WEBVTT - Mitu Gulati on Whether Trump Could Restructure US Debt 0:00:02.720 --> 0:00:15.800 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.440 --> 0:00:21.599 Hello and welcome to another episode of the Odd Thoughts podcast. 0:00:21.800 --> 0:00:23.200 I'm Tracy Alloway. 0:00:22.880 --> 0:00:24.640 And I'm Joe. Why isn't thal Joe? 0:00:24.680 --> 0:00:27.960 You know what I like to say about bonds go on. 0:00:28.760 --> 0:00:32.560 I think there's this perception that bonds are all about 0:00:32.960 --> 0:00:38.519 finance and legalities. They are these contracts and borrowers have 0:00:38.600 --> 0:00:41.280 to stick to the contract, lenders have to stick to 0:00:41.320 --> 0:00:45.760 the contract. But actually I like to look at bonds 0:00:45.840 --> 0:00:49.600 as more stories. Yeah, and I know we've been talking 0:00:49.760 --> 0:00:52.960 on this podcast a lot about norms and the idea 0:00:53.000 --> 0:00:55.040 that a lot of the way the US operates is 0:00:55.080 --> 0:00:58.520 based on norms and habits that have developed over time. 0:00:59.040 --> 0:01:01.880 Bonds are kind of the same way. It's all about 0:01:01.920 --> 0:01:07.440 the narrative of who owes, whom, what and why, and 0:01:07.480 --> 0:01:08.920 that can change really quickly. 0:01:09.400 --> 0:01:09.560 You know. 0:01:09.600 --> 0:01:12.160 It's actually interesting about you saying this. I was thinking 0:01:12.200 --> 0:01:14.800 back to our episode that we did with a Sujit 0:01:15.120 --> 0:01:19.640 end up about creditor and creditor violence, and perhaps one 0:01:19.680 --> 0:01:23.319 way to think about that whole phenomenon is the exploitation 0:01:23.680 --> 0:01:26.880 of rules above norms. Right, So you have all of 0:01:26.920 --> 0:01:30.559 these norms about how debt is paid back, et cetera. 0:01:31.200 --> 0:01:35.000 And there's like extra alpha to be squeezed by actually 0:01:35.040 --> 0:01:38.080 redoubting to the courts and the rules that are literally 0:01:38.120 --> 0:01:41.880 written down in a fight between creditors about who gets 0:01:41.920 --> 0:01:44.800 the cash flows, et cetera. And it really is about 0:01:44.800 --> 0:01:48.280 this tension of like what's written on paper, what's technical, 0:01:48.320 --> 0:01:51.120 what does these words mean, et cetera versus Come on, 0:01:51.400 --> 0:01:53.080 that's not how we deal with bonds. 0:01:53.160 --> 0:01:56.160 That's right. You can use the rules if you're really clever, 0:01:56.360 --> 0:01:58.760 to try to achieve your aims right and change the 0:01:58.840 --> 0:02:02.320 story on some of these. So we should talk about 0:02:02.360 --> 0:02:05.520 that because there is a lot of discussion about what 0:02:05.560 --> 0:02:09.400 the Trump administration could do when it comes to sovereign debt. Obviously, 0:02:09.560 --> 0:02:12.200 people have been talking about the potential Mara Lago accord, 0:02:12.480 --> 0:02:16.280 which includes a possible debt swap. Again, all of that 0:02:16.360 --> 0:02:20.639 is hypothetical at the moment, but beyond that, there are 0:02:20.639 --> 0:02:22.960 some other things going on, and it certainly seems like 0:02:23.080 --> 0:02:25.000 nothing is off the table when it comes to the 0:02:25.040 --> 0:02:28.239 Trump administration. So we should we should. 0:02:27.919 --> 0:02:30.520 Discuss Yeah, but can I just say one thing, which 0:02:30.639 --> 0:02:34.560 is my ethical reservations here of doing any episode. It 0:02:34.639 --> 0:02:38.040 feels like the entire world now operates in this system 0:02:38.440 --> 0:02:41.280 in which people both outside of the White House and 0:02:41.480 --> 0:02:45.080 inside the White House, the various people trying to like 0:02:45.160 --> 0:02:48.040 curry Trump's favor on a given day try to wish 0:02:48.120 --> 0:02:50.920 cast their ideas about policy into the ether. And they 0:02:50.919 --> 0:02:52.880 put out a tweet and they say it's a negotiation. 