WEBVTT - Tightening the Belt Under a Second Trump Administration 0:00:13.720 --> 0:00:16.880 This is Wall Street Week, bringing you a special edition 0:00:17.200 --> 0:00:20.120 on what the new Trump administration could mean for global 0:00:20.120 --> 0:00:23.200 Wall Street. Coming to you from the Cornell Tech Campus 0:00:23.320 --> 0:00:28.880 on Roosevelve Island. I'm David Weston. Growth was a recurrent 0:00:28.920 --> 0:00:31.400 theme for Donald Trump and running for president, this time 0:00:31.720 --> 0:00:34.400 growth in the economy, growth in employment, and growth in 0:00:34.440 --> 0:00:37.920 the stock market. His pick for treasure Secretary, Scott Bessen, 0:00:38.120 --> 0:00:40.360 laid out for us at least part of his plan 0:00:40.479 --> 0:00:41.120 to get there. 0:00:41.479 --> 0:00:47.159 I'm a big believer that for Trump two point zero, 0:00:47.560 --> 0:00:52.879 that we can control spending by freezing the discretionary component 0:00:53.040 --> 0:00:57.959 except for defense and moving toward a three percent deficit 0:00:58.080 --> 0:01:01.120 by twenty twenty eight. I think that would be music 0:01:01.200 --> 0:01:05.080 to the market's ears. I think the debt market would 0:01:05.160 --> 0:01:07.240 respond to that. I think rates would go down. I 0:01:07.240 --> 0:01:10.720 think inflation would go down. So there's a chance here 0:01:10.760 --> 0:01:12.440 for a self reinforcing cycle. 0:01:14.160 --> 0:01:16.640 Take us through how Wall Street looks at what Trump 0:01:16.680 --> 0:01:19.560 policies could mean for that growth. We welcome back now, 0:01:19.680 --> 0:01:23.920 Rick reader Blackrock Global CIO Flicating income and if it's 0:01:24.040 --> 0:01:26.720 Global Allocation Investment Team, great to have you back. 0:01:26.800 --> 0:01:27.760 Thanks for so. 0:01:27.800 --> 0:01:30.640 I think it's your ears that mister Pssant was trying 0:01:30.640 --> 0:01:32.960 to appeal to is he right that if he could 0:01:32.959 --> 0:01:34.640 bring that off, it would be music to your ears? 0:01:34.640 --> 0:01:35.600 And is it doable? 0:01:36.000 --> 0:01:38.160 So I don't know about music. It's more of a symphony. 0:01:38.200 --> 0:01:40.679 I mean that is I mean, it can't be any better. 0:01:41.080 --> 0:01:43.440 You know what the markets care about is is there 0:01:43.520 --> 0:01:45.280 a plan? And I thought one of the key things 0:01:45.400 --> 0:01:48.400 we said by twenty twenty eight there's a plan in place. 0:01:48.480 --> 0:01:51.800 Oftentimes you have elected officials like we're gonna spend and 0:01:51.800 --> 0:01:54.680 we're gonna do it now. It has to be a progression, 0:01:55.040 --> 0:01:57.120 but it has to be a thoughtful progression around how 0:01:57.120 --> 0:01:59.480 do we get spending down? But we don't do it 0:01:59.560 --> 0:02:03.000 to real disrupt the system, but they're thoughtful ways to 0:02:03.040 --> 0:02:04.760 get there. On my senses, there is a series of 0:02:04.800 --> 0:02:06.960 initiatives they're thinking about about how to get it down, 0:02:07.240 --> 0:02:09.640 how to restrain spending and then come up with a 0:02:09.639 --> 0:02:12.679 consistent plan. Listen, the debt is the biggest problem in 0:02:12.680 --> 0:02:14.959 the US economy is an incredible shape. I mean, the 0:02:15.040 --> 0:02:17.760 vibrance of this economy blows people why. I mean how 0:02:17.760 --> 0:02:20.440 many times last year the rest of the recession economy 0:02:20.480 --> 0:02:23.560 just moves along. There's one risk that's out there, and 0:02:23.600 --> 0:02:26.079 that is the debt burden. If we have a plan 0:02:26.160 --> 0:02:29.040 to bring it down. Markets are all about confidence and 0:02:29.080 --> 0:02:31.680 confidence that we see the plan, we see the balance, 0:02:31.960 --> 0:02:34.720 we see how we can create equilibrium over time, and 0:02:34.760 --> 0:02:35.960 that can't be any better. 