1 00:00:02,720 --> 00:00:18,360 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm Stephanie Flanders, head 2 00:00:18,360 --> 00:00:21,600 Speaker 1: of Government and Economics at Bloomberg, and this is Trump Economics, 3 00:00:21,720 --> 00:00:24,439 Speaker 1: the podcast that looks at the economic world of Donald Trump, 4 00:00:24,680 --> 00:00:27,280 Speaker 1: how he's already shaped the global economy and what on 5 00:00:27,320 --> 00:00:32,920 Speaker 1: earth is going to happen next. This week, we're zeroing 6 00:00:32,960 --> 00:00:36,640 Speaker 1: in on government debt. Why is it so high and 7 00:00:36,680 --> 00:00:39,239 Speaker 1: why do investors not seem to worry about it in 8 00:00:39,280 --> 00:00:42,760 Speaker 1: the case of the US. This Monday, October thirteenth, I 9 00:00:42,800 --> 00:00:45,360 Speaker 1: had a conversation about that question as part of a 10 00:00:45,400 --> 00:00:48,880 Speaker 1: conference we hosted at Bloomberg for professional economists in London. 11 00:00:49,360 --> 00:00:52,320 Speaker 1: The panel included two economists who've both been at the 12 00:00:52,360 --> 00:00:55,320 Speaker 1: center of economic policy making in the US and the 13 00:00:55,440 --> 00:00:59,840 Speaker 1: UK over the years. Jason Furman, now professor at Harvard University, 14 00:01:00,120 --> 00:01:03,960 Speaker 1: previously Chairman of the Council of Economic Advisors under President 15 00:01:03,960 --> 00:01:08,160 Speaker 1: Barack Obama, and Rupert Harrison, now a senior advisor at PIMCO, 16 00:01:08,520 --> 00:01:10,880 Speaker 1: but not so long ago, a senior advisor to the 17 00:01:10,920 --> 00:01:14,120 Speaker 1: former UK Chancellor George Osborne in the years after the 18 00:01:14,160 --> 00:01:17,280 Speaker 1: global financial crisis, who was also chief economist for the 19 00:01:17,400 --> 00:01:20,759 Speaker 1: UK government. Now the level of public debt. Government debt 20 00:01:21,000 --> 00:01:24,640 Speaker 1: has surged in the past twenty years, doubled relative to 21 00:01:24,640 --> 00:01:27,080 Speaker 1: the size of the economy in many industrial countries, and 22 00:01:27,120 --> 00:01:29,199 Speaker 1: for a long time that didn't seem to matter much 23 00:01:29,360 --> 00:01:32,880 Speaker 1: because interest rates were so low. In fact, servicing that 24 00:01:32,959 --> 00:01:36,040 Speaker 1: debt paying the interest got cheaper even as the amount 25 00:01:36,080 --> 00:01:38,840 Speaker 1: of debt took off. We've talked about it before, but 26 00:01:38,920 --> 00:01:42,480 Speaker 1: that has changed lately, especially in the UK, where the 27 00:01:42,480 --> 00:01:45,280 Speaker 1: burden of paying more and more in debt interest is 28 00:01:45,319 --> 00:01:48,480 Speaker 1: now blowing a big hole in the labor government spending ambitions. 29 00:01:48,920 --> 00:01:52,680 Speaker 1: In the US too, Uncle Sam's costs have more than 30 00:01:52,760 --> 00:01:55,480 Speaker 1: trebled in the last three years to well over one 31 00:01:55,640 --> 00:01:59,400 Speaker 1: trillion dollars a year. That bill's heading even higher in 32 00:01:59,400 --> 00:02:02,320 Speaker 1: the next few year, partly thanks to the extra debt 33 00:02:02,600 --> 00:02:07,920 Speaker 1: associated with the so called Big Beautiful Bill. Yet, despite this, 34 00:02:08,200 --> 00:02:13,000 Speaker 1: US treasury bonds US government IOUs remain the anchor of 35 00:02:13,040 --> 00:02:16,440 Speaker 1: the global financial system, the risk free asset by which 36 00:02:16,480 --> 00:02:20,760 Speaker 1: everything else is judged. The debt trajectory is so unsustainable 37 00:02:21,160 --> 00:02:24,240 Speaker 1: in America's place in the global economy, so in flux, 38 00:02:24,800 --> 00:02:28,200 Speaker 1: you have to wonder when bond investors might start to 39 00:02:28,240 --> 00:02:31,480 Speaker 1: take a different view of US treasuries and start selling them. 40 00:02:31,600 --> 00:02:34,640 Speaker 1: But there's not much sign of that happening yet. So 41 00:02:34,680 --> 00:02:38,040 Speaker 1: I was fascinated to hear how these two seasoned insiders 42 00:02:38,120 --> 00:02:40,760 Speaker 1: from both sides of the Atlantic were thinking about the 43 00:02:40,880 --> 00:02:45,080 Speaker 1: risks and potential for accidents. I started by asking Jason Furman, 44 00:02:45,120 --> 00:02:48,600 Speaker 1: the central question of our panel is government debt now 45 00:02:48,639 --> 00:02:53,840 Speaker 1: too high? And how much should we care? 46 00:02:56,120 --> 00:02:56,400 Speaker 2: Yes? 47 00:02:56,760 --> 00:03:01,120 Speaker 3: And I'm not sure, So let me go through those 48 00:03:01,720 --> 00:03:04,400 Speaker 3: I first started working on fiscal policy in the nineteen 49 00:03:04,480 --> 00:03:08,600 Speaker 3: nineties in the Clinton administration. At the time, we were 50 00:03:08,639 --> 00:03:09,560 Speaker 3: on track to. 51 00:03:09,760 --> 00:03:12,200 Speaker 2: Eliminate the debt within the decade. 