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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,

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Speaker 2: and this is trump Anomics, the podcast that looks at

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Speaker 2: the economic world of Donald Trump, how he's already shaped

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Speaker 2: the global economy, what on earth is going to happen next?

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Speaker 2: And this week we're talking about the price of money,

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Speaker 2: why it's going up, and why that matters to all

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Speaker 2: of us, and especially to governments with big debts like France,

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Speaker 2: where it's part of why the government just collapsed. Who

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Speaker 2: also want to explain why this big shift in the

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Speaker 2: most important price in the global economy is not entirely

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Speaker 2: caused by Donald Trump, though he might be speeding the

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Speaker 2: process up. Now, when I say the price of money,

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Speaker 2: I mean the interest rate. So just like anything you

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Speaker 2: buy phones, fruit, money also has a price, but instead

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Speaker 2: of paying for money with other goods, we pay for

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Speaker 2: it with interest. And that price of money, that interest

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Speaker 2: rate matters because it touches everything. What you pay for

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Speaker 2: a home, how much companies invest, where the prices rise

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Speaker 2: too fast, even how strong a country's currency is, Who

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Speaker 2: or what sets the price of money? Well, short term, yes,

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Speaker 2: central banks play their part. We all write a lot

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Speaker 2: about that piece, but long term, that price is set

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Speaker 2: by a wide range of structural factors that we're going

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Speaker 2: to get into in this show, and I thought we

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Speaker 2: should talk about it this week. Well, for a few reasons. First,

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Speaker 2: it's a reminder that this would have been a challenging

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Speaker 2: time for governments anyway, even without Donald Trump turning the

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Speaker 2: world upside down. The second reason is we're seeing the

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Speaker 2: consequences of a higher cost of borrowing play out in

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Speaker 2: real time this month, as bond yields the government interest

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Speaker 2: rates go up in many countries. France I've already mentioned,

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Speaker 2: now pays more than Italy to borrow from the market.

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Speaker 2: It's also arguably rising bond year that is the one

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Speaker 2: factor more than any other, putting serious financial pressure on

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Speaker 2: the labor government in the UK. But yes, I'll admit

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Speaker 2: the final reason is because we at Bloomberg Economics have

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Speaker 2: written a book that explains it all, The Price of Money,

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Speaker 2: A Guide to the past, present and Future of the

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Speaker 2: natural Rate of Interest. It's published a few weeks ago

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Speaker 2: by Oxford University Press, and it is available I'm told

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Speaker 2: at all fine bookstores, and my two lead co authors

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Speaker 2: who face it did most of the work pulling that

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Speaker 2: book together. Are here with me now. Jamie Rush, the

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Speaker 2: director of Global Economics at Bloomberg, who's here in London

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Speaker 2: and joining again from the Washington studio, Tom Orlick, who's

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Speaker 2: chief economist for Bloomberg Economics. Jamie, Tom, thanks very much

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Speaker 2: for being here to hawk card book. We don't usually

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Speaker 2: get to say that.

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Speaker 1: Thank you for having me.

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Speaker 3: Great to be here, Stephanie.

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Speaker 2: Tom, let me start with you. You know, I've said a

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Speaker 2: little bit about it, but why is it important now

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Speaker 2: to think about the long term cost of money? Because

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Speaker 2: for many people that will seem pretty abstract.

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Speaker 3: So I think there's a few factors at work, Stephanie.

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Speaker 3: So the first is, this is a moment for the

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Speaker 3: global markets. This is a moment where across Europe, across Japan,

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Speaker 3: in the United States, long term interest rates are high,

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Speaker 3: and in many of those places they're rising, with far

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Speaker 3: reaching consequences for governments, for businesses, for households, for investors.

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Speaker 3: I think the second reason is, well, there are some

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Speaker 3: really long term factors that drive the rate of interest,

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Speaker 3: things like demographics, for example, but there's also some important

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Speaker 3: factors that are playing out right now. So think about

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Speaker 3: Donald Trump and the end of the Pax Americana, the

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Speaker 3: US security guarantee. That's forcing everyone from European NATO allies

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Speaker 3: to Japan and Korea and Taiwan to significantly increase their

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Speaker 3: defense spending. And when they do that, when governments borrow

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Speaker 3: to increase defense spending, that puts upward pressure on interest rates.

