WEBVTT - Jim Millstein on the Massive Risks of Any 'Mar-a-Lago Accord' 0:00:02.480 --> 0:00:13.920 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.120 --> 0:00:22.040 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:22.160 --> 0:00:23.840 I'm Joe Wisenthal. 0:00:23.400 --> 0:00:24.560 And I'm Tracy Alloway. 0:00:24.920 --> 0:00:27.920 So, Tracy, you know, there's obviously a lot of anxiety 0:00:28.160 --> 0:00:31.280 these days, really for a while, but going into the election, 0:00:31.400 --> 0:00:33.960 post about the size of the US debt, the size 0:00:34.000 --> 0:00:35.400 of the US deficit, et cetera. 0:00:35.840 --> 0:00:37.599 And what I the way I like. 0:00:37.600 --> 0:00:41.159 To think of these things is that any discussion of 0:00:41.240 --> 0:00:45.639 federal spending is about a competition for resource allocation. Right, 0:00:45.720 --> 0:00:48.959 So we know that a huge component of what drives 0:00:49.000 --> 0:00:55.280 persistent deficits is the social safety nets, social security, medicare, medicaid, 0:00:55.480 --> 0:00:58.720 et cetera. And when we talk about the debt or 0:00:58.760 --> 0:01:01.320 the deficit in the abstract, and when people talk about 0:01:01.360 --> 0:01:04.400 tackling the debt or the deficit, what they're really talking 0:01:04.400 --> 0:01:10.360 about is freeing up resources somewhere, freeing up consumption somewhere, 0:01:10.440 --> 0:01:14.720 and creating availability for consumption and resources elsewhere in the economy. 0:01:14.959 --> 0:01:19.200 Are they well, I mean, yeah, I think I would say. 0:01:19.280 --> 0:01:19.360 So. 0:01:19.880 --> 0:01:22.160 It seems to me there's a desire to like pay 0:01:22.200 --> 0:01:25.040 down the debt and then not necessarily do anything else, 0:01:25.760 --> 0:01:27.080 like what's the else here? 0:01:27.319 --> 0:01:31.600 Well, So, for example, Secretary of Scott Bestant and some 0:01:31.680 --> 0:01:34.640 of his recent interviews talked about, you know, we want 0:01:34.640 --> 0:01:37.039 to releverage the private sector. It's we want to get 0:01:37.120 --> 0:01:42.360 raids down and therefore that makes investing more appealing for companies, 0:01:42.520 --> 0:01:44.920 et cetera. And so the idea of like, okay, we're 0:01:44.959 --> 0:01:49.280 going to like reduce demand, reduced consumption from various sectors 0:01:49.280 --> 0:01:53.040 of the economy that are perceived to be unproductive, such 0:01:53.160 --> 0:01:58.280 as retirees, et cetera, and then open up expansion so 0:01:58.320 --> 0:02:02.600 then there's less consumption and then that creates resource availability 0:02:02.600 --> 0:02:05.360 for other things which are perceived to be more productive, 0:02:05.560 --> 0:02:06.680 like reindustrialization. 0:02:06.880 --> 0:02:09.480 Okay, maybe what I would say, you know how I 0:02:09.600 --> 0:02:12.040 like to think about those Sure, I like to ask 0:02:12.200 --> 0:02:15.840 like to think about the big picture in bonds, and 0:02:16.040 --> 0:02:19.800 I always say, bonds are built on norms, right, Yeah, 0:02:20.040 --> 0:02:23.079 Government spending is built on norms. So you lend money 0:02:23.080 --> 0:02:27.120 to me and I pay you back. It's basically a promise, 0:02:28.160 --> 0:02:30.680 which means it's a human construct. Yes, and there are 0:02:30.720 --> 0:02:34.959 all these values and norms and narratives that are embedded 0:02:35.160 --> 0:02:38.880 in those constructs, in those promises, and that's what I 0:02:38.919 --> 0:02:42.440 find really fascinating, especially when those values start to change, 0:02:42.480 --> 0:02:44.160 and I think that's what's happening now. 0:02:44.240 --> 0:02:48.120 Yeah, well, you know absolutely, and obviously, you know, we 0:02:48.280 --> 0:02:51.160 did that conversation with Jim Bianco about a you know, 0:02:51.840 --> 0:02:55.200 either a literal or a metanomic moral lago accord, and 0:02:55.240 --> 0:02:57.480 then we talked to Ridalio and he slipped it in there, 0:02:57.520 --> 0:02:58.720 and I thought it was that kind of He's like, well, 0:02:58.720 --> 0:03:01.400 maybe they'll restructure the debt some way or return it out, 0:03:01.639 --> 0:03:03.960 And to me, that screams default, you know. I mean, 0:03:04.040 --> 0:03:05.360 that's just a you know, it's a polite way of 0:03:05.360 --> 0:03:06.120 saying deult. 