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Speaker 1: Hello, and welcome to another episode of the ad Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway and Joe uh debt ceiling. Oh, I'm

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Speaker 1: so excited we're doing a trillion dollar coin episode. I

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Speaker 1: knew you were going to say that and to annoy me. Yes,

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Speaker 1: this is not an episode on the trillion dollar coin.

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Speaker 1: If you are interested in that particular piece of um

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Speaker 1: finance thought experiment, you can check out our previous episode

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Speaker 1: on the topic. I think it was over an hour long,

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Speaker 1: all about the trillion dollar coin. Yeah, okay, check out

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Speaker 1: that episode if you want to talk about the trillion

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Speaker 1: dollar coin. But today we're going to be discussing something

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Speaker 1: slightly different. We are going to be talking about what

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Speaker 1: exactly happens if the US actually does default, right, because

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Speaker 1: if there's like just a lot of uncertainty about this

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Speaker 1: question of like okay, like what happens if they don't

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Speaker 1: raise the dead ceiling? And what are the constraints, what

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Speaker 1: are the various things that could happen, Like how bad

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Speaker 1: would it be if we actually, like didn't pay the debt?

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Speaker 1: Does the White House have ability to pay some debt

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Speaker 1: but not others? Like it's pretty uncertain, Like it seems

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Speaker 1: bad right, like it is lame and defaulting was bad.

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Speaker 1: Russia default was bad, and Russia is like this like tiny?

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Speaker 1: You know how big was russia debt nothing? So like

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Speaker 1: it is a moving feast of uncertainty, like a twirling

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Speaker 1: whirlwind of chaos and uncertainty and open questions over exactly

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Speaker 1: what happens. And there are all these moving parts. I

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Speaker 1: think we really need to sit down and discuss them

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Speaker 1: and kind of talk about it in an almost sequential way,

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Speaker 1: like this is what happens if this happens, and then

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Speaker 1: that happens. So we really do have the perfect guest

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Speaker 1: for this. We're going to be speaking with Joe Perks

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Speaker 1: and add thoughts favorite of course, he is also global

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Speaker 1: macro strategist over at Bespoke Investment Groups. So George, thank

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Speaker 1: you so much for coming back on all thoughts. Hey all,

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Speaker 1: thanks for having me. Let's start with the basics, since

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Speaker 1: we're talking about this as a sort of primer episode

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Speaker 1: on the debt ceiling and the debt limit. When we

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Speaker 1: talk about limits on US debt, what do we mean exactly?

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Speaker 1: So the US is really unique in a very frustrating

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Speaker 1: way in that not only do we have restraints on

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Speaker 1: spending in terms of Congress authorizing and the President signing

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Speaker 1: into law bills that create government spending um and then

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Speaker 1: appropriations processes after that, you know, throughout the year, we

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Speaker 1: also have this break on the total amount of debt

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Speaker 1: that can be issued. So Congress can at the same

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Speaker 1: time instruct the government bureaucracies to go out and spend money,

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Speaker 1: but at the same time say, oh, well, you can't

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Speaker 1: actually issue debt to you that spending we've told you

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Speaker 1: to do. And oh, by the way, you can't collect

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Speaker 1: anymore in taxes because we also control that and we've

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Speaker 1: told you the amount you can collect in taxes. So

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Speaker 1: it's this contradiction in terms of instructions to the executive

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Speaker 1: branch and to various federal government bureaucracies from Congress and

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Speaker 1: from the President, and it's it's a thing that's been

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Speaker 1: around in US politics for a long time. But you know,

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Speaker 1: I think the most important thing to understand about it

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Speaker 1: is that it's just it's nonsensical. It doesn't make sense

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Speaker 1: for there to be this extra restraint on top of

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Speaker 1: the existing safeguards against you know, in a representative democracy

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Speaker 1: where people are elected and then they authorize the spending

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Speaker 1: on behalf of the population. We also have this thing

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Speaker 1: where there's a debt, there's a debt limit that that

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Speaker 1: serves as sort of a secondary veto point on government spending.

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Speaker 1: Defenders of the debt ceiling law would say, look, kind

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Speaker 1: of that's true, but it is good to have this

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Speaker 1: debate every couple of years about our level of indebtedness.

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Speaker 1: This can be used as a break of sorts for

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Speaker 1: or constraining spending. In the Dead Ceiling fight, there really

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Speaker 1: was cuts and the cuts to the growth of federal spending.

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Speaker 1: You know, you're saying, like, okay, like this is like

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Speaker 1: the sort of like maddening law makes no sense. Does

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Speaker 1: the dead ceiling have a history of like being used

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Speaker 1: to sort of regroup and retrain our thoughts about how

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Speaker 1: much we're spending. The short answer is no. And I

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Speaker 1: think that the more consistent way to think about it

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Speaker 1: historically is that it's used by one factionum or another

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Speaker 1: in US politics against whoever happens to sort of be

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Speaker 1: the party in control. So you know, this is this

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Speaker 1: is a bi partisan thing. It's used both ways. Both

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Speaker 1: parties have declined to get rid of the dead ceiling

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Speaker 1: on a permanent basis when they've been empowered. So I

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Speaker 1: don't mean to say that this is a red versus

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Speaker 1: blue you know, one side an abuser of this versus

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Speaker 1: the other. But what it does is it just it

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Speaker 1: creates a veto point and allows the legislative minority to

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Speaker 1: extract what it wants from or some of what it

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Speaker 1: wants from the legislative majority. Now that's not necessarily the

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Speaker 1: end of the w old, but there are a couple

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Speaker 1: of things to think about here. First, the U S

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Speaker 1: system of government is already full of veto points, right,

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Speaker 1: whether it's process of buils through committees, process of builds

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Speaker 1: through the House, process of builds through the Senate, judicial

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Speaker 1: checks on all that, the executive branch, the high requirement

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Speaker 1: in the Senate to sign things in the law. There

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Speaker 1: are some exceptions, but basically you need a supermajority in

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Speaker 1: the Senate to get things signed in the law. So

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Speaker 1: there's just we have a replete number of veto points,

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Speaker 1: adding you know, just one more. The benefits are pretty

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Speaker 1: negligible even if you agree that that. You know, controlling

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Speaker 1: the debts size is a super important public policy goal.

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Speaker 1: I don't happen to agree with that, but let's take

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Speaker 1: that as given. Even then, there are costs associated with

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Speaker 1: this that that are very real. And the cost is

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Speaker 1: the credibility of the U. S is ability to pay

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Speaker 1: its debts on time in full. And you know, there

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Speaker 1: are real questions about the United States Treasuries ability to

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Speaker 1: settle out coupon and interest payments on debt, let alone,

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Speaker 1: payments to Social Security recipients, payments to government contractors, government employeescetera, etcetera.

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Speaker 1: This year because of this death ceiling being present. And

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Speaker 1: again I think it's really important to emphasize debt ceiling

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Speaker 1: being present. Even though those payments, all those payments that

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Speaker 1: are set to go out, all the spending, all the

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Speaker 1: payments that are set to come into the treasury and

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Speaker 1: formed taxes, all of that has already been approved by Congress.

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Speaker 1: The debt ceiling is a secondary approval's process that has

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Speaker 1: nothing to do with keeping a lid on on spending

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Speaker 1: in a direct sense. So, George, you you just set

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Speaker 1: out the stakes kind of perfectly there. But talk to us.

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Speaker 1: You also mentioned the treasury. Talk to us about extraordinary measures,

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Speaker 1: because the U. S. Treasury has already said that it's

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Speaker 1: started to take these extraordinary measures in order to meet

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Speaker 1: its obligations because we have in fact already exceeded that

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Speaker 1: thirty one point four trillion dollar or whatever it is

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Speaker 1: borrowing limit. What are the extraordinary measures and how do

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Speaker 1: they actually play out here? So there are a variety

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Speaker 1: of things that go into the extraordinary measures behind the scenes.

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Speaker 1: I mean, the simplest way to think about it is

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Speaker 1: changing timing of payments and sort of where there's flexibility

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Speaker 1: to defer payments or to pay them, you know, without

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Speaker 1: issuing debts, to wait for new payments to new tax

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Speaker 1: payments to come in before sending out existing payments. That's

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Speaker 1: one way to think about it. The most important thing, though,

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Speaker 1: is spending down the balance that's recorded in the Treasury

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Speaker 1: General account at the Federal Reserve. So the Federal Reserve

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Speaker 1: is the United States Treasuries fiscal agent, which basically means

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Speaker 1: that that payments are being made via the feed. So

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Speaker 1: if you're if you're the Treasury, you don't have a

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Speaker 1: checking account at a private bank. You have a checking

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Speaker 1: account at the Fed. There are ways in which the

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Speaker 1: government is nothing like household, but in terms of access

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Speaker 1: to a checking account, that is one way the government

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Speaker 1: is like a household. There is a account at the

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Speaker 1: Fed again called the Treasury General Account that is essentially

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Speaker 1: a cash balance, a balance available for payments that is

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Speaker 1: used to settle payments owed by the Treasury to other

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Speaker 1: individuals or entities throughout the economy. And what the Treasury

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Speaker 1: has been able to do since whether they're able to

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Speaker 1: do it beforehand, but what if they've done as a

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Speaker 1: matter of course since, is build up this this Treasure

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Speaker 1: General Account in the period leading up to debt ceiling

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Speaker 1: limits being reached, because that allows for flexibility over the

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Speaker 1: subsequent months. Basically, if you know that you're going to

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Speaker 1: be without a paycheck for a couple of months, you

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Speaker 1: save some cash away and your checking account. You're not

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Speaker 1: going to buy a long term investment with it because

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Speaker 1: you know you'll need it, but you'll have a little

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Speaker 1: balance in your checking account, and then when your paycheck

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Speaker 1: doesn't come through, you can still pay your rent for

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Speaker 1: a couple of months. You can't do it indefinitely, but

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Speaker 1: you have this sort of cushion there, and that's sort

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Speaker 1: of what the charge of General Account spend down is

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Speaker 1: and that's the core of extraordinary measures that that allows

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Speaker 1: the Treasury to continue to make all the payments it's

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Speaker 1: mandated to buy law, you know, whether that's UH payments

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Speaker 1: to contractors, payments to employees, payments to beneficiaries, whatever, payments

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Speaker 1: to holders of the national debt. All those can continue

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Speaker 1: to go out the door as normal, in part because

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Speaker 1: there's this cash balance at the t g A that's

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Speaker 1: being spent down. Okay, we have these sort of like

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Speaker 1: they're called extraordinary measures, but they're not like that weird.