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Speaker 3: So it's a market moment, but it's also a kind

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Speaker 3: of paradigm shift moment for the global economy, and I

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Speaker 3: think that's one reason that makes this new book timely.

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Speaker 2: You can see how many book references the book we

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Speaker 2: can get in now, Jamie, looking at quite a lot

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Speaker 2: of examples now where this is playing out. Tell us,

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Speaker 2: just as example of France, how some of these forces

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Speaker 2: are pushing up the cost of borrow and indeed helping

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Speaker 2: to cause you know, yet another government to collapse this week.

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Speaker 1: Well, there are certainly a handful of economies globally which

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Speaker 1: are sort of in the cross hairs of markets, and

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Speaker 1: they've seen interest rates go up by the most. So

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Speaker 1: you mentioned France. Largely that's because the parliament is very

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Speaker 1: fractured and it's going to be very very difficult for

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Speaker 1: them to pass any legislation which gets the budget under control.

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Speaker 1: We saw in Japan the interest rates at the long

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Speaker 1: end of the curve moved up. Why because the central

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Speaker 1: bankers ditched your curve control. And if you ditch your

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Speaker 1: co control, you no longer have control of your curve.

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Speaker 1: And in the UK, where there's a significant amount of

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Speaker 1: gloom and pessimism about the government's ability to rain in debt,

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Speaker 1: all of these things are serving to push up interest rates.

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Speaker 1: But actually these idiosyncratic things are not the main source

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Speaker 1: of the movement up in interest rates. If you look

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Speaker 1: at which part is local and which part is global,

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Speaker 1: you see that there's a huge global element to rising

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Speaker 1: borrowing costs around the world, and it's that part that

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Speaker 1: we were trying to think about when we did our analysis.

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Speaker 2: I guess this is partly just the supply of money

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Speaker 2: and the demand for money. We think of the demand

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Speaker 2: for money being things that you need to invest in

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Speaker 2: or governments might be wanting to borrow. And the supply

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Speaker 2: of money is the savings and other sources of cash

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Speaker 2: that are sitting around the economy. Over the previous decade,

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Speaker 2: people whused to talk about the savings glut. There was

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Speaker 2: a lot of money sloshing around and potentially fewer places

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Speaker 2: for it to go. So governments were able to borrow

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Speaker 2: very cheaply because there was a lot of money. But

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Speaker 2: now that shift is churning. Talk us through that sort

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Speaker 2: of demand and supply forces, because obviously it relates to

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Speaker 2: what you just said.

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Speaker 3: Yes, exactly it.

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Speaker 1: So it's the balance of saving an investment in the

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Speaker 1: global economy that matters for global interest rates, and they're

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Speaker 1: all determined with that global factory in mind. And for

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Speaker 1: many years, the global cost of borrowing was falling, and

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Speaker 1: the reason for that was because investment was getting cheaper.

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Speaker 1: We had all this these cheap goods coming from China.

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Speaker 1: Much cheaper to upgrade your technology, for example, you don't

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Speaker 1: have to spend so much on investment. That was one

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Speaker 1: of the by products of globalization. On the saving side,

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Speaker 1: you have the baby boomers socking away their paychecks into

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Speaker 1: their savings accounts, preparing for retirement. That also helped push

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Speaker 1: down the cost money and defense spending. For example, well

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Speaker 1: after the Cold War, we thought the world seemed relatively safe,

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Speaker 1: and so governments saved. They didn't They reduce their military

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Speaker 1: budgets and they save the money all of these things

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Speaker 1: are now starting to spin into reverse. So globalization, which

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Speaker 1: helped keep investment goods cheap and actually inflation down, well

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Speaker 1: that's not going to be proceeding at the same pace

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Speaker 1: as it was. Defense spending where we don't live in

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Speaker 1: a safe world. It's becoming much more dangerous. We need

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Speaker 1: to ramp up defense spending like Tom was describing. And

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Speaker 1: the demographics side of things, well, yes, the baby boomers

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Speaker 1: are now retiring, and so they're going to be drawing

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Speaker 1: down their savings rather than pushing money into them, and

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Speaker 1: so all of these factors are shifting that fundamental balance

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Speaker 1: between saving and investment in the global economy, and that

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Speaker 1: is going to help push interest rates up.

