Speaker 1: This is Wall Street Week, bringing you a special edition
Speaker 1: on what the new Trump administration could mean for global
Speaker 1: Wall Street. Coming to you from the Cornell Tech Campus
Speaker 1: on Roosevelve Island. I'm David Weston. Growth was a recurrent
Speaker 1: theme for Donald Trump and running for president, this time
Speaker 1: growth in the economy, growth in employment, and growth in
Speaker 1: the stock market. His pick for treasure Secretary, Scott Bessen,
Speaker 1: laid out for us at least part of his plan
Speaker 1: to get there.
Speaker 2: I'm a big believer that for Trump two point zero,
Speaker 2: that we can control spending by freezing the discretionary component
Speaker 2: except for defense and moving toward a three percent deficit
Speaker 2: by twenty twenty eight. I think that would be music
Speaker 2: to the market's ears. I think the debt market would
Speaker 2: respond to that. I think rates would go down. I
Speaker 2: think inflation would go down. So there's a chance here
Speaker 2: for a self reinforcing cycle.
Speaker 1: Take us through how Wall Street looks at what Trump
Speaker 1: policies could mean for that growth. We welcome back now,
Speaker 1: Rick reader Blackrock Global CIO Flicating income and if it's
Speaker 1: Global Allocation Investment Team, great to have you back.
Speaker 3: Thanks for so.
Speaker 1: I think it's your ears that mister Pssant was trying
Speaker 1: to appeal to is he right that if he could
Speaker 1: bring that off, it would be music to your ears?
Speaker 1: And is it doable?
Speaker 3: So I don't know about music. It's more of a symphony.
Speaker 3: I mean that is I mean, it can't be any better.
Speaker 3: You know what the markets care about is is there
Speaker 3: a plan? And I thought one of the key things
Speaker 3: we said by twenty twenty eight there's a plan in place.
Speaker 3: Oftentimes you have elected officials like we're gonna spend and
Speaker 3: we're gonna do it now. It has to be a progression,
Speaker 3: but it has to be a thoughtful progression around how
Speaker 3: do we get spending down? But we don't do it
Speaker 3: to real disrupt the system, but they're thoughtful ways to
Speaker 3: get there. On my senses, there is a series of
Speaker 3: initiatives they're thinking about about how to get it down,
Speaker 3: how to restrain spending and then come up with a
Speaker 3: consistent plan. Listen, the debt is the biggest problem in
Speaker 3: the US economy is an incredible shape. I mean, the
Speaker 3: vibrance of this economy blows people why. I mean how
Speaker 3: many times last year the rest of the recession economy
Speaker 3: just moves along. There's one risk that's out there, and
Speaker 3: that is the debt burden. If we have a plan
Speaker 3: to bring it down. Markets are all about confidence and
Speaker 3: confidence that we see the plan, we see the balance,
Speaker 3: we see how we can create equilibrium over time, and
Speaker 3: that can't be any better.
Speaker 1: So it's a tall order I think everyone would agree to,
Speaker 1: even as we say we'd love to have it. But
Speaker 1: right now we have above trend growth. Can we sustain
Speaker 1: that over the next two, three, four years?
Speaker 3: So I think the harder one is can you do
Speaker 3: it without any price pressure? So the US economy and
Speaker 3: think about we've run I was looking at you almost
Speaker 3: every single month for the last year. Long was the
Speaker 3: last couple of years income or if you take the
Speaker 3: payroll and you look at where income is, it's five
Speaker 3: percent almost every single month. It's amazingly stable. So can
Speaker 3: we still run at two three percent real GDP? If
Speaker 3: you see some initiatives around deregulation, if you see some
Speaker 3: initiatives that are incentivize people to invest both globally into
Speaker 3: the US and domestically, you can still grow.
Speaker 1: So economist tell us that there's a potential for the economy,
Speaker 1: and it's largely a function of how many workers you've
Speaker 1: got and how much productivity you have for those workers.
Speaker 1: Right now we're talking about, if anything, potentially I think
Speaker 1: fewer workers demographics, but also on immigration, So can productivity
Speaker 1: really kick up that much?
Speaker 3: So, first of all, I would argue that the best
Speaker 3: indicator of growth over the intermediate term is demographics. When
Speaker 3: you track what GDP does, it's amazingly sympathetic to the demographics,
Speaker 3: including like you say, immigration, et cetera, the age dynamics
Speaker 3: in the country. But that's over the intermediate term. You
Speaker 3: can come off that demographic curve because of stimulus one way.
Speaker 3: The So think about what's going to be So will
Speaker 3: we have immigration, Will you have some modest reversal and immigration, probably,
Speaker 3: but I don't think it'll be significant in terms of
Speaker 3: aggregate demand, and really can't and I can't believe the
Speaker 3: president will want there's some real initiative they're trying to
Speaker 3: solve for. But I don't think there's going to be
Speaker 3: a mass deportation of people. So I don't think that
Speaker 3: is going to be that significant. What I am energized
Speaker 3: about is I think, and I think people think it's
Speaker 3: going to take longer. I think productivity, you know, it
Speaker 3: really talks about AI, but software, inventory management, logistics, technology
Speaker 3: is changing. You know, people talk about the high profile
Speaker 3: things like we're going to driverless cars, but I don't
Speaker 3: think people talk about other ways that we do business.
Speaker 3: And I mean even in our business, how we think
Speaker 3: about documentation, how we think about how we create HR
Speaker 3: human resource reviews, and things like, all of a sudden,
Speaker 3: we're implementing a whole series of things. We're going to
Speaker 3: hit an inflection point on inflation, and it's hard to
Speaker 3: say is that's six months from now, a year and
Speaker 3: a half from now, But productivity is going to be
Speaker 3: is going to be the vehicle we're going to drive
Speaker 3: on to get there.