0:02:52.919 --> 0:02:55.400 They say it's not a negotiation. They say there should 0:02:55.400 --> 0:02:58.320 be applause, et cetera. And there is this incredible mailstream 0:02:58.320 --> 0:03:01.280 of noise where it's all about trying to manifest some 0:03:01.480 --> 0:03:04.520 outcome that so and so person desires. And I have 0:03:04.600 --> 0:03:08.560 some ethical questions about this sort of contribution to the 0:03:08.600 --> 0:03:12.760 noise by introducing the idea of like further taking seriously 0:03:12.800 --> 0:03:14.919 the idea of debt swaps, which to me sounds like 0:03:15.000 --> 0:03:18.639 default into the world. But yes, this is one thing 0:03:18.680 --> 0:03:21.680 that in this great manifestation of ideas people are talking about. 0:03:21.760 --> 0:03:24.519 So I suppose we should talk about it. 0:03:24.600 --> 0:03:28.040 You always say you want to take Trump literally and seriously, so. 0:03:28.600 --> 0:03:30.000 I only take them literally anymore. 0:03:30.080 --> 0:03:33.280 Okay, here's our disclaimer. This is not an actual policy 0:03:33.320 --> 0:03:36.000 suggestion for the Trump administration. But we are going to 0:03:36.000 --> 0:03:36.440 talk about it. 0:03:36.440 --> 0:03:37.200 People are talking about it. 0:03:37.320 --> 0:03:39.680 Let's talk about how realistic it is. And we have 0:03:39.800 --> 0:03:42.480 the perfect guest. We're going to be speaking with mittwu Galotti, 0:03:42.640 --> 0:03:45.640 law professor over at the University of Virginia and one 0:03:45.680 --> 0:03:48.200 of our favorites when it comes to all the ins 0:03:48.240 --> 0:03:52.880 and outs, the technicalities the legalities of sovereign debt. So Midwo, 0:03:52.960 --> 0:03:55.840 thank you so much for coming on all thoughts, I'm. 0:03:55.760 --> 0:03:59.120 So excited to be here. I shouldn't be excited about 0:03:59.120 --> 0:04:02.800 all that. No crazy things that are being discussed, but 0:04:03.680 --> 0:04:08.400 from an academic perspective, this is just heavenly, even though 0:04:08.440 --> 0:04:09.960 I might be jobless soon. 0:04:10.920 --> 0:04:11.119 Right. 0:04:11.280 --> 0:04:14.920 So markets have been crazy, but the upside is, I 0:04:14.920 --> 0:04:18.200 guess we get to talk about bond contracts. When did 0:04:18.240 --> 0:04:21.960 you first become aware of the mar A Lago accord? 0:04:22.040 --> 0:04:24.040 When did people start talking about it? 0:04:24.640 --> 0:04:27.880 So I actually think that I heard about it on 0:04:27.880 --> 0:04:30.080 one of your podcasts. 0:04:29.400 --> 0:04:33.160 Oh God about it's wowerful. 0:04:33.120 --> 0:04:36.800 And then I dug into it and looked at one 0:04:36.880 --> 0:04:42.600 of the proposals in particular interested me, which was sort 0:04:42.600 --> 0:04:49.440 of swapping out short term US treasuries for longer term, 0:04:49.839 --> 0:04:55.080 low interest US treasuries, which was talked a lot about 0:04:55.080 --> 0:04:58.480 it as a debt swap with our allies, but really 0:04:58.600 --> 0:05:03.520 was just an extension maturities at a low rate when 0:05:03.880 --> 0:05:06.800 the market might not actually be giving you the low rate. 0:05:06.920 --> 0:05:11.320 And that has become I mean, that was I think implausible. 0:05:11.360 --> 0:05:14.200 When you guys talked about it, it was just sort of, oh, 0:05:14.279 --> 0:05:19.520 here's some crazy ideas. People are now emailing and asking 0:05:20.080 --> 0:05:23.880 sort of respected market people, how could this happen and 0:05:24.600 --> 0:05:29.960 what would the legal barriers be and what are the ramifications. 