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Speaker 2: Tom, we've said it's not all down to Donald Trump,

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Speaker 2: and you could just hear from that list it's clearly

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Speaker 2: not all down to Donald Trump, much though he might

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Speaker 2: like to make the political and economic weather while he's

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Speaker 2: in office. But you can also hear in that list

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Speaker 2: number of things which are at least are being given

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Speaker 2: the kind of extra impetus by his policies. And I

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Speaker 2: guess we also have the possibility for sort of supply

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Speaker 2: chain issues or reversing globalization, which you would think, given

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Speaker 2: that it was contributing to falling prices in previous decades,

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Speaker 2: if that's contributing to rising prices and potentially come of

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Speaker 2: more variability in prices, more kind of shocks for central

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Speaker 2: banks to manage, well, that too might be a way

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Speaker 2: in which he's contributing to higher rates overall. Is that right? Yeah?

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Speaker 3: I think there's a multiple dimensions on which the Trump

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Speaker 3: administration is driving interest rates higher, Stephanie. Perhaps the first

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Speaker 3: of them, as you mentioned, is the shock to the

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Speaker 3: global system. It was the integration of a billion low

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Speaker 3: cost Chinese workers into the global trade system, which helped

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Speaker 3: keep a lid on inflation in the US through the

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Speaker 3: Great Moderation. I think many people expected the addition of

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Speaker 3: a billion Indian local cost workers to extend that trend

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Speaker 3: in the decades ahead. Donald Trump, with his tariffs is

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Speaker 3: signaling well, that's just not going to happen. Borrowing in

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Speaker 3: the United States is really high. Trump's Big Beautiful Bill

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Speaker 3: adds very significantly to the fiscal deficit over the next decade.

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Speaker 3: Some three trillion added to US debt according to the

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Speaker 3: Congressional Budget Office, And when the US Treasury is issuing

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Speaker 3: more debt well, they're going to have to pay more

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Speaker 3: to borrow, and that means interest rates go up as well. Lastly,

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Speaker 3: of course, there are the attacks on FED independence. Now,

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Speaker 3: the impact on interest rates there is a little bit complicated.

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Speaker 3: If Trump gets his way and gets a more pliant

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Speaker 3: FED chair and a more pliant FED board, well he

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Speaker 3: could get short term interest rates down, and the impact

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Speaker 3: of that ripples through the yield curve, so it also

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Speaker 3: has an impact on long term rates as well. The

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Speaker 3: bigger impact, though, would likely be a blow to the

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Speaker 3: Fed's credibility as an inflation fighter, and that would mean

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Speaker 3: that investors would demand a premium to lend to the

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Speaker 3: US government, to the US Treasury, and that too is

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Speaker 3: a force pushing up longer term borrowing costs.

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Speaker 2: We've mentioned the UK, We've mentioned France, and we know

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Speaker 2: from previous episodes that the borrowing in the US has

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Speaker 2: been continued to be very high. And then the government

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Speaker 2: deficit is very high for a country that is actually

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Speaker 2: not in the middle of a recession. It's been running

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Speaker 2: this kind of four or five six percent of GDP

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Speaker 2: budget deficits. And we've just had that big beautiful bill,

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Speaker 2: as he called it, pasted in Congress, which added enormously

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Speaker 2: to future debt. And yet I was amazed to see

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Speaker 2: the other day that of one of the few developed

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Speaker 2: countries that has seen its sort of ten year borrowing

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Speaker 2: rate go down slightly since the beginning of the year

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Speaker 2: is actually the US. So, Tom, how is the US

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Speaker 2: getting away with that? I mean, yields are obviously higher,

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Speaker 2: and they're higher than when Donald Trump took office or

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Speaker 2: when he was elected, but not as much high. We

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Speaker 2: haven't seen the kind of impact that you might have expected.

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Speaker 3: Yeah, So a few thoughts on that. The first one

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Speaker 3: is if we sort of extend the span of history

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Speaker 3: a little bit longer, the big picture is very much,

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Speaker 3: very low ten year borrowing costs before the COVID shock,

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Speaker 3: very low ten yure borrowing costs at the end of

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Speaker 3: the twenty tens, and significantly higher borrowing costs today. So yes, absolutely,

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Speaker 3: the US has been one of the countries that has

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Speaker 3: had that ten year rate nudge down since the start

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Speaker 3: of the year. But if we pull the historical frame

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Speaker 3: back a bit, the US is still very much in

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Speaker 3: the group of countries which had very low borrowing costs

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Speaker 3: a few years ago, a much higher borrowing costs today. Now,

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Speaker 3: why haven't US borrowing costs gone up so far this year?