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Speaker 1: They're like little like they're more like, you know, short

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Speaker 1: term cash management techniques that allow the government to make

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Speaker 1: its obligations for a few extra months. Let's talk about like, okay,

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Speaker 1: when those run out, what happens? Like where where do

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Speaker 1: things stand? You know? People talk, I don't know, like

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Speaker 1: what is your estimate for when like the sort of

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Speaker 1: real debt limit is right when we no longer have

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Speaker 1: these sort of drop dead Yeah, so the X date

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Speaker 1: the drop dead date? Talk about like what happens as

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Speaker 1: we get closer to that. I so, I personally don't

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Speaker 1: think my estimate is any better than what we've heard

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Speaker 1: from charity or from the Secretary Treasury yelling, she says

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Speaker 1: June five, this sort of her best estimate, but one,

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Speaker 1: It's important to understand that she described it as having

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Speaker 1: considerable uncertainty. So, for instance, if we have a really

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Speaker 1: really strong tax collection season or really really weak tax

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Speaker 1: collection season over the next three months, that's going to

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Speaker 1: have big implications for the timing here, right, just because

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Speaker 1: a huge percentage of cash flows in and out of

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Speaker 1: the Treasury take lace over over tax season. So you know,

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Speaker 1: there's just all sorts of uncertainties. Also, private sector of

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Speaker 1: visibility is is not great into all the timing of

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Speaker 1: payments in there and their size. So I'll just make

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Speaker 1: that you know, I think sometime in May June is

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Speaker 1: probably the right way to think about it. Um, late mate,

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Speaker 1: early June, we'll we'll hit this drop dead day where

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Speaker 1: essentially there are more payments being requested from the Treasury

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Speaker 1: than there is cash balance plus payments being made to

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Speaker 1: the Treasury. At that point, I think it's important to

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Speaker 1: stress that we don't actually know what's going to happen.

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Speaker 1: Nobody knows. There may be Treasury bureaucrats somewhere that know, um,

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Speaker 1: but for all intents and purposes, they're they're not saying anything,

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Speaker 1: and we we can't really be sure the I think

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Speaker 1: the most popular in terms of like people saying, well,

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Speaker 1: why don't you just do this option is something called prioritization,

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Speaker 1: which is to make some payments and not others. So

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Speaker 1: what does that look like? For instance, if the Treasury

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Speaker 1: sees that they have a payment due to the holder

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Speaker 1: of a long term Treasury bond, they will make that

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Speaker 1: coupon payment, but they won't necessarily make a payment to,

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Speaker 1: for instance, employees of the federal government for their paycheck.

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Speaker 1: How you assign a matrix of sort of like who

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Speaker 1: gets paid and who doesn't get paid in that scenario

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Speaker 1: is a super fraught political question that deserves a lot

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Speaker 1: of discussion. It's all hypothetical because the Treasury has said, well,

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Speaker 1: we can't actually do this, We don't have the technical

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Speaker 1: abilities to do this. Now, they may be bluffing when

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Speaker 1: they say that one way to sort of get a

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Speaker 1: better outcome around the death ceiling from the Treasury's perspective,

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Speaker 1: because if you're the bureaucrats of the Treasury, what you

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Speaker 1: care about is just being able to do what Congress

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Speaker 1: has told you to do in terms of making payments

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Speaker 1: in and out of the Treasure General account. You don't

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Speaker 1: really care about the political fight. You just want to

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Speaker 1: do your job, and from that perspective, Treasury has signaled

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Speaker 1: quite aggressively, Look, we cannot do prioritization. So if if

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Speaker 1: we hit the X date, then we're not gonna be

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Speaker 1: able to say, oh, make this payment but not that payment.

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Speaker 1: Whether that's true or whether that's sort of signaling in

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Speaker 1: a game that makes default very very costly for whoever

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Speaker 1: lets it happen is an unclear thing, like like one.

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Speaker 1: One possible explanation is that Treasury is saying that as

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Speaker 1: a way to signal to, for instance, congressional Republicans that hey,

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Speaker 1: y'all can't do this or it's gonna be really really bad.

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Speaker 1: If Treasury is being honest around prioritization, and again I

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Speaker 1: don't have any insight, and you know, I don't have

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Speaker 1: a way to say like, oh, they're not being honest,

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Speaker 1: but it's definitely possible that they're. They're sort of presenting

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Speaker 1: a reality that's a little bit less the case than

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Speaker 1: is other than than it really is. But assuming they're

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Speaker 1: being honest, then when Treasury runs out of cash, you

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Speaker 1: come to this second scenario called a general default, and

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Speaker 1: that is basically saying we're not going to make any

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Speaker 1: payments to anybody because everyone's on an equal footing. We

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Speaker 1: can't tell payments apart, and we are just not going

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Speaker 1: to make payments until the debt ceiling is lifted. That

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Speaker 1: would be enormously disruptive and would obviously involve an outright

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Speaker 1: default on certain US securities. There would probably be make goals,

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Speaker 1: but there would be a default. There would also be

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Speaker 1: a default on everything from Social Security checks to government

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Speaker 1: employe paychecks. The military wouldn't get paid, Military contractors don't

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Speaker 1: get paid, any government contractor would get paid. Cash out

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Speaker 1: of the Treasury would entirely stop. So I think in

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Speaker 1: terms of the first two options around like what Treasury

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Speaker 1: can do in terms of making payments, like the rest

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Speaker 1: pull in terms of making payments, those are the two extremes.

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Speaker 1: Absolute prioritization would be they have this matrix of different

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Speaker 1: priorities and they make them as they're able to, and

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Speaker 1: some people don't get the payments their owned, but Treasury

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Speaker 1: is able to finally tune that to like reflect what

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Speaker 1: they want to do. That's one spectrum, and the other

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Speaker 1: spectrum is general fault. Nobody gets anything until the debt

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Speaker 1: gets a little bit, so Obviously, general default of the

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Speaker 1: US sounds very, very bad and dire. But one of

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Speaker 1: the things we've seen in previous debt ceiling dramas is

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Speaker 1: that as we get closer and closer to that prospect,

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Speaker 1: we tend to see market participants buying US government debt

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Speaker 1: as a sort of flight to safety play. So what

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Speaker 1: would it mean for the actual treasury market if we

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Speaker 1: got to that general default point? What would you expect

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Speaker 1: to see? Well, that is where things get really fun,

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Speaker 1: because you have to sort of competing definitions of fund

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Speaker 1: may vary. Fund may not apply to the non exactly.

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Speaker 1: So on the one hand, any missed payment on something

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Speaker 1: that is assumed as a just a general functioning bedrock

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Speaker 1: principle of financial markets to never miss payments, whether it's

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Speaker 1: principal or khun having a miss payment on that creates

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Speaker 1: all sorts of headaches. Not only is are are you

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Speaker 1: maybe creating four sellers of people who are not allowed

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Speaker 1: to hold securities that have defaulted? And we can come

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Speaker 1: back to that later, but let's assume that there's some

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Speaker 1: segment of the market that says we're not allowed to

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Speaker 1: hold these. We we we just can't be seen holding these,

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Speaker 1: So we have to sell them. On the other hand,

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Speaker 1: some segment of the market would say, look, this is

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Speaker 1: a political fight. It's not a it's not a lack

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Speaker 1: of ability to pay, it's a lack of willingness to pay.

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Speaker 1: That's going to be temporary. So we will accept some

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Speaker 1: trivial risk premium to hold these securities because at some

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Speaker 1: point we trust that we're gonna be made whole. You know,

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Speaker 1: we might lose a little bit, but but you know

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Speaker 1: we're going to be paid something for holding these defaulted

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Speaker 1: securities in the meantime, so we'll hold onto those. So

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Speaker 1: figuring out who has these securities, who has to sell them,

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Speaker 1: who wants to sell them, what prices there the people

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Speaker 1: who want to sell them are willing to trade at

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Speaker 1: versus the other side of the of the demand for

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Speaker 1: these of ALTI securities by people with a little bit

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Speaker 1: looser risk tolerance. That's going to be a really there's

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Speaker 1: been a lot of volatility. As those securities work themselves out,

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Speaker 1: there will be a series of bills around the debt

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Speaker 1: ceiling maturity or around the debt ceiling X state that

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Speaker 1: will be probably the most impacted relative to their historical volatility. Bills.

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Speaker 1: Remember don't pay coop on payments, so you know, your

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Speaker 1: whole payment of interest comes with the maturity of the bill,

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Speaker 1: So you know, as a percentage of of your total

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Speaker 1: cash flow for the instrument, bills are going to be

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Speaker 1: a lot more impacted. And they're also much less volatile historically,

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Speaker 1: so you know, if you if you see for selling,

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Speaker 1: you can see sort of more outside moves in those

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Speaker 1: in those word are typically much safer, less volatile securities.

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Speaker 1: On the other hand, you've got notes, bonds, notes and

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Speaker 1: bonds which are longer term. You know, if you're thinking

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Speaker 1: about a third year bond, one missed coupon payment, that

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Speaker 1: that you know you probably get paid back in cash

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Speaker 1: a month later. It doesn't really matter as much to

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Speaker 1: the to the total value of the security. So it's

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Speaker 1: plausible that you see long term securities that miss coupon

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Speaker 1: payments during that period outperform the front end of the

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Speaker 1: Yolker or or or or fall. You know how their

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Speaker 1: yields fall, prices go up in absolute terms because of

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Speaker 1: general risk of version. Now there's also a scenario here

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Speaker 1: where and we're sort of getting far out into hypotheticals

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Speaker 1: without really stressing what are our metrics for like this

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Speaker 1: scenario are But there's also a scenario here where basically

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Speaker 1: there isn't much change in the treasury market because the

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Speaker 1: people who are willing to pay more and the people

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Speaker 1: who are forced to sell or want to sell are

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Speaker 1: relatively evenly matched, and everything kind of just trades out

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Speaker 1: at equilibrium levels. That's a very real possibility, is it

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Speaker 1: my expectation? Probably not, But like it's it's something you

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Speaker 1: have to think about. So one of the things that

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Speaker 1: makes treasuries special is that they are used for collateral

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Speaker 1: in the repo market. So you know, if you're loaning

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Speaker 1: or borrowing a large amount of money, you will often

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Speaker 1: use treasury securities as your collateral slash security in order

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Speaker 1: to do that. What would be the impact on the

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Speaker 1: repo market if you had doubts over whether or not

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Speaker 1: some of these bonds are in default or are in

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Speaker 1: fact going to be receiving their coupon payments on schedule.

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Speaker 1: I think it's probably best to think about the repo

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Speaker 1: markets an extension of the cash treasury market from that perspective,

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Speaker 1: And in this scenario, I think there will be some

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Speaker 1: repo market makers who are willing and able to take

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Speaker 1: quote unquote defaulted treasuries as collateral and maybe apply some

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Speaker 1: small haircut to them, but are willing to do it

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Speaker 1: for a relatively small increase in their income from from

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Speaker 1: the activity. You know, just like there will be people

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Speaker 1: who will be willing to pay, you know, slightly less

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Speaker 1: than than typical for for a similar security because it's defaulted.