0:05:30.560 --> 0:05:33.800 So what's basically going on in the last several weeks 0:05:33.880 --> 0:05:36.240 is that this very theoretical idea, which by the way, 0:05:36.279 --> 0:05:39.280 Trump himself actually I don't think he's ever used he's 0:05:39.279 --> 0:05:41.880 certainly never used the term mar Alago court. But there's 0:05:41.960 --> 0:05:45.320 the people around him, some influential thinkers talking about this 0:05:45.360 --> 0:05:48.039 could be some endgame here where there's some sort of 0:05:48.040 --> 0:05:51.159 rethinking about the US dollar and the dead And now 0:05:51.320 --> 0:05:53.719 it's come to the point where people who are serious 0:05:53.760 --> 0:05:56.839 in markets, they're coming to mewtwo Gladia and they say, 0:05:56.839 --> 0:05:58.720 what's up, help me understand this? 0:05:59.480 --> 0:06:00.880 Yes, I think so. 0:06:01.440 --> 0:06:06.040 You know, we talked about Trump and taking him seriously 0:06:06.200 --> 0:06:10.120 and taking the kinds of things that he has done 0:06:10.320 --> 0:06:13.760 in the past seriously, and what he's willing to do, 0:06:14.320 --> 0:06:19.120 and restructuring distress debt is something that he has done 0:06:19.160 --> 0:06:23.040 a lot of, and he talked about it prior to 0:06:23.240 --> 0:06:27.279 his first presidency when he talked about, oh, the US 0:06:27.400 --> 0:06:29.560 debt not a big deal. We could just inflate it 0:06:29.560 --> 0:06:34.560 away or something like that. A debt swap using the 0:06:34.760 --> 0:06:41.240 power of US governing law is really not that insane, 0:06:42.160 --> 0:06:46.200 both in historical contexts and in what we could do. 0:06:46.800 --> 0:06:50.440 It is insane in terms of norms that have been 0:06:50.800 --> 0:06:54.480 built carefully over the last sixty seventy years. 0:06:54.880 --> 0:06:56.080 But Trump is not. 0:06:56.240 --> 0:06:59.320 Alexander Hamilton, I think yes, to. 0:06:59.279 --> 0:07:03.240 Put it mildly, explain this further. You said earlier a 0:07:03.320 --> 0:07:07.360 debt swap could be basically the equivalent of extending maturities 0:07:07.440 --> 0:07:12.000 on existing treasuries. But like I would hope that there 0:07:12.120 --> 0:07:16.880 is some clause in the bond documents that would rule 0:07:16.920 --> 0:07:18.920 that out. Am I wrong? 0:07:19.040 --> 0:07:23.400 I guess I'm wrong, alas you are wrong. So really, 0:07:23.520 --> 0:07:28.880 anybody and everybody who holds US treasuries should go and 0:07:28.960 --> 0:07:33.040 look at the contract terms for their US treasuries and 0:07:33.160 --> 0:07:38.440 ask the question, do my contract terms restrict the US 0:07:38.440 --> 0:07:44.480 Treasury Department from saying to me tomorrow, you know we 0:07:44.520 --> 0:07:47.320 need a little more money, So we're just extending the 0:07:47.360 --> 0:07:51.920 maturity of your debt by another twenty years at the 0:07:52.000 --> 0:07:55.720 interest rate that you lent to us. Is there anything 0:07:55.800 --> 0:07:59.160 restricting that I don't think you'll find anything. 0:08:00.520 --> 0:08:03.080 This blows my mind because to me, if I'm a 0:08:03.080 --> 0:08:07.200 holder of US treasuries and a creditor or I'm lender, 0:08:07.280 --> 0:08:08.960 the creditor says, you know what, I'm just paying you 0:08:09.040 --> 0:08:11.000 back a long time, to me, that sounds like default. 0:08:11.440 --> 0:08:14.640 And you're saying that in the research that you've done, 0:08:14.840 --> 0:08:18.040 this would not say trigger credit default shops, because to 0:08:18.080 --> 0:08:21.360 my mind, my assumption would be, oh, this breaks the 0:08:21.480 --> 0:08:25.320 entire system. This is a default, and we can't have 0:08:25.400 --> 0:08:27.600 a default on the risk free assets. And you're saying 0:08:27.600 --> 0:08:30.080 that actually in the wording of the document is not there. 0:08:30.520 --> 0:08:32.920 So we have to be clear and I have to 0:08:32.960 --> 0:08:36.559 be geeky here in my law professor mode, there are 0:08:36.960 --> 0:08:39.960 at least three different types of default. So there's a 0:08:40.080 --> 0:08:43.920 default on the contract. Something you could sue somebody for 0:08:44.360 --> 0:08:47.480 breach of contract. It would not be a breach of contract. 0:08:47.880 --> 0:08:51.640 US government is allowed to do this. Then there's default 0:08:51.760 --> 0:08:55.320 in terms of would it trigger the handful of credit 0:08:55.360 --> 0:08:58.120 default swaps that are written on US Treasury. Well, that 0:08:58.320 --> 0:09:03.200 sort of depends on the credit rating agencies decide, and 0:09:03.640 --> 0:09:07.960 based on what we saw in Greece twenty twelve, they 0:09:08.080 --> 0:09:11.760 probably would say it was a default for credit default swaps. 