Speaker 1: What does this mean for rates? What do you anticipate
Speaker 1: given everything that Donald Trump is likely to do.
Speaker 3: So I think that, you know, there's a near term
Speaker 3: in the longer term, So I think the near term
Speaker 3: is Listen, I don't think the Federal Reserve can cut
Speaker 3: rates anytime soon. You know, maybe the back half of
Speaker 3: this year. We've got to see because you've got this
Speaker 3: this growth I think this growth stimulus that's in there,
Speaker 3: and you've got what is you know, nominal GDP that
Speaker 3: could run at about five percent pretty hard for them
Speaker 3: the cut rates, and they did, which I would argue
Speaker 3: was a great call to get rates down to a
Speaker 3: level that's not that restrictive and just leave it there
Speaker 3: for a long time. So usually it takes the FED
Speaker 3: moving to get rates down. So I don't think rates
Speaker 3: are going anywhere anytime soon. I certainly don't think they're
Speaker 3: going down. The other side of it, it's hard in
Speaker 3: the near term to get inflation down. So with all
Speaker 3: these in issues, including you know, there is a near
Speaker 3: term effect. I don't think it's a long term effect
Speaker 3: around tariff that is a price level adjustment, but in
Speaker 3: the near term that does affect it some deglobalization because
Speaker 3: you're gonna have some build in the US as we
Speaker 3: bring some of the manufacturing and other product back. So
Speaker 3: near term I think inflation stays a bit higher. So
Speaker 3: what does that mean. Listen, don't think anybody's gonna make
Speaker 3: any money on interest rates rallying anytime soon. If anything,
Speaker 3: I could see them migrate a bit higher in the
Speaker 3: near term. But I think what's going to happen is
Speaker 3: you're going to have this in the near term, and
Speaker 3: then I think we're going to hit this inflection point
Speaker 3: alongside the productivity enhancement, but I think will be quite real.
Speaker 3: But in the interim, I like staying shorter in terms
Speaker 3: of my interest rate exposure. And by the way, it's
Speaker 3: a pretty historic point in time. With interestrates where they
Speaker 3: are and the yield curve as flat as it is,
Speaker 3: you can you can sit in the very front end
Speaker 3: of the yield curve, clip a lot of coupon, a
Speaker 3: lot of income. We run the CTF for the go
Speaker 3: bink that we just we just clip coupon and income
Speaker 3: and you don't have to. Traditionally, as a lender, you
Speaker 3: have to go way out, you have to lend long.
Speaker 3: You don't have to do that today.
Speaker 1: How different may this Trump administration be than what we've
Speaker 1: seen in the past. A lot of things you describe,
Speaker 1: I've been around for a long time, things like the
Speaker 1: debt and deficit you think are so big nobody's be
Speaker 1: able to fix it. Can we really expect them to
Speaker 1: find new approaches? And let me introduce for example, Elon Musk.
Speaker 1: It's the must affected all this in sort of different
Speaker 1: sorts of thinking.
Speaker 3: So I'm hoping that sound. I mean, I think the
Speaker 3: traditional the way traditional economics work in the traditional how
Speaker 3: we thought about tariffs, how we thought about some of
Speaker 3: these initiatives. I actually think there's going to be some
Speaker 3: vibrant thinking, some new thinking that will be You know,
Speaker 3: if you think about what tariffs are, do you get
Speaker 3: an initial price level adjustment, but you can actually create
Speaker 3: growth around it if you're going to see more product
Speaker 3: produced domestically, there are certain products that are efficient for
Speaker 3: us to continue to expert how you utilize tariffs can
Speaker 3: quite frankly not be that. People say the normal traditional
Speaker 3: economic thesis is, you know, lift inflation and then it'll
Speaker 3: slow growth. I'm actually not sure. And I think a
Speaker 3: lot of in the type of economy we operate in today,
Speaker 3: service economy different than the past. I think the historic
Speaker 3: algorithms of how you thought about how economies respond. Think
Speaker 3: about the interest rates, we talk all all the time.
Speaker 3: People that got rates are going high, the economy is
Speaker 3: going to tank, doesn't happen. I think you'll see some
Speaker 3: innovation in this administration, and I think you'll see some
Speaker 3: things that are different, and I think they're going to
Speaker 3: quite frankly try some things and make it and determine
Speaker 3: you know, where is And I'm hoping quite Frankly, some
Speaker 3: of these initiatis, as we talked about earlier, have a
Speaker 3: longer timepective, longer term perspective to them, like not just
Speaker 3: focus on the next week, the next month, but how
Speaker 3: do you put in place some initiatives that are creative,
Speaker 3: thoughtful and create what I call velocity, that are durable
Speaker 3: and actually put the economy on a pretty good spot
Speaker 3: longer term versus gosh, we got to succeed in the
Speaker 3: next month or so.
Speaker 1: We've spent several years now fixate on the FED, what
Speaker 1: it's going to do, what it has done every month
Speaker 1: we talk with you about exactly what's going on. Are
Speaker 1: we looking at a time that actually FED maybe a
Speaker 1: little less relevant that will we focus more on the
Speaker 1: White House into somebody Saint Congress a little bit less
Speaker 1: on what the FOMC does.
