Speaker 1: The phony bookkeeping goes merrily on. You know, we borrow
Speaker 1: money from the Social Security Trust Fund and we call
Speaker 1: it income Now corporation did something like that, the management
Speaker 1: would all be watching each other's laundry and club fed.
Speaker 1: Hi and welcome back to Bloomberg Benchmark, a podcast about
Speaker 1: the global economy. It's Thursday, October Tween night. I'm Tori Stillwell,
Speaker 1: the US economics reporter in DC with Bloomberg News. I'm
Speaker 1: with my colleagues inco hosts Dan Moss, our executive editor
Speaker 1: for International Economics here in d C with me and Akiedo,
Speaker 1: our editor for Benchmark in San Francisco. Hello, Tory, how's
Speaker 1: it going. It's going. You know, it's pretty it's pretty
Speaker 1: miserable weather here and just waiting for a debt deal
Speaker 1: to come down, so you know the usual. Well, this
Speaker 1: has been another very exciting week in the global economy. Um, Dan,
Speaker 1: what's cut your eye over the past week? I was
Speaker 1: looking at the Ali Baba earnings released yesterday. The general
Speaker 1: nar clity of was that Ali Barbera hit it out
Speaker 1: of the park. Sales were up by almost a third
Speaker 1: despite a slowing Chinese economy, Defying the slowdown overcoming the slowdown.
Speaker 1: And yes it's true China's headline GDP is slowing, but
Speaker 1: the mix of what's driving Chinese growth has changed dramatically
Speaker 1: in recent years. Services now accounts for more than half consumption,
Speaker 1: which is what Ali Barbera is is doing pretty well,
Speaker 1: getting stronger, exports getting weaker, manufacturing getting weaker, fixed their sets,
Speaker 1: investment getting weaker. So it's not that Ali Barbera overcame
Speaker 1: the slowdown. Ali barber is the Chinese economy. Yeah, that's
Speaker 1: a great point, and that's also a great plug for
Speaker 1: our second episode on the Chinese financial market crisis for
Speaker 1: people who haven't digging to listen to that show yet,
Speaker 1: which I get out tor, what's been interesting for you? Yeah?
Speaker 1: I want to share from services to goods. We got
Speaker 1: the Advanced Trade report this morning, so that be Wednesday morning,
Speaker 1: and before your eyes glaze over, I swear it's interesting
Speaker 1: the US merchandise trade deficits, so for goods it actually
Speaker 1: shrank um and that was due to higher exports. Shipments
Speaker 1: of goods to overseas customers climbed two point four percent,
Speaker 1: which is the biggest increase since March. And this is
Speaker 1: great news because you know, we've talked in many episodes
Speaker 1: about there being a strong dollar and that being bad
Speaker 1: for manufacturers here because it makes them goods more expensive
Speaker 1: to foreign customers. Some of that may be starting to abate,
Speaker 1: which would be excellent news for our economy. Well, you, guys,
Speaker 1: I wanted to talk about the deal that the White
Speaker 1: House made with Republicans. They reached this deal late Monday
Speaker 1: night to raise the eighteen point one trillion dollar debt
Speaker 1: ceiling and thus prevent the US government from de fall
Speaker 1: thing on its debt. So yeah, the government was able
Speaker 1: to avoid a lot of potential chaos with with the steal.
Speaker 1: But first let's introduce our guests. John Steel Gordon, a
Speaker 1: historian and author of the book Hamilton's Blessing, The Extraordinary
Speaker 1: Life and Times of our National Debt. Hello John, Hello,
Speaker 1: I'm glad to be here for people who are listening
Speaker 1: and are like I know that the death ceiling is
Speaker 1: a big deal, but I don't quite know what it is. Tori.