0:02:36.320 --> 0:02:38.760 So it's a tall order I think everyone would agree to, 0:02:38.880 --> 0:02:41.160 even as we say we'd love to have it. But 0:02:41.280 --> 0:02:45.000 right now we have above trend growth. Can we sustain 0:02:45.080 --> 0:02:47.240 that over the next two, three, four years? 0:02:47.400 --> 0:02:48.880 So I think the harder one is can you do 0:02:48.919 --> 0:02:51.519 it without any price pressure? So the US economy and 0:02:51.560 --> 0:02:54.200 think about we've run I was looking at you almost 0:02:54.240 --> 0:02:56.320 every single month for the last year. Long was the 0:02:56.360 --> 0:02:58.520 last couple of years income or if you take the 0:02:58.520 --> 0:03:01.000 payroll and you look at where income is, it's five 0:03:01.080 --> 0:03:05.919 percent almost every single month. It's amazingly stable. So can 0:03:05.960 --> 0:03:10.079 we still run at two three percent real GDP? If 0:03:10.120 --> 0:03:13.080 you see some initiatives around deregulation, if you see some 0:03:13.200 --> 0:03:18.000 initiatives that are incentivize people to invest both globally into 0:03:18.040 --> 0:03:20.960 the US and domestically, you can still grow. 0:03:21.080 --> 0:03:23.519 So economist tell us that there's a potential for the economy, 0:03:23.560 --> 0:03:25.640 and it's largely a function of how many workers you've 0:03:25.680 --> 0:03:27.919 got and how much productivity you have for those workers. 0:03:28.440 --> 0:03:30.280 Right now we're talking about, if anything, potentially I think 0:03:30.440 --> 0:03:35.080 fewer workers demographics, but also on immigration, So can productivity 0:03:35.120 --> 0:03:36.400 really kick up that much? 0:03:36.920 --> 0:03:38.960 So, first of all, I would argue that the best 0:03:38.960 --> 0:03:43.000 indicator of growth over the intermediate term is demographics. When 0:03:43.000 --> 0:03:48.920 you track what GDP does, it's amazingly sympathetic to the demographics, 0:03:48.960 --> 0:03:52.640 including like you say, immigration, et cetera, the age dynamics 0:03:52.640 --> 0:03:55.440 in the country. But that's over the intermediate term. You 0:03:55.480 --> 0:03:59.760 can come off that demographic curve because of stimulus one way. 0:03:59.840 --> 0:04:01.320 The So think about what's going to be So will 0:04:01.360 --> 0:04:05.160 we have immigration, Will you have some modest reversal and immigration, probably, 0:04:05.920 --> 0:04:07.800 but I don't think it'll be significant in terms of 0:04:07.840 --> 0:04:11.080 aggregate demand, and really can't and I can't believe the 0:04:11.080 --> 0:04:13.200 president will want there's some real initiative they're trying to 0:04:13.240 --> 0:04:14.720 solve for. But I don't think there's going to be 0:04:14.760 --> 0:04:17.000 a mass deportation of people. So I don't think that 0:04:17.120 --> 0:04:19.640 is going to be that significant. What I am energized 0:04:19.680 --> 0:04:22.320 about is I think, and I think people think it's 0:04:22.320 --> 0:04:24.960 going to take longer. I think productivity, you know, it 0:04:25.000 --> 0:04:30.560 really talks about AI, but software, inventory management, logistics, technology 0:04:30.640 --> 0:04:33.240 is changing. You know, people talk about the high profile 0:04:33.320 --> 0:04:36.400 things like we're going to driverless cars, but I don't 0:04:36.400 --> 0:04:38.920 think people talk about other ways that we do business. 0:04:38.960 --> 0:04:40.800 And I mean even in our business, how we think 0:04:40.839 --> 0:04:46.040 about documentation, how we think about how we create HR 0:04:46.480 --> 0:04:48.880 human resource reviews, and things like, all of a sudden, 0:04:48.920 --> 0:04:51.080 we're implementing a whole series of things. We're going to 0:04:51.120 --> 0:04:54.000 hit an inflection point on inflation, and it's hard to 0:04:54.000 --> 0:04:55.400 say is that's six months from now, a year and 0:04:55.440 --> 0:04:57.280 a half from now, But productivity is going to be 0:04:57.440 --> 0:04:59.560 is going to be the vehicle we're going to drive 0:04:59.600 --> 0:05:00.839 on to get there. 