Speaker 3: So, David, I mean, we've lived in markets for a
Speaker 3: decade or more in this dynamic of everything's on the
Speaker 3: back of the monetary policy mechanism, not just in the US,
Speaker 3: in Europe, Bank in Japan, Bank of England, and it
Speaker 3: has been because normally for years we've thought about the
Speaker 3: way policy should work, is monetary fiscal policy work hand
Speaker 3: and glove. Fiscal creates some initiative on the to stimulate,
Speaker 3: and then the central bank pulls back, and then vice versa,
Speaker 3: and you get this pendulum effect. We've lived in a
Speaker 3: world where there's been functionally no effective fiscal and it's
Speaker 3: all been on the back of policy making of monetary
Speaker 3: policy way too much today. I actually think today central bank,
Speaker 3: the FED should go on holiday for a while and
Speaker 3: let the fiscal do what it's going to do and
Speaker 3: then react. If inflation is a bit higher, then maybe
Speaker 3: you have to react that. If in fact we're getting productivity,
Speaker 3: then you come in to look at it. I think
Speaker 3: today it'd be great to have a different decade than
Speaker 3: we just had of where it just had to be
Speaker 3: the monetary policy tool and it doesn't work. I mean,
Speaker 3: there's singular think about negative interest rates in Europe. It
Speaker 3: didn't do anything other than hurt the banking system, of
Speaker 3: pension system. It doesn't work. Extremes of central bank policy
Speaker 3: does not do not work. So I think the extending
Speaker 3: of some fiscal it's quite healthy.
Speaker 1: Many things to Rick reader of Blackrock. Coming up, we
Speaker 1: continue our special edition anticipating what lies ahead during President
Speaker 1: Trump's second term, focusing on fiscal policy with Torsten's lack
Speaker 1: of Apollo and Maya McGuinness of the Committee for a
Speaker 1: Responsible Federal Budget here on Wall Street Week. This is
Speaker 1: a special edition of Wall Street Week focused on what
Speaker 1: President Trump's return to the White House will mean for investors.
Speaker 1: I'm David weston President Trump returns to office having committed
Speaker 1: his administration to cutting two things, taxes and the cost
Speaker 1: of government. Mitch Daniels ran the omb for President George W.
Speaker 1: Bush before becoming Governor of Indiana and head of Purdue University,
Speaker 1: and he says cutting the cost of government is long overdue.
Speaker 4: It's not a bad place to start. You're right that
Speaker 4: the money's not as big, But for the reasons we've discussed,
Speaker 4: I think it is a more straightforward case to make
Speaker 4: that the federal government needn't be doing many of these things.
Speaker 4: And we're going to have to get into a mode
Speaker 4: where the federal government limits itself to must do items,
Speaker 4: nice to do items or optional ones we simply can't
Speaker 4: afford anymore. We haven't really afforded them for quite a
Speaker 4: long time. As I've sometimes glibly said, you'd be amazed
Speaker 4: how much government you'd never missed.
Speaker 1: You would not miss.
Speaker 4: You'd hear the screams of the clients and recipients of
Speaker 4: the money, but the average person would not see any
Speaker 4: difference in their lives, and that might embolden the country
Speaker 4: to support other trimming and reductions and modernizations of the
Speaker 4: kind we really need.
Speaker 1: That was Mitch Daniels explaining why we might not miss
Speaker 1: the Department Education if it went away. To take us
Speaker 1: through the income statement and balance sheet of the federal government,
Speaker 1: we turned out to torst and Slock Apollo, chief economist
Speaker 1: again as president of the Committee for a Responsible Federal Budget.
Speaker 1: So welcome to Wall Street. We're good to have you here. Min.
Speaker 1: Let me start with you, and before we get to
Speaker 1: what we can do about cutting costs and fixing the
Speaker 1: deficit problem we have. How big a problem is it?
Speaker 1: How do we define it?
Speaker 5: It's big, It's a big.
Speaker 6: So we're basically we've waited till the last minute to
Speaker 6: start to try to turn this ship around.
Speaker 5: We should have done this years ago.
Speaker 6: Debt to GDP, which is probably the most important metric
Speaker 6: right now, is about one hundred percent of GDP. The
Speaker 6: record we ever had in this country right after World
Speaker 6: War Two was one hundred and six we'll surpass that
Speaker 6: in two years. That was right after a world war.
Speaker 6: This is during a time of economic growth and stability.
Speaker 6: More worrying, I think is interest payments on the debt,
Speaker 6: which really signal the health of the fiscal situation.
Speaker 5: But they're the fastest growing part of the budget.
Speaker 6: They are the second largest item in the budget, larger
Speaker 6: even than spending on defense. And so all these numbers
Speaker 6: are projected to get worse over time, with our borrowing
Speaker 6: about twenty two trillion dollars over the next decade if
Speaker 6: we don't do anything to make the situation worse, which,
Speaker 6: if you know, Congress, I wouldn't bet on. So the
Speaker 6: fiscal situation is now at the point where it's having
Speaker 6: profoundly negative effects throughout both our economy and I would
Speaker 6: even say our national security.
Speaker 5: We've got to make changes really quickly at this point.
Speaker 1: Torsa Azmaya says, the problem is bad and it's getting
Speaker 1: worse now. President Trump assures us he's going to somehow
Speaker 1: address it. But how do we see the problem in
Speaker 1: our everyday life, in the markets, in the value of assets.
Speaker 7: Well, one thing that has been unusual in the last
Speaker 7: few months is that Normally, when the Federal Reserve lowest
Speaker 7: interest rates, you begin to also see long term interest
Speaker 7: rates come down. But since the FIT started lowing interest
Speaker 7: rates on September the eighteenth last year, we have seen
Speaker 7: short term interstrates have come down, of course, around one
Speaker 7: hundred basis points, but long term interest rates have gone
Speaker 7: up one hundred basis points. And this has opened the
Speaker 7: conversation in markets about why are long term interestrates going
Speaker 7: up when the FIT is cutting interest rates? And the
Speaker 7: worries and some of the debate is is this because
Speaker 7: of fiscal worries?