52 00:03:12,639 --> 00:03:15,520 Speaker 3: We had balanced the budget multiple years in a row, 53 00:03:15,919 --> 00:03:19,920 Speaker 3: and the tenure treasury was at six percent. Now we 54 00:03:20,080 --> 00:03:24,040 Speaker 3: have debt one hundred percent to GDP ratio. We have 55 00:03:24,120 --> 00:03:27,200 Speaker 3: a deficit above six percent of GDP. As far as 56 00:03:27,240 --> 00:03:31,360 Speaker 3: the eyes can see, we're in an enormous boom in 57 00:03:31,440 --> 00:03:35,920 Speaker 3: terms of investment demand for AI data centers. We've created 58 00:03:35,960 --> 00:03:39,680 Speaker 3: a lot of uncertainty about lending money to the United States, 59 00:03:40,520 --> 00:03:44,360 Speaker 3: and the tenure treasury is around four percent. And so 60 00:03:44,480 --> 00:03:46,200 Speaker 3: what does all of that tell me? It tells me 61 00:03:46,600 --> 00:03:50,080 Speaker 3: that there had been a lot more capacity to borrow 62 00:03:50,520 --> 00:03:53,160 Speaker 3: than I had ever appreciated back when I first started 63 00:03:53,200 --> 00:03:56,160 Speaker 3: working on this topic more than twenty five years ago, 64 00:03:56,920 --> 00:04:00,360 Speaker 3: and frankly then most of us possibly could have thought. 65 00:04:01,080 --> 00:04:05,040 Speaker 3: Now we have more capacity than we realized. We also 66 00:04:05,080 --> 00:04:07,760 Speaker 3: have more debt than we realized, and so the gap 67 00:04:07,840 --> 00:04:10,680 Speaker 3: between where we are and where we can be is 68 00:04:10,720 --> 00:04:14,560 Speaker 3: still uncomfortable. I have no doubt that if the United 69 00:04:14,560 --> 00:04:18,000 Speaker 3: States or the UK, or France or Belgium or Japan 70 00:04:18,640 --> 00:04:22,560 Speaker 3: continue on the fiscal trajectories that they're on, at some 71 00:04:22,680 --> 00:04:26,400 Speaker 3: point it will become extremely expensive for them to borrow. 72 00:04:26,760 --> 00:04:30,080 Speaker 3: You'll get the type of cycle of higher debt, higher 73 00:04:30,120 --> 00:04:34,360 Speaker 3: interest rates, higher debt, higher interest rates, and it will 74 00:04:34,360 --> 00:04:37,560 Speaker 3: all be painful to deal with. But I'm not sure 75 00:04:37,560 --> 00:04:41,120 Speaker 3: when that date is. I'm not sure if I could. 76 00:04:41,640 --> 00:04:44,320 Speaker 3: I'm responsibly tele policy maker that this should be the 77 00:04:44,440 --> 00:04:47,239 Speaker 3: number one on your agenda. But at the very least 78 00:04:47,320 --> 00:04:50,400 Speaker 3: my view is no one should be making the problem worse. 79 00:04:50,880 --> 00:04:53,880 Speaker 3: They should be looking for opportunities to make it better. 80 00:04:54,279 --> 00:04:57,039 Speaker 3: And at least in the United States, there's some basically 81 00:04:57,120 --> 00:05:01,440 Speaker 3: accounting forcing events around the povency of Social Security and 82 00:05:01,520 --> 00:05:04,400 Speaker 3: Medicare which come up in the next decade that I 83 00:05:04,440 --> 00:05:06,240 Speaker 3: think are a much better way to deal with it 84 00:05:06,440 --> 00:05:09,080 Speaker 3: than waiting for the market to force your hand when 85 00:05:09,120 --> 00:05:10,000 Speaker 3: the options will. 86 00:05:09,839 --> 00:05:10,480 Speaker 2: Be less good. 87 00:05:11,200 --> 00:05:13,520 Speaker 1: Just for those who don't get into the details of those, 88 00:05:13,640 --> 00:05:16,279 Speaker 1: just unpack that a little bit. That the forcing event 89 00:05:16,520 --> 00:05:20,080 Speaker 1: around Medicare and Social Security. 90 00:05:20,200 --> 00:05:22,839 Speaker 3: Yeah, social Security is our old age and survivors and 91 00:05:22,880 --> 00:05:27,680 Speaker 3: disability pension system. It's trust fund is exhausted in twenty 92 00:05:27,760 --> 00:05:32,520 Speaker 3: thirty three. Medicare is help for the elderly. That trust 93 00:05:32,520 --> 00:05:36,000 Speaker 3: fund is exhausted, believe in twenty thirty four, and so 94 00:05:36,160 --> 00:05:40,160 Speaker 3: Congress has to pass a law raising taxes, cutting benefits, 95 00:05:40,800 --> 00:05:44,560 Speaker 3: or doing some sort of general revenue transfer gimmick, which 96 00:05:44,600 --> 00:05:47,400 Speaker 3: would be the worst option there. You want to deal 97 00:05:47,440 --> 00:05:49,800 Speaker 3: with these things in advance, but it's very often that 98 00:05:49,839 --> 00:05:52,719 Speaker 3: you almost come right up against the date and deal 99 00:05:52,760 --> 00:05:56,000 Speaker 3: with it. And these two problems total about two percent 100 00:05:56,040 --> 00:05:59,760 Speaker 3: of GDP, and our fiscal gap is probably about three 101 00:05:59,760 --> 00:06:02,880 Speaker 3: percent of GDP. So if you dealt with them, and 102 00:06:02,920 --> 00:06:06,160 Speaker 3: that's a very big if, that gets you a decent 103 00:06:06,279 --> 00:06:09,320 Speaker 3: fraction of the way to the adjustment, you would need 104 00:06:09,640 --> 00:06:11,559 Speaker 3: to put the debt on a sustainable course. 