I think the 233 00:14:23,160 --> 00:14:28,280 Speaker 1: expectation is uh that government debt would be uh, would 234 00:14:28,280 --> 00:14:31,280 Speaker 1: continue to be paid, Social Security would continue to be 235 00:14:31,360 --> 00:14:35,000 Speaker 1: paid out uh, and it would be other uh you 236 00:14:35,040 --> 00:14:38,840 Speaker 1: know categories uh, federal contractors. You know, if you think 237 00:14:38,840 --> 00:14:42,360 Speaker 1: the Lockheed Martins and the Boeings, uh, they're probably not 238 00:14:42,440 --> 00:14:45,800 Speaker 1: going to get paid on time. Uh and uh and 239 00:14:45,920 --> 00:14:51,840 Speaker 1: a swase probably of of uh, you know, government salaried workers. 240 00:14:52,360 --> 00:14:56,160 Speaker 3: And of course, I mean in Washington, Josh, people, don't 241 00:14:56,600 --> 00:14:59,800 Speaker 3: you know, we don't focus on these fripperies like you know, 242 00:15:00,240 --> 00:15:03,520 Speaker 3: global financial markets, in the US position as the most 243 00:15:03,560 --> 00:15:06,000 Speaker 3: important creditor in the world. What we're really concerned with 244 00:15:06,120 --> 00:15:09,960 Speaker 3: is who wins and who loses. Politically from this, clearly 245 00:15:10,000 --> 00:15:13,920 Speaker 3: both sides have continued to battle on the apparent belief 246 00:15:14,040 --> 00:15:17,040 Speaker 3: that it supports their interest. I mean, maybe the President 247 00:15:17,160 --> 00:15:20,640 Speaker 3: thinks it makes the Republicans look bad, but equally Republicans 248 00:15:20,880 --> 00:15:25,000 Speaker 3: in the who are most hawkish in Congress, appear to 249 00:15:25,040 --> 00:15:28,040 Speaker 3: think at least it plays well to their base to 250 00:15:28,120 --> 00:15:31,520 Speaker 3: be showing that they were concerned about excess government spending. 251 00:15:31,600 --> 00:15:33,600 Speaker 3: So how does this play out politically? 252 00:15:34,800 --> 00:15:37,200 Speaker 4: They're both playing a bit of a long game, which 253 00:15:37,240 --> 00:15:41,440 Speaker 4: is what is raising the stakes here. For Biden, he 254 00:15:41,560 --> 00:15:45,040 Speaker 4: knows and his people know that they're eighteen House Republicans 255 00:15:45,280 --> 00:15:47,920 Speaker 4: who have districts that Biden himself won in twenty twenty. 256 00:15:48,040 --> 00:15:50,880 Speaker 4: Democrats think they can flip many of those. You might 257 00:15:50,920 --> 00:15:54,000 Speaker 4: have heard of someone named George Santos for instance, you know, 258 00:15:54,280 --> 00:15:56,960 Speaker 4: And so they are sort of have an eye on 259 00:15:57,000 --> 00:15:58,960 Speaker 4: this that they're not sure how long McCarthy is going 260 00:15:59,040 --> 00:16:03,280 Speaker 4: to be speaker beyond this Congress, and so that is 261 00:16:03,320 --> 00:16:06,360 Speaker 4: sort of like they would welcome the contrast and have 262 00:16:06,440 --> 00:16:10,120 Speaker 4: already gotten it in fact, because they want to target 263 00:16:10,120 --> 00:16:14,480 Speaker 4: those swing Republicans and say, look, these folks are playing 264 00:16:14,480 --> 00:16:17,000 Speaker 4: with fire on the debt limit. They are grabbing the 265 00:16:17,040 --> 00:16:20,720 Speaker 4: steering wheel and you know, pulling us towards the cliff, 266 00:16:21,320 --> 00:16:24,320 Speaker 4: and that's just you know, something they're keen to run against. 267 00:16:24,320 --> 00:16:26,840 Speaker 4: For McCarthy, of course, he needs to show that he 268 00:16:26,880 --> 00:16:31,080 Speaker 4: has exacted sort of cuts, and he needs to show 269 00:16:31,080 --> 00:16:35,240 Speaker 4: that he basically got Joe Biden to blink, and to 270 00:16:35,280 --> 00:16:37,680 Speaker 4: a certain extent he already has. Remember Biden, for a 271 00:16:37,720 --> 00:16:39,720 Speaker 4: long time said he wouldn't negotiate over the debt limit, 272 00:16:39,800 --> 00:16:43,880 Speaker 4: and they're still sort of maintaining that. But Biden is 273 00:16:43,960 --> 00:16:46,920 Speaker 4: of course implicitly negotiating on the debt limit, if not 274 00:16:47,080 --> 00:16:50,280 Speaker 4: explicitly negotiating on it. So right now I think they're 275 00:16:50,280 --> 00:16:52,080 Speaker 4: both trying to shore up power with an eye to 276 00:16:52,160 --> 00:16:53,120 Speaker 4: the next Congress. 