Speaker 1: The cash balance is going to be coming down, you know,
Speaker 1: really close to, if not going through the Treasury's sort
Speaker 1: of thirty billion dollar minimum that it has suggested in
Speaker 1: the past. Danger zone. We're going right into the danger
Speaker 1: zone here.
Speaker 2: Default on our debt would produce an economic and financial catastrophe.
Speaker 3: With a default something most everyone agrees would be a catastrophe.
Speaker 1: This is beyond imagination.
Speaker 3: Hello, Stephonomics, here the podcast that brings you the global
Speaker 3: economy this week. There's no getting away from it. We're
Speaker 3: talking about debt, the trillions of dollars of debt sitting
Speaker 3: on government balance sheets around the world. In the past
Speaker 3: twenty years or so, America's government debt is nearly doubled
Speaker 3: as a share of its economy, and we've seen a
Speaker 3: similar explosion in the UK and other places. But we've
Speaker 3: not had a debt crisis. We've not even talked about
Speaker 3: it very much.
Speaker 2: Now.
Speaker 3: That's partly because policymakers had other things to worry about,
Speaker 3: like the global financial crisis and COVID. It's also because
Speaker 3: for nearly all of that time, the cost of borrowing
Speaker 3: and servicing all of that debt was going down. Like
Speaker 3: households who mortgaged, remortgaged, remortgaged again. The debt was growing,
Speaker 3: but thanks to falling interest rates, the payments were coming down. Now,
Speaker 3: as we know, interest rates are going up. Whereas it
Speaker 3: was practically free for many governments to borrow only a
Speaker 3: couple of years ago, now the average rate for advanced
Speaker 3: economies is more like three percent. It doesn't sound like much,
Speaker 3: but from zero to three is a pretty big jump.
Speaker 3: So it's reasonable to wonder whether we need to start
Speaker 3: worrying about all of that government debt again. Indeed, whether
Speaker 3: the presence of that debt is going to make central
Speaker 3: banks more nervous of keeping interest rate costs as high
Speaker 3: as they need to be to defeat inflation. The economist
Speaker 3: Stephen King is worried about that, and I'm going to
Speaker 3: have that very reasonable debate with him in a little while.
Speaker 3: But before that, we have to talk about the unreasonable
Speaker 3: debt debate raging in Washington, for whether the federal government
Speaker 3: should simply be able to borrow more to pay its bills,
Speaker 3: also known as raising the debt ceiling. I'm delighted to
Speaker 3: get the latest and some of the broader implications from
Speaker 3: two of Bloomberg's stars in the US White House, reported
Speaker 3: Josh Wingrove and our senior editor Chris Anstey, who's been
Speaker 3: overseering and steering a lot of our coverage of this
Speaker 3: never ending or we hope eventually ending debt ceiling saga. Josh,
Speaker 3: we're obviously talking in the middle of the day on Tuesday.
Speaker 3: There's always a possibility that peace will break out before
Speaker 3: this episode reaches people's ears. But sort of briefly, where
Speaker 3: would you say we were in this saga over raising
Speaker 3: the US debt limit.
Speaker 4: Well, it's tough to say on an hour by power basis,
Speaker 4: but right now, the mood music is good. McCarthy and
Speaker 4: Biden met Monday, and of course they've given up the
Speaker 4: sort of clown car approach where they were piling a
Speaker 4: bunch of people into the room, and now they've sort
Speaker 4: of narrowed down to Biden and McCarthy to try to
Speaker 4: hash out a deal that's a similar model to what
Speaker 4: they did under the Trump administration. And so the question
Speaker 4: is going to get something that McCarthy can sell to
Speaker 4: his people in a way that won't jeopardize not only
Speaker 4: the potential deal itself, but whether he remains a speaker
Speaker 4: or not. And that's the real ax factor here, is
Speaker 4: that McCarthy's footing in his own party is not all
Speaker 4: that strong, and that doesn't give him a lot of
Speaker 4: wiggle rooms. So the brass tax of it are right. Now,
Speaker 4: both parties agree that the US deficit is too big
Speaker 4: and that the debt is on a track to push
Speaker 4: something near fifty trillion total in the next ten years
Speaker 4: or so, but they disagree completely on how to address that. Democrats,
Speaker 4: of course, think that revenues need to catch up.
Speaker 3: When you say revenue tax increases.