105 00:06:12,520 --> 00:06:14,280 Speaker 1: Rupert, how are you thinking about public debt? 106 00:06:14,800 --> 00:06:16,520 Speaker 4: So? I think the question is it too high? 107 00:06:16,600 --> 00:06:19,040 Speaker 5: I think when you thinking about public finance, you can't 108 00:06:19,120 --> 00:06:21,120 Speaker 5: have a test of let is it working now or 109 00:06:21,160 --> 00:06:22,840 Speaker 5: if even is it going to work next year or 110 00:06:22,839 --> 00:06:25,159 Speaker 5: the year after, because you have to be thinking about 111 00:06:25,279 --> 00:06:28,200 Speaker 5: vulnerability and you have to be thinking about much longer 112 00:06:28,240 --> 00:06:30,479 Speaker 5: time horizons, because you can only make an impact on 113 00:06:30,520 --> 00:06:31,360 Speaker 5: public debt. 114 00:06:31,480 --> 00:06:33,520 Speaker 4: Over decade type horizons. 115 00:06:33,520 --> 00:06:36,360 Speaker 5: So you have to think, like, is this creating vulnerabilities 116 00:06:36,440 --> 00:06:37,400 Speaker 5: over the next decade? 117 00:06:37,760 --> 00:06:38,919 Speaker 4: Is going to make three opening points? 118 00:06:38,920 --> 00:06:41,719 Speaker 5: One is like it's clearly it will probably at some 119 00:06:41,760 --> 00:06:44,000 Speaker 5: point happen for the US, but it is not happening now. 120 00:06:44,160 --> 00:06:46,560 Speaker 5: As Jason just said, the US ten years and four percent, 121 00:06:47,120 --> 00:06:50,960 Speaker 5: and the market is not signaling that US boring and 122 00:06:51,000 --> 00:06:52,800 Speaker 5: debt is unsustainable, even though if you look at a 123 00:06:52,880 --> 00:06:55,920 Speaker 5: chart of deficits and debt in an economics tech book, 124 00:06:55,960 --> 00:06:58,200 Speaker 5: it clearly is unsustainable, but the market is not pricing 125 00:06:58,240 --> 00:07:01,640 Speaker 5: that yet. The US definitely still has a different environment. 126 00:07:01,839 --> 00:07:04,320 Speaker 5: The PIMCO house view is that the dollar is going 127 00:07:04,360 --> 00:07:06,640 Speaker 5: to remain the global reserve asset for at least the 128 00:07:06,680 --> 00:07:09,800 Speaker 5: next five years. Treasuries will remain the global safe asset 129 00:07:10,040 --> 00:07:12,160 Speaker 5: for at least the next five years. There are things 130 00:07:12,240 --> 00:07:15,320 Speaker 5: happening around the edges. So you know, there are global 131 00:07:15,360 --> 00:07:18,560 Speaker 5: central banks diversifying reserves into gold, so gold is now 132 00:07:18,600 --> 00:07:22,640 Speaker 5: over four thousand dollars. There are things interesting things happening 133 00:07:22,640 --> 00:07:27,160 Speaker 5: around the edge, and in cryptocurrencies and digital currencies, both 134 00:07:27,160 --> 00:07:30,200 Speaker 5: of you know, crypto and central bank digital currencies that 135 00:07:30,200 --> 00:07:31,320 Speaker 5: could in the long term. 136 00:07:31,240 --> 00:07:32,560 Speaker 4: Challenge the role of the dollar. 137 00:07:32,680 --> 00:07:34,800 Speaker 5: But actually interestingly, in the short term, maybe the main 138 00:07:34,840 --> 00:07:37,120 Speaker 5: effect will be if we get a huge explosion of 139 00:07:37,160 --> 00:07:39,800 Speaker 5: stable coins that actually results in an increase in demand 140 00:07:39,840 --> 00:07:41,840 Speaker 5: for dollars. So for now that the US is in 141 00:07:41,880 --> 00:07:45,400 Speaker 5: a different situation, and maybe Jason's right that domestic politics 142 00:07:45,440 --> 00:07:48,880 Speaker 5: is the forcing issue in the US rather than market pressure. 143 00:07:49,240 --> 00:07:51,320 Speaker 5: It's clearly not the case of sitting here in the 144 00:07:51,400 --> 00:07:55,840 Speaker 5: UK or in Europe that the high deck clearly creates vulnerabilities. 145 00:07:55,960 --> 00:08:00,560 Speaker 5: You can see that markets are sensitive to news, and 146 00:08:00,600 --> 00:08:02,040 Speaker 5: so you see that in countries like the UK. 147 00:08:02,480 --> 00:08:03,800 Speaker 4: We saw the trust episode. 148 00:08:03,800 --> 00:08:07,000 Speaker 5: Obviously there were some idiosyncratic factors that exacerbated that, but 149 00:08:07,040 --> 00:08:10,600 Speaker 5: we've also seen market moves more recently where clearly there's 150 00:08:10,600 --> 00:08:13,720 Speaker 5: a high sensitivity. So the day that Rachel Reeves was 151 00:08:13,720 --> 00:08:16,400 Speaker 5: seen crying in the House of Commons. Markets reacted quite 152 00:08:16,400 --> 00:08:18,960 Speaker 5: significantly because they thought she might be replaced as a 153 00:08:19,000 --> 00:08:20,960 Speaker 5: Chancellor by someone who would have a looser approach to 154 00:08:21,000 --> 00:08:23,760 Speaker 5: the fiscal rules. That tells you there's a sensitivity in markets. 