0:09:11.760 --> 0:09:16.160 But that doesn't apply to everyone. So those are the 0:09:16.280 --> 0:09:19.760 two big default scenarios. 0:09:19.840 --> 0:09:21.760 What do you mean that doesn't apply to everyone. 0:09:21.520 --> 0:09:22.080 Well, they don't. 0:09:22.200 --> 0:09:26.120 The default for a credit default swap really only applies 0:09:26.160 --> 0:09:29.840 to the people who are holding credit defaulse protection on 0:09:30.080 --> 0:09:32.400 US Treasury, so they would be able to get their 0:09:32.440 --> 0:09:36.640 money back from somebody who had provided them insurance. But 0:09:36.720 --> 0:09:40.800 the rest of US dupes like me would just have 0:09:40.920 --> 0:09:45.120 to sit with the US extending the maturities. Now, the 0:09:45.200 --> 0:09:49.600 details are important, but if you are willing to let 0:09:49.640 --> 0:09:52.200 me bore you with them, I can sort of sketch 0:09:52.240 --> 0:09:56.920 out the scenarios always Okay. My students asked me this 0:09:57.120 --> 0:09:59.800 in class a couple of days ago, so I had 0:09:59.840 --> 0:10:02.760 to sketch it out for them. So I said, step one, 0:10:03.320 --> 0:10:06.640 the US Treasury Department and the Secretary of the Treasury 0:10:07.200 --> 0:10:13.559 have authority to manage the maturities of US treasuries. What 0:10:13.640 --> 0:10:18.600 does manage the maturities mean? It really does mean, you know, 0:10:18.760 --> 0:10:23.760 issuing bonds of different maturities, managing your yield curve. But 0:10:23.880 --> 0:10:31.760 could it include unilaterally extending the maturities? Seems implausible, but 0:10:31.880 --> 0:10:37.000 this government has pushed its legal authority in many ways. Now, 0:10:37.040 --> 0:10:41.040 what is most likely to happen that the US Treasury 0:10:41.200 --> 0:10:45.520 if they ever went down this path because they needed 0:10:45.640 --> 0:10:49.280 money and rates had gone up and they wanted to 0:10:49.480 --> 0:10:51.839 take advantage of the fact that their old borrowing was 0:10:51.880 --> 0:10:54.400 at low rates, what they would do. I think the 0:10:54.440 --> 0:10:58.680 pattern we have seen is that they would extend the 0:10:58.760 --> 0:11:03.959 maturities and then Congress would quickly pass a law confirming it. 0:11:04.720 --> 0:11:07.640 That's what we've seen in all of the other Trump 0:11:07.720 --> 0:11:12.439 executive orders, plus Congress quickly passing a law, and then 0:11:12.960 --> 0:11:16.560 there would be lawsuits. There would be lawsuits left and 0:11:16.679 --> 0:11:20.880 right saying this is a violation of the Constitution because 0:11:20.880 --> 0:11:24.720 remember there's no contractual protection. So now you have to 0:11:24.760 --> 0:11:29.040 say you've somehow taken my property and I have an 0:11:29.160 --> 0:11:35.480 implicit moralistic right to having my money paid back at 0:11:35.480 --> 0:11:37.600 the time when you said you would pay it back. 0:11:38.040 --> 0:11:43.520 Now that's really tough, and we have historical precedent for this, 0:11:43.720 --> 0:11:48.560 going back to the nineteen thirties when we were in 0:11:48.679 --> 0:11:53.280 deep trouble because of gold. We didn't have enough gold 0:11:53.480 --> 0:11:58.160 to pay everyone in case. They invoked their gold clauses, 0:11:58.200 --> 0:12:03.560 which entitled whole of certain US treasuries to get paid 0:12:03.640 --> 0:12:06.920 in gold. If they had gotten paid in gold or 0:12:07.000 --> 0:12:10.800 asked to get paid in gold, US would have essentially 0:12:10.880 --> 0:12:17.520 gone broke. So the President back by Congress abrogated the 0:12:17.559 --> 0:12:21.560 gold clause protection in contracts, and it was thought that 0:12:21.800 --> 0:12:24.600 surely the Supreme Court would say this is not allowed. 