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Speaker 1: But but not like you know half as much, you

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Speaker 1: know that kind of thing. But we don't really know

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Speaker 1: the other thing, and I think this affects both the

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Speaker 1: repo market and the cash market is we don't really

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Speaker 1: know how well the back end settlement systems and trading

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Speaker 1: systems are going to handle being able to trade something

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Speaker 1: that's already past maturity right like and hopefully their QA

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Speaker 1: and DEV people at banks and at funds and at

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Speaker 1: other providers who are thinking about this and have have

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Speaker 1: tested this. But what happens if I have to buy

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Speaker 1: on recording this February ninth? What happens if I have

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Speaker 1: to buy on February ninth a bill that shows that

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Speaker 1: that has a maturity data associated with it a February seven?

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Speaker 1: Can the systems even accept that? Or it does it

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Speaker 1: throw an error and say no, you're not allowed to

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Speaker 1: do that. I'm so glad you brought this up because

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Speaker 1: this is something I've wondered about exactly, which is that

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Speaker 1: with most financial instruments, when we're talking about default, you know,

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Speaker 1: it's just like it's kind of an economic question, well

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Speaker 1: what's there when you're going to get your recovery, etcetera.

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Speaker 1: And I've always wondered whether like a US debt default,

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Speaker 1: like would it almost be more like the Y two

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Speaker 1: K problems. See this is a crossover episode between the

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Speaker 1: Y companies have terrible software and the U. S Treasury. No,

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Speaker 1: this is exactly what I've wondered whether rather whether we're

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Speaker 1: thinking about it the risks is sort of the wrong dimension,

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Speaker 1: whether it's actually kind of like creates all just sort

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Speaker 1: of technical things like here's the one instrument that no

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Speaker 1: one ever thinks about missing a payment on, etcetera. Right,

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Speaker 1: it's like, uh, you know, I don't I don't know

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Speaker 1: what the analogy would be, but I'm glad you brought

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Speaker 1: this up because it seems like this could be the

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Speaker 1: one thing. It's like, did they even like code the

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Speaker 1: possibility that some of these instruments wouldn't get paid and

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Speaker 1: what kind of like I mean it's kind of specultive, right, Like,

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Speaker 1: it's hard to answer, but I'm glad you brought this up. Yeah,

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Speaker 1: I mean I think the team over Hindsight Capital would say, well,

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Speaker 1: I sure hope they'd this because you know, you've known

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Speaker 1: it's a possibility. Yeah, when are we gonna get this?

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Speaker 1: Every single trade their way ahead of things. Um, but yeah,

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Speaker 1: I mean we've known this is at least the hypothetical

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Speaker 1: possibility since at least, so you would hope right that

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Speaker 1: that there have been some efforts to make sure that

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Speaker 1: settlement systems can handle this sort of thing. But just

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Speaker 1: because you would hope that doesn't and you can actually

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Speaker 1: say like, oh, yeah, that's that's how it works. I

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Speaker 1: know at some level there would be able to be

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Speaker 1: settlement of treasury securities and defaulted. I mean, you can

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Speaker 1: do stuff over the phone, you can do stuff with

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Speaker 1: manual settlement procedures, but there's just no way that the

401
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Speaker 1: markets canna be able to handle super high volumes if

402
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Speaker 1: everyone's normal trading systems are just not working correctly because of,

403
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Speaker 1: for instance, a maturity date that's prior to a settlement date, right, Like,

404
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Speaker 1: it's just I think there would probably be some disruptions there.

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Speaker 1: So you know that adds a liquidity dimension, and you know,

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Speaker 1: liquidity being withdrawn possibly due to due to issues on

407
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Speaker 1: the in the software, on top of the absolute risk

408
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Speaker 1: premiums that people are willing to to bear. And you

409
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Speaker 1: know this all applies equally to repo to you know, um,

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Speaker 1: with repos. Instead of thinking like, oh, I want to

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Speaker 1: buy your sell bond, it's like, oh, if I want

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Speaker 1: to use this bond as collateral, can my system accept

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Speaker 1: to this collateral if it's got a date that's later

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Speaker 1: than you know, same same principles basically. So yeah, I

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Speaker 1: mean I don't know the answer to any of this,

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Speaker 1: to be clear, Like I used to work relatively close

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Speaker 1: to bank settlement systems back at my prior role, but

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Speaker 1: I haven't been near a bank settlement systems in almost

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Speaker 1: a decade now, So you know, I I don't know, um,

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Speaker 1: and I'm not sure anyone anywhere knows with great certainty

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Speaker 1: what the aggregate trading community, whether it's fast money, real money,

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Speaker 1: you know, what they can handle in this respect. But um, yeah,

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Speaker 1: I don't know. So I want to talk about another

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Speaker 1: you know, go back to this idea or talk about

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Speaker 1: this idea of you hear payment prioritization, and of course,

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Speaker 1: as you mentioned, Treasury hasn't assisted. Maybe they're bluffing that.

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Speaker 1: It's technically they don't have the capability to say shut

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Speaker 1: off one kind of payments easily while say like making

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Speaker 1: sure that we continue to pay a debt. But setting

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Speaker 1: us technical questions of whether they can do that. What

431
00:22:03,680 --> 00:22:07,679
Speaker 1: about like the political questions of who gets to decide

432
00:22:08,440 --> 00:22:11,399
Speaker 1: what shuts down? Because if you're Biden and it's like, okay,

433
00:22:11,480 --> 00:22:13,680
Speaker 1: like we're not gonna pay the military, and look, the

434
00:22:13,720 --> 00:22:17,240
Speaker 1: Republicans are preventing the military are brave men and women

435
00:22:17,280 --> 00:22:19,840
Speaker 1: from getting paid. Look, and then the Republicans might say, well,

436
00:22:19,920 --> 00:22:22,399
Speaker 1: you didn't have to shut down military payment, etcetera. You

437
00:22:22,440 --> 00:22:25,680
Speaker 1: could have like done something less impactful, etcetera. But who

438
00:22:25,720 --> 00:22:30,240
Speaker 1: gets to decide even a prioritization what doesn't doesn't get paid? Yeah,

439
00:22:30,240 --> 00:22:34,119
Speaker 1: I think totally there are deep political questions about every

440
00:22:34,160 --> 00:22:36,800
Speaker 1: facet of this whole problem. And I think it does

441
00:22:36,840 --> 00:22:39,800
Speaker 1: illustrate so well how debt is a fundamentally political thing.

442
00:22:39,800 --> 00:22:43,760
Speaker 1: I mean, we have our constitution because the first crack

443
00:22:43,880 --> 00:22:46,840
Speaker 1: post revolution at at creating a structure for governance in

444
00:22:46,840 --> 00:22:49,800
Speaker 1: the US didn't handle debt well, like, that's literally why

445
00:22:49,840 --> 00:22:52,560
Speaker 1: we have a constitution, the constitution we have today. Obviously

446
00:22:52,560 --> 00:22:55,000
Speaker 1: there's more stuff in the Constitution than just management of debt,

447
00:22:55,520 --> 00:22:59,520
Speaker 1: but there is a general problem here where you are

448
00:22:59,600 --> 00:23:04,639
Speaker 1: taking what was the purview of Congress and elected representatives

449
00:23:04,640 --> 00:23:09,600
Speaker 1: in assigning payments to various stakeholders that the Treasury faces

450
00:23:09,640 --> 00:23:11,960
Speaker 1: on a on a settlement basis, and you're you're taking

451
00:23:12,000 --> 00:23:14,160
Speaker 1: that away and you're handing it to Treasury with no

452
00:23:14,720 --> 00:23:17,760
Speaker 1: explicit decision to do so. If you're going to prioritize

453
00:23:17,840 --> 00:23:20,480
Speaker 1: without legislation, and there will be no legislation on this,

454
00:23:20,680 --> 00:23:24,359
Speaker 1: you know, then Treasury unelective bureaucrats at Treasury are just

455
00:23:24,400 --> 00:23:25,800
Speaker 1: being told to make the best of it that they

456
00:23:25,840 --> 00:23:28,840
Speaker 1: can and have fun figuring it out. That is not

457
00:23:28,880 --> 00:23:30,840
Speaker 1: how a government's supposed to be run, right, I mean,

458
00:23:31,000 --> 00:23:33,240
Speaker 1: that's not how a democracy is supposed to function. If

459
00:23:33,320 --> 00:23:36,560
Speaker 1: Congress had wanted to delegate prioritization to Treasury and said

460
00:23:36,560 --> 00:23:39,280
Speaker 1: that explicitly, that would be a fine whatever, that their purview,

461
00:23:39,320 --> 00:23:42,120
Speaker 1: But that's not what's going on here. It's Congress saying, well,

462
00:23:42,240 --> 00:23:44,159
Speaker 1: we're not going to do anything, so just do the

463
00:23:44,160 --> 00:23:46,280
Speaker 1: best you can and throwing it back to Treasury. And

464
00:23:46,320 --> 00:23:48,879
Speaker 1: when you get that outcome, I mean, that's not going

465
00:23:48,920 --> 00:23:51,080
Speaker 1: to be good for anybody, regardless of who the winners

466
00:23:51,080 --> 00:23:53,520
Speaker 1: and losers Treasury picks are, if they even have the

467
00:23:53,560 --> 00:23:56,480
Speaker 1: ability to make those picks. It's it's it's it's a

468
00:23:56,520 --> 00:24:00,119
Speaker 1: pretty deep irony that that a representative democratic system is

469
00:24:00,440 --> 00:24:02,440
Speaker 1: doing this to itself. And again, I just I want

470
00:24:02,440 --> 00:24:05,080
Speaker 1: to emphasize that this is Congress doing it to itself.

471
00:24:05,119 --> 00:24:07,720
Speaker 1: This is not this is this is not inherent thing

472
00:24:07,760 --> 00:24:10,639
Speaker 1: around that national debt management. This is a series of

473
00:24:10,680 --> 00:24:14,200
Speaker 1: bad decisions that have been made by elected representatives over

474
00:24:14,640 --> 00:24:16,959
Speaker 1: the past thirty or forty years that have gotten us

475
00:24:17,000 --> 00:24:19,880
Speaker 1: to this point. And it's entirely a self inflicted situation.