155 00:08:23,800 --> 00:08:26,520 Speaker 5: It tells you that you're vulnerable. And that's what high 156 00:08:26,520 --> 00:08:29,320 Speaker 5: debt does, It makes you vulnerable. France is a similar 157 00:08:29,320 --> 00:08:33,120 Speaker 5: situation where you clearly have some sensitivity in markets to 158 00:08:33,600 --> 00:08:37,120 Speaker 5: political dysfunction and a lack of an obvious way out 159 00:08:37,160 --> 00:08:41,040 Speaker 5: of prolonged beficits in France counterbalanced by market fears about 160 00:08:41,080 --> 00:08:43,200 Speaker 5: well what is the DCB going to do here? And 161 00:08:43,240 --> 00:08:47,240 Speaker 5: that's what's limiting it. So clearly for non US countries 162 00:08:47,280 --> 00:08:49,360 Speaker 5: that vulnerability is there, and that's what high debt has done, 163 00:08:49,400 --> 00:08:51,520 Speaker 5: it creates vulnerabilities. And I guess the final point, we 164 00:08:51,559 --> 00:08:54,480 Speaker 5: are now in a policy world that is the precise 165 00:08:54,600 --> 00:08:57,440 Speaker 5: mirror of the twenty tens. So in the twenty tens, 166 00:08:57,679 --> 00:08:59,160 Speaker 5: the central banks had run out of. 167 00:08:59,120 --> 00:09:00,720 Speaker 4: Ammunition because ins are on the. 168 00:09:00,720 --> 00:09:03,320 Speaker 5: Floor and the only game in town was governments, so 169 00:09:03,480 --> 00:09:06,720 Speaker 5: enormous dependence on fiscal policy. So when the pandemic hits, 170 00:09:06,760 --> 00:09:08,360 Speaker 5: for example, fiscal policy is. 171 00:09:08,360 --> 00:09:11,160 Speaker 4: The only game in town. Similarly, in Europe with. 172 00:09:11,160 --> 00:09:14,080 Speaker 5: The energy crisis, fiscal policy is the only game in town. 173 00:09:14,480 --> 00:09:17,440 Speaker 5: The next time we have recessions or crises, fiscal policy 174 00:09:17,480 --> 00:09:19,440 Speaker 5: is going to be much more constrained because markets are 175 00:09:19,480 --> 00:09:22,040 Speaker 5: much more sensitive, at least in the countries that are 176 00:09:22,080 --> 00:09:25,400 Speaker 5: now pushing up against the limits. And the opposite is 177 00:09:25,400 --> 00:09:27,400 Speaker 5: that it's now the central banks who have all the ammunition, 178 00:09:27,800 --> 00:09:29,559 Speaker 5: and so that from a market's point of view, that's 179 00:09:29,720 --> 00:09:30,599 Speaker 5: very important. 180 00:09:30,800 --> 00:09:33,000 Speaker 1: As Jason said, you've if you were sort of stepping back, 181 00:09:33,040 --> 00:09:34,240 Speaker 1: you said, the debt's gone up a lot in the 182 00:09:34,320 --> 00:09:37,840 Speaker 1: last fifteen to twenty years, the cost of financing that debt, 183 00:09:37,920 --> 00:09:41,600 Speaker 1: and indeed that the bond deals have not gone up 184 00:09:41,679 --> 00:09:45,760 Speaker 1: until recently, but it's been a pretty painful jump, especially 185 00:09:45,760 --> 00:09:47,600 Speaker 1: in the case of the UK. I just wonder when 186 00:09:47,640 --> 00:09:49,959 Speaker 1: you look at countries sometimes you think they're vulnerable because 187 00:09:50,000 --> 00:09:52,760 Speaker 1: the long term trajectory is clearly unsustainable in the case 188 00:09:52,800 --> 00:09:55,240 Speaker 1: of the US, for example, in other cases, I think 189 00:09:55,280 --> 00:09:58,480 Speaker 1: in Europe more often, and I think now, particularly in 190 00:09:58,520 --> 00:10:01,360 Speaker 1: the case of the UK, it's about a high and 191 00:10:01,840 --> 00:10:05,079 Speaker 1: increasing amount of financing costs that's having to come out 192 00:10:05,080 --> 00:10:06,960 Speaker 1: of the treasurer. A lot of that has to do 193 00:10:07,080 --> 00:10:09,320 Speaker 1: with the structure of the debt, and I just wonder 194 00:10:09,360 --> 00:10:12,160 Speaker 1: whether it's made you think in retrospect, in twenty ten, 195 00:10:12,320 --> 00:10:15,120 Speaker 1: one of the things that made the UK look quite 196 00:10:15,160 --> 00:10:17,280 Speaker 1: resilient in these kind of cases was it had a 197 00:10:17,400 --> 00:10:21,679 Speaker 1: very high maturity of debt. It's now relatively low, it's 198 00:10:21,679 --> 00:10:23,720 Speaker 1: certainly much lower than it used to be, and has 199 00:10:23,760 --> 00:10:26,960 Speaker 1: a very high proportion of index link guilt, which in 200 00:10:27,000 --> 00:10:29,679 Speaker 1: retrospect has left it very vulnerable to the increase in inflation. 201 00:10:29,760 --> 00:10:32,360 Speaker 1: So I just sort of, as a matter of debt management, 202 00:10:32,400 --> 00:10:34,120 Speaker 1: are we now looking back and thinking that was not 203 00:10:34,240 --> 00:10:37,640 Speaker 1: a very. 204 00:10:36,120 --> 00:10:38,079 Speaker 5: I think it's a really interesting question because it's actually 205 00:10:38,120 --> 00:10:40,319 Speaker 5: not that the maturity profile of the debt has got shorter. 206 00:10:40,400 --> 00:10:44,040 Speaker 5: It's that QE has massively increased the short term sensitivity 207 00:10:44,080 --> 00:10:46,800 Speaker 5: of the broader public sector to short term rates. I 208 00:10:46,840 --> 00:10:49,280 Speaker 5: wasn't in government for during the kind of initial QE, 209 00:10:49,400 --> 00:10:53,680 Speaker 5: but certainly after twenty ten this was the effective shortening 210 00:10:53,720 --> 00:10:57,000 Speaker 5: of the UK's maturity profile through QE, and then the 211 00:10:57,040 --> 00:11:00,680 Speaker 5: sensitivity to bank reserves is something that that has sort 212 00:11:00,679 --> 00:11:04,920 Speaker 5: of totally missed went through the net I think of 213 00:11:04,960 --> 00:11:07,480 Speaker 5: the policy world. I think economists really missed a tricket 214 00:11:07,480 --> 00:11:09,880 Speaker 5: that we are actually throwing away one of the UK's 215 00:11:09,920 --> 00:11:12,360 Speaker 5: main assets, which is this low maturity profile. I think 216 00:11:12,400 --> 00:11:14,800 Speaker 5: that has been that is a real shape. 