Speaker 4: Taxes, yeah, Democrats want to talk taxes on corporations and
Speaker 4: high earners and the wealthy. Republicans want to talk spending cuts,
Speaker 4: but generally not on defense, which of course is a
Speaker 4: huge line item. So if you try to make big
Speaker 4: cuts without touching defense, you're cutting deep into other things.
Speaker 4: So that's the standoff ring. Now, they both think the
Speaker 4: depthsit is too big, but they both have completely opposite
Speaker 4: ways of addressing.
Speaker 3: Almost never a government say borrowing is too low, but occasionally,
Speaker 3: very occasionally. By now, probably half the world, anyone who's
Speaker 3: kind of politically interested has probably had a lesson in
Speaker 3: the US debt limit. But just for those who haven't Chris,
Speaker 3: and he just remind us why this somewhat odd, So
Speaker 3: many would say completely stupid debt ceiling debate exists at all,
Speaker 3: and does any other country manage its government? Is total
Speaker 3: government borrowing in quite the same way.
Speaker 1: So the US debt limit history actually goes back to
Speaker 1: World War One, and in the event, it was actually
Speaker 1: designed to make it easier for the Treasury to issue debt.
Speaker 1: It used to be that every time the Treasury wanted
Speaker 1: to sell a bunch of bonds, it needed congressional approval.
Speaker 1: So in nineteen seventeen they came up with, oh, let's
Speaker 1: set an overall limit and then the Treasury can sell
Speaker 1: whatever it likes within that limit. It's only in recent
Speaker 1: decades that it's become a bitter partisan battle every time,
Speaker 1: or almost every time it comes up. Denmark also has
Speaker 1: a debt limit that was introduced in the early nineteen nineties,
Speaker 1: but the Danish Parliament essentially sets the limit so high
Speaker 1: that it doesn't really impose kind of any binding any
Speaker 1: binding parameters. And then Australia, ironically it was a left
Speaker 1: of center party that introduced a debt limit after the
Speaker 1: global financial crisis. They thought it would help them develop
Speaker 1: a reputation for fiscal probity after stepping up spending during
Speaker 1: the financial crisis, and then it was a right of
Speaker 1: center government that got rid of it in twenty thirteen.
Speaker 1: So we're basically the only country that has this bitter
Speaker 1: partisan showdown most times it comes round to raising the limit.
Speaker 3: Well, thank you, Chris for that historical perspective and the
Speaker 3: amount of the energy that you've expended getting all that information.
Speaker 3: I don't think it will be wasted year's time. We'll
Speaker 3: be asking you exactly the same questions when it comes
Speaker 3: around again. But I mean, like any negotiation, I guess
Speaker 3: it does obviously come down to the levels of mutual
Speaker 3: trust and respect. And we know that there's issues certainly
Speaker 3: between the Republican side and the Democrat side, But as
Speaker 3: you suggested, Josh's also within the Republican caucus in Congress,
Speaker 3: there's some question marks about the level of trust. And
Speaker 3: we saw that back at the start of the year
Speaker 3: when it took how many attempts was it to elect
Speaker 3: the leader in the first place, the speaker in the
Speaker 3: first place, So that already suggested that McCarthy didn't have
Speaker 3: a lot of support to fall back on. Would you say,
Speaker 3: you know, having watched him, having watched this play out
Speaker 3: over the last few months, Josh, do you think his
Speaker 3: position is weaker or stronger now than it was when
Speaker 3: he was finally given that role of speaker.
Speaker 4: I think it's stronger because he passed a bill, and
Speaker 4: that was a question that really was up in the air.
Speaker 4: Biden said, no talks until you come up with the budget. Now,
Speaker 4: McCarthy came up with a bill. It's not really a budget,
Speaker 4: but it's close enough. And they thought, look, if this
Speaker 4: guy can't even get his act together to do a
Speaker 4: budget or a bill, then he's in a weak position.
Speaker 4: But he got one passed and that sort of strengthened
Speaker 4: his footing to come into these talks. That bill includes caps,
Speaker 4: it raises the dead ceiling. It also has no chance
Speaker 4: of passing the.
Speaker 3: Senate because you need the Democrats to come along.
Speaker 4: That's right, that's right, that's right. So right now McCarthy
Speaker 4: has a bill that is completely dead on arrival in
Speaker 4: the Senate. Biden has a budget that is completely dead
Speaker 4: on arrival in the House, and the question is how
Speaker 4: they chop that together into some kind of deal. As
Speaker 4: the clock takes down here.