Speaker 1: Is this because of other factors?
Speaker 7: And some of the quantifications suggest that may be there is,
Speaker 7: at least in some of the term premium estermates from
Speaker 7: the Federal Reserve Bank of New York, there is some
Speaker 7: reasons to worry about that. Maybe as much as eighty
Speaker 7: percent of the rise in long term interest rates has
Speaker 7: been driven by not what the FIT expectations have been doing,
Speaker 7: but by other factors, including, of course, what the fiscal
Speaker 7: outlook is at the moment.
Speaker 1: Maya, you've dealt with the federal budget and the deficit
Speaker 1: for a good long time now. We remember the so
Speaker 1: called bond vigilantes what brings those out. Are we in
Speaker 1: danger at all of bringing out bond vigilantis.
Speaker 6: Well, my highly non scientific method would say things are changing.
Speaker 5: I'm hearing, We're hearing from market people all the time.
Speaker 6: While this issue was kind of in the wilderness for
Speaker 6: a long time there, even when our debt was growing,
Speaker 6: even when we were clearly borrowing beyond our means and
Speaker 6: we didn't need to, interest rates are incredibly low.
Speaker 5: Markets weren't worried. Now they seem to be very worried,
Speaker 5: and we're hearing about it.
Speaker 6: We're interacting with them much more in terms of the
Speaker 6: policy level. The problem is what I get, the sense
Speaker 6: I get is that markets want lower debt and lower taxes.
Speaker 6: Citizens want lower debt kind of they like that talking
Speaker 6: point lower taxes and higher spending. Politicians don't want to
Speaker 6: do anything hard. So you can see that there's a
Speaker 6: real understanding that we need to make changes, but the
Speaker 6: political will to get us there is really challenging at
Speaker 6: this time because those changes we can cut a lot
Speaker 6: that people wouldn't notice, like Governor Daniels said, but if
Speaker 6: we're going to actually make a difference, this is going
Speaker 6: to start to have real effects in some of these
Speaker 6: bigger programs that politicians have said they're not willing to touch.
Speaker 6: So we're going to have a political tension about whether
Speaker 6: we're going to do this for real or not.
Speaker 1: That political will is almost always an issue in Washington.
Speaker 5: But let's assign that's help though.
Speaker 1: Well, let's put that to what side. If we wanted
Speaker 1: to fix the problem, what are the things that would
Speaker 1: make the biggest difference. There are a lot of things
Speaker 1: we could do, but where to get the most bang
Speaker 1: for the buck.
Speaker 6: Yeah, the three things that people have said they absolutely
Speaker 6: will not do is what we should really start with.
Speaker 6: So the biggest items are Social Security and medicare, both
Speaker 6: of which are the largest government programs and have trust
Speaker 6: funds which are headed towards insolvency. So not only for
Speaker 6: the fiscal situation do we need to make changes, but
Speaker 6: if we do not take social Security in about a decade,
Speaker 6: it will be insolvent and there will be across the
Speaker 6: board benefit cuts for the people who depend on the program.
Speaker 5: So political points are scored for people who promise not
Speaker 5: to touch it.
Speaker 6: It really leaves everybody vulnerable, and it harms the budget
Speaker 6: because we're repaying trillions of dollars to those trust friends
Speaker 6: every year with no plan to make it structurally sound.
Speaker 6: At the same time, the promise, the belief we can
Speaker 6: do this without raising revenue is completely at odds with
Speaker 6: the general size of the problem. So I would start
Speaker 6: by looking at Social Security, raising the retirement age, thinking
Speaker 6: about means testing, changing the way you calculate inflation, medicare.
Speaker 6: There are a lot of changes that we can make
Speaker 6: because the healthcare industry itself is remarkably inefficient. And finally,
Speaker 6: there's almost two trillion dollars in tax expenditures a year
Speaker 6: lost revenue from exclusions, exemptions, deductions. They are inefficient, they
Speaker 6: are regressive, they are not transparent. They pay us to
Speaker 6: do things we would do anyhow. So those are the
Speaker 6: three areas I would start.
Speaker 1: Torston helped me understand when we talk about things like medicare,
Speaker 1: and we talk about Social Security for a long time,
Speaker 1: does that factor into the term premium you talked about.
Speaker 1: As the term premium goes up, are the markets really
Speaker 1: anticipating that as well as the short of how much
Speaker 1: money we're spending week by week.
Speaker 7: I do think that they do, because the market is
Speaker 7: looking at the Congressional Budget Office forecast and also MAAS
Speaker 7: and the Community for a Responsible Federal Budget forecast, and
Speaker 7: they are all showing that we're going from one hundred
Speaker 7: percent debt to GDP to two hundred percent that to GDP.
Speaker 7: And the biggest component of that increase is indeed mandatory spending,
Speaker 7: meaning social security and Medicare and medicate And if you
Speaker 7: think about that, there's about seventy three million people in
Speaker 7: the US who get soci security and supplemental income from
Speaker 7: the government. That's a lot of voters.
Speaker 1: That's a lot of people.
