WEBVTT - Is the Health-Care Bill Dead on Arrival? 0:00:05.800 --> 0:00:08.360 Welcome to the Bloomberg P and L Podcast. I'm Pim 0:00:08.400 --> 0:00:11.440 Fox along with my co host Lisa Bramowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg P M 0:00:20.680 --> 0:00:30.920 L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. 0:00:30.960 --> 0:00:33.120 I know that this one person has been following the 0:00:33.159 --> 0:00:37.360 healthcare negotiations so closely that it's affecting his health. Max 0:00:37.440 --> 0:00:40.159 Neeson is here in the Bloomberg eleven three oh studio 0:00:40.600 --> 0:00:45.280 with us. Max Neison is a Bloomberg Gadfly columnist covering healthcare, 0:00:45.400 --> 0:00:49.440 and he really has been following not only what we 0:00:49.640 --> 0:00:53.040 can expect from this healthcare bill, but some of the 0:00:53.120 --> 0:00:58.240 political machinations that went into arriving at this. So first, uh, Max, 0:00:58.280 --> 0:01:00.760 I want to start with a line that you wrote 0:01:00.960 --> 0:01:05.080 in in your column yesterday, where you are talking about 0:01:05.160 --> 0:01:09.360 how the entire medical establishment opposes the bill on moral 0:01:09.480 --> 0:01:12.080 and financial grounds. As a result, is this completely dead 0:01:12.120 --> 0:01:14.080 on arrival? And it does? Is it even a waste 0:01:14.120 --> 0:01:17.000 of time for us to focus on it? I think 0:01:17.160 --> 0:01:20.720 in its current form it's definitely dead on arrival in 0:01:20.760 --> 0:01:24.080 the Senate, and they've basically said as much. Rather than 0:01:24.200 --> 0:01:27.240 taking up the House version of the bill, um, you know, 0:01:27.280 --> 0:01:29.360 which would be something of an endorsement or at least 0:01:29.520 --> 0:01:32.000 a sign that they they think it's something they can 0:01:32.040 --> 0:01:34.600 pass or could potentially come law, they're gonna go ahead 0:01:34.640 --> 0:01:38.039 and start from scratching and write their own version of 0:01:38.040 --> 0:01:41.959 the legislation. And it's likely to be substantially different on 0:01:42.040 --> 0:01:43.800 a number of points than that what we saw past 0:01:43.840 --> 0:01:47.560 in the House. Max, can you just uh, just just 0:01:47.640 --> 0:01:49.800 backtracked just for a second, because I want to understand 0:01:49.840 --> 0:01:52.640 this idea that the a c A, the Affordable Care Act. 0:01:53.000 --> 0:01:56.600 We've heard a lot of criticism about it. What would 0:01:56.760 --> 0:01:59.800 save that or what would improve it? I'm just curious 0:01:59.840 --> 0:02:02.880 to see if what we've got is not great, what 0:02:02.920 --> 0:02:06.600 would we need to make it slightly better? Um. I mean, 0:02:06.800 --> 0:02:09.600 some of it would would require a time machine. But 0:02:09.600 --> 0:02:12.359 but as for what can be done now, a good 0:02:12.400 --> 0:02:16.639 start would be to keep funding and for the administration 0:02:16.680 --> 0:02:20.400 to commit to keep funding some cost sharing payments to 0:02:20.480 --> 0:02:24.440 insures and to low income people that help both insurers 0:02:24.440 --> 0:02:28.520 deal with unexpected losses and help lower income people actually 0:02:28.560 --> 0:02:31.880 afford um what are now some rising premiums. These were 0:02:31.919 --> 0:02:33.960 things that we're built into the law and help make 0:02:33.960 --> 0:02:36.240 it sustainable, but the fact that they've been kind of 0:02:36.320 --> 0:02:39.160 yanked around has made it very difficult for insures to 0:02:39.160 --> 0:02:42.200 stick around, and that kind of creates a bad cycle 0:02:42.280 --> 0:02:45.680 within individual markets like in Iowa right now. So, Max, 0:02:45.720 --> 0:02:48.000 one thing that you said earlier, you were talking about 0:02:48.040 --> 0:02:51.400 how the Senates not just sort of taking on the 0:02:51.480 --> 0:02:54.520 House bill in its own form and starting a fresh 0:02:55.120 --> 0:02:58.520 is kind of a pretty pretty big slam