0:05:01.240 --> 0:05:03.839 What does this mean for rates? What do you anticipate 0:05:03.920 --> 0:05:06.000 given everything that Donald Trump is likely to do. 0:05:07.200 --> 0:05:08.640 So I think that, you know, there's a near term 0:05:08.640 --> 0:05:10.599 in the longer term, So I think the near term 0:05:10.720 --> 0:05:12.640 is Listen, I don't think the Federal Reserve can cut 0:05:12.720 --> 0:05:15.280 rates anytime soon. You know, maybe the back half of 0:05:15.320 --> 0:05:17.960 this year. We've got to see because you've got this 0:05:17.960 --> 0:05:20.360 this growth I think this growth stimulus that's in there, 0:05:20.640 --> 0:05:23.640 and you've got what is you know, nominal GDP that 0:05:23.680 --> 0:05:25.960 could run at about five percent pretty hard for them 0:05:25.960 --> 0:05:28.000 the cut rates, and they did, which I would argue 0:05:28.040 --> 0:05:30.320 was a great call to get rates down to a 0:05:30.440 --> 0:05:33.000 level that's not that restrictive and just leave it there 0:05:33.040 --> 0:05:35.360 for a long time. So usually it takes the FED 0:05:35.480 --> 0:05:37.400 moving to get rates down. So I don't think rates 0:05:37.400 --> 0:05:39.680 are going anywhere anytime soon. I certainly don't think they're 0:05:39.680 --> 0:05:41.919 going down. The other side of it, it's hard in 0:05:41.920 --> 0:05:44.600 the near term to get inflation down. So with all 0:05:44.600 --> 0:05:47.039 these in issues, including you know, there is a near 0:05:47.160 --> 0:05:48.920 term effect. I don't think it's a long term effect 0:05:48.960 --> 0:05:52.120 around tariff that is a price level adjustment, but in 0:05:52.160 --> 0:05:55.520 the near term that does affect it some deglobalization because 0:05:55.520 --> 0:05:57.240 you're gonna have some build in the US as we 0:05:57.320 --> 0:06:00.640 bring some of the manufacturing and other product back. So 0:06:00.839 --> 0:06:02.919 near term I think inflation stays a bit higher. So 0:06:02.960 --> 0:06:05.080 what does that mean. Listen, don't think anybody's gonna make 0:06:05.120 --> 0:06:07.920 any money on interest rates rallying anytime soon. If anything, 0:06:08.240 --> 0:06:10.440 I could see them migrate a bit higher in the 0:06:10.480 --> 0:06:12.680 near term. But I think what's going to happen is 0:06:12.680 --> 0:06:14.200 you're going to have this in the near term, and 0:06:14.200 --> 0:06:16.200 then I think we're going to hit this inflection point 0:06:16.240 --> 0:06:19.720 alongside the productivity enhancement, but I think will be quite real. 0:06:19.760 --> 0:06:22.360 But in the interim, I like staying shorter in terms 0:06:22.360 --> 0:06:24.440 of my interest rate exposure. And by the way, it's 0:06:24.480 --> 0:06:26.800 a pretty historic point in time. With interestrates where they 0:06:26.800 --> 0:06:29.400 are and the yield curve as flat as it is, 0:06:29.400 --> 0:06:31.240 you can you can sit in the very front end 0:06:31.240 --> 0:06:33.599 of the yield curve, clip a lot of coupon, a 0:06:33.600 --> 0:06:35.520 lot of income. We run the CTF for the go 0:06:35.640 --> 0:06:38.239 bink that we just we just clip coupon and income 0:06:38.520 --> 0:06:40.200 and you don't have to. Traditionally, as a lender, you 0:06:40.240 --> 0:06:42.120 have to go way out, you have to lend long. 0:06:42.600 --> 0:06:43.760 You don't have to do that today. 0:06:44.520 --> 0:06:47.720 How different may this Trump administration be than what we've 0:06:47.720 --> 0:06:49.240 seen in the past. A lot of things you describe, 0:06:49.279 --> 0:06:51.240 I've been around for a long time, things like the 0:06:51.240 --> 0:06:53.400 debt and deficit you think are so big nobody's be 0:06:53.400 --> 0:06:55.960 able to fix it. Can we really expect them to 0:06:56.000 --> 0:06:59.600 find new approaches? And let me introduce for example, Elon Musk. 0:06:59.720 --> 0:07:02.440 It's the must affected all this in sort of different 0:07:02.520 --> 0:07:03.360 sorts of thinking. 