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Speaker 3: Maybe it's useful to think about kind of three different

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Speaker 3: groups of countries. You've got your fragile emerging markets that

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Speaker 3: are very dependent on portfolio capital flows, and there's big

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Speaker 3: questions about the quality of their institutions, places like Turkey

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Speaker 3: or Argentina. If they make a policy error, all the

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Speaker 3: money flows out straight away, interest rates spike higher, currencies

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Speaker 3: plunge lower, and the impact are very real and very rapid.

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Speaker 3: Then you've got advanced economies where the quality of institutions

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Speaker 3: is stronger and investors have a higher degree of confidence.

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Speaker 3: But they're still small relative to the size of the

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Speaker 3: global economy, and so when they make policy missteps they

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Speaker 3: face some pretty rapid and severe consequences as well. Think

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Speaker 3: about the UK under the Trust administration. The US perhaps

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Speaker 3: is in a category of its own right, the world's

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Speaker 3: biggest economy, the world's deepest financial markets, the world's most

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Speaker 3: powerful military, a history of good governance, even if there

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Speaker 3: are growing concerns about erosion of institutions right now, and

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Speaker 3: for a country like the United States, the issue of

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Speaker 3: the world's reserve currency. I think what you have is

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Speaker 3: just much more capacity to play fast and loose with

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Speaker 3: the rules before facing the real consequences. Perhaps this is

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Speaker 3: an opportunity for me to surface my favorite quote from

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Speaker 3: The Great Gatsby, how did you go bankrupt? First slowly,

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Speaker 3: then all at once?

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Speaker 2: Well, we've been pointing to some ways in which that

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Speaker 2: might happen on this show, Jamie, I want to take

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Speaker 2: off a couple of things, because we've gone through a

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Speaker 2: lot of factors. But there'll be some people listening who

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Speaker 2: will think of other ways in which the world's changing

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Speaker 2: and will be interested to know how this affects the

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Speaker 2: cost of money. One thing we do talk about in

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Speaker 2: the book is inequality, and one thing that seems destined

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Speaker 2: to continue, although individual countries have had different experiences, but

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Speaker 2: the sort of emergence of the sort of super wealthy

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Speaker 2: and apparently much more unequal division of wealth. You wealth

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Speaker 2: obviously plays a big part in savings and investment. How

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Speaker 2: is that going to affect to the cost of money.

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Speaker 1: The mechanism at play here is that people at the

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Speaker 1: top end of the income distribution saved more, their earnings

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Speaker 1: have gone up faster than their capacity to buy cpots,

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Speaker 1: and then so they're putting that in their bank accounts,

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Speaker 1: and so over the past few decades or so, as

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Speaker 1: income inequality has moved upwards, perhaps contributed more to savings

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Speaker 1: and it helped to contain borrowing costs or push them down.

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Speaker 1: Looking ahead, our view is that income inequality is not

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Speaker 1: likely to rise by as much as it has over

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Speaker 1: the previous few decades, largely because it has risen so

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Speaker 1: much already and it would require significant policy change. But

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Speaker 1: clearly with the direction of travel in US, policy is

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Speaker 1: likely to climb a little further, and again that will

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Speaker 1: continue to exert some downward pressure on interest rates going ahead.

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Speaker 2: And if we move more slowly or faster towards a

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Speaker 2: net zero goal when it comes to the carbon transition,

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Speaker 2: how does that affect things, Because that's obviously one of

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Speaker 2: those areas where we've had in the book, we've had

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Speaker 2: to have a pretty big range of uncertainty.

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Speaker 1: Yeah, So I think that the impacts of climate change

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Speaker 1: on rates, or at least the research into it, still

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Speaker 1: in its infancy, So you have so many unknown It's

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Speaker 1: not just about economics, but the impact of global heating

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Speaker 1: on the economy, and so I think you need to

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Speaker 1: think about it through two lenses. One is what are

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Speaker 1: the physical damages that climate change does the global economy,

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Speaker 1: Because the more damage it does, the slower growth will be,

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Speaker 1: the lower the inherent rate of return in the economy

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Speaker 1: will be, and that will push down on interest rates.