277 00:16:53,400 --> 00:16:56,640 Speaker 3: Obviously, the voters in particular districts and is one thing. 278 00:16:56,680 --> 00:16:58,960 Speaker 3: But with the broader public, what do they think about this? 279 00:16:59,040 --> 00:17:01,840 Speaker 3: Do they think it's stupid or do they actually do 280 00:17:01,920 --> 00:17:05,480 Speaker 3: we have a sense Chris or Josh about whether they 281 00:17:05,520 --> 00:17:07,880 Speaker 3: care about the level of US public debt, whether they 282 00:17:07,920 --> 00:17:10,560 Speaker 3: care that this is a matter for debate. 283 00:17:11,000 --> 00:17:16,240 Speaker 1: So a recent poll, an Associated Press NRC poll out 284 00:17:16,880 --> 00:17:21,920 Speaker 1: on Friday, said that about two thirds of US adults 285 00:17:22,480 --> 00:17:28,080 Speaker 1: were highly concerned about the potential if the debt limit, 286 00:17:28,440 --> 00:17:31,760 Speaker 1: the potential damage if the debt limit was not increased, 287 00:17:32,440 --> 00:17:36,320 Speaker 1: and at about six and ten wanted any increase in the 288 00:17:36,359 --> 00:17:42,000 Speaker 1: debt limit to be accompanied by reducing the budget deficit. 289 00:17:42,760 --> 00:17:48,320 Speaker 1: So kind of broadly aligned with what's under negotiation now. 290 00:17:49,160 --> 00:17:52,359 Speaker 1: But the other thing, you know, as you know, Stephanie, 291 00:17:52,520 --> 00:17:56,919 Speaker 1: we have a motto at Bloomberg News show Don't Tell. 292 00:17:57,680 --> 00:18:02,359 Speaker 1: And if you look back at history, in nineteen ninety five, 293 00:18:02,720 --> 00:18:08,360 Speaker 1: there was a bitter battle between then President Clinton and 294 00:18:08,520 --> 00:18:15,240 Speaker 1: a Republican Congress over federal spending that resulted in a 295 00:18:15,359 --> 00:18:21,440 Speaker 1: government shutdown, and the following year, in ninety six, Clinton 296 00:18:21,520 --> 00:18:26,200 Speaker 1: was re elected back practically Waltz to reelection. The most 297 00:18:26,280 --> 00:18:30,120 Speaker 1: damaging dat limit showdown that we've had up to now 298 00:18:30,400 --> 00:18:35,600 Speaker 1: was twenty eleven, and we had again a Democratic president, 299 00:18:35,640 --> 00:18:43,320 Speaker 1: a Republican and a Republican congressional majority to deal with. 300 00:18:43,520 --> 00:18:48,800 Speaker 1: And Obama again, you know, was re elected in twenty twelve. 301 00:18:48,920 --> 00:18:54,720 Speaker 1: So history suggests that Republicans have not used these fiscal 302 00:18:54,800 --> 00:19:00,520 Speaker 1: battles to good effect at the ballot box. And last year, 303 00:19:00,720 --> 00:19:05,080 Speaker 1: you know, looking at the mid term elections, the Republican 304 00:19:05,160 --> 00:19:11,280 Speaker 1: message was that Biden had blown out government spending, that's 305 00:19:11,359 --> 00:19:16,840 Speaker 1: what caused the inflation crisis. He had a disastrous record 306 00:19:16,920 --> 00:19:22,400 Speaker 1: of you know, damaging middle class purchasing power. And look 307 00:19:22,440 --> 00:19:30,320 Speaker 1: what happened. The Democrats did historically extremely well at the midterms. 308 00:19:30,480 --> 00:19:36,480 Speaker 1: So history, even recent history, suggests that at the end 309 00:19:36,520 --> 00:19:39,479 Speaker 1: of the day, this will not be a winning a 310 00:19:39,520 --> 00:19:42,560 Speaker 1: winning argument for the GOP next year. 311 00:19:43,720 --> 00:19:45,800 Speaker 4: I would add one thing to that, and that is 312 00:19:45,840 --> 00:19:50,880 Speaker 4: that all that is absent a situation where it default happens. 313 00:19:51,000 --> 00:19:55,359 Speaker 4: And I think Joe Biden thinks that Republicans are being reckless. 314 00:19:55,400 --> 00:19:58,280 Speaker 4: He thinks that it's ludicrous to use the debt seeming 315 00:19:58,480 --> 00:20:03,119 Speaker 4: as a bargaining chip. He thinks it's almost offensive that 316 00:20:03,200 --> 00:20:07,400 Speaker 4: Republicans are willing to proverbially shoot the hostage here with 317 00:20:07,480 --> 00:20:10,920 Speaker 4: respect to the dead limit and actually threaten a default. 