476
00:24:20,200 --> 00:24:22,560
Speaker 1: I think this is such an important point to make,

477
00:24:22,600 --> 00:24:26,239
Speaker 1: this idea that debt is ultimately a social construct and

478
00:24:26,440 --> 00:24:29,200
Speaker 1: inherently political in many ways. You know, it tells a

479
00:24:29,320 --> 00:24:33,840
Speaker 1: story of who owes who what and why, and so

480
00:24:34,000 --> 00:24:37,359
Speaker 1: it's immediately caught up in you know, the potential for

481
00:24:37,440 --> 00:24:42,840
Speaker 1: different narratives. You mentioned how self defeating a lot of

482
00:24:42,880 --> 00:24:45,240
Speaker 1: this tends to be in the US, and it does

483
00:24:45,280 --> 00:24:48,080
Speaker 1: seem to put it mildly that defaulting on US debt

484
00:24:48,119 --> 00:24:51,040
Speaker 1: would be bad. So what would happen if, you know,

485
00:24:51,160 --> 00:24:55,200
Speaker 1: the executive branch just just decided to ignore Congress on this,

486
00:24:55,440 --> 00:24:57,600
Speaker 1: Like what if people just go off and you know,

487
00:24:57,680 --> 00:25:01,000
Speaker 1: the president goes off and does his own So earlier

488
00:25:01,040 --> 00:25:03,120
Speaker 1: we were talking about, I mentioned how fun it would

489
00:25:03,119 --> 00:25:04,760
Speaker 1: be if we had a general default and what that

490
00:25:04,800 --> 00:25:07,760
Speaker 1: would mean for the treasure market as for the treasury

491
00:25:07,760 --> 00:25:11,520
Speaker 1: market functioning fund, same thing for constitutional fund in this

492
00:25:11,600 --> 00:25:14,119
Speaker 1: instance that you just described. Um So, just as a

493
00:25:14,119 --> 00:25:16,440
Speaker 1: bit of background, if you read section four the fourteenth Amendment,

494
00:25:16,440 --> 00:25:19,400
Speaker 1: one of the key reconstruction amendments after the Civil War,

495
00:25:19,800 --> 00:25:21,920
Speaker 1: there's a clause that says the validity of the public

496
00:25:22,000 --> 00:25:24,360
Speaker 1: dat of the United States, authorized by law, including debts

497
00:25:24,359 --> 00:25:26,680
Speaker 1: incurred for payment of pensions and bounties for services and

498
00:25:26,680 --> 00:25:30,120
Speaker 1: suppressing insurrection and rebellion, shall not be questioned. So this

499
00:25:30,200 --> 00:25:33,080
Speaker 1: is just basically saying, like there's a general constitutional principle

500
00:25:33,119 --> 00:25:35,879
Speaker 1: that if the United States government owes someone something, you

501
00:25:35,920 --> 00:25:38,000
Speaker 1: can't get in the way of that right like that,

502
00:25:38,000 --> 00:25:40,760
Speaker 1: that's the plain text reading of that. How far do

503
00:25:40,840 --> 00:25:43,119
Speaker 1: those powers go? It's an it's an interesting question. No,

504
00:25:43,119 --> 00:25:45,879
Speaker 1: one's ever really litigated it. This this this clause section

505
00:25:45,920 --> 00:25:50,360
Speaker 1: four was mentioned in a in litigation around a new

506
00:25:50,400 --> 00:25:53,600
Speaker 1: Deal case, but it wasn't it wasn't really directly established

507
00:25:53,680 --> 00:25:56,440
Speaker 1: to be read in a maximalist or minimalist way. Other

508
00:25:56,480 --> 00:25:59,639
Speaker 1: parts of the fourteenth Amendment have been litigated to the

509
00:25:59,760 --> 00:26:01,359
Speaker 1: end of time. I mean, it is one of the

510
00:26:01,359 --> 00:26:03,639
Speaker 1: most litigated parts of the entire Constitution that the Spring

511
00:26:03,640 --> 00:26:06,680
Speaker 1: Court heres cases on. But this particular section has very

512
00:26:06,680 --> 00:26:09,280
Speaker 1: little litigation associated with it, so we don't really know

513
00:26:09,359 --> 00:26:11,800
Speaker 1: what courts would do. But if you read that that

514
00:26:11,800 --> 00:26:15,040
Speaker 1: that text, just as you know, sort of a plain text,

515
00:26:15,240 --> 00:26:18,040
Speaker 1: then it seems to create a constitutional obligation to pay

516
00:26:18,080 --> 00:26:20,640
Speaker 1: the public debt of the United States. And it's one

517
00:26:20,680 --> 00:26:22,840
Speaker 1: thing to say, well, you know, we can't pay the

518
00:26:22,840 --> 00:26:25,080
Speaker 1: public debt because we've run out of dollars. But we

519
00:26:25,119 --> 00:26:27,320
Speaker 1: know you and I, Joe and Tracy and hopefully odd

520
00:26:27,320 --> 00:26:30,400
Speaker 1: lots of listeners at this point know that to treasury

521
00:26:30,440 --> 00:26:33,400
Speaker 1: creates dollars. In the Federal Reserve creates dollars, and there's

522
00:26:33,440 --> 00:26:36,639
Speaker 1: no there's no lack of those dollars there there you

523
00:26:36,760 --> 00:26:38,959
Speaker 1: can't run out of them. So that's not that's not

524
00:26:39,000 --> 00:26:43,760
Speaker 1: a restraint. What what then, is preventing the federal government,

525
00:26:43,880 --> 00:26:46,560
Speaker 1: or specifically the executive branch and the Treasury, from going

526
00:26:46,560 --> 00:26:48,960
Speaker 1: out and doing what the Constitution tells it to do

527
00:26:49,119 --> 00:26:51,440
Speaker 1: by preventing people from questioning the debt and just saying,

528
00:26:52,280 --> 00:26:56,800
Speaker 1: restraints on issuance of debt to make good on payments

529
00:26:56,800 --> 00:27:01,120
Speaker 1: owed by the United States to third parties are I'm constitutional.

530
00:27:01,200 --> 00:27:03,200
Speaker 1: The dead ceiling is I'm constitutional, and we're going to

531
00:27:03,320 --> 00:27:06,840
Speaker 1: keep issuing debt until to to make payments until someone

532
00:27:06,920 --> 00:27:11,520
Speaker 1: tells us to stop. That path is one that is

533
00:27:11,600 --> 00:27:16,800
Speaker 1: hard to see from a political a political group that

534
00:27:16,920 --> 00:27:19,600
Speaker 1: has been as risk averse as the Biden administration has been.

535
00:27:19,760 --> 00:27:22,040
Speaker 1: But I do think you can make a very good

536
00:27:22,040 --> 00:27:24,919
Speaker 1: case that in an emergency, a situation where there's a

537
00:27:24,920 --> 00:27:28,439
Speaker 1: general default, where you know markets are crashing, where you

538
00:27:28,480 --> 00:27:32,000
Speaker 1: know there's there's massive economic disruption, that this is a

539
00:27:32,040 --> 00:27:34,680
Speaker 1: good choice to be made, that that that the debt

540
00:27:34,760 --> 00:27:37,920
Speaker 1: ceiling is totally self defeating. It's a it's a it

541
00:27:37,960 --> 00:27:40,119
Speaker 1: shouldn't exists in the first place. And by the way,

542
00:27:40,240 --> 00:27:43,480
Speaker 1: there's a constitutional reading right here. Now. I'm not a

543
00:27:43,480 --> 00:27:46,320
Speaker 1: constitutional scholar. I'm not a constitutional lawyer. I'm none of

544
00:27:46,320 --> 00:27:49,000
Speaker 1: those things. Um, like jay Z said, you know, I

545
00:27:49,320 --> 00:27:53,320
Speaker 1: passed the bar, but I know a little bit. I

546
00:27:53,359 --> 00:27:56,280
Speaker 1: know enough to know that this could hypothetically work. But

547
00:27:56,480 --> 00:27:58,840
Speaker 1: that's about it. So I don't think I would predict

548
00:27:58,840 --> 00:28:00,760
Speaker 1: that the bid administration should or could go out and

549
00:28:00,760 --> 00:28:03,720
Speaker 1: do this. But it is interesting to think about how

550
00:28:03,960 --> 00:28:06,800
Speaker 1: these powers appear to be given to them by the Constitution,

551
00:28:07,280 --> 00:28:10,800
Speaker 1: and that there could be a Supreme Court case settled

552
00:28:11,040 --> 00:28:16,680
Speaker 1: based on whether the US has just issued bonds that

553
00:28:16,720 --> 00:28:23,560
Speaker 1: are illegal under the Constitution. You know. Again fun, So, okay,

554
00:28:23,640 --> 00:28:26,000
Speaker 1: we're not going to have like a coin conversation. But

555
00:28:26,040 --> 00:28:30,240
Speaker 1: this does get to the other possibility, which is these

556
00:28:30,240 --> 00:28:35,159
Speaker 1: technical workarounds that people believe exists in the law. So

557
00:28:35,280 --> 00:28:38,360
Speaker 1: one possibility one of these workarounds could be invoked the

558
00:28:38,400 --> 00:28:41,040
Speaker 1: fourteenth Amendment, And it seems pretty clear the history on

559
00:28:41,160 --> 00:28:44,560
Speaker 1: that does not seem to be particularly ambiguous about why

560
00:28:44,600 --> 00:28:46,520
Speaker 1: it's there, And it's kind of you know, I'm reading

561
00:28:46,520 --> 00:28:49,360
Speaker 1: on Congress dot gov inspired by the desire to put

562
00:28:49,360 --> 00:28:52,200
Speaker 1: beyond question the obligations for the government issued during the

563
00:28:52,240 --> 00:28:54,880
Speaker 1: Civil War, and so like, I don't know, like it

564
00:28:55,040 --> 00:28:58,760
Speaker 1: doesn't seem particularly ambiguous, but setting aside the fourteenth, talk

565
00:28:58,840 --> 00:29:02,000
Speaker 1: to us about some of these other ideas in the

566
00:29:02,080 --> 00:29:05,479
Speaker 1: law to avoid a default. I think the easiest one

567
00:29:05,480 --> 00:29:08,080
Speaker 1: to understand and easy by the you know, if you

568
00:29:08,080 --> 00:29:10,200
Speaker 1: know a little bit of bond math, The easiest one

569
00:29:10,200 --> 00:29:13,920
Speaker 1: to understand is this idea of issuing very high coupon bonds.