0:03:06.200 --> 0:03:09.960 But one man's default is another man's restructuring. Jar that's right. 0:03:10.040 --> 0:03:12.320 But I think if I were a treasury holder, I 0:03:12.360 --> 0:03:14.760 would be very upset if the thing that I considered 0:03:14.760 --> 0:03:18.000 to be the most liquid, safe asset of the entire world, 0:03:18.040 --> 0:03:20.160 that the entire finance system runs on, the one thing 0:03:20.200 --> 0:03:24.200 that's perceived to be genuinely risk free from a credit standpoint, 0:03:24.720 --> 0:03:27.840 suddenly gets like, oh, it's this is a five year 0:03:27.840 --> 0:03:29.600 bond and a seven year bond and you're going to 0:03:29.639 --> 0:03:31.520 get the same money in the end. I think that 0:03:31.560 --> 0:03:35.720 would be very disruptive in a way that is not disruptive, say, 0:03:35.880 --> 0:03:39.000 like you know, when a hospital chain has to restructure 0:03:39.000 --> 0:03:39.760 its dead it. 0:03:39.760 --> 0:03:42.960 Is definitely the risk free rate upon which, like all 0:03:42.960 --> 0:03:45.800 the other markets are basically built on. Should I do 0:03:45.880 --> 0:03:49.160 a reminder of what the mar a Lago accord may 0:03:49.240 --> 0:03:52.880 surely says about this point. So the way I think 0:03:52.920 --> 0:03:55.720 about it, it's an attempt to resolve some of the 0:03:55.760 --> 0:04:00.360 tensions embedded in the Trump administration's economic agenda. We about 0:04:00.360 --> 0:04:03.760 it with Jim Bianco, and those tensions are primarily the 0:04:03.840 --> 0:04:09.000 desire to reshore manufacturing and shrink the deficit, and also, 0:04:09.320 --> 0:04:12.560 I guess, address the sort of emotional sense that the 0:04:12.720 --> 0:04:16.279 US isn't getting compensated enough for its role in the 0:04:16.279 --> 0:04:21.240 global economy or global security. Oh wow, all while paying 0:04:21.320 --> 0:04:25.480 down the debt. Right, so having your cake and eating 0:04:25.480 --> 0:04:28.960 it too. And I should just emphasize this isn't a 0:04:29.000 --> 0:04:32.920 hardcore plan. This is based on a paper that Stephn 0:04:33.040 --> 0:04:36.600 Miran put out last year that people started getting very 0:04:36.640 --> 0:04:39.160 interested in and talking about. And that's why we're talking 0:04:39.160 --> 0:04:39.520 about it. 0:04:39.560 --> 0:04:40.840 Well, I want to go to our guess a second. 0:04:40.839 --> 0:04:42.680 But there is something very funny because there's all these 0:04:42.720 --> 0:04:45.200 academic papers that are going out, and it's like, oh, 0:04:45.240 --> 0:04:48.680 there's this big plan, and you know, the exorbitant privilege 0:04:48.720 --> 0:04:51.440 of the dollar makes it so that, you know, it's 0:04:51.480 --> 0:04:54.280 hard to reshore manufacturing in the US, and we need 0:04:54.320 --> 0:04:58.159 to weaken the dollar and decentralize its role. And it's 0:04:58.200 --> 0:05:01.240 like they sort of like intellectualize it five D chests. Meanwhile, 0:05:01.360 --> 0:05:04.200 Trump is like, no, I just want more money from terrorists. 