Speaker 3: I mean, sticking with you, Joorsh for a minute. I mean,
Speaker 3: if you were just thinking, how is this likely to
Speaker 3: play out a few months ago, knowing what you knew
Speaker 3: about McCarthy's position, but also the likely position of President
Speaker 3: Biden in the administration, is it sort of shaping up
Speaker 3: broadly as you would have expected.
Speaker 4: So with the caveat that no one knew when the
Speaker 4: so called X state is, and for the unfamiliar, lucky you,
Speaker 4: the X state is. Of course, that's the prediction of
Speaker 4: when Treasury's extraordinary measures will run out. In other words,
Speaker 4: the bank account runs dry and default is now imminent.
Speaker 4: And the prediction had varied. Frankly, a lot of people
Speaker 4: thought we might have more time until July or even August,
Speaker 4: and that's what kind of left this on the back burner.
Speaker 4: But tax revenues have been such that the deadline looks
Speaker 4: a lot sooner than we think. And now, of course
Speaker 4: Treasury Secretary Yellen morning as early as June first, maybe
Speaker 4: in the days or a very small number of weeks
Speaker 4: after that. So yeah, it's been playing out, but it's
Speaker 4: playing out in a way that they thought that this
Speaker 4: plane had a lot more runway than it has, and
Speaker 4: so now they're sort of scrambling.
Speaker 3: Yeah, and actually, I mean you mentioned previously, you know
Speaker 3: the importance of having a deadline, but also we talked
Speaker 3: about trust. How urgent you think this is to fix
Speaker 3: depends on whether you believe the Department of Treasuries estimates
Speaker 3: of when the money is going to run out. Janet Yellen,
Speaker 3: the Treasure sector has said early June, which was earlier
Speaker 3: than many expected. Christ do Republicans believe her? Do you
Speaker 3: believe her when she says that?
Speaker 1: I think one thing that gives some credence to Yellen's
Speaker 1: timeline is that independent analysts on Wall Street who pour
Speaker 1: over the daily cash balance figures from the Treasury out
Speaker 1: every afternoon, do say that the cash balance is going
Speaker 1: to be coming down really close to, if not going
Speaker 1: through the Treasury's sort of thirty billion dollar minimum that
Speaker 1: it has suggested in the past in that early June period.
Speaker 1: So we see, for example, Alec Phillips at Goldman SACKX,
Speaker 1: Lou crandle Att uh writes an eye Cap Morgan Stanley's
Speaker 1: economists uh are all saying, uh, yeah, early June is
Speaker 1: really a danger. Well, some of them have called you
Speaker 1: know the old uh top gun term the danger zone.
Speaker 1: We're going right into the danger zone here, uh, And uh,
Speaker 1: you don't want this cash balance so low that you
Speaker 1: know there is an unexpectedly uh poor day for revenue inflows,
Speaker 1: an unexpectedly big you know, amount of obligations coming due,
Speaker 1: and you go negative, and then you can't uh make
Speaker 1: all of your uh all of your scheduled payments. Do
Speaker 1: the Republicans believe Yellen? I think there is a swath
Speaker 1: of them that don't, uh, that think that this is
Speaker 1: in fact, don't even think that going past X date
Speaker 1: is particularly damaging. Uh think that the the Treasury, at
Speaker 1: the end of the day, they could just delay payments
Speaker 1: selectively on a few accounts and it wouldn't be a
Speaker 1: big deal. So that's a dynamic that has made that
Speaker 1: very slim majority that McCarthy has in the House so
Speaker 1: dangerous this time around.
Speaker 3: Well, our US chief economist Stana Wong has estimated the
Speaker 3: impact on the economy of a prolonged standoff where the
Speaker 3: federal government actually had to live within its means suddenly,
Speaker 3: I mean, and have big cuts in spending, and that
Speaker 3: would cause a big recession. But we know there are
Speaker 3: quite a few more steps they can take on the
Speaker 3: way to those kind of measures. Obviously they don't want
Speaker 3: to talk about the sort of stockgap tactics that they
Speaker 3: might employ. But Chris, what kind of things do you
Speaker 3: think would come first? I mean, would you think they'd
Speaker 3: be rather than actually miss a debt payment, which would
Speaker 3: be symbolically important for global markets, are they more likely
Speaker 3: to stop I don't know, salaries for federal workers. What's
Speaker 3: your sense?