Speaker 1: Can you can you give a quick explainer on what
Speaker 1: exactly this mysterious term is. Yes, I will do you
Speaker 1: one better. I will define a couple of terms. So
Speaker 1: we have all our ducks in our own. So the
Speaker 1: debt is just the total of federal budget deficits you
Speaker 1: know throughout history, minus federal budget surpluses. That's all of
Speaker 1: them put together. Now, the deficit is just how much
Speaker 1: spending exceeds revenues in one given fiscal year. And that's
Speaker 1: that's sort of easy to imagine as a consumer, how
Speaker 1: much you're spending versus how much you're getting in. So
Speaker 1: you can have a surplus and it's still to exactly
Speaker 1: for for one year. You can have a surplus and
Speaker 1: they're still debt exactly. UM. Now, the debt ceiling is
Speaker 1: the legal limit on how much total debt the government
Speaker 1: can issue. And that's not just the amounts borrowed in
Speaker 1: credit markets, but also insecurities treasuries issued to UM other
Speaker 1: parts of the government for example, John, how many countries
Speaker 1: have a debt ceiling? Is this a unique situation here?
Speaker 1: It's it's the only one that I know of, UM,
Speaker 1: And that may be because we have a presidential um
Speaker 1: form of government as opposed to a parliamentary form of
Speaker 1: government where the where the government and the parliament are
Speaker 1: essentially one and the same, and so they don't need
Speaker 1: a debt ceiling. Why do we have it in the
Speaker 1: first place, and what are the pros and cons of it? Well,
Speaker 1: the death ceiling. Before nineteen seventeen, Congress authorized all issue
Speaker 1: of debt. If the Treasury wanted to issue you know,
Speaker 1: a billion dollars worth of treasury bonds, that Congress had
Speaker 1: to say, Okay, you can spend it on building bridges
Speaker 1: or whatever. And then in nineteen seventeen they put a
Speaker 1: limit on the various forms of debt. I mean, how
Speaker 1: many Treasury bills, how many Treasury notes, how many Treasury
Speaker 1: bonds um the Treasury could issue. And then in nineteen
Speaker 1: thirty nine they established the debt ceiling, and you know,
Speaker 1: the total debt cannot exceed this number without Congressional permission.
Speaker 1: This seems like it was just kind of a control measure,
Speaker 1: like Congress wanting some measure of control over what the
Speaker 1: Treasury is doing. Yes, um, that's that's the point of it.
Speaker 1: But of course, if Congress appropriates money to spend um,
Speaker 1: and then it has to provide the money to do
Speaker 1: the spending. And if you don't don't have the you know,
Speaker 1: tax revenues coming in, and you have no choice but
Speaker 1: to borrow the money. So it's kind of a you know,
Speaker 1: dog chasing its tail kind of a thing. John, Was
Speaker 1: it always this contentious, No, not usually. It's in the
Speaker 1: last UMF twenty years that has really gotten heated, and
Speaker 1: especially under Obama. How do you account for that? Well,
Speaker 1: I've I think partly it's the American politics is polarizing.
Speaker 1: You know. It used to be used to have liberal
Speaker 1: Democrats and conservative Democrats and liberal Republicans and conservative Republicans.
Speaker 1: You don't anymore. Old Democrats are liberal, Republicans are conservative. Yeah,
Speaker 1: And for our listeners, let's just sort of establish where
Speaker 1: we are in the In the debt ceiling talks in Washington, UM,
Speaker 1: the Republicans and the White House came to agreement, az
Speaker 1: Aki said, And so now it's got to pass both
Speaker 1: the House and the Senate. UM. Our congressional reporters say
Speaker 1: that will probably happen in the House sometime Wednesday today,
Speaker 1: the day we're recording, and then it'll have to go
Speaker 1: to the Senate for approval as well. And they have
Speaker 1: until November three is our deadline. Basically, that's before the
Speaker 1: US gets very close to defaulting on its obligations, which
Speaker 1: would be an extraordinarily bad scenario. Let's back up a
Speaker 1: little bit here. When I first learned what the debt
Speaker 1: ceiling was, I was astonished, because every year Congress decides
Speaker 1: on the budget, you know, it decides on how much
Speaker 1: it wants to spend and how much approximately it's going
Speaker 1: to take in and revenue, and then decides, uh, these
Speaker 1: are the bonds that we have to issue in order
Speaker 1: to borrow enough to actually be able to spend that
Speaker 1: amount of money. So they already decide on all of this,
Speaker 1: and then later they also have to go through this
Speaker 1: thing where they authorize the amount that the of the
Speaker 1: total total debt of the government. And it just seems
Speaker 1: like this very weird thing where you already say that
Speaker 1: you're going to spend this amount and you already decide
Speaker 1: on it, but then you have to go through this
Speaker 1: separate process of then getting approval to do all of
Speaker 1: that all over again. It's so confusing to me, very bizarre.