0:07:04.480 --> 0:07:07.360 So I'm hoping that sound. I mean, I think the 0:07:07.440 --> 0:07:10.400 traditional the way traditional economics work in the traditional how 0:07:10.400 --> 0:07:12.920 we thought about tariffs, how we thought about some of 0:07:12.960 --> 0:07:15.840 these initiatives. I actually think there's going to be some 0:07:16.000 --> 0:07:18.160 vibrant thinking, some new thinking that will be You know, 0:07:18.200 --> 0:07:20.080 if you think about what tariffs are, do you get 0:07:20.120 --> 0:07:24.120 an initial price level adjustment, but you can actually create 0:07:24.200 --> 0:07:26.120 growth around it if you're going to see more product 0:07:26.200 --> 0:07:30.360 produced domestically, there are certain products that are efficient for 0:07:30.480 --> 0:07:33.800 us to continue to expert how you utilize tariffs can 0:07:33.960 --> 0:07:37.360 quite frankly not be that. People say the normal traditional 0:07:37.400 --> 0:07:40.600 economic thesis is, you know, lift inflation and then it'll 0:07:40.640 --> 0:07:43.640 slow growth. I'm actually not sure. And I think a 0:07:43.680 --> 0:07:47.000 lot of in the type of economy we operate in today, 0:07:47.480 --> 0:07:50.280 service economy different than the past. I think the historic 0:07:50.840 --> 0:07:54.120 algorithms of how you thought about how economies respond. Think 0:07:54.160 --> 0:07:55.480 about the interest rates, we talk all all the time. 0:07:55.480 --> 0:07:57.120 People that got rates are going high, the economy is 0:07:57.160 --> 0:07:59.280 going to tank, doesn't happen. I think you'll see some 0:07:59.360 --> 0:08:02.600 innovation in this administration, and I think you'll see some 0:08:02.640 --> 0:08:05.160 things that are different, and I think they're going to 0:08:05.240 --> 0:08:09.120 quite frankly try some things and make it and determine 0:08:09.480 --> 0:08:11.760 you know, where is And I'm hoping quite Frankly, some 0:08:11.800 --> 0:08:14.160 of these initiatis, as we talked about earlier, have a 0:08:14.200 --> 0:08:17.680 longer timepective, longer term perspective to them, like not just 0:08:17.720 --> 0:08:19.800 focus on the next week, the next month, but how 0:08:19.840 --> 0:08:22.400 do you put in place some initiatives that are creative, 0:08:22.440 --> 0:08:25.600 thoughtful and create what I call velocity, that are durable 0:08:25.640 --> 0:08:27.720 and actually put the economy on a pretty good spot 0:08:27.760 --> 0:08:29.880 longer term versus gosh, we got to succeed in the 0:08:29.880 --> 0:08:31.560 next month or so. 0:08:31.720 --> 0:08:34.560 We've spent several years now fixate on the FED, what 0:08:34.600 --> 0:08:37.120 it's going to do, what it has done every month 0:08:37.480 --> 0:08:39.920 we talk with you about exactly what's going on. Are 0:08:39.920 --> 0:08:41.719 we looking at a time that actually FED maybe a 0:08:41.760 --> 0:08:44.040 little less relevant that will we focus more on the 0:08:44.040 --> 0:08:46.400 White House into somebody Saint Congress a little bit less 0:08:46.440 --> 0:08:47.640 on what the FOMC does. 0:08:48.160 --> 0:08:50.439 So, David, I mean, we've lived in markets for a 0:08:50.640 --> 0:08:54.480 decade or more in this dynamic of everything's on the 0:08:54.520 --> 0:08:57.680 back of the monetary policy mechanism, not just in the US, 0:08:57.720 --> 0:09:01.760 in Europe, Bank in Japan, Bank of England, and it 0:09:01.800 --> 0:09:05.440 has been because normally for years we've thought about the 0:09:05.480 --> 0:09:08.840 way policy should work, is monetary fiscal policy work hand 0:09:08.840 --> 0:09:12.280 and glove. Fiscal creates some initiative on the to stimulate, 0:09:12.600 --> 0:09:15.240 and then the central bank pulls back, and then vice versa, 0:09:15.320 --> 0:09:18.319 and you get this pendulum effect. We've lived in a 0:09:18.360 --> 0:09:22.199 world where there's been functionally no effective fiscal and it's 0:09:22.200 --> 0:09:24.400 all been on the back of policy making of monetary 0:09:24.440 --> 0:09:29.480 policy way too much today. I actually think today central bank, 0:09:29.520 --> 0:09:32.480 