570
00:29:13,960 --> 00:29:17,320
Speaker 1: So when when we issue a bond, typically what happens

571
00:29:17,400 --> 00:29:21,160
Speaker 1: is there's a bullet bond. Is the is the standard

572
00:29:21,240 --> 00:29:23,880
Speaker 1: term for what people think of, as you know, for instance,

573
00:29:23,920 --> 00:29:26,760
Speaker 1: a treasury bond, where you get a series of payments

574
00:29:26,800 --> 00:29:29,840
Speaker 1: over time that are called coupons, that are regular small payments,

575
00:29:29,840 --> 00:29:31,239
Speaker 1: and then you get a big payment at the end,

576
00:29:31,240 --> 00:29:34,600
Speaker 1: which is called the principle. Right principle is you know,

577
00:29:34,640 --> 00:29:37,800
Speaker 1: typically you you pay you you quote the price of

578
00:29:37,800 --> 00:29:40,800
Speaker 1: a bond as the percentage of the principal payment that

579
00:29:40,840 --> 00:29:42,320
Speaker 1: you will receive at the end. So for instance of

580
00:29:42,320 --> 00:29:45,719
Speaker 1: bondus trading at that means you pay now and then

581
00:29:45,760 --> 00:29:47,880
Speaker 1: you get the series of coupon payments associated with that

582
00:29:47,920 --> 00:29:50,000
Speaker 1: bond and the principal payment at the end, which is

583
00:29:50,000 --> 00:29:54,240
Speaker 1: a hundred. When Treasury auctions securities they are sensitive to

584
00:29:55,080 --> 00:29:58,360
Speaker 1: they basically want to set the price of those securities

585
00:29:58,760 --> 00:30:02,000
Speaker 1: just below one when they're first issued. Um, they don't

586
00:30:02,000 --> 00:30:04,440
Speaker 1: want to issue bonds at a premium. And they also

587
00:30:04,480 --> 00:30:06,960
Speaker 1: have a serious other constraints, like, for instance, the minimum

588
00:30:07,080 --> 00:30:10,440
Speaker 1: increment of coupon. So what they'll do is they'll issue

589
00:30:11,000 --> 00:30:15,160
Speaker 1: bonds with a coupon that sets the um the principal

590
00:30:15,200 --> 00:30:19,320
Speaker 1: payment um or sorry, sets the auction price just below

591
00:30:19,320 --> 00:30:22,360
Speaker 1: a hundred when they when they issue. So, for instance,

592
00:30:22,360 --> 00:30:24,120
Speaker 1: they're not going to go out and issue a fifteen

593
00:30:24,160 --> 00:30:29,040
Speaker 1: coupon coupon bond when the prevailing yield on treasure securities

594
00:30:29,160 --> 00:30:31,000
Speaker 1: is like five percent, right like like like, they're never

595
00:30:31,000 --> 00:30:33,640
Speaker 1: going to do that. But that's just like an internal

596
00:30:33,680 --> 00:30:35,680
Speaker 1: norm that's not like written in law anywhere. They don't

597
00:30:35,720 --> 00:30:38,000
Speaker 1: have a legal obligation to do it that way. If

598
00:30:38,000 --> 00:30:40,000
Speaker 1: they wanted to, they could go out and issue a

599
00:30:40,040 --> 00:30:42,800
Speaker 1: bond that matures with a principal value of a hundred

600
00:30:43,320 --> 00:30:47,320
Speaker 1: and pays coupon payments of a hundred, you know, hundred

601
00:30:47,640 --> 00:30:50,600
Speaker 1: per year for the next thirty years. Say so let's say,

602
00:30:50,600 --> 00:30:52,600
Speaker 1: for instance, they did this, they said, well, we're gonna

603
00:30:52,600 --> 00:30:55,840
Speaker 1: issue what's called a super high coupon bond, and again

604
00:30:55,880 --> 00:30:59,600
Speaker 1: this is nonsense territory from a from a pure finance perspective.

605
00:30:59,680 --> 00:31:02,160
Speaker 1: But let's say they go out and and that bond

606
00:31:02,200 --> 00:31:04,600
Speaker 1: that matures thirty years from now at a phase five,

607
00:31:05,040 --> 00:31:07,240
Speaker 1: it will pay a hundred and coupons every year as

608
00:31:07,240 --> 00:31:09,560
Speaker 1: opposed to the you know, four percent coupon on the

609
00:31:09,640 --> 00:31:12,200
Speaker 1: most recently issue third or bond something like that. So

610
00:31:12,240 --> 00:31:13,880
Speaker 1: if you do the bond math on that, if you

611
00:31:13,920 --> 00:31:16,200
Speaker 1: if you discount all those cash flows back to present

612
00:31:16,280 --> 00:31:19,560
Speaker 1: value at the current prevailing interest rate, what you've got

613
00:31:19,600 --> 00:31:23,040
Speaker 1: is an eighteen hundred dollar You receive eighteen hundred dollars

614
00:31:23,040 --> 00:31:25,800
Speaker 1: today for the bond maturing at a hundred in the future.

615
00:31:25,840 --> 00:31:27,440
Speaker 1: And the reason you get that is because it's got

616
00:31:27,440 --> 00:31:30,480
Speaker 1: that long string of payments associated with it, whether the

617
00:31:30,480 --> 00:31:33,560
Speaker 1: same size as the as the principal payment. You've basically

618
00:31:33,760 --> 00:31:37,640
Speaker 1: issued a zero coupon strip, all in one instrument for

619
00:31:37,680 --> 00:31:40,640
Speaker 1: the next thirty years. And you've done that, you're the

620
00:31:40,720 --> 00:31:43,000
Speaker 1: impact to the debt ceiling is a hundred, but you

621
00:31:43,040 --> 00:31:45,880
Speaker 1: now have another seventeen hundred in your in your pocket

622
00:31:45,880 --> 00:31:48,640
Speaker 1: because of those coupon payments. Those coupon payments aren't covered

623
00:31:48,640 --> 00:31:51,040
Speaker 1: by the debt sailing their coupon payments not principal payments.

624
00:31:51,400 --> 00:31:55,440
Speaker 1: Right that when when Treasury counts debt, they're not counting

625
00:31:55,640 --> 00:31:59,440
Speaker 1: the coup the interest costs, they're counting the principal value.

626
00:31:59,680 --> 00:32:03,960
Speaker 1: So hundred dollars is I mean, like like it's a

627
00:32:04,000 --> 00:32:07,840
Speaker 1: technicality where you can say, well, the coupon isn't principal,

628
00:32:07,920 --> 00:32:11,760
Speaker 1: but it's still cash in my pocket now delivered at

629
00:32:11,760 --> 00:32:14,440
Speaker 1: a later date that doesn't count against the dead ceiling.

630
00:32:14,880 --> 00:32:17,440
Speaker 1: So you know, that would be another technical workaround they

631
00:32:17,480 --> 00:32:21,440
Speaker 1: could use. Again, this one is on much less dicey

632
00:32:21,600 --> 00:32:24,400
Speaker 1: legal footing. There are lots of reasons why Treasury maybe

633
00:32:24,400 --> 00:32:26,000
Speaker 1: want to say we don't want to do this, Um,

634
00:32:26,120 --> 00:32:27,720
Speaker 1: we don't have any interest in this, we're not able

635
00:32:27,760 --> 00:32:30,200
Speaker 1: to do this whatever. There There could be lots of

636
00:32:30,200 --> 00:32:32,480
Speaker 1: reasons for that, but but legally it's it's not quite

637
00:32:32,480 --> 00:32:35,120
Speaker 1: as dicey as saying to Congress in the Supreme Court, well,

638
00:32:35,120 --> 00:32:36,680
Speaker 1: we're just going to keep issuing Debton. You know, take

639
00:32:36,720 --> 00:32:38,920
Speaker 1: your best shot at stopping us. I'm trying to think

640
00:32:39,360 --> 00:32:41,840
Speaker 1: what would be a harder sell to the public is that,

641
00:32:41,960 --> 00:32:45,840
Speaker 1: you know, issuing a high coupon bond that like gets

642
00:32:45,880 --> 00:32:48,280
Speaker 1: you immediate proceeds that are a lot more than the

643
00:32:48,320 --> 00:32:51,520
Speaker 1: actual issue once amount, or is it a large novelty coin. Well,

644
00:32:51,560 --> 00:32:54,920
Speaker 1: I mean, so I was gonna you know, the novelty coin.

645
00:32:55,080 --> 00:32:57,880
Speaker 1: I'm sure you know, well, we know the headlines are

646
00:32:57,880 --> 00:32:59,760
Speaker 1: gonna be on that. But you know, at the same time,

647
00:32:59,800 --> 00:33:03,320
Speaker 1: I'm I'm imagining Biden is borrowing at a hundred percent

648
00:33:03,480 --> 00:33:06,760
Speaker 1: interest rates from China to like the payday loan to

649
00:33:06,920 --> 00:33:10,040
Speaker 1: like you know, like the the The headlines could go

650
00:33:10,040 --> 00:33:13,520
Speaker 1: in either direction, for sure, Yeah, I mean, but then

651
00:33:13,560 --> 00:33:16,320
Speaker 1: you have to explain like like what how it's even

652
00:33:16,360 --> 00:33:18,640
Speaker 1: possible to borrow a hundred percent interest rates or or

653
00:33:18,680 --> 00:33:20,880
Speaker 1: like what is even happening there? I mean, I do

654
00:33:21,000 --> 00:33:25,800
Speaker 1: think both the coin for for all it's downsides tracing.

655
00:33:25,840 --> 00:33:27,480
Speaker 1: I know how much you love the coin, but you

656
00:33:27,520 --> 00:33:32,000
Speaker 1: know the benefit of both the high coupon bond plan

657
00:33:32,080 --> 00:33:35,040
Speaker 1: and the coin plan is that they're weird incantations, you know,

658
00:33:35,160 --> 00:33:39,240
Speaker 1: run by technocrats. They're not They're not like a tangible

659
00:33:39,280 --> 00:33:41,239
Speaker 1: thing where it's like the U. S Constitution and like

660
00:33:41,280 --> 00:33:44,320
Speaker 1: this sort of feeling that the world is going straight.

661
00:33:44,360 --> 00:33:46,320
Speaker 1: It's like, oh, well they said the right words and

662
00:33:46,320 --> 00:33:48,800
Speaker 1: everything is fixed now. So who cares is is how

663
00:33:48,840 --> 00:33:51,600
Speaker 1: people tend to think about this stuff. I think. Whereas

664
00:33:51,640 --> 00:33:53,640
Speaker 1: when you're talking about the Supreme Court and the Constitution

665
00:33:53,680 --> 00:33:56,920
Speaker 1: and Article um section four of the fourteenth Amendment and

666
00:33:57,200 --> 00:33:59,840
Speaker 1: the history and that, people get very arpen arms all

667
00:33:59,880 --> 00:34:02,040
Speaker 1: the Constitution, you know whatever. Whereas if it's just like, oh,

668
00:34:02,040 --> 00:34:03,600
Speaker 1: well we just said the right words magically to the

669
00:34:03,640 --> 00:34:06,280
Speaker 1: bond market and now everything's fine, I think you get

670
00:34:06,280 --> 00:34:09,880
Speaker 1: a very different you know, feeling from that politically. But

671
00:34:10,239 --> 00:34:12,960
Speaker 1: that's speculation on that part. This is something that's important,

672
00:34:13,000 --> 00:34:15,759
Speaker 1: which is that okay, let's say the administration to say,

673
00:34:15,800 --> 00:34:18,920
Speaker 1: you know what, the fourteenth Amendment says, the dead sailing

674
00:34:19,280 --> 00:34:21,880
Speaker 1: is invalid. We're just going to ignore it and continue

675
00:34:21,880 --> 00:34:25,200
Speaker 1: fiscal operations as normal. And then, as you pointed out,

676
00:34:25,400 --> 00:34:28,480
Speaker 1: there might be some ambiguity about whether the bonds issued

677
00:34:28,560 --> 00:34:30,600
Speaker 1: after that moment are legal, and maybe there would be

678
00:34:30,920 --> 00:34:32,560
Speaker 1: get to the Supreme Court. We don't really know what

679
00:34:32,600 --> 00:34:35,759
Speaker 1: they were going to say. But to some extent, this

680
00:34:35,840 --> 00:34:39,520
Speaker 1: even applies to any other solution as well, including the

681
00:34:39,600 --> 00:34:43,040
Speaker 1: high coupon bonds, including the coin, which is that like

682
00:34:43,280 --> 00:34:45,319
Speaker 1: someone could sue over the coin, Like no one's gonna

683
00:34:45,320 --> 00:34:46,920
Speaker 1: stop it. And if like five out of the nine

684
00:34:46,920 --> 00:34:50,520
Speaker 1: Supreme Court justices says you can't issue a hundred year bonds,

685
00:34:50,560 --> 00:34:52,960
Speaker 1: like that's clearly in violation to the spirit of the

686
00:34:53,000 --> 00:34:56,239
Speaker 1: dead Sailing law. You know, you're still issuing debt at

687
00:34:56,239 --> 00:34:58,080
Speaker 1: a time when we're not supposed to issue any more

688
00:34:58,160 --> 00:35:01,520
Speaker 1: debt Like the uncertain the exist in almost any of

689
00:35:01,560 --> 00:35:04,800
Speaker 1: these scenarios for sure. And you know we set it before,

690
00:35:04,840 --> 00:35:07,680
Speaker 1: and I'll say it again, this is all a political question,

691
00:35:07,719 --> 00:35:11,800
Speaker 1: a social question, right like that, Like political power means

692
00:35:12,040 --> 00:35:14,440
Speaker 1: telling people to do something that they don't want to do.