318 00:20:11,119 --> 00:20:13,240 Speaker 4: He thinks all this is silly, But he also knows 319 00:20:13,880 --> 00:20:16,840 Speaker 4: that the buck stops with the president and that if 320 00:20:16,840 --> 00:20:19,200 Speaker 4: there were a default, and if there were an ensuing recession, 321 00:20:19,800 --> 00:20:23,320 Speaker 4: and if everyone's borrowing costs ticked up, he'd wear it. 322 00:20:23,440 --> 00:20:26,199 Speaker 4: And so that's part of the background for him, and 323 00:20:26,240 --> 00:20:29,480 Speaker 4: that probably explains why he has come off this sort 324 00:20:29,480 --> 00:20:32,720 Speaker 4: of divide that he was trying to draw between Ah, 325 00:20:32,760 --> 00:20:34,560 Speaker 4: we're not negotiating on the debt limit, and it's like 326 00:20:34,640 --> 00:20:37,000 Speaker 4: they kind of are. They really are, of course negotiating 327 00:20:37,000 --> 00:20:39,840 Speaker 4: on the debt limit, because that is the speaker's condition 328 00:20:40,040 --> 00:20:42,320 Speaker 4: for these talks. 329 00:20:42,680 --> 00:20:45,000 Speaker 3: Very wise words from Josh, and it makes me think 330 00:20:45,080 --> 00:20:48,240 Speaker 3: that this is one episode we'd quite like to be outdated. 331 00:20:48,880 --> 00:20:52,639 Speaker 3: Quite quickly and have a resolution. Josh Wing Grow Chris Anstey, 332 00:20:52,680 --> 00:20:53,680 Speaker 3: thank you so much. 333 00:20:53,520 --> 00:21:00,000 Speaker 1: Thank you, thank you. 334 00:21:00,119 --> 00:21:01,919 Speaker 3: Now I want to step back from all that chatter 335 00:21:02,320 --> 00:21:05,440 Speaker 3: to ask whether some of those arguing against raising the 336 00:21:05,480 --> 00:21:09,919 Speaker 3: debt ceiling might have a point, not about threatening a 337 00:21:10,040 --> 00:21:13,439 Speaker 3: US default that's really stupid, but in the suggestion that 338 00:21:13,480 --> 00:21:17,320 Speaker 3: government debt has got too high. Public debt levels have 339 00:21:17,520 --> 00:21:21,119 Speaker 3: risen enormously in the past few decades in most developed economies, 340 00:21:21,320 --> 00:21:23,000 Speaker 3: but as I said at the start, we didn't fuss 341 00:21:23,040 --> 00:21:25,640 Speaker 3: about it because the interest rate was falling. In fact, 342 00:21:25,680 --> 00:21:29,480 Speaker 3: the average cost of servicing government debt has fallen for 343 00:21:29,600 --> 00:21:33,200 Speaker 3: most of the twenty first century in advanced economies, even 344 00:21:33,240 --> 00:21:37,159 Speaker 3: as their debt stocks have nearly doubled. But that's not 345 00:21:37,359 --> 00:21:46,600 Speaker 3: the case anymore. So if interest rates stay at these 346 00:21:46,720 --> 00:21:49,919 Speaker 3: higher rates, we could be in trouble. But that, of 347 00:21:50,000 --> 00:21:54,879 Speaker 3: course is a question that's very hotly debated, especially among economists, 348 00:21:55,119 --> 00:21:57,960 Speaker 3: so to talk through whether we're now in a higher rate, 349 00:21:58,080 --> 00:22:01,400 Speaker 3: higher inflation environment. I'm delighted to welcome back to Stephanomics 350 00:22:01,440 --> 00:22:05,800 Speaker 3: Stephen King, former chief economist for HSBC, now it's advisor 351 00:22:06,200 --> 00:22:09,680 Speaker 3: and author of many books, including most recently we need 352 00:22:09,720 --> 00:22:13,679 Speaker 3: to talk about inflation. Stephen, welcome back. I guess the 353 00:22:13,680 --> 00:22:16,160 Speaker 3: first obvious question is, and I know it's the subject 354 00:22:16,280 --> 00:22:22,760 Speaker 3: of your book, but briefly, are we looking at significantly 355 00:22:22,840 --> 00:22:26,639 Speaker 3: higher inflation for quite a long period to come. Is 356 00:22:26,680 --> 00:22:28,880 Speaker 3: that something that government's in particular ought to be sort 357 00:22:28,920 --> 00:22:30,800 Speaker 3: of putting into their forecast. 