Speaker 1: So the universal assumption on Wall Street, among the ratings agencies,
Speaker 1: investors probably more broadly, is that the Treasury would prioritize
Speaker 1: payments on Treasury securities that it would not end up
Speaker 1: defaulting on bonds. And you know, it's another kind of
Speaker 1: key category to think about is social Security recipients. There
Speaker 1: are sixty million odd beneficiaries in the Social Security program
Speaker 1: that get their checks every month. Really hard to see
Speaker 1: those stopping now, as you suggested, Stephanie, Treasury sector Yellen
Speaker 1: has been you know, adamant that you know there that
Speaker 1: everything is at risk, uh, you know, trying to uh,
Speaker 1: you know, if you just think of game theory, her
Speaker 1: interest is, uh is in trying to uh showcase how
Speaker 1: disastrous going past X date is in order to put
Speaker 1: pressure on Congress to actually raise or suspend the limit.
Speaker 2: Uh.
Speaker 1: But at the end of the day, I think the
Speaker 1: expectation is uh that government debt would be uh, would
Speaker 1: continue to be paid, Social Security would continue to be
Speaker 1: paid out uh, and it would be other uh you
Speaker 1: know categories uh, federal contractors. You know, if you think
Speaker 1: the Lockheed Martins and the Boeings, uh, they're probably not
Speaker 1: going to get paid on time. Uh and uh and
Speaker 1: a swase probably of of uh, you know, government salaried workers.
Speaker 3: And of course, I mean in Washington, Josh, people, don't
Speaker 3: you know, we don't focus on these fripperies like you know,
Speaker 3: global financial markets, in the US position as the most
Speaker 3: important creditor in the world. What we're really concerned with
Speaker 3: is who wins and who loses. Politically from this, clearly
Speaker 3: both sides have continued to battle on the apparent belief
Speaker 3: that it supports their interest. I mean, maybe the President
Speaker 3: thinks it makes the Republicans look bad, but equally Republicans
Speaker 3: in the who are most hawkish in Congress, appear to
Speaker 3: think at least it plays well to their base to
Speaker 3: be showing that they were concerned about excess government spending.
Speaker 3: So how does this play out politically?
Speaker 4: They're both playing a bit of a long game, which
Speaker 4: is what is raising the stakes here. For Biden, he
Speaker 4: knows and his people know that they're eighteen House Republicans
Speaker 4: who have districts that Biden himself won in twenty twenty.
Speaker 4: Democrats think they can flip many of those. You might
Speaker 4: have heard of someone named George Santos for instance, you know,
Speaker 4: And so they are sort of have an eye on
Speaker 4: this that they're not sure how long McCarthy is going
Speaker 4: to be speaker beyond this Congress, and so that is
Speaker 4: sort of like they would welcome the contrast and have
Speaker 4: already gotten it in fact, because they want to target
Speaker 4: those swing Republicans and say, look, these folks are playing
Speaker 4: with fire on the debt limit. They are grabbing the
Speaker 4: steering wheel and you know, pulling us towards the cliff,
Speaker 4: and that's just you know, something they're keen to run against.
Speaker 4: For McCarthy, of course, he needs to show that he
Speaker 4: has exacted sort of cuts, and he needs to show
Speaker 4: that he basically got Joe Biden to blink, and to
Speaker 4: a certain extent he already has. Remember Biden, for a
Speaker 4: long time said he wouldn't negotiate over the debt limit,
Speaker 4: and they're still sort of maintaining that. But Biden is
Speaker 4: of course implicitly negotiating on the debt limit, if not
Speaker 4: explicitly negotiating on it. So right now I think they're
Speaker 4: both trying to shore up power with an eye to
Speaker 4: the next Congress.
Speaker 3: Obviously, the voters in particular districts and is one thing.
Speaker 3: But with the broader public, what do they think about this?
Speaker 3: Do they think it's stupid or do they actually do
Speaker 3: we have a sense Chris or Josh about whether they
Speaker 3: care about the level of US public debt, whether they
Speaker 3: care that this is a matter for debate.