Speaker 1: Probably has something to do with getting good headlines the
Speaker 1: next morning you can spending John, do you think things
Speaker 1: would be better if we just got rid of this
Speaker 1: debt ceiling altogether or if we just kind of tried
Speaker 1: to meld it in together with the budget making process. Yes,
Speaker 1: I do, because I think it's now become a political football, um,
Speaker 1: and it doesn't serve any purpose other than to get
Speaker 1: politicians to get good headlines the next morning, which is
Speaker 1: of course half of politics. I guess every every year
Speaker 1: when this issue comes up, it does give us a
Speaker 1: good chance, though, to reflect on how much the US
Speaker 1: government owes to everyone else, both US citizens and US
Speaker 1: businesses and companies and individuals around the world. Tori, do
Speaker 1: you want to give us a quick primer on what
Speaker 1: this debt looks like? Now? Yes, sell debt comes in
Speaker 1: many different shades, and there's many different labels for the
Speaker 1: different kinds of debt. So I'll walk through a couple
Speaker 1: of them. So, the US public debt subject to limit,
Speaker 1: which includes um even debt that is accumulated when parts
Speaker 1: of the government borrow or lend from or to other
Speaker 1: parts of the government. So that amount right there is
Speaker 1: eighteen point one trillion dollars right now, and that's right
Speaker 1: at the limit that is the debt ceiling right there.
Speaker 1: That's a lot of money. Yeah. Then we have the
Speaker 1: US public debt held by the public, and this is uh,
Speaker 1: this is more often used by economists. This is what
Speaker 1: people are really concerned about. And this is thirteen trillion
Speaker 1: dollars um. To give you some context, before the recession
Speaker 1: um in December two thousand seven, that number was five
Speaker 1: point one trillion dollars. So we've we've more than doubled
Speaker 1: that level since then, and you know that has to
Speaker 1: do with revenues decreasing during the recession. Also, you know
Speaker 1: we spent to try to get the economy going back
Speaker 1: up again, so we've definitely seen debt balloon recently. Let's
Speaker 1: put these numbers into some kind of perspective, because taken
Speaker 1: in and of themselves, they sound stratus eric. But how
Speaker 1: is the US doing relative to other major economies? Is
Speaker 1: that a lot of debt? Is it average? Is it
Speaker 1: not very much? It's well above average. We're currently about
Speaker 1: a hundred and three hundred four percent of g d P.
Speaker 1: There are countries in worthshape. Greece is a hundred and
Speaker 1: fifty eight percent, Japan is about a hundred and seventy
Speaker 1: four percent. But Japan, the Japanese are very thrifty people,
Speaker 1: and the Japanese national debt is almost entirely internally held.
Speaker 1: The UK is around ninety percent, Frances around eighty six percent.
Speaker 1: These numbers have all been getting steadily worse over the
Speaker 1: last um several decades, and it's important to look at
Speaker 1: these debt to GDP ratios instead of just the absolute
Speaker 1: amount in trillions of dollars. Because your economy produces a
Speaker 1: lot every year and you have some amount of debt,
Speaker 1: that's totally fine. But if your economy doesn't produce a
Speaker 1: whole lot, but the debt size is actually a lot,
Speaker 1: that's when you're kind of in trouble. But on Japan
Speaker 1: and Act, you may also be able to provide some
Speaker 1: perspective of this. Shouldn't it to GDP of the magnitude
Speaker 1: that John does just described If you believe half of
Speaker 1: what's said about the US debt, shouldn't that be leading
Speaker 1: to a catastrophe in Japan? Yet Japanese bonds are in
Speaker 1: more demand than ever. The country is not falling apart.