Speaker 7: And if you begin to think about what the path
Speaker 7: looks like for demographics going forward, it is the case
Speaker 7: that this is by far the most important driver of
Speaker 7: why dead levels are going up. So that's why from
Speaker 7: a market perspective, it becomes in some sense, it doesn't
Speaker 7: matter for the market where the cuts or how we
Speaker 7: are going to reverse the trend as long as auction
Speaker 7: sizes do not grow dramatically, as long as treasury auctions
Speaker 7: and the metrics coming out of how treasury debt is
Speaker 7: auction begin to potentially look better at least down the road,
Speaker 7: because it is clear, as J. Powlo also has said
Speaker 7: numerous times, we are on a sustainable path.
Speaker 1: At the moment, Meyer, we have now a president coming
Speaker 1: in office who says that he really wants to do
Speaker 1: something about the deficit. Now, to be sure, it seems
Speaker 1: to be on the cost side, not on the revenue side.
Speaker 1: But let's assume he does have the political Really he
Speaker 1: has two people who are going to help him on that,
Speaker 1: mister Mosk and mister mederical swaming. How difficult will it
Speaker 1: be to really make a substantial reduction in the deficit
Speaker 1: through cost cuts.
Speaker 6: If they are not concerned about politics, we can get
Speaker 6: a lot done. I think the real challenge is going
Speaker 6: to be what they recommend where I think they'll have
Speaker 6: very sound and probably aggressive recommendations with what the President
Speaker 6: and Congress is willing to do. But if they want
Speaker 6: to be serious about this again, they would not take
Speaker 6: social scurity and medicare off the table. But there are
Speaker 6: so many areas where we can change the way the
Speaker 6: government does its business, starting in healthcare reform, so looking
Speaker 6: at the hospitals, looking at the various associations prescription drugs,
Speaker 6: the insures, tons of money to be saved there if
Speaker 6: we redo the way the entire industry is set up, right.
Speaker 5: Now where there's many inefficiencies, likewise.
Speaker 6: Procurement in the national security field. Huge savings can be
Speaker 6: had there. But these are very vested interests. They're incredibly powerful,
Speaker 6: and like you were just saying, there are going to
Speaker 6: be more and more seniors who are voting. THEARP is
Speaker 6: also going to push back on them if they do
Speaker 6: go into that area where they should so I think
Speaker 6: they'll take I think they'll come up with real savings.
Speaker 6: I think their disruptive approach is exactly what's needed. I
Speaker 6: worry that they have conflicts with the government and that
Speaker 6: we're going to have to have a lot of transparency
Speaker 6: around this effort. But I think they can come up
Speaker 6: with not that two trillion in a year that they
Speaker 6: originally were talking about, but they've backed that to about
Speaker 6: one trillion or less.
Speaker 5: That's very aggressive and reasonable at the same time.
Speaker 6: But it's once it goes into the political propu where
Speaker 6: I think we're going to see pushback because there are
Speaker 6: constituencies for every single program in the budget.
Speaker 5: Why hope they succeed.
Speaker 1: What about cutting the federal payroll. That's something that's been
Speaker 1: put out there, actually is something that would really help us.
Speaker 6: Absolutely, we should do that if you talk to anybody
Speaker 6: who works in government, the bureaucracy is bloated. There are
Speaker 6: certainly savings to be had there. It's not going to
Speaker 6: save a tremendous amount of money.
Speaker 4: Though.
Speaker 6: One of the things that we've heard out of the
Speaker 6: dose folks so far is pointing to the things where
Speaker 6: the savings seems kind of easy, like let's cut the
Speaker 6: huge bureaucracy, let's save money in the silly stuff like
Speaker 6: gerbil racing, you know, and all the laugh lines out there.
Speaker 5: Those aren't where the dollars are.
Speaker 6: The dollars are in interest these days. But the things
Speaker 6: that you can control social security, medicare, medicaid, and national
Speaker 6: security where there's a lot of savings. But I would
Speaker 6: say those savings are going to end up being plowed
Speaker 6: back into that area of the budget where I think
Speaker 6: is very likely to grow, and we.
Speaker 5: Probably have to think about that too.
Speaker 6: National security and climate related disasters are likely to absorb
Speaker 6: more and more of our resources going forward, would put
Speaker 6: on an even bigger squeeze than we already have.
Speaker 1: Torsten, how worried should we be about this? Because there
Speaker 1: are members of your profession economists who say, you know,
Speaker 1: as long as we have the reserve currency, you don't
Speaker 1: really have to worry about it that much. We can
Speaker 1: continue to borrow going forward. Should we be worried about this,
Speaker 1: are there consequences that really hurt our economy? Well?
Speaker 7: The good news is that the rest of the world
Speaker 7: is not in good shape when it comes to this discussion,
Speaker 7: both when it comes to the fiscal outlook, but also
Speaker 7: when it comes.
Speaker 1: To the business cycle.
Speaker 7: Europe from a business cycle perspective, is not doing very well.
Speaker 7: UK is not doing very well, China is not doing
Speaker 7: well very well. Japan is doing a.
Speaker 1: Little bit better.
Speaker 7: But for global investors, they still want to invest in
Speaker 7: US financial markets. It is the biggest financial markets, both
Speaker 7: on the debt and the equity side. So that is
Speaker 7: to a last degree, helping us a lot at the
Speaker 7: moment and a very important reason why it all that
Speaker 7: is going up.
Speaker 1: Are we going to get it done?
Speaker 6: Oh no, We're not going to get enough of it done.
Speaker 6: I mean, right now, you would need to save nine
Speaker 6: trillion dollars over ten years just to stabilize the debt
Speaker 6: as a share of GDP where it currently is. We
Speaker 6: need seventeen trillion to balance the budget. That's not happening. Luckily,
Speaker 6: we don't have to balance the budget. But what's discouraging
Speaker 6: is that a decade ago that was the goal, and
Speaker 6: it was a reasonable goal.