the FED should go on holiday for a while and 0:09:32.679 --> 0:09:34.480 let the fiscal do what it's going to do and 0:09:34.480 --> 0:09:37.320 then react. If inflation is a bit higher, then maybe 0:09:37.360 --> 0:09:40.200 you have to react that. If in fact we're getting productivity, 0:09:40.240 --> 0:09:41.559 then you come in to look at it. I think 0:09:41.600 --> 0:09:45.959 today it'd be great to have a different decade than 0:09:46.000 --> 0:09:47.960 we just had of where it just had to be 0:09:48.000 --> 0:09:50.320 the monetary policy tool and it doesn't work. I mean, 0:09:50.320 --> 0:09:52.719 there's singular think about negative interest rates in Europe. It 0:09:52.760 --> 0:09:55.319 didn't do anything other than hurt the banking system, of 0:09:55.400 --> 0:09:58.880 pension system. It doesn't work. Extremes of central bank policy 0:09:58.920 --> 0:10:01.319 does not do not work. So I think the extending 0:10:01.400 --> 0:10:02.880 of some fiscal it's quite healthy. 0:10:04.600 --> 0:10:07.040 Many things to Rick reader of Blackrock. Coming up, we 0:10:07.120 --> 0:10:10.880 continue our special edition anticipating what lies ahead during President 0:10:10.920 --> 0:10:14.880 Trump's second term, focusing on fiscal policy with Torsten's lack 0:10:14.880 --> 0:10:17.520 of Apollo and Maya McGuinness of the Committee for a 0:10:17.559 --> 0:10:28.880 Responsible Federal Budget here on Wall Street Week. This is 0:10:28.920 --> 0:10:31.080 a special edition of Wall Street Week focused on what 0:10:31.200 --> 0:10:34.160 President Trump's return to the White House will mean for investors. 0:10:34.440 --> 0:10:37.959 I'm David weston President Trump returns to office having committed 0:10:38.000 --> 0:10:41.360 his administration to cutting two things, taxes and the cost 0:10:41.440 --> 0:10:45.160 of government. Mitch Daniels ran the omb for President George W. 0:10:45.240 --> 0:10:49.040 Bush before becoming Governor of Indiana and head of Purdue University, 0:10:49.200 --> 0:10:52.760 and he says cutting the cost of government is long overdue. 0:10:54.480 --> 0:10:56.520 It's not a bad place to start. You're right that 0:10:56.559 --> 0:11:00.000 the money's not as big, But for the reasons we've discussed, 0:11:00.800 --> 0:11:02.920 I think it is a more straightforward case to make 0:11:03.320 --> 0:11:07.360 that the federal government needn't be doing many of these things. 0:11:07.400 --> 0:11:09.920 And we're going to have to get into a mode 0:11:10.040 --> 0:11:14.319 where the federal government limits itself to must do items, 0:11:14.440 --> 0:11:17.480 nice to do items or optional ones we simply can't 0:11:17.480 --> 0:11:19.880 afford anymore. We haven't really afforded them for quite a 0:11:19.880 --> 0:11:24.640 long time. As I've sometimes glibly said, you'd be amazed 0:11:24.679 --> 0:11:26.000 how much government you'd never missed. 0:11:26.120 --> 0:11:27.040 You would not miss. 0:11:27.880 --> 0:11:32.040 You'd hear the screams of the clients and recipients of 0:11:32.120 --> 0:11:36.880 the money, but the average person would not see any 0:11:36.920 --> 0:11:40.600 difference in their lives, and that might embolden the country 0:11:40.640 --> 0:11:45.559 to support other trimming and reductions and modernizations of the 0:11:45.640 --> 0:11:46.440 kind we really need. 0:11:48.160 --> 0:11:51.120 That was Mitch Daniels explaining why we might not miss 0:11:51.200 --> 0:11:53.440 the Department Education if it went away. To take us 0:11:53.440 --> 0:11:56.120 through the income statement and balance sheet of the federal government, 0:11:56.160 --> 0:11:59.520 we turned out to torst and Slock Apollo, chief economist 0:12:00.160 --> 0:12:03.240 again as president of the Committee for a Responsible Federal Budget. 