down, frankly 0:02:58.720 --> 0:03:00.480 of the House plan by say, and we're not even 0:03:00.480 --> 0:03:03.280 gonna endorse it by taking it at all? Um, what 0:03:03.400 --> 0:03:06.240 changes do you expect the Senate to make? How will 0:03:06.240 --> 0:03:09.160 the bill differ in the form that the Senate puts 0:03:09.160 --> 0:03:13.360 it out versus the House? So, Um, I think the 0:03:13.360 --> 0:03:15.200 first thing that they're gonna want to wait to see 0:03:15.240 --> 0:03:18.440 is the Congressional Budget Office score of this bill, which 0:03:18.480 --> 0:03:21.040 will give them a sense of where we are. The 0:03:21.040 --> 0:03:24.680 fact that the House didn't wait for that was pretty unusual. 0:03:24.800 --> 0:03:27.360 When does that come out, We we don't know, probably 0:03:27.440 --> 0:03:30.240 probably and probably next week. So we we don't know 0:03:30.320 --> 0:03:33.480 how much the House version of the bill will cost um, 0:03:33.600 --> 0:03:36.480 how much, how many people we left uninsured, how much 0:03:36.520 --> 0:03:38.600 it will affect Medicaid, how it will affect the overall 0:03:38.640 --> 0:03:41.320 insurance market. Those are all still unknown. So that's the 0:03:41.320 --> 0:03:43.840 place they're going to start with what needs to be fixed. 0:03:43.880 --> 0:03:46.520 But in terms of the kind of specific points that 0:03:46.600 --> 0:03:49.640 I think a new Senate bill will adjust or or 0:03:49.720 --> 0:03:51.640 kind of differ from the House bill, and it's going 0:03:51.680 --> 0:03:54.640 to be the degree of cuts to Medicaid and the 0:03:54.720 --> 0:03:58.000 degree of protection for those with pre existing conditions, both 0:03:58.040 --> 0:04:01.200 of which were cut substantially by the h c A. Well, 0:04:01.280 --> 0:04:04.760 you know, as Lisa introduced this idea that no one 0:04:04.880 --> 0:04:10.160 in the medical or healthcare community was consulted or participated 0:04:10.360 --> 0:04:13.720 in the creation of what passed the House yesterday. Is 0:04:13.760 --> 0:04:17.880 that accurate? Um, I imagined that, you know, people made calls. 0:04:17.920 --> 0:04:20.400 But considering the speed at which this bill was put 0:04:20.440 --> 0:04:22.960 together in a matter of weeks, as opposed to the 0:04:23.080 --> 0:04:27.600 more than a year than the Affordable Care up with hearings, consultations, 0:04:27.960 --> 0:04:30.760 multiple scoring, this kind of you know, got put together 0:04:30.839 --> 0:04:33.920 quickly then modified quickly. I don't think there was all 0:04:33.960 --> 0:04:35.839 that much input. And you can see that from the 0:04:35.880 --> 0:04:40.640 fact that, um, you know, several organizations of doctors hospitals, Um, 0:04:40.680 --> 0:04:44.159 you know, disease focused organizations. I'll kind of object to 0:04:44.160 --> 0:04:46.360 this bill. Well, that's why I wanted to go next, 0:04:46.480 --> 0:04:48.720 which is, uh, what do you think is going to 0:04:48.800 --> 0:04:53.320 happen to hospitals if this bill were to prevail, it 0:04:53.400 --> 0:04:57.960 would be uh, something of a blood bath, particularly for 0:04:58.400 --> 0:05:01.080 hospitals in more rural areas and in areas that have 0:05:01.520 --> 0:05:04.960 a lot of Medicaid beneficiaries. What would be likely to 0:05:05.000 --> 0:05:06.560 happen is that they would have a lot of people 0:05:06.600 --> 0:05:09.159 that would lose insurance coverage and it would be back 0:05:09.200 --> 0:05:11.080 to kind of the bad old days of having to 0:05:11.560 --> 0:05:16.320 provide a lot more financial assistance and uncompensated care. Well 0:05:16.360 --> 0:05:17.760 then why then, why not? Do you know what would 0:05:17.760 --> 0:05:20.599 take a page out of President Donald Trump's playbook, which 0:05:20.720 --> 0:05:24.080 at one point I believe he threatened to let Obamacare 0:05:24.200 --> 0:05:26.640 the A c A continue and fail. At least that's 0:05:26.680 --> 0:05:29.800 what he I believe said. Well, why not let the 0:05:29.800 --> 0:05:32.640 Democrats say, Okay, you want this bill, let it go, 0:05:33.000 --> 0:05:34.840 and then you'll end up with these hospitals that are 0:05:34.839 --> 0:05:36.960 closing and people that realize that the bill is not 0:05:37.000 --> 0:05:40.440 so great. Um, you know, I think it's just a 0:05:40.520 --> 0:05:44.120 question of what you're viewpoint of what is appropriate or 0:05:44.160 --> 0:05:47.480 in a policy or kind of moral standpoint, you need 0:05:47.560 --> 0:05:50.680 a lot of Democrats, you know, a lot of a 0:05:50.680 --> 0:05:52.960 lot of democrats, you understand my point. In other words, 0:05:53.160 --> 0:05:55.360 if this is the bill at the House Republicans want, 0:05:55.760 --> 0:05:58.839 then give it to them. And then okay, then you say, 0:05:58.839 --> 0:06:01.600 all right, these are the result. You know they already though, 0:06:01.960 --> 0:06:04.359 this is a different kind of story. So you can't, 0:06:04.360 --> 0:06:08.039 in good conscience if you think it's truly bad, can you, 0:06:08.080 --> 0:06:11.560 in good conscience let this kind of thing go? Yeah? 0:06:11.680 --> 0:06:14.000 And and it kind of and they already have. You know, 0:06:14.080 --> 0:06:16.520 these House members voted for the bill, so they get 0:06:16.560 --> 0:06:19.080 to run ads and go back to their constituents with 0:06:19.120 --> 0:06:22.000 the fact that they voted to take away potentially your 0:06:22.040 --> 0:06:24.440 health care um that of your family. Do you have 0:06:24.480 --> 0:06:26.880 a pre existing condition? You know, look at look at 0:06:26.920 --> 0:06:30.159 what just happened. So they already have that benefit. And 0:06:30.800 --> 0:06:32.720 we'll still, I think we want to fight against this 0:06:32.760 --> 0:06:35.440 actually becoming a law. Well, of course, this is going 0:06:35.520 --> 0:06:38.040 to be a conversation and a topic that is going 0:06:38.080 --> 0:06:40.560 to continue to keep on giving because, of course, as 0:06:40.600 --> 0:06:43.719 you just said, max Um, the Senate is pledging to 0:06:43.839 --> 0:06:46.360 write its own version of the bill. Thank you very much, 0:06:46.520 --> 0:06:49.279 Max and Neeson Bloomberg gad Fly columns when it comes 0:06:49.320 --> 0:06:53.360 to healthcare, pharmaceuticals, and just about everything that's important, much appreciated. 0:07:05.040 --> 0:07:09.440 As we were talking about earlier unemployment, the unemployment rate 0:07:09.480 --> 0:07:12.520 in the US felt the lowest levels since May two 0:07:12.520 --> 0:07:16.800 thousand and seven, according to numbers that came out this morning. Uh. 0:07:16.840 --> 0:07:19.520 This just shows that the job market continues to recover 0:07:19.640 --> 0:07:23.040 after the worst financial crisis, UH, since the Great Recession. 0:07:23.080 --> 0:07:25.640 I want to bring in John Cochrane, Senior Fellow at 0:07:25.720 --> 0:07:30.160 the Hoover Institution at Stanford University in California. John, you're 0:07:30.160 --> 0:07:34.320 going to be attending a monetary policy conference, the Structural 0:07:34.360 --> 0:07:38.560 Foundations of Monetary Policy. UH, that is ongoing right now, 0:07:38.800 --> 0:07:41.120 and I want to sort of get your take on 0:07:41.200 --> 0:07:46.600 whether this good Jobs report validates the feds unconventional methods 0:07:46.600 --> 0:07:51.480 of stimulating the economy after the two thousand and eight crisis. Ah. Well, 0:07:51.480 --> 0:07:56.000 there's a good question of because they're despite um. Certainly, 0:07:56.280 --> 0:07:58.920 I think pretty much everyone agrees that said a great 0:07:58.960 --> 0:08:01.320 job in two thousand eight of not screwing up in 0:08:01.360 --> 0:08:03.280 the way that they really did in the Great depression, 0:08:03.400 --> 0:08:05.560 and ben Burneki said we learned that lesson, we won't 0:08:05.600 --> 0:08:07.840 do it again, and they did. Now is is the 0:08:07.880 --> 0:08:12.560 resulting period of quiet due to it's it's big actions 0:08:13.040 --> 0:08:16.240 or or do we just naturally recover from the recession? 