358 00:22:32,280 --> 00:22:34,480 Speaker 2: Well, I think it's definitely. The chances of the forecasting 359 00:22:34,480 --> 00:22:38,360 Speaker 2: it are quite low, because, of course, you know, what 360 00:22:38,440 --> 00:22:41,000 Speaker 2: governments and central banks wants us to believe is that 361 00:22:41,520 --> 00:22:46,000 Speaker 2: inflation will always return to its two percent target or thereabouts. 362 00:22:46,040 --> 00:22:49,000 Speaker 2: But I think what we have discovered over the last 363 00:22:49,040 --> 00:22:52,280 Speaker 2: two or three years is that it is possible to 364 00:22:52,400 --> 00:22:56,920 Speaker 2: have much higher inflation than anyone had anticipated. And moreover, 365 00:22:57,000 --> 00:23:00,000 Speaker 2: once you've got it, it proves to be more difficult 366 00:23:00,080 --> 00:23:02,920 Speaker 2: to get rid of than I think people had originally assumed. 367 00:23:02,960 --> 00:23:06,679 Speaker 2: If you simply think of inflation as being a series 368 00:23:06,720 --> 00:23:10,440 Speaker 2: of random external shocks associated with let's say, the pandemic 369 00:23:10,520 --> 00:23:15,120 Speaker 2: and then Putin's invasion of Ukraine, then you might say, well, 370 00:23:15,160 --> 00:23:17,960 Speaker 2: what goes up must come back down again. But now 371 00:23:18,000 --> 00:23:20,959 Speaker 2: central banks, relatively in my view, are talking about so 372 00:23:21,080 --> 00:23:24,960 Speaker 2: called second round effects. Effectively, people domestically pushing for higher 373 00:23:24,960 --> 00:23:28,040 Speaker 2: prices or higher wages. And it certainly turns out that 374 00:23:28,400 --> 00:23:32,000 Speaker 2: inflation is rather more sticky than the party makers themselves 375 00:23:32,000 --> 00:23:34,840 Speaker 2: had anticipated. And I think what that does open up 376 00:23:34,920 --> 00:23:39,360 Speaker 2: is a possibility at least of inflation being persistently higher 377 00:23:40,760 --> 00:23:43,359 Speaker 2: than the party makers themselves are prepared to admit. So 378 00:23:44,160 --> 00:23:46,520 Speaker 2: maybe not a return to the nineteen seventies, but certainly 379 00:23:46,560 --> 00:23:50,240 Speaker 2: a sense that perhaps achieving a two percent inflation target 380 00:23:50,280 --> 00:23:53,040 Speaker 2: will be a lot more difficult in the future than 381 00:23:53,080 --> 00:23:54,880 Speaker 2: we've seen over the last few decades. 382 00:23:55,400 --> 00:23:58,240 Speaker 3: I mean, it used to be said that inflation was 383 00:23:58,320 --> 00:24:00,560 Speaker 3: kind of good for governments to have a lot of debt, 384 00:24:00,600 --> 00:24:03,200 Speaker 3: because you would talk about sort of inflating debt away. 385 00:24:04,000 --> 00:24:06,879 Speaker 3: How does that work? And is that the kind of 386 00:24:07,600 --> 00:24:11,200 Speaker 3: situation we might be facing now? Could governments be looking 387 00:24:11,200 --> 00:24:13,159 Speaker 3: at these big debts doots and thinking, oh, great, now 388 00:24:13,160 --> 00:24:14,520 Speaker 3: we're going to have a bit of inflation, it will 389 00:24:14,520 --> 00:24:14,920 Speaker 3: go away. 390 00:24:15,680 --> 00:24:17,720 Speaker 2: Well, it's worth stressing first of all, how much debt 391 00:24:17,720 --> 00:24:21,359 Speaker 2: has risen now. Economists typically look at this expressing the 392 00:24:21,440 --> 00:24:24,440 Speaker 2: level of government debt relative to the size of the economy, 393 00:24:25,560 --> 00:24:28,520 Speaker 2: and in peacetime, what typically happens is that that ratio 394 00:24:29,240 --> 00:24:33,080 Speaker 2: is relatively low, possibly falling, certainly not rising very quickly. 395 00:24:33,080 --> 00:24:36,400 Speaker 2: It tends to happen only during wartime. But what's been striking, 396 00:24:36,440 --> 00:24:39,600 Speaker 2: particularly since the global financial crisis, is that around lots 397 00:24:39,640 --> 00:24:43,480 Speaker 2: of different parts of the world these ratios have risen rapidly. 