0:12:03.240 --> 0:12:05.440 So welcome to Wall Street. We're good to have you here. Min. 0:12:05.559 --> 0:12:07.200 Let me start with you, and before we get to 0:12:07.240 --> 0:12:09.560 what we can do about cutting costs and fixing the 0:12:09.600 --> 0:12:11.720 deficit problem we have. How big a problem is it? 0:12:11.760 --> 0:12:13.719 How do we define it? 0:12:13.720 --> 0:12:15.160 It's big, It's a big. 0:12:15.240 --> 0:12:17.520 So we're basically we've waited till the last minute to 0:12:17.559 --> 0:12:18.880 start to try to turn this ship around. 0:12:18.920 --> 0:12:20.160 We should have done this years ago. 0:12:20.640 --> 0:12:23.240 Debt to GDP, which is probably the most important metric 0:12:23.720 --> 0:12:26.880 right now, is about one hundred percent of GDP. The 0:12:26.920 --> 0:12:28.920 record we ever had in this country right after World 0:12:28.960 --> 0:12:31.280 War Two was one hundred and six we'll surpass that 0:12:31.360 --> 0:12:33.760 in two years. That was right after a world war. 0:12:33.920 --> 0:12:36.800 This is during a time of economic growth and stability. 0:12:37.200 --> 0:12:39.680 More worrying, I think is interest payments on the debt, 0:12:39.720 --> 0:12:41.960 which really signal the health of the fiscal situation. 0:12:42.320 --> 0:12:44.280 But they're the fastest growing part of the budget. 0:12:44.600 --> 0:12:47.240 They are the second largest item in the budget, larger 0:12:47.280 --> 0:12:51.079 even than spending on defense. And so all these numbers 0:12:51.120 --> 0:12:53.640 are projected to get worse over time, with our borrowing 0:12:53.920 --> 0:12:57.120 about twenty two trillion dollars over the next decade if 0:12:57.160 --> 0:13:00.280 we don't do anything to make the situation worse, which, 0:13:00.320 --> 0:13:03.040 if you know, Congress, I wouldn't bet on. So the 0:13:03.080 --> 0:13:05.440 fiscal situation is now at the point where it's having 0:13:05.480 --> 0:13:08.960 profoundly negative effects throughout both our economy and I would 0:13:09.000 --> 0:13:10.439 even say our national security. 0:13:10.480 --> 0:13:12.679 We've got to make changes really quickly at this point. 0:13:13.320 --> 0:13:16.240 Torsa Azmaya says, the problem is bad and it's getting 0:13:16.240 --> 0:13:19.160 worse now. President Trump assures us he's going to somehow 0:13:19.160 --> 0:13:21.720 address it. But how do we see the problem in 0:13:21.760 --> 0:13:24.240 our everyday life, in the markets, in the value of assets. 0:13:24.320 --> 0:13:26.520 Well, one thing that has been unusual in the last 0:13:26.559 --> 0:13:29.440 few months is that Normally, when the Federal Reserve lowest 0:13:29.440 --> 0:13:32.360 interest rates, you begin to also see long term interest 0:13:32.440 --> 0:13:35.240 rates come down. But since the FIT started lowing interest 0:13:35.320 --> 0:13:38.439 rates on September the eighteenth last year, we have seen 0:13:38.679 --> 0:13:41.040 short term interstrates have come down, of course, around one 0:13:41.080 --> 0:13:43.800 hundred basis points, but long term interest rates have gone 0:13:43.920 --> 0:13:46.040 up one hundred basis points. And this has opened the 0:13:46.080 --> 0:13:49.439 conversation in markets about why are long term interestrates going 0:13:49.520 --> 0:13:51.800 up when the FIT is cutting interest rates? And the 0:13:51.880 --> 0:13:54.559 worries and some of the debate is is this because 0:13:54.640 --> 0:13:55.559 of fiscal worries? 0:13:55.840 --> 0:13:57.800 Is this because of other factors? 0:13:58.040 --> 0:14:00.600 And some of the quantifications suggest that may be there is, 0:14:00.720 --> 0:14:02.960 at least in some of the term premium estermates from 0:14:02.960 --> 0:14:05.280 the Federal Reserve Bank of New York, there is some 0:14:05.480 --> 0:14:08.040 reasons to worry about that. Maybe as much as eighty 0:14:08.080 --> 0:14:10.520 percent of the rise in long term interest rates has 0:14:10.559 --> 0:14:13.720 been driven by not what the FIT expectations have been doing, 0:14:13.840 --> 0:14:17.079 but by other factors, including, of course, what the fiscal 0:14:17.160 --> 0:14:18.440 outlook is at the moment. 