0:08:16.600 --> 0:08:18.920 That's the open question. That's why we have conferences to 0:08:18.960 --> 0:08:22.720 debate things like this. Well, all right, so which side 0:08:22.720 --> 0:08:24.080 are you going to come down on and what do 0:08:24.120 --> 0:08:29.560 you expect your your opponent or the contrary opinion to be. Oh, 0:08:29.600 --> 0:08:31.960 we don't, we don't have opponents, We have polite discussion. 0:08:33.600 --> 0:08:36.520 My own view is that the Kiwi operation didn't do 0:08:36.559 --> 0:08:40.160 a whole lot um. It perhaps signaled to markets that 0:08:40.200 --> 0:08:41.679 the interest rates are gonna be low for a long 0:08:41.720 --> 0:08:44.920 time and that was useful. But then contrarywise, that means 0:08:44.960 --> 0:08:47.040 that QUI isn't doing a whole lot of harm and 0:08:47.080 --> 0:08:48.720 that you don't need to be in a big rush 0:08:48.760 --> 0:08:51.280 to wind down the balance sheet. That's one of the 0:08:51.280 --> 0:08:54.720 big items on discussion at our conference is the big 0:08:55.000 --> 0:08:58.240 balance sheet, lots of reserves. Is it causing too much stimulus? 0:08:58.320 --> 0:08:59.920 Is it a problem to the said need to unwin 0:09:00.040 --> 0:09:02.160 ended quickly or is it just kind of sitting out 0:09:02.200 --> 0:09:04.839 there and not causing any particular problems and kind of 0:09:04.920 --> 0:09:08.480 nice to keep the economy very liquid. John, in your conversations, 0:09:08.480 --> 0:09:14.240 how important is wage growth? Well, wage growth is what 0:09:14.280 --> 0:09:17.120 we're here for. Um, all right. Then you're here for 0:09:17.200 --> 0:09:19.360 our raises, all right, So so tell us about why 0:09:19.400 --> 0:09:22.600 we're not seeing more of them. We're here for real 0:09:22.960 --> 0:09:26.160 wage growth. Um, we we want Uh, you know, just 0:09:26.240 --> 0:09:30.280 inflationary wage growth doesn't do anybody any good. But higher productivity, 0:09:30.360 --> 0:09:34.000 higher real wages, greater prosperity, and a job market that 0:09:34.120 --> 0:09:37.360 isn't just unemployment. Unemployment is people are looking for jobs, 0:09:37.440 --> 0:09:39.679 but there's still a big problem of people out there 0:09:39.679 --> 0:09:43.439 who aren't even looking anymore. The labor force participation rate 0:09:43.600 --> 0:09:46.920 is still low, the economy is growing much slower than 0:09:46.960 --> 0:09:49.160 it should be by at least my view, and and 0:09:49.280 --> 0:09:52.720 uh uh just about everyone else. The question is whether 0:09:52.760 --> 0:09:54.679 that has to do with money or not. In the 0:09:54.679 --> 0:09:58.240 long run, money can money can boost you a little 0:09:58.240 --> 0:10:00.240 bit for an afternoon, but there's no substitute it for 0:10:00.240 --> 0:10:02.280 a diet and exercise if you want long run growth. 0:10:02.400 --> 0:10:05.040 So is diet an exercise in this case some kind 0:10:05.040 --> 0:10:07.760 of fiscal stimulus or is it something else? And you 0:10:07.800 --> 0:10:11.240 talk about you know, we're here for you know, wage growth. 0:10:11.240 --> 0:10:14.040 That's that's the reason we're here. By that view, this 0:10:14.120 --> 0:10:18.640 Job's report wasn't that great. Um, well, we're here for 0:10:18.760 --> 0:10:21.679 a solid, long run real wage growth which in the end, 0:10:22.200 --> 0:10:25.000 uh and and more people working at those higher wages. 