Speaker 5: Now it's not. Nine trillion in savings is a tremendous amount.
Speaker 6: When we put in place the Fiscal Responsibility Act as
Speaker 6: part of the debt ceiling last time around, that saved
Speaker 6: one to two trillion. That was difficult to do, and
Speaker 6: that was the easiest part of the budget discretionary. So
Speaker 6: now we're moving into savings that are going to have
Speaker 6: to come from the harder parts.
Speaker 1: Many thanks to Miamiguinness of the Committee for a Responsible
Speaker 1: Federal Budget and to tourist the slack of Apollo. One
Speaker 1: of the changes President Trump has promised is in the
Speaker 1: US approach to trade and tariffs. To explain where we
Speaker 1: may be headed, We're going to talk with Ambassador Michael
Speaker 1: Frohman of the Counsul and Foreign Relations and Libby Cantrell
Speaker 1: from PIMCO. That's next on our special Trump Administration edition
Speaker 1: of Wall Street Week.
Speaker 8: Every economist I know who's not employed by labor union
Speaker 8: is in favor of free trade. Every congressman I know
Speaker 8: is advocating some restrictions on trade. Can we survive without
Speaker 8: putting new restrictions on trade?
Speaker 3: Well, I don't think we have to put new restrictions
Speaker 3: on trade, but we sure got to get a better
Speaker 3: deal out there. We are absolutely the world's worst negotiators
Speaker 3: on trade.
Speaker 1: That was Lewis Rockeiser on Wall Street Week talking with
Speaker 1: GM CEO Roger Smith back in nineteen eighty seven, back
Speaker 1: when free trade was still in fashion and before Michael
Speaker 1: Moore made mister Smith the centerpiece of his mockumentary Roger
Speaker 1: and Me. As we anticipate what the second Trump administration
Speaker 1: may mean for investors, we have to consider the pledges
Speaker 1: he has made to raise various tariffs on trade with others.
Speaker 1: Here to sort it out, we turned to Ambassador Michael Frohman,
Speaker 1: president of the Council on Formulations, and Libby Cantrell, head
Speaker 1: of US Public Policy for PIMCO. So welcome both of you.
Speaker 1: Is great to have you here. So first we'll start
Speaker 1: with exactly what the Trump administration did the first time
Speaker 1: seventeen What actually happened.
Speaker 9: Yeah, So, what we saw them do is move forward
Speaker 9: with tariffs, limited tariffs on limited products from China. On average,
Speaker 9: the effective tariff freight increased from about two percent to
Speaker 9: about twelve percent on Chinese products, but it was still
Speaker 9: limited and it was sequenced, it had exceptions, so it
Speaker 9: was quite different from what he has indicated that he
Speaker 9: wants to do under Trump two point zero.
Speaker 1: So it was limited, Michael, but did have effects on
Speaker 1: the economy to affect the stock market, did to affect values.
Speaker 10: You know, I don't think it affected the stock market
Speaker 10: because the stock market took a lot of other things
Speaker 10: into consideration, including tax policy, deregulation, and other issues. It
Speaker 10: didn't necessarily have the effect that was desired though, in
Speaker 10: that for example, steel, he put tariffs on steel not
Speaker 10: just coming from China but from around the world, and
Speaker 10: we didn't see that much more steel production or that
Speaker 10: much more steel employment in the United States than we
Speaker 10: had before. What it ends up doing is diverting trade.
Speaker 10: So rather than importing from China, we're deporting. We're importing
Speaker 10: us from China and importing more from Vietnam from Mexico.
Speaker 10: Mexico is now our number one trading partner, and we're
Speaker 10: still importing though more or less the same amount.
Speaker 1: Yeah, but President Trump has a solution to the Mexico problem. Right,
Speaker 1: He's going to go after Canada and Mexico.
Speaker 10: Right, Tariffs on maritaris for everybody. Look, I think he
Speaker 10: starts from the premise, and this is a core belief
Speaker 10: of President Trump. He's been focused on tariffs for decades.
Speaker 10: He starts with the premise that bioladical trade deficits are bad.
Speaker 10: It's a measure of who's winning and who's losing in
Speaker 10: a relationship. And the tariffs are intended to set the
Speaker 10: standard that we want to eliminate bio level trade deficits,
Speaker 10: either by those countries buying more of our goods or
Speaker 10: those could be selling less of their goods to us.
Speaker 10: And then it's beginning of a negotiation. And now he's
Speaker 10: also said tariffs are a very useful tool for a
Speaker 10: lot of non economic issues, whether it's migration or fence
Speaker 10: and al or to deter countries from invading one another.
Speaker 10: So it's become a tool of choice for the incoming administration.
Speaker 1: How much can President Trump as president do without Congress?
Speaker 5: Liby Michael knows this well. I mean, he can do
Speaker 5: a lot.
Speaker 9: The Congress has bequeathed a lot of authorities to the
Speaker 9: executive branch. Meaning that much of what he has threatened
Speaker 9: to do, whether that is just just empty threats, whether
Speaker 9: that's just bark or not bite, he could actually do
Speaker 9: and he could do it without Congress. So, for instance,
Speaker 9: he can increase tariffs on China. He can potentially declare
Speaker 9: a national emergency and put a universal tariff on under
Speaker 9: powers that are afford to him by AIPA, a very
Speaker 9: esoteric statute that hasn't actually is not typically used. And
Speaker 9: then there are other, honestly other statutory authorities that were
Speaker 9: provided by the Congress to the executive brands digging back
Speaker 9: into the nineteen thirties, and we actually haven't seen use
Speaker 9: of those since the nineteen thirties. But again, I think
Speaker 9: the punchline for investors here is that on mostly on
Speaker 9: fiscal issues, on taxes and spending, you have to go
Speaker 9: through Congress.