0:05:04.240 --> 0:05:07.360 Like I don't know, he like, there's this intellectual infrastructure 0:05:07.400 --> 0:05:10.800 around it. I'm not sure that Trump himself buys into 0:05:10.800 --> 0:05:13.279 this anyway. We really do have the perfect guest, because 0:05:13.279 --> 0:05:15.600 we're gonna be speaking someone who knows about the intersection 0:05:15.800 --> 0:05:18.479 of finance and politics, someone who knows about debt and 0:05:18.520 --> 0:05:22.400 debt restructuring, someone who actually matters. We've had him on 0:05:22.400 --> 0:05:30.719 the show, sorry my wife, someone whose opinion, someone whose 0:05:30.760 --> 0:05:33.839 opinion actually matters. All of our guests matter, all of 0:05:33.839 --> 0:05:36.799 our guests opinion matters. We're gonna be speaking with Jim Milstein, 0:05:37.080 --> 0:05:40.920 co chair of Googenheim Securities. Jim, thank you so much 0:05:40.960 --> 0:05:43.760 for coming back on ODS My pleasure. We talked about 0:05:43.800 --> 0:05:46.680 your background when we had you on the show last year. 0:05:46.760 --> 0:05:49.480 What do you know about debt restructuring just a little. 0:05:50.920 --> 0:05:51.560 What have you done? 0:05:51.880 --> 0:05:52.840 What have you done in that room? 0:05:53.080 --> 0:05:53.760 You've dabbled. 0:05:55.160 --> 0:05:58.480 Yeah, it's my metier, you know. So I had this 0:05:59.080 --> 0:06:02.240 awful job and a great title called Chief Restructuring Officer 0:06:02.279 --> 0:06:04.359 of the United States Department of the Treasury during the 0:06:04.360 --> 0:06:05.200 Financial crisis. 0:06:06.000 --> 0:06:07.000 That is quite a title. 0:06:07.080 --> 0:06:09.960 It is quite a title. It sounds like they might 0:06:09.960 --> 0:06:12.320 have been hiring me to restructure the federal government. In fact, 0:06:12.360 --> 0:06:15.200 I was there to help restructure the TARP investments we 0:06:15.279 --> 0:06:18.720 made during the financial crisis and AIG and Ally Financial 0:06:18.800 --> 0:06:20.599 and City and b of A and the rest of 0:06:21.000 --> 0:06:24.200 that crowd. But before that, you know, I worked on 0:06:24.279 --> 0:06:28.840 the restructuring of Argentina. The Republic of Argentina's one of 0:06:28.839 --> 0:06:32.680 their many restructurings ye debt in two thousand and five, 0:06:32.760 --> 0:06:35.720 we did a big exchange offer for their international bond 0:06:35.760 --> 0:06:38.400 in net and this I worked on Puerto Rico's debt 0:06:38.440 --> 0:06:41.240 default and restructuring back in the odds. 0:06:41.640 --> 0:06:44.400 Wait, were you on the hedge fund side of Argentina. 0:06:44.040 --> 0:06:45.680 Or the republic side? 0:06:45.720 --> 0:06:46.560 Oh? Okay, yeah. 0:06:46.640 --> 0:06:49.200 And then when I was a lawyer back in the eighties, 0:06:50.200 --> 0:06:53.280 my firm Cleary Gottlie worked on all of the Brady 0:06:53.279 --> 0:06:57.520 bond restructurings across Latin America. So you know, I've done 0:06:57.560 --> 0:06:59.200 a bunch of sovereign. 0:07:00.120 --> 0:07:04.280 Yes, yeah, Okay, Shall I just jump into it and 0:07:04.400 --> 0:07:07.960 ask the obvious question or one of the obvious questions? 0:07:08.000 --> 0:07:12.480 But where is the suggestion coming from? A debt restructuring 0:07:12.600 --> 0:07:15.520 is part of a potential Mara Lago accord? And what 0:07:15.680 --> 0:07:17.280 is the problem we're trying to solve? 0:07:17.920 --> 0:07:21.920 So I think there's a clear I mean, I don't 0:07:21.960 --> 0:07:25.840 want to engage in sanewashing, which, yes, you know, there's 0:07:25.920 --> 0:07:29.040 clearly an impetus by the President to impose tariffs. He's 0:07:29.120 --> 0:07:33.240 tariff man, and around him through Bessent and Moran, there 0:07:33.320 --> 0:07:39.280 is some intellectual architecture that suggests that's just a tactic 0:07:39.480 --> 0:07:43.960 towards an end, and the end is to bring manufacturing 0:07:44.040 --> 0:07:47.280 back to the United States. Yeah. Obviously, during this period 0:07:47.280 --> 0:07:51.560 of globalization, we've been running massive trade deficits, particularly in manufacturers, 0:07:51.600 --> 0:07:56.080 where we're importing a number of critical systems to both 0:07:56.120 --> 0:08:00.559 our defense industry and to