0:10:25.480 --> 0:10:28.480 In the end, that has to come from productivity growth. Um. 0:10:28.600 --> 0:10:32.080 You can fiscal stimulus, monetary stimulus, these things can help 0:10:32.120 --> 0:10:34.520 to get you out of a recession. But the foundations 0:10:34.520 --> 0:10:38.120 of long run growth they have to come from greater productivity, 0:10:38.160 --> 0:10:42.160 which in the end is tax reform, regulatory reform, more innovation, 0:10:42.320 --> 0:10:45.880 more businesses, more competition, all that great stuff that the 0:10:46.120 --> 0:10:48.960 Fed um, bless their hearts. Um, that's not their job. 0:10:49.800 --> 0:10:53.200 I'm gonna give you a softball, John, Why are so 0:10:53.240 --> 0:10:57.360 many people either not working, not studying for work, or 0:10:57.480 --> 0:11:01.520 even bothering to look for work? Maybe you can reference 0:11:01.600 --> 0:11:07.120 Nicholas ever stats column and commentary. Uh sorry, I didn't 0:11:07.160 --> 0:11:08.640 happen to read that one of this has to do 0:11:08.679 --> 0:11:10.760 with that he describes it. Well, you're on your blog 0:11:10.840 --> 0:11:13.440 you say that one of the answers to why people 0:11:13.440 --> 0:11:15.360 are not looking for work, not studying for work is 0:11:15.400 --> 0:11:20.280 the opioid epidemic. And that according to Alan Krueger, about 0:11:21.080 --> 0:11:28.439 seven million working age men are taking opioids pain killers. Yeah. 0:11:29.080 --> 0:11:32.000 Is Unfortunately, it's not a softball. It's not something that 0:11:32.400 --> 0:11:35.360 there's one big stimulus that will solve the problem. There's 0:11:35.360 --> 0:11:38.520 a lot of Middle America that is right taking open 0:11:38.640 --> 0:11:42.199 pain killers. Um, stuck in some ways in communities that 0:11:42.240 --> 0:11:45.160 aren't working. They might have bought a house that now 0:11:45.280 --> 0:11:47.600 is underwater. They can't move to where the better jobs are. 0:11:47.640 --> 0:11:50.880 They might be stuck in some government programs, which though 0:11:50.920 --> 0:11:54.000 those help them when they're in trouble, now uh, they 0:11:54.040 --> 0:11:55.880 if they get a job, they lose all the benefits, 0:11:55.960 --> 0:11:58.400 so um, they don't want to. That makes it much 0:11:58.440 --> 0:12:00.920 harder for them to move, get some training, get a job, 0:12:00.960 --> 0:12:03.880 move out. America is not as dynamic as it used 0:12:03.880 --> 0:12:05.720 to be. It used to be when things are in trouble, 0:12:05.800 --> 0:12:07.559 you get up, you move, you do something else. And 0:12:07.720 --> 0:12:10.040 that's just much harder these days for a lot of 0:12:10.080 --> 0:12:12.280 structural reasons, some of them having to do with government 0:12:12.280 --> 0:12:14.240 programs and some of them having to do with lots 0:12:14.240 --> 0:12:17.280 of big messages. Yeah, well, not monetary policy, but but 0:12:17.320 --> 0:12:19.120 so John, a lot of the issues that you're talking 0:12:19.120 --> 0:12:22.400 about that really are the next frontier for any recovery 0:12:22.480 --> 0:12:25.440 in the US are not things, as you said, bless 0:12:25.440 --> 0:12:27.960 the FEDS hards, not things that they can solve. So 0:12:28.280 --> 0:12:31.280 at a conference like the one that you're currently at, 0:12:31.400 --> 0:12:34.200 which you're talking about the structural foundations of monetary policy, 0:12:34.240 --> 0:12:38.000 I mean people basically just saying at this point, there's 0:12:38.040 --> 0:12:43.600 nothing left for them to do well. I think that's important. Um, 0:12:43.679 --> 0:12:46.520 you know, the FED would like to help, and there's 0:12:46.520 --> 0:12:49.880 a big temptation for an institution uh this large, to 0:12:50.040 --> 0:12:53.040 take on jobs that it's ill suited for, So repeating 0:12:53.040 --> 0:12:55.440 that message is important. I think a lot of what 0:12:55.559 --> 0:12:58.559 the discussion for monetary policy is is, Look, it's it's 0:12:58.640 --> 0:13:03.360 late summer, and late summer, winter comes. There will be 0:13:03.400 --> 0:13:07.079 another recession sometime soon or sometime later, who knows when 0:13:07.120 --> 0:13:09.319 it will come. There will be another crisis, something will 0:13:09.360 --> 0:13:11.960 blow up, And I think a lot of what's what 0:13:12.160 --> 0:13:15.480 the important thinking is is for the Fed's job, which 0:13:15.559 --> 0:13:19.559 is demand not supply, which is stimulus, which is fighting recessions, 0:13:19.559 --> 0:13:22.840 