Speaker 5: But in terms of the.
Speaker 9: Executive branch and the president specifically can do a lot
Speaker 9: and basically can do it unchecked.
Speaker 1: Michael, why did Congress seed so much authority to presidents
Speaker 1: through the years.
Speaker 10: Well, how do we get sure they I'm not sure
Speaker 10: they realized how much authority they seed it. And in fact,
Speaker 10: there's a debate going on in Congress because they read
Speaker 10: the Constitution as giving them authorities to regulate interstay trade
Speaker 10: and trade policy by custom has always been a partnership
Speaker 10: between the executive and Congress. But as as Libby said,
Speaker 10: they between the various trade the trade laws, but also AIPA,
Speaker 10: the International Economic Emergency Powers Act. If he chooses to
Speaker 10: invoke it, he has really pretty much unchecked power. It
Speaker 10: may be questioned in courts, but my guess is there'll
Speaker 10: be a fair amount of difference to the executive.
Speaker 1: You mentioned that Donald Trump indicates that he may use
Speaker 1: these for purposes other than purely economic purposes, all sorts
Speaker 1: of geopolitical political issues might be. How effective is that.
Speaker 1: I mean, some people say he doesn't really want to
Speaker 1: impose the tariffs, he just wants to use it as
Speaker 1: a bargaining chip. That's right.
Speaker 10: Look, I think we have to first of all take
Speaker 10: him at his word and take what he says seriously,
Speaker 10: because he does have a very strong belief in this area.
Speaker 10: But he does love to negotiate the deal, as we
Speaker 10: all know, and he wants to negotiate from a position
Speaker 10: of strength, and thus far he's been really quite successful
Speaker 10: in that. When he announced that he was going to
Speaker 10: impose tariffs on Canada. Canada immediately up their budget for
Speaker 10: border security, and my guess is that they announced the
Speaker 10: tariffs on Mexico will lead to a conversation with the
Speaker 10: government of Mexico about what more they can do on
Speaker 10: migration and on pentanol issues, and really country by country,
Speaker 10: my guess is tariffs are intended first and foremost to
Speaker 10: bring the other country to the table, and then if
Speaker 10: they can't reach an adequate agreement on the outstanding issues,
Speaker 10: he may ultimately impose them.
Speaker 1: Donald Trump seems to think they're also there to raise revenue.
Speaker 1: He has said that he thinks he can replace a
Speaker 1: lot of the Internal Revenue Code essentially with tarifs. How
Speaker 1: big are tariffs? Can they really make up a bit lot?
Speaker 9: So this is actually something I do think that's quite important.
Speaker 9: I think the margage just views tariffs as a problem,
Speaker 9: but I think in a lot of ways, President Trump
Speaker 9: used tariffs as partly a solution, not only to get
Speaker 9: concessions from our trading partners and maybe to kind of
Speaker 9: right or wrong, but also to raise revenue. And if
Speaker 9: you look at actually current customs revenue, the US is
Speaker 9: generating about one hundred billion dollars of revenue a year
Speaker 9: from existing tariffs, so it could go up much more. Now,
Speaker 9: of course, tariffs could have an inflationary and could impact
Speaker 9: growth as well, so it does have sort of a
Speaker 9: double sided effect, and that could actually affect.
Speaker 5: Revenues just generally.
Speaker 9: But if you just look at it sort of steady
Speaker 9: state your tariffs, I mean, they're basically to tax and
Speaker 9: they can increase revenue quite a bit. And this is actually,
Speaker 9: think on the Hill something that's pretty salient because you
Speaker 9: know they are looking at this as a potentially relatively
Speaker 9: big source of source of revenue.
Speaker 1: Does that make extension of the Trump attack TCGA right?
Speaker 9: If the task cuts and job did you.
Speaker 1: Make it easier to get that extension done?
Speaker 9: And I think that it sort of depends on whether
Speaker 9: the CBO, the Congressional Budget Office, incorporates that in the
Speaker 9: overall score. And as you know, members of Congress are
Speaker 9: really focused on the cost of the bill with the
Speaker 9: score of the bill according to the CBO. But I
Speaker 9: do think it's going to be in the back of
Speaker 9: the minds, even if it's not legislated so that can't
Speaker 9: be scored by the CBO. I do think it'll be
Speaker 9: the back of the minds of members of Congress when
Speaker 9: they go vote for a big tax cut bill that
Speaker 9: will likely add to the deficit. I think in the
Speaker 9: back of their minds they'll think, well, we also will
Speaker 9: be increasing some regvan.
Speaker 10: There's some mirony there though, because either tariffs work, in
Speaker 10: which case you're going to reduce imports and therefore have
Speaker 10: no tariffs to pay, or they don't really work. They're
Speaker 10: going to increase the cost of goods that consumers and
Speaker 10: manufacturers that import inputs into their manufacturing processes have to pay.
Speaker 10: And so I think it's of limited use really as
Speaker 10: a revenue tool. I mean, even one hundred billion dollars
Speaker 10: when you have a Trump tax cut, which might cost
Speaker 10: five trillion dollars over ten years. Tariffs are not a
Speaker 10: substitute for income tax, either corporate or individual income tax.
Speaker 1: But make it the other side to the take. But
Speaker 1: you might not like what the other side has to say.
Speaker 1: There is retaliation because of it.