217 00:11:15,280 --> 00:11:18,080 Speaker 1: I think it was referred to as idiosyncratic factors in 218 00:11:18,080 --> 00:11:21,520 Speaker 1: this post. Everyone has said, in different ways, including you, 219 00:11:21,720 --> 00:11:24,960 Speaker 1: that the US is in a distinctive position and it 220 00:11:25,000 --> 00:11:27,960 Speaker 1: isn't being forced at least by the international markets to 221 00:11:28,080 --> 00:11:32,240 Speaker 1: take the unsustainability of its debts seriously. I guess there 222 00:11:32,280 --> 00:11:35,200 Speaker 1: were some challenges to that earlier in the year, when 223 00:11:35,240 --> 00:11:38,839 Speaker 1: we saw the sort of safe haven status of US 224 00:11:38,880 --> 00:11:42,040 Speaker 1: assets and treasuries seemingly being challenged a bit, and the 225 00:11:42,559 --> 00:11:46,480 Speaker 1: dollar falling in response to trade uncertainty, and yields at 226 00:11:46,480 --> 00:11:48,920 Speaker 1: certain times going up, although it is striking that they've 227 00:11:48,960 --> 00:11:52,200 Speaker 1: gone down since the start of the year. Overall, How 228 00:11:52,600 --> 00:11:55,040 Speaker 1: firm are you in your view that all the things 229 00:11:55,040 --> 00:11:57,559 Speaker 1: that the president's doing and not going to fundamentally in 230 00:11:57,600 --> 00:11:59,640 Speaker 1: the next few years change the way that people think 231 00:11:59,679 --> 00:12:03,280 Speaker 1: about US as the ultimate sort of asset in the 232 00:12:03,320 --> 00:12:04,600 Speaker 1: system of a fixed point. 233 00:12:05,000 --> 00:12:08,680 Speaker 3: One probably should never be particularly firm about anything in economics. 234 00:12:09,000 --> 00:12:11,440 Speaker 3: I don't think i'd make an exception for predicting Donald 235 00:12:11,480 --> 00:12:15,000 Speaker 3: Trump but yeah, I mean there's a lot to be 236 00:12:15,080 --> 00:12:19,560 Speaker 3: nervous about. There's a lot of uncertainty. Certainly earlier this 237 00:12:19,679 --> 00:12:22,120 Speaker 3: year it looked that way. And I think we're highlighting 238 00:12:22,120 --> 00:12:24,120 Speaker 3: an important point, which is a lot of this is 239 00:12:24,160 --> 00:12:28,320 Speaker 3: not just debt to GDP ratios. For each percentage point 240 00:12:28,760 --> 00:12:31,120 Speaker 3: that US debt goes up as a share of GDP, 241 00:12:31,800 --> 00:12:34,160 Speaker 3: interest rates are two and a half basis points higher. 242 00:12:34,200 --> 00:12:36,199 Speaker 3: And just use that as a rule of thumb, and 243 00:12:36,679 --> 00:12:39,160 Speaker 3: over the next decade, maybe the debt will rise twenty 244 00:12:39,200 --> 00:12:43,520 Speaker 3: percentage points, so interest rates will rise half a percentage point, 245 00:12:43,640 --> 00:12:48,000 Speaker 3: And you know, that's what it is. What matters, though, enormously, 246 00:12:48,120 --> 00:12:51,400 Speaker 3: are the types of institute that we're talking about. Liz 247 00:12:51,400 --> 00:12:54,040 Speaker 3: Trust's many budget, I believe was a percent and a 248 00:12:54,040 --> 00:12:56,640 Speaker 3: half of GDP. Presumably everyone in the room knows that 249 00:12:56,679 --> 00:12:59,560 Speaker 3: number better than I do. But it wasn't that you 250 00:12:59,679 --> 00:13:03,320 Speaker 3: could put that number into an equation and predict what 251 00:13:03,360 --> 00:13:05,920 Speaker 3: would happen to guilts. You had to put the full 252 00:13:05,960 --> 00:13:09,280 Speaker 3: set of institutional changes, ignoring the OBR talking about the 253 00:13:09,320 --> 00:13:11,760 Speaker 3: independence of the Bank of England looking like she might 254 00:13:11,800 --> 00:13:14,600 Speaker 3: do more, you know, et cetera, et cetera, add to 255 00:13:14,640 --> 00:13:18,160 Speaker 3: the list that looked roughly like what was going on 256 00:13:18,240 --> 00:13:21,040 Speaker 3: in the United States earlier this year. But now central 257 00:13:21,040 --> 00:13:24,120 Speaker 3: bank independence seems just a little bit safer. But what 258 00:13:24,320 --> 00:13:27,120 Speaker 3: I guarantee it, No, I'm much more worried about it 259 00:13:27,160 --> 00:13:29,280 Speaker 3: on a five or six year timescale than I am 260 00:13:29,920 --> 00:13:33,400 Speaker 3: on a five month to six month timescale. So maybe 261 00:13:33,480 --> 00:13:36,160 Speaker 3: Rudbrook was right when he said he had a call 262 00:13:36,240 --> 00:13:38,280 Speaker 3: for the next five years for the dollar, and I 263 00:13:38,320 --> 00:13:39,520 Speaker 3: don't think he went beyond them. 264 00:13:40,160 --> 00:13:43,240 Speaker 1: Rupert has also pointed, I think you were agreeing with people, 265 00:13:43,320 --> 00:13:47,520 Speaker 1: including Treasury sectories got bessent that the stable coin could 266 00:13:47,520 --> 00:13:51,120 Speaker 1: in itself provide some underpinning for treasuries. 