fighting crises. Uh, get get your powder dry, get ready 0:13:22.840 --> 0:13:24.800 to think about how were you gonna where the next 0:13:24.800 --> 0:13:26.319 one is coming from, and how you're going to solve 0:13:26.360 --> 0:13:29.120 that one. Speak if you can about corporate tax cuts 0:13:29.120 --> 0:13:31.600 that have been proposed by the administration and whether that 0:13:31.640 --> 0:13:38.319 will lead to an increase in wages for workers. Oh um, well, 0:13:38.360 --> 0:13:41.720 we'll see what comes out of there. Um, it should 0:13:42.040 --> 0:13:46.160 in the end, or better prices for consumers. We got 0:13:46.160 --> 0:13:49.400 to remember, every cent of corporate taxes does not paid 0:13:49.440 --> 0:13:52.480 by corporations. It's paid from higher prices to the you 0:13:52.559 --> 0:13:56.720 and I pay, or lower wages from workers. Um, some 0:13:56.960 --> 0:13:59.120 argument for lower profits, but in the end, profits go 0:13:59.200 --> 0:14:01.800 overseas if they don't got what they want. So all 0:14:01.840 --> 0:14:05.440 that money will eventually mean are either wages for workers 0:14:05.840 --> 0:14:08.640 or or lower prices for consumers. That's that's great stuff. 0:14:09.360 --> 0:14:11.959 I would hope they would also attack the complexity of 0:14:12.000 --> 0:14:14.520 the tax code and a lot of tax accountants and 0:14:14.600 --> 0:14:16.800 lawyers and lobbyists can go drive for uber and do 0:14:16.880 --> 0:14:21.400 something productive. How confident are you that the current administration 0:14:21.480 --> 0:14:23.200 can come up with a plan that will end up 0:14:23.720 --> 0:14:27.240 helping productivity to increase. Oh gosh, that don't ask me 0:14:27.240 --> 0:14:32.760 political questions. I'm economist, all right, Fine, I know it's 0:14:32.840 --> 0:14:35.200 much more fun and I have my opinions like anyone else. 0:14:35.200 --> 0:14:37.400 But let's let's stick the things I know something about. 0:14:37.720 --> 0:14:39.280 All right, I want to thank you very much for 0:14:39.360 --> 0:14:43.040 joining us. He's are you still the Grumpy Economist? Uh? 0:14:43.440 --> 0:14:45.800 That's my official title. As you may have noticed, that 0:14:45.880 --> 0:14:50.160 is not my personality. Yea, exactly, well unless we ask 0:14:50.440 --> 0:14:52.480 about politics, in which case, there there you show your 0:14:52.480 --> 0:14:57.000 your grumpy colors, no humility. All right, I encourage everyone 0:14:57.040 --> 0:14:59.760 to check out your blog, The Grumpy Economist. Thanks very much. 0:15:00.080 --> 0:15:03.720 John Cochrane is a senior fellow at the Hoover Institution, 0:15:03.840 --> 0:15:17.640 giving us his take on jobs and the economy. 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Slash lens 0:15:56.800 --> 0:15:58.640 I am so excited to bring in the next guest 0:15:58.680 --> 0:16:01.680 because he now works at Boberg Intelligence. I were Jersey 0:16:02.200 --> 0:16:06.480 interest rate strategist and long time contact of mine. I'm 0:16:06.520 --> 0:16:09.760 so excited to have you. Uh he uh is coming 0:16:09.800 --> 0:16:13.280 to us on the phone from Princeton. You know. I 0:16:13.320 --> 0:16:16.080 want to touch base with you on a somewhat contrarian 0:16:16.200 --> 0:16:20.280 take that you unfailed today. Uh in some Bloomberg Intelligence 0:16:20.280 --> 0:16:23.440 where you were saying, look, everyone's expecting the Fed to 0:16:23.800 --> 0:16:26.880 start unwinding the balance sheet, but it might not have 0:16:27.000 --> 0:16:30.360 the effect on yields that people think. Can you explain that? Yeah? 0:16:30.440 --> 0:16:33.720 So so I think the conventionalism would tell you that 0:16:33.800 --> 0:16:36.920 when there's more supply of treasuries that um and and 0:16:37.000 --> 0:16:40.200 effectively with the Fed Reserve running off its balance sheet, Uh, 0:16:40.200 --> 0:16:43.480 that's what you're going to get UM is additional supply 0:16:43.520 --> 0:16:46.200 of treasuries. Normally, when that