Speaker 1: So a recent poll, an Associated Press NRC poll out
Speaker 1: on Friday, said that about two thirds of US adults
Speaker 1: were highly concerned about the potential if the debt limit,
Speaker 1: the potential damage if the debt limit was not increased,
Speaker 1: and at about six and ten wanted any increase in the
Speaker 1: debt limit to be accompanied by reducing the budget deficit.
Speaker 1: So kind of broadly aligned with what's under negotiation now.
Speaker 1: But the other thing, you know, as you know, Stephanie,
Speaker 1: we have a motto at Bloomberg News show Don't Tell.
Speaker 1: And if you look back at history, in nineteen ninety five,
Speaker 1: there was a bitter battle between then President Clinton and
Speaker 1: a Republican Congress over federal spending that resulted in a
Speaker 1: government shutdown, and the following year, in ninety six, Clinton
Speaker 1: was re elected back practically Waltz to reelection. The most
Speaker 1: damaging dat limit showdown that we've had up to now
Speaker 1: was twenty eleven, and we had again a Democratic president,
Speaker 1: a Republican and a Republican congressional majority to deal with.
Speaker 1: And Obama again, you know, was re elected in twenty twelve.
Speaker 1: So history suggests that Republicans have not used these fiscal
Speaker 1: battles to good effect at the ballot box. And last year,
Speaker 1: you know, looking at the mid term elections, the Republican
Speaker 1: message was that Biden had blown out government spending, that's
Speaker 1: what caused the inflation crisis. He had a disastrous record
Speaker 1: of you know, damaging middle class purchasing power. And look
Speaker 1: what happened. The Democrats did historically extremely well at the midterms.
Speaker 1: So history, even recent history, suggests that at the end
Speaker 1: of the day, this will not be a winning a
Speaker 1: winning argument for the GOP next year.
Speaker 4: I would add one thing to that, and that is
Speaker 4: that all that is absent a situation where it default happens.
Speaker 4: And I think Joe Biden thinks that Republicans are being reckless.
Speaker 4: He thinks that it's ludicrous to use the debt seeming
Speaker 4: as a bargaining chip. He thinks it's almost offensive that
Speaker 4: Republicans are willing to proverbially shoot the hostage here with
Speaker 4: respect to the dead limit and actually threaten a default.
Speaker 4: He thinks all this is silly, But he also knows
Speaker 4: that the buck stops with the president and that if
Speaker 4: there were a default, and if there were an ensuing recession,
Speaker 4: and if everyone's borrowing costs ticked up, he'd wear it.
Speaker 4: And so that's part of the background for him, and
Speaker 4: that probably explains why he has come off this sort
Speaker 4: of divide that he was trying to draw between Ah,
Speaker 4: we're not negotiating on the debt limit, and it's like
Speaker 4: they kind of are. They really are, of course negotiating
Speaker 4: on the debt limit, because that is the speaker's condition
Speaker 4: for these talks.
Speaker 3: Very wise words from Josh, and it makes me think
Speaker 3: that this is one episode we'd quite like to be outdated.
Speaker 3: Quite quickly and have a resolution. Josh Wing Grow Chris Anstey,
Speaker 3: thank you so much.
Speaker 1: Thank you, thank you.
Speaker 3: Now I want to step back from all that chatter
Speaker 3: to ask whether some of those arguing against raising the
Speaker 3: debt ceiling might have a point, not about threatening a
Speaker 3: US default that's really stupid, but in the suggestion that
Speaker 3: government debt has got too high. Public debt levels have
Speaker 3: risen enormously in the past few decades in most developed economies,
Speaker 3: but as I said at the start, we didn't fuss
Speaker 3: about it because the interest rate was falling. In fact,
Speaker 3: the average cost of servicing government debt has fallen for
Speaker 3: most of the twenty first century in advanced economies, even
Speaker 3: as their debt stocks have nearly doubled. But that's not
Speaker 3: the case anymore. So if interest rates stay at these
Speaker 3: higher rates, we could be in trouble. But that, of
Speaker 3: course is a question that's very hotly debated, especially among economists,
Speaker 3: so to talk through whether we're now in a higher rate,
Speaker 3: higher inflation environment. I'm delighted to welcome back to Stephanomics
Speaker 3: Stephen King, former chief economist for HSBC, now it's advisor
Speaker 3: and author of many books, including most recently we need
Speaker 3: to talk about inflation. Stephen, welcome back. I guess the
Speaker 3: first obvious question is, and I know it's the subject
Speaker 3: of your book, but briefly, are we looking at significantly
Speaker 3: higher inflation for quite a long period to come. Is
Speaker 3: that something that government's in particular ought to be sort
Speaker 3: of putting into their forecast.