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Speaker 1: But going in the opposite direction, if the world gets

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Speaker 1: serious about tackling climate change, it's going to take huge

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Speaker 1: investments in energy infrastructure to green the economy. And if

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Speaker 1: you look at what new economy finance being there for

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Speaker 1: saying at Bloomberg, we're talking about trillion dollar investments here,

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Speaker 1: and so that extra spending that's required, that extra investment

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Speaker 1: would push interest rates up, and we think that if

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Speaker 1: there is a significant push, then the net effect is

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Speaker 1: more likely to be upwards on borrowing costs than downwards.

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Speaker 2: That rais is interesting point, and that actually it was

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Speaker 2: one of the things I think a bit about in

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Speaker 2: the final chapter of the book, when you sort of

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Speaker 2: think about what are the implications of this change for governments,

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Speaker 2: for businesses and others. I mean, we've tended to describe

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Speaker 2: the cost of money going up as like a negative thing,

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Speaker 2: a challenge, a headwind, and it certainly is for governments.

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Speaker 2: If you have a lot of debt. It could also happen,

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Speaker 2: as we describe, for reasons that we could be quite

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Speaker 2: happy about. It could be a world of higher interest rates,

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Speaker 2: could be a world in which we all might prefer

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Speaker 2: to live in. I mean, we obviously savers it's better

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Speaker 2: for them if they have higher interest rates. We've already

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Speaker 2: seen in a kind of small way, companies find it

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Speaker 2: all be easier to cover their pension obligations because that

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Speaker 2: higher interest rate means that future money that their promise

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Speaker 2: to pensioners is worth a bit less in today's money

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Speaker 2: than it was in the period where rates were extremely

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Speaker 2: low and we had all those big holes in pension funds.

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Speaker 2: But what else could be better about a higher rate world?

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Speaker 1: Think about AI as an example here specifically, So what

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Speaker 1: will AI due to the natural rate? Well, to realize

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Speaker 1: that the promise of this technology, you have to pile

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Speaker 1: a huge amount of money into it, and that will

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Speaker 1: tend to push interest rates up. But at the same time,

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Speaker 1: the benefits could be huge and growth could be faster.

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Speaker 1: Income growth could be faster, people could be better off.

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Speaker 1: So it's in spite of the higher interest rate environment,

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Speaker 1: people will be on the whole quite significantly better off.

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Speaker 1: So I think that's kind of a good example of

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Speaker 1: how interest rates can move for good reasons, they can

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Speaker 1: move for bad reasons, and it's not always clear which

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Speaker 1: is which.

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Speaker 2: I guess. If there's lots of demand for money, that

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Speaker 2: could be, as you say, people desperately wanting to use

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Speaker 2: it to build green energy and to have a much faster,

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Speaker 2: more dramatic approach to prevent climate change. It could be

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Speaker 2: that they want to use it for all these exciting investments,

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Speaker 2: and this is what we seem to be seeing. If

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Speaker 2: it's for governments to desperately cover their rising bills from

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Speaker 2: aging populations and creaking health services, then that's less of

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Speaker 2: a positive.

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Speaker 1: Yeah, And I think that's the big risk, isn't it.

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Speaker 1: So if you look at aging populations, you should expect

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Speaker 1: probably that the tax to GDP ratio and move in

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Speaker 1: line with the dependency ratio. Such the older population more

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Speaker 1: outlays higher taxes. But if you look at how divided

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Speaker 1: parliaments are across advanced economies, the actual ability of governance

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Speaker 1: to raise taxes in line with those liabilities is extremely low.

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Speaker 1: So if they can't. If they can't do that, then

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Speaker 1: you're just going to borrow more interest rates will therefore

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Speaker 1: rise and you end up in this bad equilibrium.

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Speaker 2: And that's what sounds a little bit similar to what

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Speaker 2: the finances of the Chancellor in the UK is grappling

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Speaker 2: with as we head towards this budget, which as always

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Speaker 2: is being billed as sort of a make or break budget.

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Speaker 2: But the fundamental thing she's trying to avoid really is

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Speaker 2: people noticing that the tax rate, tax share of GDP's

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Speaker 2: gone up, but it seems almost inevitable that it will.