our manufacturing industry. We once 0:08:00.760 --> 0:08:05.080 dominated the semiconductor trade. We actually created that industry in 0:08:05.080 --> 0:08:08.760 the nineteen sixties through a series of government policies, research 0:08:08.800 --> 0:08:11.520 and development grants to IBM and AT and T that 0:08:11.680 --> 0:08:16.280 created the semiconductor technology. Then a series of procurement policies 0:08:16.360 --> 0:08:21.440 at NASA and the Defense Department to commercialize that industry, 0:08:21.480 --> 0:08:25.000 and eventually we created, you know, the calculator industry and 0:08:25.080 --> 0:08:28.160 the computer industry and the TV industry and all of that. 0:08:29.400 --> 0:08:31.960 But that was all a byproduct of a coordinated set 0:08:32.000 --> 0:08:36.480 of federal policies. Fast forward forty years, fifty years later, 0:08:37.200 --> 0:08:41.000 and you know, semiconductor manufacturing is mostly being done, particularly 0:08:41.040 --> 0:08:47.160 at the high end, in a strategically vulnerable country across 0:08:47.200 --> 0:08:51.560 the Straits of China from China in Taiwan, and that 0:08:51.640 --> 0:08:54.760 has created a sense now going back in the ten 0:08:54.840 --> 0:08:57.640 years in the defense establishment, that we have a problem, 0:08:58.760 --> 0:09:01.920 and not just in semi conductors, but in a number 0:09:01.920 --> 0:09:06.120 of advanced industries where we're really reliant as a country 0:09:06.200 --> 0:09:11.720 on the importation of critical technologies and critical intermediate inputs. Again, 0:09:12.080 --> 0:09:14.600 you know, if you piece together some of the things 0:09:14.600 --> 0:09:16.760 that Bessint has said and some of the things that 0:09:17.360 --> 0:09:21.480 Moran has said, the goal of the tariff play, which 0:09:21.520 --> 0:09:27.320 is really just a tactic, is to bring manufacturing back 0:09:27.360 --> 0:09:30.800 to the United States to hollow in or build out 0:09:30.840 --> 0:09:33.360 the communities that were hollowed out by the wave of 0:09:33.400 --> 0:09:38.240 globalization that occurred after China's admission to the WTO in 0:09:38.280 --> 0:09:44.160 the early two thousands. One of the critical elements or 0:09:44.200 --> 0:09:47.360 transmission mechanisms that they're trying to affect is the exchange 0:09:47.440 --> 0:09:50.720 rate of the dollar. A high dollar means that our 0:09:50.880 --> 0:09:54.920 exports are more expensive and our imports are less expensive. 0:09:55.000 --> 0:09:58.480 So we have been the beneficiary with a strong dollar 0:09:58.720 --> 0:10:04.080 of very cheap imports, you know, moderating the inflation that 0:10:04.160 --> 0:10:08.200 might otherwise occur from domestic manufacturing. But that said, we've 0:10:08.240 --> 0:10:13.240 lost manufacturing. We used forty years ago we represented twenty 0:10:13.280 --> 0:10:16.120 five percent of the manufacturing industry. Now we're a mere 0:10:16.240 --> 0:10:20.160 fifteen percent of global manufacturing. China was nowhere to be seen. 0:10:20.640 --> 0:10:25.200 Now they're thirty five percent of global manufacturing. The goal 0:10:25.320 --> 0:10:28.600 of this Mari Lago accord is to really weaken the 0:10:28.640 --> 0:10:35.000 dollar without upsetting the financial flows that finance our debt. 0:10:35.000 --> 0:10:38.600 And crucially, the manufacturing buildout is supposed to be done 0:10:38.640 --> 0:10:41.920 by private capital. To Joe's point earlier, it's not. You know, 0:10:41.960 --> 0:10:45.000 we've had efforts from the Biden administration, the Chips Act 0:10:45.240 --> 0:10:48.280 to try to boost some of those industries. But the 0:10:48.320 --> 0:10:52.480 emphasis under Trump is really we want to create a 0:10:52.520 --> 0:10:56.280 beneficial market environment so that private capital moves in. 0:10:56.559 --> 0:11:01.720 Yes, there's obviously a kind of you