0:14:18.720 --> 0:14:20.920 Maya, you've dealt with the federal budget and the deficit 0:14:20.960 --> 0:14:23.400 for a good long time now. We remember the so 0:14:23.480 --> 0:14:26.600 called bond vigilantes what brings those out. Are we in 0:14:26.680 --> 0:14:29.080 danger at all of bringing out bond vigilantis. 0:14:29.280 --> 0:14:33.120 Well, my highly non scientific method would say things are changing. 0:14:33.200 --> 0:14:35.680 I'm hearing, We're hearing from market people all the time. 0:14:35.760 --> 0:14:38.240 While this issue was kind of in the wilderness for 0:14:38.280 --> 0:14:40.320 a long time there, even when our debt was growing, 0:14:40.400 --> 0:14:42.960 even when we were clearly borrowing beyond our means and 0:14:43.000 --> 0:14:45.800 we didn't need to, interest rates are incredibly low. 0:14:46.080 --> 0:14:48.880 Markets weren't worried. Now they seem to be very worried, 0:14:49.680 --> 0:14:51.040 and we're hearing about it. 0:14:51.080 --> 0:14:53.200 We're interacting with them much more in terms of the 0:14:53.240 --> 0:14:56.320 policy level. The problem is what I get, the sense 0:14:56.360 --> 0:15:00.760 I get is that markets want lower debt and lower taxes. 0:15:01.240 --> 0:15:03.960 Citizens want lower debt kind of they like that talking 0:15:04.000 --> 0:15:07.880 point lower taxes and higher spending. Politicians don't want to 0:15:07.880 --> 0:15:10.360 do anything hard. So you can see that there's a 0:15:10.440 --> 0:15:12.800 real understanding that we need to make changes, but the 0:15:12.840 --> 0:15:15.760 political will to get us there is really challenging at 0:15:15.760 --> 0:15:18.720 this time because those changes we can cut a lot 0:15:18.760 --> 0:15:21.360 that people wouldn't notice, like Governor Daniels said, but if 0:15:21.400 --> 0:15:23.040 we're going to actually make a difference, this is going 0:15:23.080 --> 0:15:24.520 to start to have real effects in some of these 0:15:24.560 --> 0:15:27.480 bigger programs that politicians have said they're not willing to touch. 0:15:27.920 --> 0:15:30.560 So we're going to have a political tension about whether 0:15:30.560 --> 0:15:31.840 we're going to do this for real or not. 0:15:32.160 --> 0:15:35.160 That political will is almost always an issue in Washington. 0:15:35.400 --> 0:15:37.280 But let's assign that's help though. 0:15:37.400 --> 0:15:39.360 Well, let's put that to what side. If we wanted 0:15:39.400 --> 0:15:41.600 to fix the problem, what are the things that would 0:15:41.600 --> 0:15:42.840 make the biggest difference. There are a lot of things 0:15:42.840 --> 0:15:45.160 we could do, but where to get the most bang 0:15:45.240 --> 0:15:45.680 for the buck. 0:15:46.000 --> 0:15:48.320 Yeah, the three things that people have said they absolutely 0:15:48.320 --> 0:15:50.120 will not do is what we should really start with. 0:15:50.160 --> 0:15:53.680 So the biggest items are Social Security and medicare, both 0:15:53.720 --> 0:15:57.080 of which are the largest government programs and have trust 0:15:57.080 --> 0:16:00.200 funds which are headed towards insolvency. So not only for 0:16:00.240 --> 0:16:03.120 the fiscal situation do we need to make changes, but 0:16:03.160 --> 0:16:06.520 if we do not take social Security in about a decade, 0:16:06.680 --> 0:16:08.680 it will be insolvent and there will be across the 0:16:08.680 --> 0:16:11.200 board benefit cuts for the people who depend on the program. 0:16:11.440 --> 0:16:14.120 So political points are scored for people who promise not 0:16:14.240 --> 0:16:15.040 to touch it. 0:16:15.040 --> 0:16:17.920 It really leaves everybody vulnerable, and it harms the budget 0:16:17.960 --> 0:16:20.920 because we're repaying trillions of dollars to those trust friends 0:16:20.960 --> 0:16:23.400 every year with no plan to make it structurally sound. 0:16:23.840 --> 0:16:26.000 At the same time, the promise, the belief we can 0:16:26.040 --> 0:16:29.840 do this without raising revenue is completely at odds with 0:16:29.960 --> 0:16:32.840 the general size of the problem. So I would start 0:16:32.880 --> 0:16:36.040 by looking at Social Security, raising the retirement age, thinking 0:16:36.120 --> 0:16:41.040 about means testing, changing the way you calculate inflation, medicare. 