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Speaker 2: Tom Jamie's already said individual countries can't change the global

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Speaker 2: supply and demand for money, and maybe even the US

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Speaker 2: is going to to some extent be a taker of

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Speaker 2: these forces, not a maker, although Donald Trump's doing his

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Speaker 2: best to change that. What do you think about, just

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Speaker 2: as a final thought about how to prepare, you know,

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Speaker 2: or do better or worse in this world where money

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Speaker 2: becomes more expensive, I guess I'm thinking a little bit

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Speaker 2: as household but also as a government.

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Speaker 3: So, first of all, Stephanie, for any of the rich

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Speaker 3: people out there who heard Jamie's comments about inadequate demand

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Speaker 3: as a kind of blight on the broader economy and

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Speaker 3: wants to do their bits to address the problem, they

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Speaker 3: could buy copy of our book. It won't fundamentally solve

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Speaker 3: the problem, but every little bit helps. So coming back

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Speaker 3: to your question, one of the things which I find

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Speaker 3: really fun about working on this book with the Bloomberg

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Speaker 3: Economics team is that it just touches such a rich

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Speaker 3: variety of subjects. Right, So, what drives the natural rate

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Speaker 3: of interest? Well, it's about climate change, it's about artificial intelligence,

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Speaker 3: it's about demographics, it's about deglobalization. And one of the

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Speaker 3: interesting things about writing the book was the we had

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Speaker 3: to get to grips with all of these subjects, but

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Speaker 3: we had to get to grips with them in a

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Speaker 3: very specific way, right, with a very specific angle. It's

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Speaker 3: not what does climate change mean for everybody's life in

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Speaker 3: the future of the planet, It's what does climate change

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Speaker 3: mean for the balance between saving an investment? Right. So,

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Speaker 3: in a sense, if some of the predictions which we

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Speaker 3: have in the book play out, people are going to

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Speaker 3: have other stuff to worry about. Right. They're going to

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Speaker 3: be living in a much hotter planet, or they're going

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Speaker 3: to be living in a world where robots are thinking

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Speaker 3: for themselves, or they're going to be thinking of living

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Speaker 3: in a world where there's much more, much more conflict,

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Speaker 3: and much more defense spending. But in terms of the

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Speaker 3: focus of the book on interest rates, from the early

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Speaker 3: nineteen eighties to the mid twenty tens, we were living

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Speaker 3: in a world a US, a Europe where interest rates

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Speaker 3: were on a structural declining trend. Right, it was getting

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Speaker 3: cheaper and cheaper to borrow, and that had far reaching

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Speaker 3: consequences for everybody. If you're an investor in equity markets

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Speaker 3: or property, you made a lot of money because were

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Speaker 3: coming down and money was piling into those markets. If

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Speaker 3: you were a minister of finance, you could borrow more

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Speaker 3: cheaply and not really face a bill for piling on debt. Now,

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Speaker 3: with rates rising, all of those trends swinging into reverse, right,

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Speaker 3: and so we don't have low interest rates as a

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Speaker 3: upward driver of equity and property markets. We have rising

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Speaker 3: interest rates as a drag on equity and property markets.

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Speaker 3: We don't have low interest rates giving ministers of finance

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Speaker 3: a free lunch. We've got higher interest rates, which means

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Speaker 3: the bill is about to arrive.

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Speaker 2: But typically upbeat economists answer, well, I guess money doesn't

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Speaker 2: make the world go around, but maybe it does make

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Speaker 2: economics more interesting for all of us. And I guess

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Speaker 2: the moral of what you just said, Thomas. If the

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Speaker 2: price is money is going up, it's going to be

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Speaker 2: even more important to spend it and borrow it wisely.

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Speaker 2: Tom Warlick, Jamie Rush, thank you so much.

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Speaker 3: Thank you. Thanks definitely great to be here.

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Speaker 2: Thanks for listening to Trumponomics from Bloomberg. It was hosted

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Speaker 2: by me Stephanie Flanders. I was joined by Bloomberg's Tom

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Speaker 2: Orlick and Jamie Rush. Trumponomics was produced by Samasadi and

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00:22:10,960 --> 00:22:14,879
Speaker 2: Moses Dam with help from a Keen and special thanks

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Speaker 2: this week to Rachel Lewis Kriskey. Sound design is by

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Speaker 2: Blake Maples and Kelly Gary and Sage Bowman is Bloomberg's

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Speaker 2: head of podcast And please help others find this show

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00:22:26,920 --> 00:22:30,159
Speaker 2: and enjoy it by rating and reviewing it highly wherever

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Speaker 2: you listen