267 00:13:51,480 --> 00:13:54,480 Speaker 5: I think it's just an interesting short term possibility. Certainly 268 00:13:54,520 --> 00:13:56,760 Speaker 5: the Treasury appeared to think that it can. 269 00:13:57,120 --> 00:13:58,480 Speaker 1: Jason, do you think that's the real thing. 270 00:13:59,520 --> 00:14:02,480 Speaker 3: I look at all the different ways the dollar is used. 271 00:14:02,679 --> 00:14:05,800 Speaker 3: In most of them it's dominant. But the one place 272 00:14:05,840 --> 00:14:10,120 Speaker 3: where it's massively overwhelmingly dominant is stable coins, where it's 273 00:14:10,480 --> 00:14:13,920 Speaker 3: ninety nine ninety eight percent of the stable coins. That's 274 00:14:14,000 --> 00:14:17,839 Speaker 3: higher than it is for any other purpose. And so 275 00:14:17,920 --> 00:14:20,800 Speaker 3: I think that's interesting that the marginal thing, the new 276 00:14:20,840 --> 00:14:23,320 Speaker 3: thing that's added to the world, in addition to reserves 277 00:14:23,360 --> 00:14:26,400 Speaker 3: and settlement and pricing and all that stuff is even 278 00:14:26,440 --> 00:14:29,080 Speaker 3: more dollar dominant than the stuff that came before it. 279 00:14:29,240 --> 00:14:33,880 Speaker 3: So at the margin, yeah, I think that is possibly 280 00:14:33,920 --> 00:14:37,200 Speaker 3: as strength. Now there's a big issue of are we 281 00:14:37,280 --> 00:14:40,200 Speaker 3: regulating stable coins enough? Are people going to have confidence 282 00:14:40,200 --> 00:14:41,920 Speaker 3: in them? Will live be a crisis in them? You know, 283 00:14:41,960 --> 00:14:44,200 Speaker 3: do they get bailed out? How much are they used 284 00:14:44,240 --> 00:14:46,520 Speaker 3: for criminal activity, et cetera, et cetera. So I'm not 285 00:14:46,560 --> 00:14:49,560 Speaker 3: sure that the genius fect we passed here to regulate 286 00:14:49,600 --> 00:14:53,320 Speaker 3: them gets all of that right. But yeah, the margin, 287 00:14:53,680 --> 00:14:56,800 Speaker 3: it's more dominant than the dollar's ever been in any sphere. 288 00:14:57,200 --> 00:14:59,200 Speaker 1: I know there's also people in this world who lobying 289 00:14:59,280 --> 00:15:02,120 Speaker 1: the UK as we speak, to be more open to 290 00:15:02,520 --> 00:15:05,400 Speaker 1: developing that market. Is that get out of jail free 291 00:15:05,440 --> 00:15:08,000 Speaker 1: card for Rachel Reeves if she pushes ahead with the 292 00:15:08,080 --> 00:15:09,120 Speaker 1: UK stable coin. 293 00:15:09,320 --> 00:15:11,480 Speaker 5: Well, like Jason just said, at the moment, most of 294 00:15:11,520 --> 00:15:13,440 Speaker 5: the world wants to put money into dollar stable coins. 295 00:15:13,480 --> 00:15:15,320 Speaker 5: I'm not sure there is this huge on tap market 296 00:15:15,320 --> 00:15:17,800 Speaker 5: for sterling stable coins. But maybe one of the frustrating 297 00:15:17,840 --> 00:15:21,000 Speaker 5: things is we don't know, because it's quite striking that 298 00:15:21,040 --> 00:15:23,720 Speaker 5: the UK when it comes to digital currency, is absolutely 299 00:15:23,880 --> 00:15:25,960 Speaker 5: stuck in the middle because you've got the US going 300 00:15:26,000 --> 00:15:28,320 Speaker 5: all in with crypto and stable coins with. 301 00:15:28,280 --> 00:15:28,960 Speaker 4: The Genius Act. 302 00:15:29,200 --> 00:15:31,920 Speaker 5: You've got the ECB still pursuing this concept of a 303 00:15:31,960 --> 00:15:35,600 Speaker 5: digital Euro, largely for kind of geopolitical reasons of wanting 304 00:15:35,640 --> 00:15:38,080 Speaker 5: to try and help create this alternative to the dollar system, 305 00:15:38,080 --> 00:15:40,840 Speaker 5: which is quite deeply embedded in the European institutions. 306 00:15:41,160 --> 00:15:42,480 Speaker 4: And the UK is doing neither. 307 00:15:42,920 --> 00:15:45,000 Speaker 5: And the Governor of the Bank of England has sort 308 00:15:45,000 --> 00:15:48,840 Speaker 5: of made some slightly less lukewarm comments about stable coins, 309 00:15:48,840 --> 00:15:51,280 Speaker 5: but with so many caveats that, you know, I like 310 00:15:51,320 --> 00:15:53,720 Speaker 5: stable coins, but only if we regulate them to the 311 00:15:53,720 --> 00:15:55,560 Speaker 5: point that no one's going to use them, was I 312 00:15:55,600 --> 00:15:58,800 Speaker 5: think my summary of his article. So the UK is 313 00:15:58,840 --> 00:16:00,800 Speaker 5: basically not getting involved in either of these things, and 314 00:16:00,880 --> 00:16:03,000 Speaker 5: maybe in ten fifteen years we'll look back and either 315 00:16:03,120 --> 00:16:04,880 Speaker 5: with regret or with huge relief about that. 316 00:16:04,920 --> 