Speaker 2: Well, I think it's definitely. The chances of the forecasting
Speaker 2: it are quite low, because, of course, you know, what
Speaker 2: governments and central banks wants us to believe is that
Speaker 2: inflation will always return to its two percent target or thereabouts.
Speaker 2: But I think what we have discovered over the last
Speaker 2: two or three years is that it is possible to
Speaker 2: have much higher inflation than anyone had anticipated. And moreover,
Speaker 2: once you've got it, it proves to be more difficult
Speaker 2: to get rid of than I think people had originally assumed.
Speaker 2: If you simply think of inflation as being a series
Speaker 2: of random external shocks associated with let's say, the pandemic
Speaker 2: and then Putin's invasion of Ukraine, then you might say, well,
Speaker 2: what goes up must come back down again. But now
Speaker 2: central banks, relatively in my view, are talking about so
Speaker 2: called second round effects. Effectively, people domestically pushing for higher
Speaker 2: prices or higher wages. And it certainly turns out that
Speaker 2: inflation is rather more sticky than the party makers themselves
Speaker 2: had anticipated. And I think what that does open up
Speaker 2: is a possibility at least of inflation being persistently higher
Speaker 2: than the party makers themselves are prepared to admit. So
Speaker 2: maybe not a return to the nineteen seventies, but certainly
Speaker 2: a sense that perhaps achieving a two percent inflation target
Speaker 2: will be a lot more difficult in the future than
Speaker 2: we've seen over the last few decades.
Speaker 3: I mean, it used to be said that inflation was
Speaker 3: kind of good for governments to have a lot of debt,
Speaker 3: because you would talk about sort of inflating debt away.
Speaker 3: How does that work? And is that the kind of
Speaker 3: situation we might be facing now? Could governments be looking
Speaker 3: at these big debts doots and thinking, oh, great, now
Speaker 3: we're going to have a bit of inflation, it will
Speaker 3: go away.
Speaker 2: Well, it's worth stressing first of all, how much debt
Speaker 2: has risen now. Economists typically look at this expressing the
Speaker 2: level of government debt relative to the size of the economy,
Speaker 2: and in peacetime, what typically happens is that that ratio
Speaker 2: is relatively low, possibly falling, certainly not rising very quickly.
Speaker 2: It tends to happen only during wartime. But what's been striking,
Speaker 2: particularly since the global financial crisis, is that around lots
Speaker 2: of different parts of the world these ratios have risen rapidly.
Speaker 2: So your government debt has become a big issue in
Speaker 2: the way that it wasn't through much of the post
Speaker 2: war period. Now, generally speaking, the principle that's worth sticking
Speaker 2: to you here is the idea that inflation tends to
Speaker 2: be the debtor's friend and the creditors enemy. And the
Speaker 2: reason for that is that if you borrow let's say
Speaker 2: a dollar, and then you have lots of inflation, the
Speaker 2: amount you have to pay back in so called real
Speaker 2: terms a year or two years later is quite a
Speaker 2: lot less because the dollar itself is devalued over that
Speaker 2: period of time. So it is generally the case that
Speaker 2: governments have the incentive to create inflation, and one way
Speaker 2: they try to deal with that over recent decades is
Speaker 2: to say, well, okay, we can't trust ourselves in this process,
Speaker 2: so we think we should make central banks independent so
Speaker 2: that they are in control of the inflation process and
Speaker 2: we can't simply, if you like, print money to bail
Speaker 2: ourselves out of an excessive debt problem. Of course, the
Speaker 2: difficulty today is that the relationship between monetary policy controlled
Speaker 2: by the central bank and physical policy controlled by the government,
Speaker 2: that relationship has become more blurred, partly through the innovations
Speaker 2: associated with so called quantitative easing.
Speaker 3: So if it used to be the case that you
Speaker 3: would have a big baud of inflation and it might
Speaker 3: inflate debt away in theory, it ought to have been
Speaker 3: harder to have that happen this time around, because you
Speaker 3: had these central, independent central banks dedicated to getting inflation
Speaker 3: back to target as soon as possible, and we have
Speaker 3: indeed seen interest rates go up in response to that.