Speaker 1: Why is it such a big deal. So part of
Speaker 1: the reason why people aren't panicked about Japan right now
Speaker 1: is because, like John said, most of the debt is
Speaker 1: actually owed to its own citizens, its own companies. So
Speaker 1: when the death's kind of internal like that, you're just
Speaker 1: it's kind of like you're pushing money around within the
Speaker 1: same country, it's not that big of a deal. Whereas
Speaker 1: when you have foreign investors, that's when things get a
Speaker 1: little bit more worrying. That was the case for Greece,
Speaker 1: that was the case for Spain, etcetera during the European
Speaker 1: sovereign debt crisis. UM. But at the end of the day,
Speaker 1: this is really about market psychology. You know, investors can
Speaker 1: really wake up tomorrow and decide that the US or
Speaker 1: Japan or any of these other countries just aren't trustworthy anymore,
Speaker 1: and that's when interest rates go up very quickly and
Speaker 1: you quickly tumble into a financial crisis. I suppose they could.
Speaker 1: But don't you think comparisons with Greece and Spain are
Speaker 1: somewhat exaggerated. I mean, here in the US, we or
Speaker 1: you do actually control your own currency. That's not the
Speaker 1: case in Greece and not the case in Spain. John,
Speaker 1: what do you think of those comparisons, Well, I think
Speaker 1: that's perfectly true. I mean, we are the reserve currency
Speaker 1: and that is a huge economic advantage for US UM
Speaker 1: and there's no other country that really could provide the
Speaker 1: reserve currency at this point, so we're very lucky in
Speaker 1: that regard. So we're okay for now. Well, we can
Speaker 1: afford the debt right now because interest rates are extraordinarily
Speaker 1: low and have been for several years. But if they
Speaker 1: go back up to normal rates, suddenly the interest on
Speaker 1: the debt is going to be eating up an awful
Speaker 1: lot of tax revenue. How worried should we be about
Speaker 1: the size of the US debt? I think we should
Speaker 1: be moderately worried about it. It's not a crisis, but
Speaker 1: it can quickly become one. And what are we borrowing
Speaker 1: this money for. In the nineteenth century, we use the
Speaker 1: national debt to save the Union, you know. In the
Speaker 1: nineteen thirties we used it to save the American economy.
Speaker 1: In the nineteen four Days, we used it to save
Speaker 1: the world. What have we spent this all this money on?
Speaker 1: In nineteen seventy the national debt was of g d P.
Speaker 1: Today it's over and we've had no great war, no
Speaker 1: great depression. But we do have an aging population. We
Speaker 1: do have an aging population, but it's not as bad
Speaker 1: as say Japan is at the moment. And so what
Speaker 1: we've basically done is we have borrowed money from our
Speaker 1: grandchildren so that we can enjoy it today. And you know,
Speaker 1: don't forget today's borrowing is necessarily tomorrow's taxes. We're taking
Speaker 1: this money from our grandchildren so that we can have
Speaker 1: a nice lifestyle. When I when I talked to an
Speaker 1: economist yesterday, John Nale over at LPL Financial, he told
Speaker 1: me that when he talks to clients UM and investors,
Speaker 1: the debt is the number one question that people have
Speaker 1: for him. It is the thing that people are most
Speaker 1: worried about. Do you think that's why that is? It's
Speaker 1: just this whole feeling that it's getting unsustainable and it's
Speaker 1: getting out of hand, and it jeopardizes serve the U
Speaker 1: S as we know it, and just kind of curious
Speaker 1: why they would be so worried about it. Why that's
Speaker 1: the first question. Well, I think one thing is that
Speaker 1: this could this could suddenly become a crisis, very very quickly.
Speaker 1: It's again it's psychology. I mean, in the nineteen seventies,
Speaker 1: New York City trotted on down to Wall Street and
Speaker 1: asked to borrow more money. UM and Wall Street just said, sorry,
Speaker 1: we're not lending the City of New York any more money.
Speaker 1: And suddenly it was forward the city dropped debt. Fortunately,
Speaker 1: the State of New York bailed out New York City
Speaker 1: and put it under strict control. I mean, one thing
Speaker 1: they did was required New York City to keep its
Speaker 1: books according to generally accept at accounting principles. It would
Speaker 1: certainly help if the federal government had to do that.
Speaker 1: What they don't. You know, you know those surpluses we
Speaker 1: had in nine, two thousand, two thousand one, the national
Speaker 1: debt went up every one of those years. Now, how
Speaker 1: can you be running a surplus and yet you're debt
Speaker 1: is increasing? It was phony bookkeeping is how you do it.