0:12:24.640 --> 0:12:29.040 You cannot just take away people's contractual rights. And the 0:12:29.080 --> 0:12:32.880 Supreme Court, in one of the most famous cases of 0:12:32.920 --> 0:12:37.640 that era, said it was okay. And the markets. I 0:12:38.840 --> 0:12:40.920 don't want to say this, but I'm gonna say it 0:12:40.960 --> 0:12:46.240 because it's true. The markets didn't crash. Yeah, I think 0:12:46.240 --> 0:12:49.440 it's around nineteen thirty five. I'm going to mess up 0:12:49.480 --> 0:12:53.560 which year Congress did the abrogation and then when the 0:12:53.600 --> 0:12:57.720 Supreme Court decision came out. But the predictions were this 0:12:57.760 --> 0:13:01.840 will destroy the US ability to ever borrow in the future, 0:13:02.480 --> 0:13:05.800 and that did not happen. There's some famous articles about this. 0:13:21.520 --> 0:13:24.960 What's your read then on why this didn't happen, like 0:13:25.080 --> 0:13:27.480 why did the market seem to just go like, Okay, 0:13:27.559 --> 0:13:29.280 this is unusual, but fine. 0:13:30.160 --> 0:13:35.720 So my read, with no proof, is that there are 0:13:35.840 --> 0:13:41.760 these rare instances where the market thinks, you know, this 0:13:42.000 --> 0:13:46.960 abrogation of contractual rights, while it looks like a violation 0:13:47.720 --> 0:13:51.040 of the rule of law in every which way possible, 0:13:52.160 --> 0:13:58.079 is necessary to make us all better, and therefore, instead 0:13:58.120 --> 0:14:02.120 of penalizing the government does it, we're going to reward 0:14:02.200 --> 0:14:07.480 them and we're going to lend even more. Arguably Greece 0:14:07.559 --> 0:14:15.200 in twenty twelve, where Greece also legislatively abrogated contractual rights 0:14:16.120 --> 0:14:20.040 and did something very similar, is a similar situation where 0:14:20.080 --> 0:14:25.800 the market didn't penalize them anywhere near the amount that 0:14:26.040 --> 0:14:32.240 many sages on Wall Street were saying would happen. Now. 0:14:32.280 --> 0:14:35.040 I'm not saying that that's what would happen now, I mean, 0:14:35.120 --> 0:14:37.840 this administration seems crazy. 0:14:38.920 --> 0:14:42.720 What about Fourteenth Amendment Section four that says the validity 0:14:42.760 --> 0:14:45.080 of the public debt of the United States authorized by law, 0:14:45.120 --> 0:14:47.840 including debts and curd for payments of pensions and bounties 0:14:47.840 --> 0:14:51.960 for services and suppressing insurrection or rebellion, should not be questioned. 0:14:52.000 --> 0:14:54.600 Oh, I love it that you're bringing up the Fourteenth 0:14:54.640 --> 0:14:57.520 Amendment and the debt language of the fourteenth Amendment that 0:14:57.600 --> 0:14:59.320 my students don't even know exist. 0:15:00.120 --> 0:15:01.760 The only reason I know about this is because it 0:15:01.800 --> 0:15:03.040 comes up a lot during the dead Sertes. 0:15:03.320 --> 0:15:05.680 Joe carries around a copy of it in his podcast 0:15:05.800 --> 0:15:06.600 at all times. 0:15:07.360 --> 0:15:10.920 Okay, this language is so important for a variety of 0:15:11.000 --> 0:15:15.280 reasons relating to multiple debt crises around the world, but 0:15:15.320 --> 0:15:17.640 I won't go into those. Let's just look at the 0:15:17.840 --> 0:15:23.640 language about the validity of the US debt. Arguably, that 0:15:23.920 --> 0:15:29.320 language goes back to the eighteen hundreds at least, when 0:15:29.600 --> 0:15:37.400 often small municipalities would say a certain debt was illegally 0:15:37.520 --> 0:15:42.240 issued by this government in place that did not have 0:15:42.480 --> 0:15:46.040 the proper authorization to issue it. So if that's the 0:15:46.160 --> 0:15:51.600 meaning of validity, that it's about the original issuance, the 0:15:51.720 --> 0:15:55.120 Trump administration could say, we're not challenging the validity. We 0:15:55.200 --> 0:15:59.560 think your debt is very valid. We're just extending the maturity, 0:15:59.680 --> 0:16:02.120 and we do promise to pay you. Let's say they 0:16:02.120 --> 0:16:05.440 extend the maturity by one hundred years. We promised to 0:16:05.480 --> 0:16:07.720 pay you in one hundred years. 