know, traditionally Republican 0:11:01.760 --> 0:11:05.920 bias in favor of private capital and scaling back the 0:11:06.040 --> 0:11:11.360 use of public investment to promote industrial development. But you know, 0:11:12.080 --> 0:11:16.640 raising a tariff wall, a high tariffall is a bet 0:11:17.040 --> 0:11:21.560 that private capital will invest behind it. Biden administration, you know, 0:11:21.800 --> 0:11:25.440 started something that I actually worked on as a graduate 0:11:25.480 --> 0:11:29.719 student back in the seventies called industrial policy. That is 0:11:29.760 --> 0:11:35.920 to use not only tariff barriers, but investment policy, tax policy, 0:11:36.440 --> 0:11:41.760 procurement policy, and R and D policy to promote domestic industry. So, 0:11:42.600 --> 0:11:45.720 you know, Trump has inherited the Chips Act and it 0:11:45.800 --> 0:11:48.840 is making progress. It has spread terrible, Yeah, I know, 0:11:48.880 --> 0:11:52.080 he said it's terrible. But the reality is that there's 0:11:52.080 --> 0:11:54.360 all sorts of activity now both in the under the 0:11:54.440 --> 0:11:58.960 Chips Act subsidies and through the Inflation Reduction Act, which 0:11:59.160 --> 0:12:02.920 was another one of the Biden administration's policies to promote 0:12:03.679 --> 0:12:08.760 investment in the United States. The reality is that those 0:12:08.760 --> 0:12:11.839 investments have been made and are continuing to be made 0:12:12.400 --> 0:12:16.000 around the fifty States, most particularly in the Red States, 0:12:16.520 --> 0:12:19.280 and so there will be political pushback on the Trump 0:12:19.360 --> 0:12:25.120 administration to just zero those out going forward. So going back, though, 0:12:25.400 --> 0:12:33.480 you know, if we really want to restore American manufacturing dominance, 0:12:33.520 --> 0:12:38.680 particularly in critical industries critical to our defense establishment, we're 0:12:38.720 --> 0:12:40.960 going to have to use a mix not only of 0:12:41.040 --> 0:12:44.679 high tariff barriers, but of R and D subsidies, of 0:12:44.920 --> 0:12:50.120 investment subsidies, and use procurement as a way to create 0:12:50.240 --> 0:12:52.839 demand pull for these new industries. 0:13:09.720 --> 0:13:12.800 You use the word sanewashing, which is a good word, 0:13:13.000 --> 0:13:16.280 because there are there's this sort of intellectual as you said, 0:13:16.360 --> 0:13:21.800 architecture around Trump. It's not clear that Trump himself sees 0:13:21.840 --> 0:13:25.440 it this way that this is that this works, that 0:13:25.520 --> 0:13:30.040 you can sort of like reaccelerate US manufacturing simply via 0:13:30.120 --> 0:13:33.599 some sort of weakening of the dollar in a coordinated 0:13:33.640 --> 0:13:36.840 way or tariffs. What is the gap between what you 0:13:36.960 --> 0:13:40.600 see is actually going on and the sort of like 0:13:41.120 --> 0:13:42.880 the white papers that people put out. 0:13:42.720 --> 0:13:46.000 Of Okay, so so, and this is all coming out 0:13:46.040 --> 0:13:48.559 of Moran's paper. As Tracy indicated at the beginning, I mean, 0:13:48.559 --> 0:13:54.080 he's put together the most kind of comprehensive strategy, and 0:13:54.160 --> 0:13:57.679 he acknowledges this very narrow chord or within which this 0:13:57.800 --> 0:14:00.280 might work, and in some sense the present and it 0:14:00.280 --> 0:14:04.800 has already gotten out ahead with his tariff tactics and 0:14:04.880 --> 0:14:10.320 also his threatening to withdraw the security umbrella from NATO, 0:14:10.920 --> 0:14:17.080 because those are the two critical sticks that Moran advocated 0:14:17.280 --> 0:14:23.560 we use to induce foreign central banks and foreign investors 0:14:24.200 --> 0:14:28.040 to continue to buy treasuries at favorable rates, so it 0:14:28.120 --> 0:14:33.120 is to continue to finance what is really a growing 0:14:33.760 --> 0:14:37.720 and potential as Dalio said in your podcast, debt crisis. 