Speaker 1: And the phony bookkeeping ended in two thousand and one. No,
Speaker 1: that's when we slipped into deafic set again. Now the
Speaker 1: phony bookkeeping goes merrily on, and you know, we borrow
Speaker 1: money from the Social Security Trust Fund and we call
Speaker 1: it income. Now a corporation did something like that, the
Speaker 1: management would all be watching each other's laundry and club fed.
Speaker 1: I'm wondering. You know, this is a conversation with a
Speaker 1: lot of numbers and a lot of vocabulary. That's pretty difficult.
Speaker 1: Talking about sovereign debt is not my favorite thing in
Speaker 1: the world, because it's so complicated. But if you're a
Speaker 1: normal person out there, if you're like a normal American citizen, Um,
Speaker 1: why should you care about the debt ceiling? And why
Speaker 1: should you care about the US debt? I think the
Speaker 1: debt ceiling is they don't care about it. Most people
Speaker 1: don't care about politics, and people who do care about
Speaker 1: politics find that absolutely incomprehensible. But ninety percent of the
Speaker 1: American people don't like politics very much. It's sort of
Speaker 1: now they deal with it as much as they have to,
Speaker 1: sort of like nobody likes going to the dentist, but
Speaker 1: we do. Anyway, I can personally attest to that. Well,
Speaker 1: I'm wondering, John, what do you think Alexander Hamilton's would
Speaker 1: have said if there was a time machine that he
Speaker 1: teleported into modern day America and saw that the US
Speaker 1: debt is now around eighteen trillion dollars and that the
Speaker 1: debt ceiling becomes this huge political debating point every year. Well,
Speaker 1: I mean, Alexander Hamilton's said that you know that the
Speaker 1: national debt, if it is not excessive, will be to
Speaker 1: us a national blessing, and it has many times proved
Speaker 1: to be exactly that we could not have won the
Speaker 1: Civil War without it. Now what Hamilton's who died in
Speaker 1: eighteen o four, would say about twenty fifteen, I think
Speaker 1: he'd be probably more interested in things like airplanes and
Speaker 1: television and ray idea and what have you and snapchat. Right.
Speaker 1: There are a number of prominent economists, such as Paul Krookman,
Speaker 1: though he's not the only one who would say, with
Speaker 1: interest rates the slow ought we not be borrowing to invest?
Speaker 1: What would hamilton have made of that? Well on thing,
Speaker 1: about one third of the national debt turns over every
Speaker 1: couple of years UM, so it wouldn't be very long
Speaker 1: before if interest rates go back up to normal, when
Speaker 1: the amount of tax revenue needed to service the debt
Speaker 1: would go straight up. And then you know, either we
Speaker 1: keep borrowing um and pretending everything's fine, or there has
Speaker 1: to be drastic tax increases which would certainly slow the economy,
Speaker 1: or there's going to have to be big government cuts
Speaker 1: which would also slow the economy. So we better to
Speaker 1: do something about his starting now. But I wouldn't hold
Speaker 1: my brand well. I want to end on a light note.
Speaker 1: Have you seen that Hamilton's and musical yet? I have not? Um,
Speaker 1: I hear it's very good hip hop. Not exactly my
Speaker 1: kind of music. I'm more Rogers and Hamistan musical type. Um,
Speaker 1: but everybody was saying it said it was absolutely great. Yeah.
Speaker 1: I saw it a few weeks back back in August
Speaker 1: and it's it's amazing. I am going to plug it.
Speaker 1: I'm gonna say that you should watch it. The hip
Speaker 1: hop is it's very well done and uh it's hilarious
Speaker 1: to boot. So on that note, thank you so much
Speaker 1: for joining us. Thank you, and thanks to all of
Speaker 1: you for listening to Bloomberg Benchmark. We will be back
Speaker 1: next week. You can find us on Bloomberg dot com, iTunes, Podecast, SoundCloud, Stitcher,
Speaker 1: and many other places. If you're on iTunes, please take
Speaker 1: a moment to rate and review the show. That really
Speaker 1: helps other listeners discover us and let us know what
Speaker 1: you thought of the show. You can reach us and
Speaker 1: follow us on Twitter at Daniel Mass, d C, Tori
Speaker 1: Stillwell and Akio seven. See you next week.