happens, people would say, oh, well, 0:16:46.240 --> 0:16:48.480 that means that treasury yields have to go higher, the 0:16:48.520 --> 0:16:50.920 price of bonds has to move lower, just because there's 0:16:51.120 --> 0:16:54.000 there's more supply into the market. But it's not obvious 0:16:54.000 --> 0:16:56.240 to me that that's what will happen, because it really 0:16:56.280 --> 0:16:58.400 all depends not on what the Fed does, but what 0:16:58.440 --> 0:17:02.160 the Treasury Department does. So how do they actually put 0:17:02.200 --> 0:17:04.439 those extra bonds back in the market, because they'll have 0:17:04.480 --> 0:17:07.200 to issue more bonds as these old bonds at the 0:17:07.240 --> 0:17:11.000 Federal Reserve holds matures and um. And the Federal Reserve 0:17:11.080 --> 0:17:12.919 has quite a lot of room in the front end 0:17:12.960 --> 0:17:15.560 in order to increase issues, so they can issue very 0:17:15.600 --> 0:17:17.680 short term tea bills. They can issue two year notes 0:17:17.720 --> 0:17:20.439 and three year notes and and those things don't have 0:17:20.480 --> 0:17:23.000 a lot of interest rate risks. So therefore the yields 0:17:23.040 --> 0:17:25.560 don't have to necessarily move higher just because the Fed 0:17:25.640 --> 0:17:27.679 lets its balance sheets start to run off. Well, I 0:17:27.720 --> 0:17:29.520 just want to get you to continue that thought ire 0:17:29.600 --> 0:17:31.800 about running off the balance sheet, because you also write 0:17:31.800 --> 0:17:34.240 that the Federal Reserve could run off its treasury holdings 0:17:34.280 --> 0:17:37.520 pretty quickly. In what do you mean by that? Well, well, 0:17:37.520 --> 0:17:39.840 that's something interesting. So when the Federal Reserve was doing 0:17:39.880 --> 0:17:42.760 all of its buying five five to ten years ago, 0:17:43.040 --> 0:17:44.760 um or you know, now it's hard to believe that 0:17:44.800 --> 0:17:47.080 it's been almost ten years since they started a quantitative easing, 0:17:47.119 --> 0:17:51.280 but you know, we're all getting older. Um. The fact 0:17:51.320 --> 0:17:54.120 is that two thousand eighteen is actually the most bonds 0:17:54.240 --> 0:17:57.639 that mature on their balance sheet next year, UM and 0:17:57.680 --> 0:18:02.680 that starts to tape slow down in UM. So the 0:18:02.840 --> 0:18:06.960 four hundred about four dred billion dollars runs off its portfolio. 0:18:07.240 --> 0:18:10.800 And if you recall, the Federal Reserve was was buying 0:18:10.800 --> 0:18:14.400 bonds on the order of fifteen billion dollars a month. 0:18:14.680 --> 0:18:17.960 So actually next year you could have more bonds run 0:18:17.960 --> 0:18:20.080 off its balance sheet than when they actually started to 0:18:20.119 --> 0:18:23.879 buy the bonds in their large scale asset purchases. So 0:18:23.960 --> 0:18:26.600 this would be the large scale asset run off I guess, 0:18:26.640 --> 0:18:29.040 and that would have well and just sort of walk 0:18:29.119 --> 0:18:30.680 us through with the effect of that is if they're 0:18:30.720 --> 0:18:35.159 not going to reinvest those proceeds, I mean, I'm just thinking, 0:18:35.480 --> 0:18:37.919 um allowed, I mean, as you said, it depends on 0:18:37.920 --> 0:18:41.119 whether the Treasury is going to replenish them. Although the 0:18:41.160 --> 0:18:43.879 baseline scenario that everyone seems to have is that the 0:18:44.200 --> 0:18:47.040 Treasury is going to be forced to increase longer term 0:18:47.080 --> 0:18:51.200 issuance in short order. Well, they're going to definitely need 0:18:51.280 --> 0:18:55.119 to increase um longer term issuance over time, primarily because 0:18:55.119 --> 0:18:58.720 the deficits are going to be moving higher. UM. So, 0:18:59.040 --> 0:19:02.440 imagine in a world today where the Federal Reserve hadn't 0:19:02.480 --> 0:19:05.480 done quantitative using now grant that the economic environment might 0:19:05.520 --> 0:19:08.880 be significantly different. But if if the Federal Reserve