0:16:07.600 --> 0:16:13.000 When we're all dead. Yes, Okay, I hesitate to ask 0:16:13.160 --> 0:16:16.160 this question for some of the reasons that Joe laid 0:16:16.160 --> 0:16:20.160 out earlier. But we've established that there's a lot of 0:16:20.200 --> 0:16:23.480 creativity embedded in the rules of bonds, or at least 0:16:23.480 --> 0:16:26.880 you can use those rules rather creatively to achieve whatever 0:16:26.960 --> 0:16:30.880 aims you're trying to achieve. One of the things that 0:16:30.960 --> 0:16:34.359 has come up recently is the idea of maybe collecting 0:16:34.600 --> 0:16:37.920 on historical debt. Oh yeah, that was never paid to 0:16:37.960 --> 0:16:40.720 the US, you know it. I called it the equivalent 0:16:40.840 --> 0:16:44.520 of like looking in your sofa under the cushions for 0:16:44.640 --> 0:16:49.040 spare change. How viable would something like that be? 0:16:49.960 --> 0:16:54.440 Okay, legally that is much more viable. So this has 0:16:54.560 --> 0:16:57.720 come up in the context of there's a recent book, 0:16:58.000 --> 0:17:02.640 very recent by a senior US Treasury official about the 0:17:02.680 --> 0:17:09.199 negotiations between Andrew Mellon and Winston Churchill about the debts 0:17:09.280 --> 0:17:13.560 that were owed to the United States by Great Britain 0:17:14.320 --> 0:17:16.800 after World War One. So I think it's about four 0:17:16.840 --> 0:17:21.600 point four billion or so that was owed, and Great 0:17:21.640 --> 0:17:26.240 Britain resisted paying, and the US tried to get it paid, 0:17:26.400 --> 0:17:28.800 and then finally we kind of gave up, and then 0:17:28.840 --> 0:17:31.200 we had World War Two and all sorts of things. 0:17:31.640 --> 0:17:35.760 Those debts have never been written off. Officially they are 0:17:35.880 --> 0:17:42.879 still official debts of now the United Kingdom to the US. 0:17:43.600 --> 0:17:45.760 They had interest rates on them. I think the interest 0:17:45.840 --> 0:17:50.960 rate was three percent. If you compounded that amount to 0:17:50.960 --> 0:17:56.600 today's values, that would be many trillions of dollars worth. Okay, 0:17:56.680 --> 0:18:00.600 so that's old. But how would you engineer this. That's 0:18:00.640 --> 0:18:03.919 a debt that is owed by the United Kingdom to 0:18:04.000 --> 0:18:08.439 the US. The US owes the United Kingdom because the 0:18:08.520 --> 0:18:13.040 United Kingdom, by the Treasury Zone estimates, holds upwards of 0:18:13.240 --> 0:18:19.199 seven hundred billion in US treasuries, those can be and 0:18:19.280 --> 0:18:23.680 the legal term is set off. Two sets of debts 0:18:24.880 --> 0:18:27.399 can be set off against each other. It is a 0:18:27.560 --> 0:18:31.560 technique that is used every day in the markets. 0:18:32.800 --> 0:18:35.399 It's just who would have thought. 0:18:35.119 --> 0:18:39.159 That it could be applied in this context, But it 0:18:39.240 --> 0:18:43.760 can be, and in fact, in the Russia Ukraine contexts, 0:18:43.920 --> 0:18:47.480 the Biden administration thought very hard about using set off 0:18:47.520 --> 0:18:50.840 techniques to get funding to Ukraine. So this is an 0:18:50.840 --> 0:18:55.680 idea that's out there current. But applying it to the 0:18:55.800 --> 0:18:58.479 UK debt and then maybe even applying it to the 0:18:58.480 --> 0:19:02.120 French debt from World War One would be truly radical, 0:19:02.160 --> 0:19:05.560 but maybe it wouldn't destroy the markets in the same 0:19:05.560 --> 0:19:09.320 way as the first swap that we discussed. 