0:14:37.880 --> 0:14:42.760 And then just let me say maybe to frame that problem. Today, 0:14:43.360 --> 0:14:47.960 federal debt to GDP is one to one. Federal debt 0:14:48.040 --> 0:14:52.560 is equal to GDP. We're running deficits at seven percent 0:14:52.640 --> 0:14:56.040 of GDP, and the economy has kind of grown at 0:14:56.080 --> 0:15:00.400 one too little north of two percent. So the debt 0:15:00.440 --> 0:15:03.720 is growing faster as a result of the imbalance in 0:15:03.760 --> 0:15:07.560 the federal budget, where deficits are growing at the rate 0:15:07.600 --> 0:15:10.640 of seven percent of GDP, which means the debt's growing 0:15:10.640 --> 0:15:13.480 at the rate of seven percent of GDP. Where our 0:15:13.600 --> 0:15:17.440 debt is growing now faster than GDP and is becoming 0:15:17.520 --> 0:15:21.080 an increasing overhang to the extent that when you look 0:15:21.080 --> 0:15:25.720 at the federal budget, interest expense has become the second 0:15:25.840 --> 0:15:27.600 largest category of federal spending. 0:15:27.960 --> 0:15:29.800 Issuing bonds to pay off bonds. 0:15:29.880 --> 0:15:33.880 That's right, So we're now we're now issuing bonds to 0:15:33.960 --> 0:15:38.320 pay the interest on our bonds. This is a classic 0:15:38.480 --> 0:15:42.000 recipe for disaster. We're not even treading water. Was now 0:15:42.280 --> 0:15:46.960 slowly sinking behind a huge under a huge pile of debt. 0:15:47.160 --> 0:15:50.960 So we have to get that fiscal imbalance corrected. And 0:15:51.000 --> 0:15:53.960 as you were saying at the beginning of the podcast, Joe, 0:15:55.320 --> 0:15:59.080 you know, now some very tough allocation decisions need to 0:15:59.080 --> 0:16:02.760 be made with regard to federal spending because someone joked 0:16:02.760 --> 0:16:04.920 that the federal when you look at the federal government, 0:16:05.000 --> 0:16:09.320 it's really a retirement program attached to an army, right, 0:16:09.800 --> 0:16:15.040 I mean the largest ever. Yeah, it's exactly. You have 0:16:15.200 --> 0:16:17.720 you have, you know, income security in the form of 0:16:17.760 --> 0:16:21.120 Social Security for retirement, and you have medical security in 0:16:21.160 --> 0:16:24.680 the form of Medicare for retirement. But when you add 0:16:24.720 --> 0:16:28.480 it all up, the parts of the budget that you know, 0:16:28.600 --> 0:16:31.760 Elon musk Is and his merry band of pranksters are 0:16:31.800 --> 0:16:36.400 off trying to slash is a relatively small part of 0:16:36.480 --> 0:16:41.360 federal spending, but it is the stuff that actually you know, 0:16:41.560 --> 0:16:48.000 supports education, transportation, housing, infrastructure, right. 0:16:48.280 --> 0:16:51.000 The wider economy, some sort of stuff. 0:16:50.680 --> 0:16:54.840 That you know, is building human capital, building physical public capital, 0:16:54.960 --> 0:16:59.400 building housing structure. That part of the budget is a 0:16:59.440 --> 0:17:03.320 mere seven hundred billion out of a total spending of 0:17:03.520 --> 0:17:07.760 six point seventy five trillion. The rest of it is 0:17:08.560 --> 0:17:14.800 interest on the debt, retirement, security, defense, and healthcare support. 0:17:15.119 --> 0:17:18.400 And so we're really we're really in a pickle. We're 0:17:18.440 --> 0:17:21.159 going to see in the fall or maybe sooner when 0:17:21.200 --> 0:17:24.199 the reconciliation bills finally make their way to a vote 0:17:24.520 --> 0:17:26.800 on the floor of the House in the Senate, we're 0:17:26.800 --> 0:17:29.200 going to see whether or not this Congress really has 0:17:29.280 --> 0:17:34.640 the courage to deal with the allocation issues that you mentioned. 0:17:34.760 --> 0:17:37.639 Because in the House that in the framework for the 0:17:37.640 --> 0:17:41.400 House Reconciliation Bill, they call for eight hundred and eighty billion. 