398 00:24:43,560 --> 00:24:46,080 Speaker 2: So your government debt has become a big issue in 399 00:24:46,119 --> 00:24:49,480 Speaker 2: the way that it wasn't through much of the post 400 00:24:49,560 --> 00:24:53,080 Speaker 2: war period. Now, generally speaking, the principle that's worth sticking 401 00:24:53,160 --> 00:24:56,119 Speaker 2: to you here is the idea that inflation tends to 402 00:24:56,160 --> 00:24:59,720 Speaker 2: be the debtor's friend and the creditors enemy. And the 403 00:24:59,720 --> 00:25:03,359 Speaker 2: reason for that is that if you borrow let's say 404 00:25:03,960 --> 00:25:06,800 Speaker 2: a dollar, and then you have lots of inflation, the 405 00:25:06,880 --> 00:25:09,480 Speaker 2: amount you have to pay back in so called real 406 00:25:09,600 --> 00:25:11,879 Speaker 2: terms a year or two years later is quite a 407 00:25:11,880 --> 00:25:15,800 Speaker 2: lot less because the dollar itself is devalued over that 408 00:25:15,840 --> 00:25:19,000 Speaker 2: period of time. So it is generally the case that 409 00:25:19,640 --> 00:25:23,680 Speaker 2: governments have the incentive to create inflation, and one way 410 00:25:23,680 --> 00:25:26,960 Speaker 2: they try to deal with that over recent decades is 411 00:25:27,000 --> 00:25:30,520 Speaker 2: to say, well, okay, we can't trust ourselves in this process, 412 00:25:30,800 --> 00:25:33,360 Speaker 2: so we think we should make central banks independent so 413 00:25:33,400 --> 00:25:36,760 Speaker 2: that they are in control of the inflation process and 414 00:25:36,920 --> 00:25:40,000 Speaker 2: we can't simply, if you like, print money to bail 415 00:25:40,040 --> 00:25:43,440 Speaker 2: ourselves out of an excessive debt problem. Of course, the 416 00:25:43,480 --> 00:25:48,040 Speaker 2: difficulty today is that the relationship between monetary policy controlled 417 00:25:48,040 --> 00:25:50,479 Speaker 2: by the central bank and physical policy controlled by the government, 418 00:25:50,800 --> 00:25:55,080 Speaker 2: that relationship has become more blurred, partly through the innovations 419 00:25:55,080 --> 00:25:57,240 Speaker 2: associated with so called quantitative easing. 420 00:25:57,960 --> 00:26:00,439 Speaker 3: So if it used to be the case that you 421 00:26:00,480 --> 00:26:02,639 Speaker 3: would have a big baud of inflation and it might 422 00:26:02,680 --> 00:26:06,240 Speaker 3: inflate debt away in theory, it ought to have been 423 00:26:06,320 --> 00:26:08,720 Speaker 3: harder to have that happen this time around, because you 424 00:26:08,800 --> 00:26:13,360 Speaker 3: had these central, independent central banks dedicated to getting inflation 425 00:26:13,480 --> 00:26:16,080 Speaker 3: back to target as soon as possible, and we have 426 00:26:16,200 --> 00:26:20,119 Speaker 3: indeed seen interest rates go up in response to that. 427 00:26:20,720 --> 00:26:23,680 Speaker 3: In a couple of years time, if the FARED and 428 00:26:23,840 --> 00:26:27,400 Speaker 3: other central banks have taken quite sort of significant measures 429 00:26:28,119 --> 00:26:31,880 Speaker 3: to confront inflation and kept interest rates at quite high 430 00:26:32,000 --> 00:26:35,680 Speaker 3: levels relative to the past, where does that leave governments? 431 00:26:35,720 --> 00:26:38,879 Speaker 3: Because they're having to suddenly pay quite a lot of 432 00:26:38,960 --> 00:26:42,320 Speaker 3: higher debt interest. Even if the debt stocks are you know, 433 00:26:42,359 --> 00:26:45,000 Speaker 3: the old stocks are being helped by higher inflation, they're 434 00:26:45,000 --> 00:26:47,920 Speaker 3: also seeing their interest expending sore. 435 00:26:49,440 --> 00:26:53,840 Speaker 2: Yeah, And the simple answer is. It partly depends on 436 00:26:55,000 --> 00:26:59,040 Speaker 2: the degree to which inflation has risen compared the degree 437 00:26:59,080 --> 00:27:02,399 Speaker 2: to which strates have risen. As a simple rule of thumb, 438 00:27:02,920 --> 00:27:06,320 Speaker 2: if inflation has risen by more than interest rates have risen, 439 00:27:06,480 --> 00:27:10,280 Speaker 2: that's normally quite good news for a government debt situation. 440 00:27:10,640 --> 00:27:13,480 Speaker 2: On the other hand, if interest rates have risen more 441 00:27:14,200 --> 00:27:16,639 Speaker 2: than the rate of inflation, then that's not such good news. 442 00:27:16,680 --> 00:27:19,360 Speaker 2: It's actually quite bad news for the government's debt situation. 