0:19:09.400 --> 0:19:13.720 That's a very big maybe. But okay, so theoretically the 0:19:13.840 --> 0:19:18.640 UK debt could cancel out some US debt. I think 0:19:18.680 --> 0:19:22.160 this is a really good example of where norms come 0:19:22.200 --> 0:19:25.920 into play, because Okay, after World War One, the US 0:19:26.000 --> 0:19:28.719 knew that the UK owed it a bunch of money, 0:19:29.280 --> 0:19:32.800 but the UK was arguing, well, this is actually emergency 0:19:32.840 --> 0:19:35.439 war funding and it's not fair if we have to 0:19:35.480 --> 0:19:39.040 pay it back, and ultimately the US just decided, you 0:19:39.080 --> 0:19:42.240 know what, it was better to keep the UK as 0:19:42.280 --> 0:19:47.960 an ally not annoy them over this particular loan, and 0:19:48.000 --> 0:19:50.800 so they just never did anything about it. But obviously 0:19:50.840 --> 0:19:54.199 relations between the US and the UK are changing, not 0:19:54.280 --> 0:19:57.439 as friendly as they used to be perhaps, and so 0:19:57.560 --> 0:20:00.520 that opens up the question of whether the how youse 0:20:00.560 --> 0:20:03.120 around these loans and bonds can start to change. 0:20:03.440 --> 0:20:06.879 No, well, this sort of anticipated the question that I 0:20:07.080 --> 0:20:09.840 was going to go to, which is like, say more 0:20:09.880 --> 0:20:12.960 about like why it was just accepted that these debts 0:20:12.960 --> 0:20:13.960 were not collected upon. 0:20:14.840 --> 0:20:19.920 Well, I'm not sure there is extensive writing about the negotiations. 0:20:19.960 --> 0:20:23.320 I think they went all the way up to the 0:20:23.440 --> 0:20:28.840 nineteen seventies, and for those who study financial history. Post 0:20:28.840 --> 0:20:32.840 World War two was a truly horrible time in Europe. 0:20:32.920 --> 0:20:39.480 The US was trying to help European countries recover. The 0:20:39.600 --> 0:20:44.120 UK in particular, had taken the position after World War 0:20:44.200 --> 0:20:47.800 One that the US should try to collect this money 0:20:48.040 --> 0:20:52.920 from Germany, because really Germany owed the money to the 0:20:53.040 --> 0:20:58.160 UK and France in reparations, and sort of the consensus 0:20:58.280 --> 0:21:03.040 was world War One reparations were a stupid idea and 0:21:03.160 --> 0:21:08.000 resulted in World War Two. This is Canes and all 0:21:08.040 --> 0:21:12.240 of that work, but generally, in the interest of letting 0:21:12.840 --> 0:21:18.200 Europe recover, I think the US decided better not to 0:21:18.280 --> 0:21:22.479 push this. But Congress never allowed those debts to be 0:21:22.640 --> 0:21:28.639 wiped out completely, and so in some sense this has 0:21:28.680 --> 0:21:34.159 always been an option. I have heard Treasury officials, people 0:21:34.240 --> 0:21:39.280 negotiating debt restructurings talk, and every once in a while, 0:21:39.359 --> 0:21:42.359 when they can't get the UK to do what they want, 0:21:43.560 --> 0:21:47.200 US officials will kind of snidely mention, you know, there's 0:21:47.280 --> 0:21:50.040 that World War One debt that you never paid, and 0:21:50.119 --> 0:21:53.679 everybody laughs and in a knowing way, And then I 0:21:53.720 --> 0:21:54.040 have this. 0:21:54.080 --> 0:21:56.919 Image of them having like a laminated copy of the 0:21:56.960 --> 0:22:00.199 bond documents and just whipping it out in negotiation. But 0:22:00.320 --> 0:22:03.240 actually that reminds me we don't know what the exact 0:22:03.280 --> 0:22:04.520 bond documentation is. 0:22:05.200 --> 0:22:07.439 We don't know. We don't even know. I mean, we 0:22:07.560 --> 0:22:10.160 know the interest rate is three percent. I've never met 0:22:10.240 --> 0:22:14.919 anybody who's actually seen the document back in nineteen seventeen, 0:22:15.760 --> 0:22:17.880 I don't think it would have been governed by the 0:22:18.200 --> 0:22:21.199 law of New York or the law of England. So 0:22:21.359 --> 0:22:26.400 who knows what statutal limitations would be. Who knows today 0:22:26.480 --> 0:22:29.960 whether or not there is some kind of international statutal 0:22:30.000 --> 0:22:33.199 limitations that would apply, and would it apply in the 0:22:33.280 --> 0:22:37.960 context of setuff. This is just for lawyers. This is 0:22:38.000 --> 0:22:42.720 a