0:17:41.440 --> 0:17:43.720 That's over ten years, so it's really not a lot. 0:17:44.160 --> 0:17:47.280 It's really like about one hundred billion of spending cuts 0:17:47.320 --> 0:17:55.360 annually in medicaid, transportation, housing, and education. You know, out 0:17:55.400 --> 0:17:59.960 of that Medicaid is about six hundred billion a year, 0:18:00.800 --> 0:18:05.080 and the housing, transportation, education, that part of the budget 0:18:05.119 --> 0:18:08.600 is about seven hundred billion, so there's a they're calling 0:18:08.680 --> 0:18:11.399 for a reduction of one hundred billion a year against 0:18:11.480 --> 0:18:16.359 that one point three billion of medicaid and social the 0:18:16.400 --> 0:18:19.919 other social spending. So it's not it's not a big ticket, 0:18:20.720 --> 0:18:23.199 and it's not going to make a massive change in 0:18:23.240 --> 0:18:29.720 the deficit, particularly if they add incremental tax cuts on tips, 0:18:29.160 --> 0:18:33.399 on over time, on social security as they've talked about. 0:18:34.960 --> 0:18:38.760 You know, they're not really attacking the deficit. So we're 0:18:38.800 --> 0:18:43.160 going to continue to need to sell a lot of debt. 0:18:43.480 --> 0:18:47.879 So you've laid out the pickle problem very well, perfectly 0:18:48.080 --> 0:18:50.240 laid out the pickle problem perfectly. 0:18:50.520 --> 0:18:52.680 Say that. 0:18:53.720 --> 0:18:57.920 The idea here embedded in the mar Lago Accord is 0:18:58.000 --> 0:19:01.600 that the US could bring down its det costs by 0:19:02.240 --> 0:19:06.920 getting foreign investors to swap some of their current treasuries 0:19:07.359 --> 0:19:11.359 into century bonds that would be less expensive for the 0:19:11.480 --> 0:19:13.520 US to actually pay back. 0:19:13.800 --> 0:19:16.639 That's right, And so how do we induce them to 0:19:16.840 --> 0:19:22.440 engage in that exchange? So the two primary tactics that 0:19:23.320 --> 0:19:26.600 Moran lays out in his paper are sort of, you know, 0:19:26.640 --> 0:19:29.160 the way you do exchange offers in the private markets 0:19:29.160 --> 0:19:33.000 that eye traffic in the way you do in exchange 0:19:33.000 --> 0:19:38.160 offers with carrots and sticks. You offer a sweetener and 0:19:38.200 --> 0:19:43.080 you threaten, you know, doom and gloom. So the two 0:19:43.280 --> 0:19:47.959 primary tactics here are that you foreign country are going 0:19:48.040 --> 0:19:51.679 to face, on the one hand, a high tarerfall unless 0:19:51.720 --> 0:19:56.320 you play ball, and on the other hand, the withdrawal 0:19:56.480 --> 0:20:00.000 of our security umbrella. So if you want the protect 0:20:00.000 --> 0:20:03.800 action of the largest and most powerful military in the 0:20:03.840 --> 0:20:09.880 world to protect your borders against a Russian invasion, you're 0:20:09.920 --> 0:20:14.160 going to have to swap your debt that you currently hold, 0:20:14.200 --> 0:20:18.639 which is generally short term bills, into what they're calling 0:20:18.720 --> 0:20:22.600 century bonds, a you know, one hundred year bond at 0:20:22.600 --> 0:20:27.680 a low interest rate, which takes the refinancing risk of 0:20:27.720 --> 0:20:30.639 an indebted country away from it because we don't have 0:20:30.680 --> 0:20:33.439 to touch that debt for underdal, turning out duration, turning 0:20:33.480 --> 0:20:38.720 out duration on the one hand, and reducing the interest 0:20:38.800 --> 0:20:42.520 burden of servicing that debt over time. So there are 0:20:42.520 --> 0:20:47.080 a couple of problems with this. One problem is that 0:20:47.680 --> 0:20:52.240 when you look at who holds US government debt, not 0:20:52.320 --> 0:20:56.040 more than fifteen percent of it today is held offshore 0:20:56.600 --> 0:20:59.000 and mutting down a lot. Yeah, it's come