443 00:27:19,920 --> 00:27:23,520 Speaker 2: That might be what's required to bring inflation down, But 444 00:27:23,600 --> 00:27:25,600 Speaker 2: at the same time, this is not friendly from the 445 00:27:25,640 --> 00:27:31,280 Speaker 2: perspective of the government's finances because effectively, the higher interest 446 00:27:31,359 --> 00:27:36,080 Speaker 2: rate is increasing debt service costs much more than the 447 00:27:36,080 --> 00:27:40,080 Speaker 2: inflation rate is eroding the real stock of debt. So overall, 448 00:27:40,560 --> 00:27:42,960 Speaker 2: if you've got interest rates higher than the inflation rate, 449 00:27:43,000 --> 00:27:47,200 Speaker 2: that's not such a welcome development in terms of debt finances. 450 00:27:47,400 --> 00:27:50,679 Speaker 2: And under those circumstances, a government typically either has to 451 00:27:50,720 --> 00:27:54,480 Speaker 2: sort of ask its creditors to lend it more and 452 00:27:54,520 --> 00:27:56,800 Speaker 2: more money at higher and higher interest rates, which because 453 00:27:56,920 --> 00:27:59,280 Speaker 2: is a bit of a vicious circle, or it has 454 00:27:59,320 --> 00:28:02,639 Speaker 2: to think about measures to try to find ways of 455 00:28:02,760 --> 00:28:05,960 Speaker 2: paying for these higher dead interest bills, and of course 456 00:28:06,000 --> 00:28:10,840 Speaker 2: that points to either significantly higher levels of taxes or 457 00:28:10,880 --> 00:28:13,919 Speaker 2: possibly a dosa austerity, none neither of which is often 458 00:28:14,600 --> 00:28:16,280 Speaker 2: is ever in fact particularly popular. 459 00:28:17,760 --> 00:28:19,480 Speaker 3: And you see it in I mean, I guess when 460 00:28:19,480 --> 00:28:23,040 Speaker 3: you look around, particularly in Europe countries like Italy. Well, 461 00:28:23,040 --> 00:28:25,880 Speaker 3: there aren't very many countries like Italy, but Italy primarily 462 00:28:26,160 --> 00:28:28,280 Speaker 3: has this very large stop of debt, which it's been 463 00:28:28,320 --> 00:28:32,400 Speaker 3: able to handle over the years, in part by being 464 00:28:32,680 --> 00:28:36,520 Speaker 3: actually reasonably tight nosed on its public finances, having built 465 00:28:36,600 --> 00:28:39,400 Speaker 3: up this enormous stock of debt, but also by having 466 00:28:40,160 --> 00:28:43,560 Speaker 3: falling borrowing costs. You know now that that's going into 467 00:28:43,600 --> 00:28:47,720 Speaker 3: reverse interest rates or even in Europe going up. You 468 00:28:47,880 --> 00:28:51,880 Speaker 3: have you know, we're all and certainly Bloomberg's economists to 469 00:28:51,960 --> 00:28:54,320 Speaker 3: sort of have a sense of what the cost of 470 00:28:54,320 --> 00:28:57,480 Speaker 3: borrowing for Italy has to go above for Italy's debt 471 00:28:57,560 --> 00:29:01,000 Speaker 3: to become completely unsustainable. We haven't been far off that 472 00:29:02,120 --> 00:29:04,520 Speaker 3: a few times in the last year or so, so 473 00:29:05,280 --> 00:29:08,560 Speaker 3: I guess the question a question for you, Stephen, is 474 00:29:09,640 --> 00:29:11,760 Speaker 3: when does this start to actually change the behavior of 475 00:29:11,760 --> 00:29:14,920 Speaker 3: a central bank. I mean, we have this independent central banks, 476 00:29:15,560 --> 00:29:18,920 Speaker 3: but if a central bank can see that what it's doing, 477 00:29:19,000 --> 00:29:22,280 Speaker 3: is about to bankrupt a government you know that is 478 00:29:22,480 --> 00:29:26,680 Speaker 3: surely going to stay their hand a little bit, isn't it, hope? 479 00:29:26,800 --> 00:29:31,120 Speaker 2: You know? So, I mean this does reveal, I think 480 00:29:31,160 --> 00:29:34,440 Speaker 2: the limits of central bank independence that central banks in 481 00:29:34,480 --> 00:29:37,400 Speaker 2: this cycle, although they have raised short term interest rates 482 00:29:37,400 --> 00:29:40,400 Speaker 2: are a long way, they haven't actually raised them as 483 00:29:40,440 --> 00:29:43,960 Speaker 2: far as they might have done, given