0:16:41.040 --> 0:16:42.520 There are a lot of changes that we can make 0:16:42.520 --> 0:16:46.800 because the healthcare industry itself is remarkably inefficient. And finally, 0:16:46.800 --> 0:16:50.040 there's almost two trillion dollars in tax expenditures a year 0:16:50.200 --> 0:16:54.680 lost revenue from exclusions, exemptions, deductions. They are inefficient, they 0:16:54.680 --> 0:16:57.200 are regressive, they are not transparent. They pay us to 0:16:57.200 --> 0:16:59.840 do things we would do anyhow. So those are the 0:17:00.000 --> 0:17:01.440 three areas I would start. 0:17:02.240 --> 0:17:05.840 Torston helped me understand when we talk about things like medicare, 0:17:05.920 --> 0:17:08.560 and we talk about Social Security for a long time, 0:17:09.040 --> 0:17:11.520 does that factor into the term premium you talked about. 0:17:11.560 --> 0:17:13.520 As the term premium goes up, are the markets really 0:17:13.520 --> 0:17:15.800 anticipating that as well as the short of how much 0:17:15.840 --> 0:17:17.600 money we're spending week by week. 0:17:17.720 --> 0:17:19.840 I do think that they do, because the market is 0:17:19.880 --> 0:17:23.000 looking at the Congressional Budget Office forecast and also MAAS 0:17:23.000 --> 0:17:25.399 and the Community for a Responsible Federal Budget forecast, and 0:17:25.440 --> 0:17:27.320 they are all showing that we're going from one hundred 0:17:27.320 --> 0:17:30.200 percent debt to GDP to two hundred percent that to GDP. 0:17:30.640 --> 0:17:34.439 And the biggest component of that increase is indeed mandatory spending, 0:17:34.640 --> 0:17:37.840 meaning social security and Medicare and medicate And if you 0:17:38.000 --> 0:17:40.159 think about that, there's about seventy three million people in 0:17:40.160 --> 0:17:42.679 the US who get soci security and supplemental income from 0:17:42.720 --> 0:17:44.480 the government. That's a lot of voters. 0:17:44.480 --> 0:17:45.320 That's a lot of people. 0:17:45.560 --> 0:17:47.800 And if you begin to think about what the path 0:17:47.880 --> 0:17:50.840 looks like for demographics going forward, it is the case 0:17:50.880 --> 0:17:53.080 that this is by far the most important driver of 0:17:53.119 --> 0:17:55.440 why dead levels are going up. So that's why from 0:17:55.440 --> 0:17:58.879 a market perspective, it becomes in some sense, it doesn't 0:17:58.880 --> 0:18:01.199 matter for the market where the cuts or how we 0:18:01.200 --> 0:18:04.080 are going to reverse the trend as long as auction 0:18:04.240 --> 0:18:08.159 sizes do not grow dramatically, as long as treasury auctions 0:18:08.160 --> 0:18:10.920 and the metrics coming out of how treasury debt is 0:18:10.960 --> 0:18:14.280 auction begin to potentially look better at least down the road, 0:18:14.320 --> 0:18:16.600 because it is clear, as J. Powlo also has said 0:18:16.720 --> 0:18:19.040 numerous times, we are on a sustainable path. 0:18:19.119 --> 0:18:22.240 At the moment, Meyer, we have now a president coming 0:18:22.280 --> 0:18:24.239 in office who says that he really wants to do 0:18:24.280 --> 0:18:27.160 something about the deficit. Now, to be sure, it seems 0:18:27.160 --> 0:18:29.280 to be on the cost side, not on the revenue side. 0:18:29.400 --> 0:18:31.159 But let's assume he does have the political Really he 0:18:31.240 --> 0:18:33.800 has two people who are going to help him on that, 0:18:34.400 --> 0:18:37.800 mister Mosk and mister mederical swaming. How difficult will it 0:18:37.840 --> 0:18:41.040 be to really make a substantial reduction in the deficit 0:18:41.080 --> 0:18:41.879 through cost cuts. 0:18:42.119 --> 0:18:44.320 If they are not concerned about politics, we can get 0:18:44.359 --> 0:18:46.080 a lot done. I think the real challenge is going 0:18:46.119 --> 0:18:47.800 to be what they recommend where I think they'll have 0:18:47.960 --> 0:18:51.479