Speaker 3: In a couple of years time, if the FARED and
Speaker 3: other central banks have taken quite sort of significant measures
Speaker 3: to confront inflation and kept interest rates at quite high
Speaker 3: levels relative to the past, where does that leave governments?
Speaker 3: Because they're having to suddenly pay quite a lot of
Speaker 3: higher debt interest. Even if the debt stocks are you know,
Speaker 3: the old stocks are being helped by higher inflation, they're
Speaker 3: also seeing their interest expending sore.
Speaker 2: Yeah, And the simple answer is. It partly depends on
Speaker 2: the degree to which inflation has risen compared the degree
Speaker 2: to which strates have risen. As a simple rule of thumb,
Speaker 2: if inflation has risen by more than interest rates have risen,
Speaker 2: that's normally quite good news for a government debt situation.
Speaker 2: On the other hand, if interest rates have risen more
Speaker 2: than the rate of inflation, then that's not such good news.
Speaker 2: It's actually quite bad news for the government's debt situation.
Speaker 2: That might be what's required to bring inflation down, But
Speaker 2: at the same time, this is not friendly from the
Speaker 2: perspective of the government's finances because effectively, the higher interest
Speaker 2: rate is increasing debt service costs much more than the
Speaker 2: inflation rate is eroding the real stock of debt. So overall,
Speaker 2: if you've got interest rates higher than the inflation rate,
Speaker 2: that's not such a welcome development in terms of debt finances.
Speaker 2: And under those circumstances, a government typically either has to
Speaker 2: sort of ask its creditors to lend it more and
Speaker 2: more money at higher and higher interest rates, which because
Speaker 2: is a bit of a vicious circle, or it has
Speaker 2: to think about measures to try to find ways of
Speaker 2: paying for these higher dead interest bills, and of course
Speaker 2: that points to either significantly higher levels of taxes or
Speaker 2: possibly a dosa austerity, none neither of which is often
Speaker 2: is ever in fact particularly popular.
Speaker 3: And you see it in I mean, I guess when
Speaker 3: you look around, particularly in Europe countries like Italy. Well,
Speaker 3: there aren't very many countries like Italy, but Italy primarily
Speaker 3: has this very large stop of debt, which it's been
Speaker 3: able to handle over the years, in part by being
Speaker 3: actually reasonably tight nosed on its public finances, having built
Speaker 3: up this enormous stock of debt, but also by having
Speaker 3: falling borrowing costs. You know now that that's going into
Speaker 3: reverse interest rates or even in Europe going up. You
Speaker 3: have you know, we're all and certainly Bloomberg's economists to
Speaker 3: sort of have a sense of what the cost of
Speaker 3: borrowing for Italy has to go above for Italy's debt
Speaker 3: to become completely unsustainable. We haven't been far off that
Speaker 3: a few times in the last year or so, so
Speaker 3: I guess the question a question for you, Stephen, is
Speaker 3: when does this start to actually change the behavior of
Speaker 3: a central bank. I mean, we have this independent central banks,
Speaker 3: but if a central bank can see that what it's doing,
Speaker 3: is about to bankrupt a government you know that is
Speaker 3: surely going to stay their hand a little bit, isn't it, hope?
Speaker 2: You know? So, I mean this does reveal, I think
Speaker 2: the limits of central bank independence that central banks in
Speaker 2: this cycle, although they have raised short term interest rates
Speaker 2: are a long way, they haven't actually raised them as
Speaker 2: far as they might have done, given the extent which
Speaker 2: inflation itself has picked up. So you know, in one sense,
Speaker 2: some governments are still doing pretty well in current circumstances
Speaker 2: because the rise in inflation be more than the rise
Speaker 2: in interest rates. And actually Italy is a very good
Speaker 2: example of this that over the last year or two
Speaker 2: the ratio of Italian government debt to its economy has
Speaker 2: fallen because inflation has been so much higher than interest rates.
Speaker 2: But as you quite rightly say, Sephanie, in a circumstance
Speaker 2: whereby let's imagine the central banks finally got on top
Speaker 2: of the inflation problem, in those circumstances, if you have
Speaker 2: interest rates still high and inflation coming in lower, that
Speaker 2: makes the fiscal arithmetic look suddenly quite scary. And then
Speaker 2: I think you start to have questions about whether a
Speaker 2: central bank can easily stick to this policy of type
Speaker 2: munting conditions if, as you say, it leads to huge
Speaker 2: problems with adding up the fiscal numbers over the medium term, so.