bonanza. We could be working on this forever. But 0:22:43.480 --> 0:22:46.240 it seems a bit crazy. But nothing's crazy these days. 0:22:46.320 --> 0:22:47.520 The lawyers always win. 0:22:47.960 --> 0:22:51.000 So speaking of all these old debts and world wars 0:22:51.119 --> 0:22:54.679 and stuff like this, I've gotten into my I'm in 0:22:54.680 --> 0:22:56.800 my mid forties, so of course I read about twentieth 0:22:56.840 --> 0:22:59.280 century history now. And one of the things that are 0:22:59.280 --> 0:23:02.760 actually like was like this big like light bulb revelation 0:23:03.400 --> 0:23:07.760 for me in reading history is that like modern fixed 0:23:07.840 --> 0:23:11.040 borders of countries, it's sort of a novel phenomenon that 0:23:11.240 --> 0:23:13.399 actually like the idea that like these are the lines 0:23:13.440 --> 0:23:15.679 around the country, we just all sort of accept that 0:23:16.000 --> 0:23:18.480 is like very fresh in modern history. And what it 0:23:18.560 --> 0:23:20.720 was striking is like reading about the run up to 0:23:20.760 --> 0:23:23.840 World War two, or like the Germans would sign a 0:23:23.880 --> 0:23:26.200 border agreement with another country, but it would be only 0:23:26.240 --> 0:23:28.840 ten years. They're like, let's be peaceful for ten years 0:23:29.000 --> 0:23:32.119 and then we'll revisit war down the line, whether or not, 0:23:32.960 --> 0:23:35.359 and then we might revisit the idea of conquest. But 0:23:35.400 --> 0:23:38.600 at least in the meantime, some of it's coming back, 0:23:38.640 --> 0:23:41.560 and it's coming back, particularly with respect to Trump's talk 0:23:41.560 --> 0:23:45.000 about Greenland, and people talked about how much a lot 0:23:45.040 --> 0:23:47.320 of people think it's a joke. But a lot of 0:23:47.320 --> 0:23:50.159 people have gotten burned by thinking that things Trump has 0:23:50.240 --> 0:23:51.960 been saying our a joke. And so that's why I've 0:23:52.000 --> 0:23:55.960 become much more on the take Trump literally side. How 0:23:56.000 --> 0:23:58.919 should we think about the idea of like countries just 0:23:58.960 --> 0:24:02.479 sort of like acquire land from other countries as a 0:24:02.520 --> 0:24:04.920 thing that could happen in the twenty first century. 0:24:05.200 --> 0:24:08.320 Okay, this is going to happen, This not could happen. 0:24:09.040 --> 0:24:12.480 You're raising an incredibly important question. So there is greenland, 0:24:12.720 --> 0:24:16.480 but Greenland's kind of fun to talk about. Yeah, although 0:24:16.760 --> 0:24:19.280 you know, Trump seems very serious about it. He keeps 0:24:19.280 --> 0:24:21.919 telling us, don't think this is a joke. We have 0:24:22.000 --> 0:24:25.280 to have it, and I will have it. But it's 0:24:25.359 --> 0:24:30.240 going to be directly relevant in the context of Ukraine. 0:24:30.320 --> 0:24:34.359 So let us say that mister Putin is able to 0:24:34.480 --> 0:24:40.359 negotiate with President Trump to take half of Ukraine. Okay, 0:24:40.480 --> 0:24:47.040 so Ukraine becomes baby Ukraine. What happens to the enormous 0:24:47.200 --> 0:24:52.359 pile of debt that Ukraine has that is unpaid and 0:24:52.440 --> 0:24:56.680 that was restructured in the context of war, including billions 0:24:56.680 --> 0:24:59.480 and billions of dollars that are owed to the US 0:24:59.680 --> 0:25:05.119 and to European allies. Does all Ukraine pay all of 0:25:05.119 --> 0:25:09.480 this or does baby Ukraine pay all of this? Does 0:25:09.520 --> 0:25:13.960 it get divided? It turns out that the laws from 0:25:14.200 --> 0:25:17.679 the era of conquest, those are the laws that apply 0:25:17.800 --> 0:25:21.280 even today. Of what happens when the borders of a 0:25:21.359 --> 0:25:26.359 state change, those laws are really unclear, and so we'd 0:25:26.359 --> 0:25:30.200 have to decide in the modern era, how would those 0:25:30.359 --> 0:25:37.080 old laws apply, given that we pretend that borders don't change, 0:25:37.600 --> 0:25:41.960