00:16:06,280 Speaker 4: I don't know which it will be. 317 00:16:06,840 --> 00:16:10,520 Speaker 1: Jason, you talked about when there is pressure, whenever that 318 00:16:10,560 --> 00:16:14,920 Speaker 1: pressure is seen, potentially around Medicare and social security. You 319 00:16:15,040 --> 00:16:18,240 Speaker 1: talked in terms of tax revenues. If you were just 320 00:16:18,600 --> 00:16:21,240 Speaker 1: looking from afar at the US, and certainly at the 321 00:16:21,240 --> 00:16:24,000 Speaker 1: political dynamics. Now you would conclude that taxes were never 322 00:16:24,040 --> 00:16:27,080 Speaker 1: going to go up again in the US. So how 323 00:16:27,160 --> 00:16:29,960 Speaker 1: is that going to shift? Or? Am I right? Do 324 00:16:29,960 --> 00:16:31,280 Speaker 1: you think there are a few taxes we might be 325 00:16:31,280 --> 00:16:34,920 Speaker 1: able to increase tariffs? I guess we increase tariff Since the. 326 00:16:34,920 --> 00:16:39,400 Speaker 3: Late nineteen seventies, the two parties have agreed that taxes 327 00:16:39,800 --> 00:16:42,320 Speaker 3: should go down for the bottom ninety nine percent of 328 00:16:42,360 --> 00:16:45,760 Speaker 3: Americans and have disagreed on the top one percent. And 329 00:16:45,800 --> 00:16:47,920 Speaker 3: so you get this toggle and tax rates on the 330 00:16:47,920 --> 00:16:51,560 Speaker 3: top one percent, and you get this ratchet of each 331 00:16:51,600 --> 00:16:56,000 Speaker 3: president lowers them on the bottom ninety nine percent. That 332 00:16:56,640 --> 00:16:59,000 Speaker 3: tax phobia, in my view, means the United States has 333 00:16:59,040 --> 00:17:02,240 Speaker 3: among the lowest revenue as a share of GDP. So 334 00:17:02,320 --> 00:17:04,320 Speaker 3: I think here revenue needs to play a big part 335 00:17:04,359 --> 00:17:08,760 Speaker 3: of the solution. Now, interestingly, Donald Trump did just break 336 00:17:08,840 --> 00:17:14,040 Speaker 3: that decades and decades of constraint by raising taxes. He 337 00:17:14,080 --> 00:17:17,359 Speaker 3: did it without Congress, he did it through tariffs. He 338 00:17:17,600 --> 00:17:21,560 Speaker 3: argues that it's paid for by foreign countries, not by Americans. 339 00:17:22,040 --> 00:17:24,280 Speaker 3: And you know, I happen to think that's a terribly 340 00:17:24,400 --> 00:17:27,600 Speaker 3: design tax. It's a sort of very very poor consumption 341 00:17:27,760 --> 00:17:31,880 Speaker 3: plus capital tax that with all sorts of international repercussions 342 00:17:31,920 --> 00:17:34,960 Speaker 3: as well. But there's a part of me that admires 343 00:17:35,480 --> 00:17:40,760 Speaker 3: that that difficult and painful a thing was actually done. 344 00:17:41,000 --> 00:17:45,440 Speaker 3: I just wish it was something else difficult of that. 345 00:17:45,760 --> 00:17:47,040 Speaker 3: And then the last thing I should say, though, is 346 00:17:47,080 --> 00:17:49,280 Speaker 3: different countries are in a different place. I mean, I'm 347 00:17:49,320 --> 00:17:52,480 Speaker 3: sort of flabbergasted that there's any I mean, I shouldn't 348 00:17:52,520 --> 00:17:54,960 Speaker 3: be because it's France, but you know, there's any attention 349 00:17:55,040 --> 00:17:58,480 Speaker 3: to raising as part of the fiscal solution in France. 350 00:17:58,560 --> 00:18:01,760 Speaker 2: I mean, the United States to move a tiny. 351 00:18:01,480 --> 00:18:03,600 Speaker 3: Fraction of the way towards France and friends should be 352 00:18:03,640 --> 00:18:06,880 Speaker 3: thinking about moving a tiny fraction or maybe more. 353 00:18:07,359 --> 00:18:09,760 Speaker 1: Just to spell that, you mean, maybe having more constraints 354 00:18:09,760 --> 00:18:11,520 Speaker 1: on spending, Yes. 355 00:18:11,440 --> 00:18:14,439 Speaker 3: More constraints on I mean, was an important part of 356 00:18:14,440 --> 00:18:15,600 Speaker 3: the debate in France. 357 00:18:15,800 --> 00:18:17,520 Speaker 2: Just seems to me you should be sitting. 358 00:18:17,280 --> 00:18:20,800 Speaker 3: There worried about productivity growth, worried that revenue is too high, 359 00:18:20,920 --> 00:18:23,760 Speaker 3: worried about the reasons your country is unattractive to be in. 360 00:18:24,560 --> 00:18:29,960 Speaker 3: And you know, I realize that, you know, the Prime Minister, 361 00:18:30,080 --> 00:18:34,080 Speaker 3: the President basically rejected the idea, but it's sort of 362 00:18:34,080 --> 00:18:36,639 Speaker 3: amazing that anyone would be thinking that's that's part of 363 00:18:36,640 --> 00:18:39,840 Speaker 3: the solution in France. But conversely, in the United States, 364 00:18:39,840 --> 00:18:42,600 Speaker 3: we need to figure out how to tacks, including at 365 00:18:42,680 --> 00:18:45,600 Speaker 3: least some of the bottom ninety nine percent of Americans. 366 00:18:46,119 --> 00:18:49,320 Speaker 1: And just to draw a link with our previous discussion 367 00:18:49,359 --> 00:18:51,480 Speaker 1: we had at this conference, the US has been able 368 00:18:51,520 --> 00:18:55,479 Speaker 1: to unilaterally raise tariffs and buy in large major trading partners. 