the extent which 484 00:29:43,960 --> 00:29:48,000 Speaker 2: inflation itself has picked up. So you know, in one sense, 485 00:29:49,120 --> 00:29:51,800 Speaker 2: some governments are still doing pretty well in current circumstances 486 00:29:51,800 --> 00:29:54,840 Speaker 2: because the rise in inflation be more than the rise 487 00:29:54,840 --> 00:29:56,720 Speaker 2: in interest rates. And actually Italy is a very good 488 00:29:56,720 --> 00:29:59,360 Speaker 2: example of this that over the last year or two 489 00:30:00,040 --> 00:30:04,440 Speaker 2: the ratio of Italian government debt to its economy has 490 00:30:04,520 --> 00:30:07,880 Speaker 2: fallen because inflation has been so much higher than interest rates. 491 00:30:07,880 --> 00:30:11,040 Speaker 2: But as you quite rightly say, Sephanie, in a circumstance 492 00:30:11,080 --> 00:30:14,360 Speaker 2: whereby let's imagine the central banks finally got on top 493 00:30:14,360 --> 00:30:17,120 Speaker 2: of the inflation problem, in those circumstances, if you have 494 00:30:17,240 --> 00:30:21,280 Speaker 2: interest rates still high and inflation coming in lower, that 495 00:30:21,360 --> 00:30:26,120 Speaker 2: makes the fiscal arithmetic look suddenly quite scary. And then 496 00:30:26,160 --> 00:30:29,600 Speaker 2: I think you start to have questions about whether a 497 00:30:29,640 --> 00:30:32,720 Speaker 2: central bank can easily stick to this policy of type 498 00:30:32,800 --> 00:30:36,760 Speaker 2: munting conditions if, as you say, it leads to huge 499 00:30:36,760 --> 00:30:41,680 Speaker 2: problems with adding up the fiscal numbers over the medium term, so. 500 00:30:41,720 --> 00:30:44,920 Speaker 3: That debt sort of hanging over the heads of central bankers. 501 00:30:44,960 --> 00:30:47,480 Speaker 3: I guess that would be your reason number fifty two 502 00:30:47,520 --> 00:30:50,440 Speaker 3: why you expect inflation to be higher in the next 503 00:30:50,440 --> 00:30:52,920 Speaker 3: few years than it has been significantly higher. And of course, 504 00:30:52,920 --> 00:30:54,400 Speaker 3: if you want to hear more reasons, you ever want 505 00:30:54,480 --> 00:30:57,240 Speaker 3: to go and read your book. But if you were 506 00:30:57,280 --> 00:31:01,200 Speaker 3: going to guess now, is the next three or four 507 00:31:01,280 --> 00:31:03,480 Speaker 3: years going to be a period where we start talking 508 00:31:03,600 --> 00:31:08,080 Speaker 3: seriously about public debt problems and government debt crisis, what 509 00:31:08,160 --> 00:31:09,640 Speaker 3: would you say? Or do you think it's Do you 510 00:31:09,680 --> 00:31:11,239 Speaker 3: think we're going to have other problems to deal with? 511 00:31:11,520 --> 00:31:11,560 Speaker 4: No? 512 00:31:11,680 --> 00:31:13,800 Speaker 2: I think the two might actually end up being conjoined 513 00:31:13,800 --> 00:31:16,800 Speaker 2: in the sense because the obvious debate I have in 514 00:31:16,840 --> 00:31:20,760 Speaker 2: these circumstances is that if the public debt numbers don't 515 00:31:20,800 --> 00:31:24,320 Speaker 2: look good, then it's easy to imagine there being a debate, 516 00:31:24,800 --> 00:31:27,280 Speaker 2: possibly led by governments rather than central banks. But the 517 00:31:27,280 --> 00:31:30,440 Speaker 2: debate that says maybe just maybe we should raise the 518 00:31:30,440 --> 00:31:33,640 Speaker 2: inflation target. Maybe two percent too low, So then you 519 00:31:33,680 --> 00:31:36,160 Speaker 2: start talking about three percent or four percent or something 520 00:31:36,200 --> 00:31:39,640 Speaker 2: like that, and before you know it, you've done exactly 521 00:31:39,680 --> 00:31:42,160 Speaker 2: what center banks are not supposed to do. You've you've 522 00:31:42,240 --> 00:31:46,360 Speaker 2: raised the inflation target. You've raised the inflation objective in 523 00:31:46,400 --> 00:31:50,560 Speaker 2: a sort of backhand way of making the fiscal numbers 524 00:31:50,600 --> 00:31:54,520 Speaker 2: add up more easily. And your history is replete with 525 00:31:54,640 --> 00:31:59,120 Speaker 2: examples of this kind that eventually, when there's no real 526 00:31:59,160 --> 00:32:01,640 Speaker 2: fiscal space, you just can't raise taxes or cut public 527 00:32:01,680 --> 00:32:04,280 Speaker 2: spending very easy. It's just particularly impossible to do that stuff. 