693
00:35:14,560 --> 00:35:18,359
Speaker 1: That is what political power is, right, And whether it's

694
00:35:18,400 --> 00:35:22,120
Speaker 1: the Biden administration forcing issuance of new debt, whether it's

695
00:35:22,160 --> 00:35:24,959
Speaker 1: the Supreme Court stepping into either validate that or or

696
00:35:25,120 --> 00:35:27,800
Speaker 1: or invalidate that. You know, that's the fourteenth a medi scenario,

697
00:35:28,320 --> 00:35:30,920
Speaker 1: or whether it's the Biden administrations saying, Okay, we're not

698
00:35:30,920 --> 00:35:33,919
Speaker 1: going to make any payments regardless of who doesn't get paid,

699
00:35:34,080 --> 00:35:37,640
Speaker 1: or it's prioritization where some people get paid, for instance,

700
00:35:37,640 --> 00:35:40,160
Speaker 1: bond holders maybe get paid, but you know, retirees don't

701
00:35:40,560 --> 00:35:43,720
Speaker 1: like whatever approach you take to this. At some point

702
00:35:43,760 --> 00:35:46,080
Speaker 1: someone is being told you don't get what you want

703
00:35:46,200 --> 00:35:49,160
Speaker 1: because you can't stop me, you know, under our system,

704
00:35:49,239 --> 00:35:52,560
Speaker 1: right like like you physically can't stop me, or you know,

705
00:35:52,800 --> 00:35:55,520
Speaker 1: enough of other political bodies have sided with me so

706
00:35:55,560 --> 00:35:57,560
Speaker 1: that you can't get done what's what you want to

707
00:35:57,560 --> 00:36:00,160
Speaker 1: get done? And you know this is a like at

708
00:36:00,160 --> 00:36:01,600
Speaker 1: the end of the day, the dead ceiling has lots

709
00:36:01,600 --> 00:36:06,000
Speaker 1: of interesting financial and economic and analytical things to explore,

710
00:36:06,280 --> 00:36:08,000
Speaker 1: but it's always going to come back to being a

711
00:36:08,040 --> 00:36:11,719
Speaker 1: political problem. Was created by politicians. It's it's being exacerbated

712
00:36:11,719 --> 00:36:15,160
Speaker 1: by politicians, and it will be solved through political means

713
00:36:15,200 --> 00:36:18,160
Speaker 1: and nothing else. And you know, I just I'll always

714
00:36:18,200 --> 00:36:22,040
Speaker 1: come back to that. I I really in that. From

715
00:36:22,040 --> 00:36:25,600
Speaker 1: that perspective, I cannot emphasize enough that that Congress has

716
00:36:25,640 --> 00:36:29,440
Speaker 1: created this problem for itself, and if there was justice,

717
00:36:29,520 --> 00:36:32,480
Speaker 1: then Congress would lose power in some sense over this,

718
00:36:32,520 --> 00:36:34,880
Speaker 1: whether it's the death ceiling is invalidated by the Supreme

719
00:36:34,960 --> 00:36:37,560
Speaker 1: Quarter or by the by administration or whatever, or you know,

720
00:36:37,719 --> 00:36:40,520
Speaker 1: some other solution. Unfortunately, like the world doesn't work based

721
00:36:40,560 --> 00:36:44,160
Speaker 1: on karmic justice, So I don't think we can hope

722
00:36:44,200 --> 00:36:46,120
Speaker 1: that oh well, the you know, Congress gets its come

723
00:36:46,200 --> 00:36:48,120
Speaker 1: up in but maybe they will. I mean, we'll see.

724
00:36:48,160 --> 00:36:49,920
Speaker 1: I mean, it's gonna be an interesting few months here,

725
00:36:50,000 --> 00:37:09,000
Speaker 1: to say the least. So the overarching theme of this

726
00:37:09,120 --> 00:37:13,399
Speaker 1: conversation is just mass uncertainty, lots of hypothetical shooting out

727
00:37:13,440 --> 00:37:17,880
Speaker 1: in every different direction, and no one really knows what's

728
00:37:17,880 --> 00:37:21,120
Speaker 1: going to happen when we finally hit that X date,

729
00:37:21,239 --> 00:37:24,279
Speaker 1: the drop dead date. But there is something sort of

730
00:37:24,320 --> 00:37:27,319
Speaker 1: more immediate, a potential more immediate impact. And I think

731
00:37:27,360 --> 00:37:29,400
Speaker 1: we touched on this when we were talking about t

732
00:37:29,560 --> 00:37:32,080
Speaker 1: g A balances, this idea of you know, the Treasury

733
00:37:32,160 --> 00:37:35,600
Speaker 1: is checking account at the Fed. It does have an

734
00:37:35,640 --> 00:37:38,880
Speaker 1: impact on liquidity. So what's going on with the t

735
00:37:39,040 --> 00:37:41,080
Speaker 1: g A. You know, if there's more money in there,

736
00:37:41,120 --> 00:37:43,640
Speaker 1: if there's less money in there, it can mean different

737
00:37:43,680 --> 00:37:48,160
Speaker 1: levels of liquidity for the broader economic system, for companies

738
00:37:48,200 --> 00:37:51,200
Speaker 1: that might be due payments from the government. Talk to

739
00:37:51,280 --> 00:37:55,160
Speaker 1: us a little bit about the immediate impact of all

740
00:37:55,280 --> 00:37:59,560
Speaker 1: this discussion over the debt ceiling on market liquidity and

741
00:37:59,640 --> 00:38:02,440
Speaker 1: money harry policy as well. Yeah, so this is kind

742
00:38:02,440 --> 00:38:05,399
Speaker 1: of a perverse thing about how the mechanics of of

743
00:38:05,480 --> 00:38:08,719
Speaker 1: the t g A being inflated with that sort of

744
00:38:09,000 --> 00:38:12,280
Speaker 1: cushion we discussed earlier. It's perverse how this works, because

745
00:38:12,560 --> 00:38:15,560
Speaker 1: when the Treasury is building up that cushion, they are

746
00:38:15,600 --> 00:38:19,080
Speaker 1: withdrawing aggurate liquidity from the private sector. Treasury is withdrawing

747
00:38:19,120 --> 00:38:23,239
Speaker 1: liquidity from the private sector because that increase in t

748
00:38:23,400 --> 00:38:26,680
Speaker 1: g A balances is being funded by some combination of

749
00:38:27,000 --> 00:38:29,880
Speaker 1: higher debt and you know, higher tax as relative depending

750
00:38:30,080 --> 00:38:32,920
Speaker 1: it's debt, right, the Treasury is issuing more bills and

751
00:38:33,000 --> 00:38:35,640
Speaker 1: more notes and bonds than they technically need for the

752
00:38:35,719 --> 00:38:39,000
Speaker 1: specific period in time. That means cash balances are being

753
00:38:39,040 --> 00:38:42,000
Speaker 1: dragged out of the private sector and to the Treasury's

754
00:38:42,160 --> 00:38:45,920
Speaker 1: cash balance. At the FED, that's a federal reserve liability,

755
00:38:46,360 --> 00:38:48,239
Speaker 1: just like a FED fund is, but in the but

756
00:38:48,320 --> 00:38:50,520
Speaker 1: the liability that the FED holds in the t g A,

757
00:38:50,640 --> 00:38:52,880
Speaker 1: the only asset, the only person who can hold that

758
00:38:52,920 --> 00:38:56,800
Speaker 1: as an asset is Treasury, whereas Federal reserve FED funds

759
00:38:56,960 --> 00:38:59,440
Speaker 1: are an asset that can be held by the banking

760
00:38:59,480 --> 00:39:02,640
Speaker 1: sector and used to match against deposits that are an

761
00:39:02,640 --> 00:39:04,800
Speaker 1: asset of the rest of the private sector. So basically

762
00:39:04,800 --> 00:39:07,359
Speaker 1: it's like reverse quite right, when this TJ is being

763
00:39:07,360 --> 00:39:10,759
Speaker 1: built up, it's it's it's pulling liquidity out of the

764
00:39:10,800 --> 00:39:14,040
Speaker 1: private sector and storing it in the t g A.

765
00:39:14,320 --> 00:39:16,799
Speaker 1: Then the t as the t J is released, it

766
00:39:16,880 --> 00:39:20,160
Speaker 1: does the opposite, right, so it unleashes private sector liquidity

767
00:39:20,160 --> 00:39:24,040
Speaker 1: because that liability of the Federal of the Federal Reserve

768
00:39:24,080 --> 00:39:27,000
Speaker 1: to the Treasury is being spent down. The payments are

769
00:39:27,000 --> 00:39:29,400
Speaker 1: wounding up as assets of the rest of the private

770
00:39:29,400 --> 00:39:31,319
Speaker 1: sector or the rest of the world. Basically, everybody but

771
00:39:31,400 --> 00:39:35,560
Speaker 1: the federal government funded by Federal Reserve FED funds liabilities

772
00:39:35,600 --> 00:39:39,120
Speaker 1: of the of the FED. So it's basically a countercyclical thing,

773
00:39:39,200 --> 00:39:41,160
Speaker 1: right Like it's it's as as times are good and

774
00:39:41,160 --> 00:39:43,239
Speaker 1: we're you know, go along and t g gets built

775
00:39:43,280 --> 00:39:45,560
Speaker 1: up and then we've got worried about that ceiling. But

776
00:39:45,760 --> 00:39:48,759
Speaker 1: at the same time, a bunch of liquidity as being unleashed. Now,

777
00:39:49,120 --> 00:39:53,120
Speaker 1: the sizes here are not necessarily huge. It sort of

778
00:39:53,120 --> 00:39:55,920
Speaker 1: depends on the specific instance. But the size of the

779
00:39:55,960 --> 00:39:58,000
Speaker 1: t g A has gotten pretty big relative to the

780
00:39:58,000 --> 00:40:00,200
Speaker 1: rest of the Fed's balance sheet as a matter of course.