369 00:18:55,520 --> 00:18:59,440 Speaker 1: Certainly Europe have not retaliated, and they've sort of accepted 370 00:18:59,440 --> 00:19:02,000 Speaker 1: these as deals. And mean, I guess the flip side 371 00:19:02,040 --> 00:19:03,720 Speaker 1: of that is if you want the US to lower 372 00:19:03,760 --> 00:19:06,200 Speaker 1: those tariffs, they're going to have to do it unilaterally, 373 00:19:06,240 --> 00:19:08,959 Speaker 1: and that's even less likely given the revenues that they're raising. 374 00:19:09,280 --> 00:19:09,760 Speaker 4: Is that right? 375 00:19:10,840 --> 00:19:11,880 Speaker 2: Yeah, I mean there's two things. 376 00:19:11,880 --> 00:19:13,680 Speaker 3: One is the Supreme Court is going to be hearing 377 00:19:13,720 --> 00:19:16,399 Speaker 3: the case and they may decide that a bunch of 378 00:19:16,440 --> 00:19:20,520 Speaker 3: these tariffs are illegal. Now, there's other legal courses that 379 00:19:20,560 --> 00:19:23,639 Speaker 3: the Trump administration can and has said it will do, 380 00:19:24,040 --> 00:19:26,000 Speaker 3: but it's hard to get up to quite as much 381 00:19:26,680 --> 00:19:29,000 Speaker 3: as the current tariff right through those, so there's a 382 00:19:29,080 --> 00:19:33,520 Speaker 3: legal avenue. They do remain quite unpopular with people, and 383 00:19:33,960 --> 00:19:36,359 Speaker 3: the next president if they're especially they're from a different 384 00:19:36,359 --> 00:19:38,840 Speaker 3: party might find it quite attractive that on their first 385 00:19:38,920 --> 00:19:41,760 Speaker 3: day in office they could sign an executive order that 386 00:19:41,880 --> 00:19:46,280 Speaker 3: would basically lower prices for American families. So that's a 387 00:19:46,359 --> 00:19:48,719 Speaker 3: little bit of an open question. I do think the 388 00:19:48,720 --> 00:19:51,000 Speaker 3: more dominant thing will be if they're in effect for 389 00:19:51,040 --> 00:19:55,000 Speaker 3: three straight years, people will really believe them. The last 390 00:19:55,000 --> 00:19:57,359 Speaker 3: thing though, in terms of the geopolitical dynamic, cause I 391 00:19:57,359 --> 00:20:00,560 Speaker 3: think Donald Trump credibly had a threat, for example, with 392 00:20:00,640 --> 00:20:03,480 Speaker 3: the European Union, that the United States is going to 393 00:20:03,520 --> 00:20:06,880 Speaker 3: set tariffs at whatever the European Union does plus fifteen, 394 00:20:07,480 --> 00:20:10,520 Speaker 3: and so if the European Union had retaliated with fifteen 395 00:20:10,560 --> 00:20:13,359 Speaker 3: percent tariffs, we would have gone to thirty. They'd gone 396 00:20:13,359 --> 00:20:16,080 Speaker 3: to thirty, we would have gone to forty five. I 397 00:20:16,119 --> 00:20:19,359 Speaker 3: don't know that any other president could carry that threat 398 00:20:19,440 --> 00:20:23,000 Speaker 3: out in a credible way. And so the United States 399 00:20:23,040 --> 00:20:26,680 Speaker 3: has established that it could have unilateral tariffs for three years. 400 00:20:26,680 --> 00:20:30,000 Speaker 3: While Donald Trump isn't president, I don't think it's established 401 00:20:30,040 --> 00:20:35,000 Speaker 3: it can have unilateral tariffs without retaliation forever. The dynamic 402 00:20:35,080 --> 00:20:37,480 Speaker 3: to me, feels quite different with almost anyone else in 403 00:20:37,480 --> 00:20:38,080 Speaker 3: the way house. 404 00:20:38,440 --> 00:20:40,280 Speaker 1: So to your point, they will still need the money. 405 00:20:40,320 --> 00:20:42,560 Speaker 1: I mean they have managed to actually increase revenues, and 406 00:20:42,600 --> 00:20:43,720 Speaker 1: that would be another hole. 407 00:20:43,600 --> 00:20:44,159 Speaker 4: In the budget. 408 00:20:45,400 --> 00:20:48,520 Speaker 1: I think we've actually run out of time, but I 409 00:20:48,600 --> 00:20:51,520 Speaker 1: think we've had a pretty wide discussion. Jason, thank you 410 00:20:51,600 --> 00:20:59,680 Speaker 1: very much for joining us from the US. Rupert, thanks again, 411 00:21:11,000 --> 00:21:13,719 Speaker 1: thanks for listening to Trumponomics from Bloomberg. It was hosted 412 00:21:13,720 --> 00:21:16,040 Speaker 1: by me, Stephanie Flanders, and I was in conversation with 413 00:21:16,160 --> 00:21:22,280 Speaker 1: Harvard professor Jason Furman and Pimco advisor Rupert Harrison. Trumponomics 414 00:21:22,280 --> 00:21:24,439 Speaker 1: was produced by Summer Sadi and Moses and Dam with 415 00:21:24,520 --> 00:21:28,080 Speaker 1: help from Amy Keen special thanks to the Society for 416 00:21:28,160 --> 00:21:33,159 Speaker 1: Professional Economists. Sound design is by Blake Maples and Kelly Gary, 417 00:21:33,480 --> 00:21:36,760 Speaker 1: and Sage Bowman is Bloomberg's head of podcasts. To help 418 00:21:36,800 --> 00:21:39,679 Speaker 1: others find it, please rate it and review it highly 419 00:21:40,000 --> 00:21:41,440 Speaker 1: wherever you listen to podcasts.