528 00:32:04,960 --> 00:32:08,480 Speaker 2: Inflation enters through the back door. So I think it 529 00:32:08,560 --> 00:32:12,280 Speaker 2: is possible that we'll have a debate which links the 530 00:32:12,280 --> 00:32:16,120 Speaker 2: fiscal situation, the debt situation, with the inflation situation, in 531 00:32:16,160 --> 00:32:20,080 Speaker 2: the sense of people beginning to recognize that actually inflation 532 00:32:20,240 --> 00:32:23,560 Speaker 2: is a way out of some of these fiscal difficulties, 533 00:32:23,600 --> 00:32:26,280 Speaker 2: even if inflation is profoundly damaging for the rest of 534 00:32:26,280 --> 00:32:28,240 Speaker 2: the economy. 535 00:32:28,360 --> 00:32:33,080 Speaker 3: And then what happens, well, then you have to write 536 00:32:33,080 --> 00:32:33,680 Speaker 3: another book. 537 00:32:33,840 --> 00:32:35,920 Speaker 2: Then we have to write another book. Yeah. I think 538 00:32:35,920 --> 00:32:43,480 Speaker 2: that in circumstances where inflation targets are being raised and 539 00:32:43,840 --> 00:32:47,040 Speaker 2: governments are clearly back in the driving seat, then we're 540 00:32:47,080 --> 00:32:49,640 Speaker 2: back to the sorts of discussions that we sort of 541 00:32:49,720 --> 00:32:51,680 Speaker 2: forgotten about over the last twenty or thirty years. We're 542 00:32:51,680 --> 00:32:54,120 Speaker 2: back to discussions about what inflation does to the economy. 543 00:32:54,720 --> 00:32:57,840 Speaker 2: And my central point really is that inflation is a 544 00:32:57,880 --> 00:33:03,640 Speaker 2: profoundly undemocratic mechanism that distributes or redistributes income away from 545 00:33:03,680 --> 00:33:08,040 Speaker 2: creditors towards debtors. It redistributes income towards those who've got 546 00:33:08,960 --> 00:33:11,600 Speaker 2: pricing power or wage power and away from those who 547 00:33:11,640 --> 00:33:14,920 Speaker 2: do not have those things. And it also messes up 548 00:33:14,920 --> 00:33:19,320 Speaker 2: your sort of price mechanism. We all rely on prices 549 00:33:19,360 --> 00:33:22,480 Speaker 2: to to sort of gauge how we should be responding 550 00:33:22,480 --> 00:33:26,680 Speaker 2: to economic shortages and economic accesses and so on. And 551 00:33:26,760 --> 00:33:29,520 Speaker 2: if the price mechanism itself is distorted through inflation, we 552 00:33:29,560 --> 00:33:31,800 Speaker 2: make the wrong decisions. And one consequence of that is 553 00:33:31,840 --> 00:33:34,880 Speaker 2: that you end up with lower productivity growth, lower levels 554 00:33:34,880 --> 00:33:39,280 Speaker 2: of economic activity, and people start talking about stagflation of 555 00:33:39,320 --> 00:33:41,000 Speaker 2: a kind that we say last saw back in the 556 00:33:41,080 --> 00:33:41,880 Speaker 2: nineteen seventies. 557 00:33:43,160 --> 00:33:45,120 Speaker 3: Well, and as Cain said, although he claimed he was 558 00:33:45,200 --> 00:33:48,960 Speaker 3: quoting lenin, there's no sure way to undermine the capitalist 559 00:33:49,040 --> 00:33:52,320 Speaker 3: system than to debaut the currency. Thank you very much, 560 00:33:52,320 --> 00:34:00,400 Speaker 3: Stephen King, Thank you so that's it for this episode 561 00:34:00,400 --> 00:34:02,960 Speaker 3: of Stephanomics. We'll be back next week. In the meantime, 562 00:34:02,960 --> 00:34:05,640 Speaker 3: you can get a lot more economic insight and news 563 00:34:05,760 --> 00:34:09,960 Speaker 3: from the Bloomberg Terminal website or app. This episode was 564 00:34:09,960 --> 00:34:13,719 Speaker 3: produced by Mangnus, Henrickson, Yang Yang and Summer Sadi, with 565 00:34:13,800 --> 00:34:17,319 Speaker 3: special thanks to Josh Wingrove, Chris Anstey, and Stephen King. 566 00:34:18,040 --> 00:34:21,160 Speaker 3: The executive producer of Stephanomics is Molly Smith and the 567 00:34:21,200 --> 00:34:23,680 Speaker 3: head of Bloomberg Podcast is Sage Bowman.