781
00:40:01,440 --> 00:40:04,279
Speaker 1: So prior to the global financial crisis two thousand seven,

782
00:40:04,320 --> 00:40:07,000
Speaker 1: two eight kind of range, the TJA was less than

783
00:40:07,040 --> 00:40:09,160
Speaker 1: one percent of the FEDS balance sheet. Basically payments in

784
00:40:09,200 --> 00:40:12,120
Speaker 1: payments out almost precisely matched each other day to day.

785
00:40:12,440 --> 00:40:14,879
Speaker 1: From two eight fifteen, it built up a little bit

786
00:40:14,920 --> 00:40:17,640
Speaker 1: because just the scope of federal government spending went up.

787
00:40:17,719 --> 00:40:20,480
Speaker 1: There was a lot more issuance of debt with post

788
00:40:20,520 --> 00:40:24,399
Speaker 1: crisis deficits that were that slowly sort of declined from

789
00:40:24,480 --> 00:40:26,239
Speaker 1: the peaks in two thousand nine. But then when we

790
00:40:26,239 --> 00:40:28,520
Speaker 1: get to and treasure says, okay, well we want to

791
00:40:28,520 --> 00:40:32,399
Speaker 1: start building up this this cash balance from average six

792
00:40:32,400 --> 00:40:34,440
Speaker 1: percent of the Fed's balance sheet UM so it was

793
00:40:34,520 --> 00:40:37,239
Speaker 1: below one percent before the goal financial crisis immediately after

794
00:40:37,320 --> 00:40:42,640
Speaker 1: is about two after that. After six since q it's

795
00:40:42,680 --> 00:40:44,759
Speaker 1: been eleven percent of the FEDS balance sheet. That's a

796
00:40:44,880 --> 00:40:47,320
Speaker 1: huge percentage of the FEDS balance sheet, and it swings

797
00:40:47,320 --> 00:40:50,040
Speaker 1: around quite a lot, unlike, for instance, the q AST

798
00:40:50,040 --> 00:40:54,640
Speaker 1: purchase portfolio. So basically you've got this complicating factor that

799
00:40:54,680 --> 00:40:57,319
Speaker 1: has nothing to do with the FEDS monetary policy UM

800
00:40:57,320 --> 00:41:00,600
Speaker 1: setting that the FEDS, the FED is not changing policy

801
00:41:00,640 --> 00:41:04,400
Speaker 1: based on treasury cash management, and yet it's got this

802
00:41:04,560 --> 00:41:07,759
Speaker 1: this sort of impact on aggregate private sector liquidity, both

803
00:41:07,800 --> 00:41:09,960
Speaker 1: positive and negative depending on what's going on with the

804
00:41:09,960 --> 00:41:11,840
Speaker 1: t g A UH, do you have to account for

805
00:41:12,040 --> 00:41:14,160
Speaker 1: so you know, as we see the t g A

806
00:41:14,480 --> 00:41:18,919
Speaker 1: spend down over the next few months, it's already underway. Um,

807
00:41:19,040 --> 00:41:22,160
Speaker 1: that will have an impact on aggregate private sector liquidity.

808
00:41:22,200 --> 00:41:24,799
Speaker 1: That will be kind of sort of counterintuitive. I guess

809
00:41:24,840 --> 00:41:27,759
Speaker 1: you could say. Right now, there's about five hundred and

810
00:41:27,760 --> 00:41:31,920
Speaker 1: sixty billion in the Treasure General account. That's down from

811
00:41:31,960 --> 00:41:35,279
Speaker 1: a peak of almost a trillion in May of last year.

812
00:41:35,360 --> 00:41:37,960
Speaker 1: The recent peak, it's it's it's it's sort of trended

813
00:41:38,040 --> 00:41:40,840
Speaker 1: lower over the past seven months or so, and that

814
00:41:40,880 --> 00:41:43,440
Speaker 1: will continue to trend lower as we go from five

815
00:41:43,840 --> 00:41:47,040
Speaker 1: sixty down to zero presumably or near zero at the

816
00:41:47,120 --> 00:41:48,919
Speaker 1: X date. All right, I want to ask one more

817
00:41:48,920 --> 00:41:52,759
Speaker 1: markets related question, and I think there's this fantasy that

818
00:41:52,840 --> 00:41:55,759
Speaker 1: people have, which is that the stock market becomes the

819
00:41:55,800 --> 00:41:59,279
Speaker 1: sort of forcing mechanism. The example that everyone would site

820
00:41:59,360 --> 00:42:02,359
Speaker 1: is the tarp out. It failed in two thousand and eight,

821
00:42:02,360 --> 00:42:04,000
Speaker 1: and the stock market crashed some more, and then they

822
00:42:04,000 --> 00:42:06,680
Speaker 1: passed it a couple of days later. It doesn't seem

823
00:42:06,800 --> 00:42:09,960
Speaker 1: like that dynamic really holds with the dead ceiling, because

824
00:42:10,000 --> 00:42:13,920
Speaker 1: even though there's this potential for catastrophe, on certainty, the

825
00:42:14,000 --> 00:42:17,359
Speaker 1: view amongst stocks investors seems to be they always get

826
00:42:17,400 --> 00:42:20,680
Speaker 1: it done in the end. Why would I sell my stock, etcetera.

827
00:42:20,840 --> 00:42:23,160
Speaker 1: Like can you talk a little bit about, like, as

828
00:42:23,200 --> 00:42:25,640
Speaker 1: we get closer, is there any sort of like history

829
00:42:25,719 --> 00:42:29,919
Speaker 1: or like the sort of interplay between market volatility and

830
00:42:30,400 --> 00:42:32,520
Speaker 1: pressure to just like all right, let's get it past.

831
00:42:33,160 --> 00:42:35,040
Speaker 1: There is no doubt that there is a feedback loop

832
00:42:35,080 --> 00:42:37,920
Speaker 1: between asset markets and how politicians think in this country.

833
00:42:37,960 --> 00:42:41,200
Speaker 1: I mean, using a more recent example from then the

834
00:42:41,200 --> 00:42:43,000
Speaker 1: top vote, which I think is a good, good one,

835
00:42:43,360 --> 00:42:46,120
Speaker 1: you could look to what happened in the spring of right,

836
00:42:46,160 --> 00:42:49,040
Speaker 1: we saw a degree of fiscal stimulus and a degree

837
00:42:49,040 --> 00:42:53,680
Speaker 1: of support for households that completely unprecedented in American history

838
00:42:53,800 --> 00:42:57,240
Speaker 1: and completely like if you had dreamed up the scenario

839
00:42:57,360 --> 00:42:59,840
Speaker 1: where that happens, even if you had you know, no

840
00:43:00,000 --> 00:43:01,799
Speaker 1: one about COVID coming, and you had said, okay, well,

841
00:43:01,800 --> 00:43:04,799
Speaker 1: then you're going to see this public sector response to that,

842
00:43:05,040 --> 00:43:07,200
Speaker 1: I don't think anyone would have believed you. They just said, no,

843
00:43:07,239 --> 00:43:10,640
Speaker 1: there's no way that the Republican Congress will will do that.

844
00:43:10,719 --> 00:43:13,640
Speaker 1: There's no way that there are no Republicans and Congress

845
00:43:13,640 --> 00:43:15,080
Speaker 1: will okay that, There's no way that I'll get through

846
00:43:15,200 --> 00:43:18,080
Speaker 1: filibusters and all that, and it absolutely did, and it

847
00:43:18,120 --> 00:43:21,160
Speaker 1: did so immediately because asset markets were in free fault

848
00:43:21,280 --> 00:43:24,800
Speaker 1: right there. There is a lot more feedback to political

849
00:43:24,800 --> 00:43:26,800
Speaker 1: economy in this country and to political out comes in

850
00:43:26,840 --> 00:43:29,719
Speaker 1: this country from the stock market then from the unplaying right.

851
00:43:29,880 --> 00:43:32,399
Speaker 1: That is just how things work. I'm not defending that,

852
00:43:32,640 --> 00:43:36,000
Speaker 1: it's just the reality. So I do think that if

853
00:43:36,040 --> 00:43:40,600
Speaker 1: we if we see stock markets start to false you know, measurably,

854
00:43:40,640 --> 00:43:44,120
Speaker 1: you know, like like big volatility, big downside in the

855
00:43:44,200 --> 00:43:47,000
Speaker 1: months or weeks leading up to the sort of X

856
00:43:47,000 --> 00:43:49,400
Speaker 1: state as it sort of becomes more clear, then you

857
00:43:49,440 --> 00:43:51,879
Speaker 1: will definitely seem a lot of pressure on politicians to

858
00:43:51,880 --> 00:43:54,360
Speaker 1: to just just raise the dang thing, you know, have

859
00:43:54,480 --> 00:43:57,840
Speaker 1: your fights about something else. Whether that comes from people

860
00:43:57,920 --> 00:44:01,360
Speaker 1: within the respective ideological goals of each party, whether that

861
00:44:01,400 --> 00:44:04,120
Speaker 1: comes from the public as a whole, it's unclear, but

862
00:44:04,600 --> 00:44:07,520
Speaker 1: either way there will be significant pressure. If, however, stock

863
00:44:07,520 --> 00:44:10,279
Speaker 1: markets say, well, you know, like they'll figure it out

864
00:44:10,320 --> 00:44:13,000
Speaker 1: and event you know, maybe there there'll be a default,

865
00:44:13,040 --> 00:44:15,480
Speaker 1: but like they'll pay those back eventually, and people be

866
00:44:15,480 --> 00:44:17,239
Speaker 1: commented and like area with plenty of people that are

867
00:44:17,280 --> 00:44:19,120
Speaker 1: willing to pick up an extra twenty five basis points

868
00:44:19,120 --> 00:44:20,919
Speaker 1: in a Treasury bill to hold it for a few

869
00:44:20,920 --> 00:44:22,880
Speaker 1: months while they figure out this, this this out and

870
00:44:22,880 --> 00:44:24,719
Speaker 1: it'll be fine, and so we can just sort of

871
00:44:24,719 --> 00:44:26,880
Speaker 1: look past that. If if that happens, that's a recipe

872
00:44:26,920 --> 00:44:29,280
Speaker 1: for a much more protracted fight and a much longer

873
00:44:29,320 --> 00:44:32,960
Speaker 1: time past the X date with you know, uncertainty going on. Now.