didn't 0:19:08.880 --> 0:19:11.480 own these and other investors would where would yields be? 0:19:12.040 --> 0:19:15.199 Um if they didn't believe it or not, you know, 0:19:15.240 --> 0:19:18.119 my opinion is that it probably wouldn't be significantly higher 0:19:18.119 --> 0:19:21.199 than than where yields are right now. Um So, So 0:19:21.320 --> 0:19:23.240 the thing is the fact that the Fed owns these 0:19:23.240 --> 0:19:26.240 instead of other people certainly has an impact. But um 0:19:26.320 --> 0:19:29.119 but what they own are very short term securities right now. 0:19:29.200 --> 0:19:32.080 Right these are all maturities that mature within the next 0:19:32.240 --> 0:19:35.800 eighteen eighteen months to two years, right so five almost 0:19:35.800 --> 0:19:38.160 five billion of them mature in the next couple of years. 0:19:38.640 --> 0:19:41.800 If the Federals, if if the Treasury Department then decides 0:19:41.840 --> 0:19:44.200 to issue these in in T bills and in two 0:19:44.280 --> 0:19:46.639 year notes, it's not going to change the amount of 0:19:46.640 --> 0:19:48.880 interest rate risk that's in the world today. It will 0:19:48.920 --> 0:19:50.840 be the exact same amount of interest rate risk that's 0:19:50.840 --> 0:19:52.760 in the world today now. If they do go out, 0:19:52.800 --> 0:19:54.800 and the Treasury Department has been talking about this and 0:19:54.840 --> 0:19:59.360 in fact, and Wednesday's um refunding statement they mentioned this um, 0:19:59.640 --> 0:20:01.680 and and they seem keen on wanting to do this. 0:20:02.200 --> 0:20:05.600 They might issue a fifty year bond and potentially increase 0:20:05.640 --> 0:20:08.880 other maturities, but not necessarily because of the said more 0:20:09.000 --> 0:20:11.040 because of the fact that you have a lot of 0:20:11.080 --> 0:20:13.879 baby boomers retiring and deficits are going to be higher 0:20:14.119 --> 0:20:17.240 over the next several years. Just um on any kind 0:20:17.280 --> 0:20:20.520 of base case scenario for for for the federal deficit. 0:20:20.720 --> 0:20:23.520 I'm glad you mentioned the deficit. How come that is 0:20:23.560 --> 0:20:28.199 not a dominant theme when it comes to appropriations in 0:20:28.400 --> 0:20:31.920 Washington or even thoughts about interest rates. Yeah, well, that's 0:20:31.920 --> 0:20:34.720 a good question. I think, you know, folks in Washington 0:20:34.800 --> 0:20:36.520 now maybe you're trying to think of, you know, house 0:20:36.560 --> 0:20:38.680 ways to stimulate the economy. I mean, the economy is 0:20:39.000 --> 0:20:41.159 not growing at a at a terrible pace, is just 0:20:41.200 --> 0:20:43.199 not growing at this fast space that we got used 0:20:43.240 --> 0:20:46.000 to in the eighties and nineties. So I think at 0:20:46.000 --> 0:20:50.040 this point, um, you know, they want some stimulative activities, 0:20:50.040 --> 0:20:51.640 and in order to do that, you kind of need 0:20:51.640 --> 0:20:56.560 to run some deficits. It just from a pure deficit standpoint, 0:20:56.680 --> 0:20:59.280 it's probably not the greatest time to be thinking about 0:20:59.320 --> 0:21:02.399 stimulative ativities when you're going to get UM. You know, 0:21:02.880 --> 0:21:05.679 like I mentioned, you're gonna have much higher UM costs 0:21:05.760 --> 0:21:09.399 for things like Social Security and medicare just because of UM, 0:21:09.440 --> 0:21:13.080 because of demographics, and that's going to swell the deficits anyway. Now, 0:21:13.200 --> 0:21:16.639 now these low interest rates, the Treasury Department can issue 0:21:16.920 --> 0:21:18.600 a lot of bonds. There's still a lot of demand 0:21:18.680 --> 0:21:20.719 for treasuries because there's a lot of risks going on 0:21:20.760 --> 0:21:23.200 around the world. Um, but there probably is some tipping 0:21:23.280 --> 0:21:25.760 points somewhere. I don't think it's going to be in 0:21:25.800 --> 0:21:28.360 the next couple of years, but um, but there probably 0:21:28.400 --> 0:21:31.000