Speaker 10: When we look at the cost of tariffs, we tend
Speaker 10: to look just at the direct cost of tariffs. How
Speaker 10: much more a consumer or an importing manufacturer might have
Speaker 10: to pay for their products. There's a cost of retaliation,
Speaker 10: And as you said, countries don't tend to just sit
Speaker 10: back and let countries impost tariffs on them without responding
Speaker 10: with an equivalent amount of retaliation. And then I think
Speaker 10: there's a third cost, which is the cost of imitation,
Speaker 10: which is that other countries around the world look and say, well,
Speaker 10: see if the US can invoke the national security exception
Speaker 10: and impost tariffs on anything they want, why don't.
Speaker 1: We Let mean at another time, in another place, Congress
Speaker 1: might get really upset about retaliation and trade wars and
Speaker 1: things like that. How much of this is really filtered
Speaker 1: through the China lens, if I can call it that,
Speaker 1: that really changes the entire dynamic on Capitol Hill.
Speaker 9: I mean, I think a lot is. Honestly, if you
Speaker 9: ask the average number of Congress back in twenty seventeen
Speaker 9: about tariffs, I would say, you know, ninety percent of
Speaker 9: members would say, there, this is a bad thing. This
Speaker 9: is going to hurt inflation, will hurt growth. I will
Speaker 9: heard our relationship with China. Now you fast forward to
Speaker 9: twenty twenty five, I'd say ninety percent of members will
Speaker 9: say that, actually they're more supportive, PARTICULARI of tariffs on China.
Speaker 9: And because I think that they haven't really seen the
Speaker 9: economic impacts that are kind of the worst case scenarios
Speaker 9: that some of the folks have talked about in terms
Speaker 9: of the kind of negative impacts from tariff. So in
Speaker 9: some ways, you know, I think that the proof has
Speaker 9: been in the pudding if you're a member of Congress,
Speaker 9: and it really there hasn't been as much friction as
Speaker 9: I think was expected, and again there's been this sort
Speaker 9: of upside on the revenue. I think the fallacy though
Speaker 9: in that thinking, potentially could be if there's a universal tariff.
Speaker 9: And while we didn't really see a much of a
Speaker 9: pass through from a CPI perspective on the first round
Speaker 9: of tariffs on China under Trump one point zero, if
Speaker 9: there's a sort of a universal tariff, mean you really
Speaker 9: can't substitute goods that you don't have a currency offsetting
Speaker 9: effect that actually could potentially be inflationary, and I do
Speaker 9: think that members of Congress may have a different a different.
Speaker 5: View on that.
Speaker 1: Michael, as a true international economics expert in trade, explain
Speaker 1: FX and its function here, because why don't other people
Speaker 1: just devalue their currency? And that's not something President Trump
Speaker 1: particularly wants. He doesn't want a stronger dollar. That's not
Speaker 1: going to help his bilateral trade devils.
Speaker 10: No, and a lot of the policies that he is
Speaker 10: proposing could well lead to a stronger dollar could lead
Speaker 10: to higher inflation here as well, And so you're going
Speaker 10: to see a lot of FX volatility potentially depending on
Speaker 10: what actually gets announced and what gets what gets implemented.
Speaker 1: You know.
Speaker 10: The other thing I would say to say Amplifyabliby said
Speaker 10: is one thing that the tariffs on China did. First
Speaker 10: of all, it's tarifs on both strategic.
Speaker 1: And non strategic goods.
Speaker 10: You know, becasibe one can make a case that goods
Speaker 10: that we really want to see made in America or
Speaker 10: that we don't want to be dependent on China for
Speaker 10: we could impose tarras on There's a case to be
Speaker 10: made for that, whether it should apply to T shirts
Speaker 10: and footwear and sneakers, all of which are being predominantly
Speaker 10: you know, it's low income Americans who spend a larger
Speaker 10: portion of their disposable income on important goods like that.
Speaker 10: So it's a regressive tax on low income Americans on
Speaker 10: a non strategic set of goods which we don't really
Speaker 10: care about whether we make T shirts in America or
Speaker 10: pajamas in America. And I think the Bide administration kept
Speaker 10: the Trump tariffs on despite a lot of efforts to
Speaker 10: have people to say, why don't you separate strategic from
Speaker 10: non strategic and at least relieve the tax burden of
Speaker 10: the non strategic I was just going to.
Speaker 9: Go back to the FX point, which I do think
Speaker 9: that one of the reasons why you didn't see that
Speaker 9: consumer passed through was because the Chinese did actually devalue
Speaker 9: their currency, you know, incrementally, and that actually absorbed some
Speaker 9: of the impacts, some of the sort of a deleterious
Speaker 9: impact of those round of tariffs. I think the issue
Speaker 9: kind of fast forward to twenty twenty five is the
Speaker 9: Chinese currency is already very weak. They've already actually devalued
Speaker 9: it as they're trying to revive their economy, and so
Speaker 9: their flexibility in terms of actually changing their currency is,
Speaker 9: you know.
Speaker 5: Is more limited.
Speaker 9: And as a result, if in extreme if he does
Speaker 9: exactly what he said he's going to do, and I
Speaker 9: don't think any of us actually think he is, but
Speaker 9: I do think we should take him seriously for sure
Speaker 9: on this. This is a deeply ideological issue for the president,
Speaker 9: But I do think that you're not going to be
Speaker 9: able to kind of count on that currency kind of
Speaker 9: adjustment as a buffer, just given what's happening in China.
Speaker 1: Many thanks to Michael Froehman of the Council on Foreign
Speaker 1: Relations and Libby Cantrell from PIMCO. That does it for
Speaker 1: us here at Wall Street Week, I'm David Weston. This
Speaker 1: is Bloomberg. See you next week for more stories of capitalism.