874
00:44:33,080 --> 00:44:34,600
Speaker 1: My view would be that if you if you get

875
00:44:34,640 --> 00:44:39,080
Speaker 1: to the X date, even if you have prioritization, barring

876
00:44:39,320 --> 00:44:41,680
Speaker 1: using one of the technical workarounds we discussed, so either

877
00:44:41,719 --> 00:44:45,440
Speaker 1: the coin or using high coupon bonds or um just

878
00:44:45,480 --> 00:44:47,840
Speaker 1: saying well, this violates the fourteenth Amendment, so we're going

879
00:44:47,880 --> 00:44:50,840
Speaker 1: to ignore the death ceiling if you if you you know,

880
00:44:51,360 --> 00:44:54,400
Speaker 1: don't have those and you have either prioritization, which Treasury

881
00:44:54,480 --> 00:44:56,839
Speaker 1: said isn't possible but could be possible and you're working

882
00:44:56,840 --> 00:44:59,840
Speaker 1: through prioritization, or if you're just doing a general default,

883
00:44:59,840 --> 00:45:01,960
Speaker 1: We're we're not paying any payments until the dead ceilings race,

884
00:45:02,000 --> 00:45:03,880
Speaker 1: because that's that's what the law tells us to do.

885
00:45:03,920 --> 00:45:06,800
Speaker 1: If if I'm the Treasury, okay, either way in either

886
00:45:06,840 --> 00:45:10,560
Speaker 1: a prior to a severe prioritization scenario or a general default,

887
00:45:11,040 --> 00:45:14,200
Speaker 1: you're going to have large economic impacts from that, right,

888
00:45:14,239 --> 00:45:16,440
Speaker 1: Like like that, the volume of outgoing payments that are

889
00:45:16,480 --> 00:45:18,840
Speaker 1: not going to show up in the bank accounts of

890
00:45:18,840 --> 00:45:20,920
Speaker 1: people that want to spend them, whether those are businesses

891
00:45:20,920 --> 00:45:23,280
Speaker 1: whether their individuals, is going to be really big. Social

892
00:45:23,280 --> 00:45:24,960
Speaker 1: Security is a really good example. Like if you start

893
00:45:25,000 --> 00:45:27,160
Speaker 1: paying Social Security, the entire economy grants to a halt

894
00:45:27,200 --> 00:45:29,560
Speaker 1: about a month. There's just not it's it's just such

895
00:45:29,560 --> 00:45:32,080
Speaker 1: a huge cash flow for such a large percentagers of

896
00:45:32,080 --> 00:45:35,799
Speaker 1: population that you can't So eventually there will be a

897
00:45:35,800 --> 00:45:37,919
Speaker 1: feedback to asset markets. This will not last forever where

898
00:45:38,000 --> 00:45:39,439
Speaker 1: it's just kind of the new normal that the US

899
00:45:39,520 --> 00:45:42,279
Speaker 1: is permanently you know, has the destiny in place, and

900
00:45:42,360 --> 00:45:45,560
Speaker 1: you know, only making some outgoing payments. Eventually the economy

901
00:45:45,600 --> 00:45:48,200
Speaker 1: starts to collapse, the stock market starts to collapse, and

902
00:45:48,400 --> 00:45:51,080
Speaker 1: you you know, you see and another interesting thing, just

903
00:45:51,120 --> 00:45:52,920
Speaker 1: to work it back to the Fed. An interesting thing

904
00:45:52,960 --> 00:45:55,840
Speaker 1: to think about it is if the economy is collapsing

905
00:45:55,920 --> 00:45:58,920
Speaker 1: because all these payments aren't going out and the stock

906
00:45:58,960 --> 00:46:00,799
Speaker 1: market is in free fault us, the FED step in

907
00:46:00,880 --> 00:46:02,640
Speaker 1: to say, okay, well we're going to cut rates now.

908
00:46:02,760 --> 00:46:04,719
Speaker 1: Because the economies and free fall because of what's going

909
00:46:04,760 --> 00:46:08,000
Speaker 1: on with the dead sailing or do they say not

910
00:46:08,080 --> 00:46:10,239
Speaker 1: our problem? I don't know. I don't have a good

911
00:46:10,239 --> 00:46:11,640
Speaker 1: answer for that. I don't I don't think a good

912
00:46:11,640 --> 00:46:14,040
Speaker 1: answer exists, but it's something interesting to think about. It

913
00:46:14,440 --> 00:46:16,279
Speaker 1: feels like this is one of those topics where there

914
00:46:16,320 --> 00:46:19,040
Speaker 1: just aren't a lot of good answers. But George did

915
00:46:19,040 --> 00:46:21,200
Speaker 1: a good job. Yeah, you did a great job. There's

916
00:46:21,200 --> 00:46:24,360
Speaker 1: a lot of uncertainty and hypotheticals as we've been talking about.

917
00:46:24,400 --> 00:46:27,080
Speaker 1: It's not an easy thing to sort of lay out

918
00:46:27,120 --> 00:46:29,759
Speaker 1: all the different options and what might happen depending on

919
00:46:29,800 --> 00:46:32,120
Speaker 1: what's pursued. But George, it was great having you on.

920
00:46:32,160 --> 00:46:35,200
Speaker 1: You did a great job. Thank you so much. Yeah,

921
00:46:35,200 --> 00:46:36,439
Speaker 1: thanks for having me on. I mean I can stick

922
00:46:36,440 --> 00:46:39,040
Speaker 1: around for another three hours and we can get all

923
00:46:39,080 --> 00:46:41,799
Speaker 1: the different hypotheticals if you want. All right, now our

924
00:46:41,920 --> 00:46:45,520
Speaker 1: to the coin conversation. Okay, I'm thanks man, let's go.

925
00:46:46,000 --> 00:47:03,000
Speaker 1: Thanks for having me on, George. Thanks George. Joe. There's

926
00:47:03,000 --> 00:47:05,640
Speaker 1: a lot to unpack from that conversation. I agree, But

927
00:47:05,760 --> 00:47:08,120
Speaker 1: George did like a great job, Like you know, there

928
00:47:08,200 --> 00:47:11,080
Speaker 1: is a lot of uncertainty. I guess because it's something

929
00:47:11,120 --> 00:47:13,560
Speaker 1: that had been lodged in my mind. But like, I'm

930
00:47:13,560 --> 00:47:16,279
Speaker 1: glad he brought up that question of like the software

931
00:47:16,320 --> 00:47:19,680
Speaker 1: element of defaulted debt, because it's just something like I

932
00:47:19,719 --> 00:47:21,640
Speaker 1: want like people like you know, like we don't talk

933
00:47:21,640 --> 00:47:25,520
Speaker 1: about debt in those terms. It seems totally like a

934
00:47:25,719 --> 00:47:28,839
Speaker 1: Y two K thing, as you mentioned, where people just

935
00:47:28,960 --> 00:47:32,400
Speaker 1: would not expect US treasuries to default. And anyway, why

936
00:47:32,440 --> 00:47:34,759
Speaker 1: would you prepare for such a scenario, because if that

937
00:47:34,800 --> 00:47:36,799
Speaker 1: were to happen, then it would be the collapse of

938
00:47:36,880 --> 00:47:39,640
Speaker 1: the financial system as we know it. But yet here

939
00:47:39,640 --> 00:47:43,800
Speaker 1: we are, you know, after two thousand eleven, after having

940
00:47:43,880 --> 00:47:47,200
Speaker 1: a very similar conversation. The other thing that's stuck out

941
00:47:47,239 --> 00:47:50,920
Speaker 1: in my mind was George's point about, you know, ultimately

942
00:47:50,960 --> 00:47:53,760
Speaker 1: this is a political process and it plays out in debt.

943
00:47:53,840 --> 00:47:56,360
Speaker 1: But the reason it plays out in the debt market

944
00:47:56,440 --> 00:48:01,359
Speaker 1: is because debt is inherently, I think, so tied up

945
00:48:01,680 --> 00:48:07,400
Speaker 1: with questions of morality and justice, and it's so easy

946
00:48:07,520 --> 00:48:10,960
Speaker 1: to build a political narrative on top of something that

947
00:48:11,080 --> 00:48:16,520
Speaker 1: is ultimately about who owes what to who and why? Absolutely,

948
00:48:16,560 --> 00:48:18,920
Speaker 1: And you know, I think that's why it's really notable

949
00:48:19,560 --> 00:48:21,960
Speaker 1: that this was written into the constitution, and we run

950
00:48:22,080 --> 00:48:24,440
Speaker 1: into the constitution after the Civil War. And what we

951
00:48:24,480 --> 00:48:28,239
Speaker 1: did have that coin conversation was with Roman Grande. He

952
00:48:28,320 --> 00:48:30,839
Speaker 1: talked about this as well, which is that like this

953
00:48:31,000 --> 00:48:34,480
Speaker 1: fear that in the pursuit of the Civil War that

954
00:48:34,600 --> 00:48:39,680
Speaker 1: southern representative representatives from the formerly confederate state would try

955
00:48:39,680 --> 00:48:42,160
Speaker 1: to induce a default because it's like, oh, we don't

956
00:48:42,200 --> 00:48:46,000
Speaker 1: want to pay the debts of the northern government that

957
00:48:46,080 --> 00:48:48,279
Speaker 1: fought a war against does and so they did, like

958
00:48:48,320 --> 00:48:49,920
Speaker 1: they this is like, you know, it gets to like

959
00:48:50,200 --> 00:48:53,520
Speaker 1: deep constitutional questions and it continues to play out over

960
00:48:53,560 --> 00:48:57,000
Speaker 1: and over again in different forms, the political weaponization of debt.

961
00:48:57,320 --> 00:48:59,640
Speaker 1: It seems to be happening more often because I think

962
00:48:59,640 --> 00:49:02,960
Speaker 1: people have realized that it is an effective pressure point.

963
00:49:03,040 --> 00:49:06,479
Speaker 1: As George laid out well on that happy note. Shall

964
00:49:06,520 --> 00:49:08,799
Speaker 1: we leave it there, Let's leave it there. Okay. This

965
00:49:08,840 --> 00:49:11,719
Speaker 1: has been another episode of the Odd Thoughts podcast. I'm

966
00:49:11,719 --> 00:49:14,360
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy

967
00:49:14,400 --> 00:49:16,760
Speaker 1: Alloway and I'm Joe Why Wasn't Though. You can follow

968
00:49:16,880 --> 00:49:20,640
Speaker 1: me on Twitter at the Stalwart. George doesn't really tweet anymore,

969
00:49:20,680 --> 00:49:22,279
Speaker 1: but maybe he'll come back one day, so I'll plug

970
00:49:22,320 --> 00:49:25,960
Speaker 1: it anyway. His handle is at Perks. Follow our producer

971
00:49:26,080 --> 00:49:30,040
Speaker 1: Carmen Rodriguez at Carmen Armand and Dash Bennett at dashbot.

972
00:49:30,280 --> 00:49:33,040
Speaker 1: And check out all of our podcasts at Bloomberg. Under

973
00:49:33,080 --> 00:49:36,960
Speaker 1: the handle at podcasts and some more odd Lots content.

974
00:49:37,040 --> 00:49:39,680
Speaker 1: Go to Bloomberg dot com slash odd Lots when we

975
00:49:39,719 --> 00:49:42,480
Speaker 1: push the transcripts. We have a blog, a weekly newsletter

976
00:49:42,520 --> 00:49:45,279
Speaker 1: that goes out every Friday. Go there, sign up. Thanks

977
00:49:45,320 --> 00:50:09,440
Speaker 1: for listening. See to