Speaker 3: That debt sort of hanging over the heads of central bankers.
Speaker 3: I guess that would be your reason number fifty two
Speaker 3: why you expect inflation to be higher in the next
Speaker 3: few years than it has been significantly higher. And of course,
Speaker 3: if you want to hear more reasons, you ever want
Speaker 3: to go and read your book. But if you were
Speaker 3: going to guess now, is the next three or four
Speaker 3: years going to be a period where we start talking
Speaker 3: seriously about public debt problems and government debt crisis, what
Speaker 3: would you say? Or do you think it's Do you
Speaker 3: think we're going to have other problems to deal with?
Speaker 4: No?
Speaker 2: I think the two might actually end up being conjoined
Speaker 2: in the sense because the obvious debate I have in
Speaker 2: these circumstances is that if the public debt numbers don't
Speaker 2: look good, then it's easy to imagine there being a debate,
Speaker 2: possibly led by governments rather than central banks. But the
Speaker 2: debate that says maybe just maybe we should raise the
Speaker 2: inflation target. Maybe two percent too low, So then you
Speaker 2: start talking about three percent or four percent or something
Speaker 2: like that, and before you know it, you've done exactly
Speaker 2: what center banks are not supposed to do. You've you've
Speaker 2: raised the inflation target. You've raised the inflation objective in
Speaker 2: a sort of backhand way of making the fiscal numbers
Speaker 2: add up more easily. And your history is replete with
Speaker 2: examples of this kind that eventually, when there's no real
Speaker 2: fiscal space, you just can't raise taxes or cut public
Speaker 2: spending very easy. It's just particularly impossible to do that stuff.
Speaker 2: Inflation enters through the back door. So I think it
Speaker 2: is possible that we'll have a debate which links the
Speaker 2: fiscal situation, the debt situation, with the inflation situation, in
Speaker 2: the sense of people beginning to recognize that actually inflation
Speaker 2: is a way out of some of these fiscal difficulties,
Speaker 2: even if inflation is profoundly damaging for the rest of
Speaker 2: the economy.
Speaker 3: And then what happens, well, then you have to write
Speaker 3: another book.
Speaker 2: Then we have to write another book. Yeah. I think
Speaker 2: that in circumstances where inflation targets are being raised and
Speaker 2: governments are clearly back in the driving seat, then we're
Speaker 2: back to the sorts of discussions that we sort of
Speaker 2: forgotten about over the last twenty or thirty years. We're
Speaker 2: back to discussions about what inflation does to the economy.
Speaker 2: And my central point really is that inflation is a
Speaker 2: profoundly undemocratic mechanism that distributes or redistributes income away from
Speaker 2: creditors towards debtors. It redistributes income towards those who've got
Speaker 2: pricing power or wage power and away from those who
Speaker 2: do not have those things. And it also messes up
Speaker 2: your sort of price mechanism. We all rely on prices
Speaker 2: to to sort of gauge how we should be responding
Speaker 2: to economic shortages and economic accesses and so on. And
Speaker 2: if the price mechanism itself is distorted through inflation, we
Speaker 2: make the wrong decisions. And one consequence of that is
Speaker 2: that you end up with lower productivity growth, lower levels
Speaker 2: of economic activity, and people start talking about stagflation of
Speaker 2: a kind that we say last saw back in the
Speaker 2: nineteen seventies.
Speaker 3: Well, and as Cain said, although he claimed he was
Speaker 3: quoting lenin, there's no sure way to undermine the capitalist
Speaker 3: system than to debaut the currency. Thank you very much,
Speaker 3: Stephen King, Thank you so that's it for this episode
Speaker 3: of Stephanomics. We'll be back next week. In the meantime,
Speaker 3: you can get a lot more economic insight and news
Speaker 3: from the Bloomberg Terminal website or app. This episode was
Speaker 3: produced by Mangnus, Henrickson, Yang Yang and Summer Sadi, with
Speaker 3: special thanks to Josh Wingrove, Chris Anstey, and Stephen King.
Speaker 3: The executive producer of Stephanomics is Molly Smith and the
Speaker 3: head of Bloomberg Podcast is Sage Bowman.