down a 0:20:59.000 --> 0:21:01.840 lot and much of that fifteen percent is not in 0:21:01.880 --> 0:21:05.120 the hands of you know, government instrumentalities, but rather than 0:21:05.240 --> 0:21:10.200 foreign private investors. So inducing that crowd to come in 0:21:10.480 --> 0:21:14.280 to this exchange offer, even if you could succeed, you're 0:21:14.320 --> 0:21:16.720 touching a very small part of the debt. So where's 0:21:16.760 --> 0:21:19.040 the rest of it? Where's the other eighty five percent 0:21:19.080 --> 0:21:23.720 of our thirty six trillion dollars of outstanding debt? It's 0:21:23.760 --> 0:21:26.320 basically owned by us. Some of it's owned and government 0:21:26.320 --> 0:21:30.240 accounts and the Social Security and Medicare trust funds, but 0:21:30.359 --> 0:21:32.920 some of it is owned by banks and insurance companies. 0:21:32.960 --> 0:21:37.680 Some of it's owned by endowments and wealthy individuals. Some 0:21:37.760 --> 0:21:40.479 of it's in the bond in the mutual fund market, 0:21:40.640 --> 0:21:45.480 you know, underwriting our money market funds. So the reality 0:21:45.600 --> 0:21:47.919 is we're to get this done. We're really doing it 0:21:47.960 --> 0:21:52.040 with ourselves. What we really need to do is turn 0:21:52.119 --> 0:21:55.240 out our debt. And the problem we're facing right now 0:21:55.880 --> 0:21:58.760 is that, you know, the debt, the cost of debt, 0:21:58.960 --> 0:22:02.520 the interest cost of our debt is relatively high. You know, 0:22:02.640 --> 0:22:07.000 the ten years at four point three, the thirty year 0:22:07.280 --> 0:22:09.560 put its outis what you'd pay for a century bond. 0:22:09.880 --> 0:22:15.200 Thirty year is even higher. And the current average interest 0:22:15.280 --> 0:22:19.080 rate on our outstanding thirty six trillion dollars of debt 0:22:19.160 --> 0:22:23.119 is three point three percent, So to term it out 0:22:23.160 --> 0:22:27.040 in this market would take that one point one trillion 0:22:27.080 --> 0:22:30.560 dollars of annual interest expence up. You know, if we 0:22:30.560 --> 0:22:32.560 had to term it out at four point three or 0:22:32.640 --> 0:22:37.240 four point six, we'd be talking about increasing the interest 0:22:37.280 --> 0:22:41.800 expense we're facing. So there, you know. So this intellectual 0:22:41.880 --> 0:22:46.360 architecture around the so called Mara Lago accord has many 0:22:46.359 --> 0:22:50.879 flaws now, at least among which is we're in targeting 0:22:51.000 --> 0:22:55.040 foreign holders of our debt, We're targeting a relatively small 0:22:55.240 --> 0:22:57.480 part of it. If the game plan here of that 0:22:57.560 --> 0:23:00.800 Mara lagocord is to weaken the dollar so is to 0:23:00.840 --> 0:23:06.280 improve the competitiveness of US domestic manufacturing. There is another 0:23:06.359 --> 0:23:11.119 approach and that you've also heard rumor of from the 0:23:11.119 --> 0:23:14.080 Trump administration, and that is the creation of a sovereign 0:23:14.359 --> 0:23:20.280 wealth fund to take assets that the US government currently owns, 0:23:20.880 --> 0:23:25.000 dump them in a central fund managed by the Treasury Department, 0:23:25.840 --> 0:23:30.720 and allowing the Treasury Department then to intervene directly into 0:23:30.760 --> 0:23:33.399 the currency of the foreign exchange markets to try and 0:23:33.520 --> 0:23:36.000 push the dollar down. I see. 0:23:36.240 --> 0:23:39.320 It's interesting because so you know, historically, right, like sovereign 0:23:39.359 --> 0:23:42.840 wealth funds in resource rich countries are often about stable 0:23:43.000 --> 0:23:47.600 keeping the currency strong, etcetera, especially for countercyclical elements, and 0:23:47.640 --> 0:23:50.280 so the idea that we would use it to intervene 0:23:50.640 --> 0:23:53.600 and in foreign exchange is interesting twists. You know, you 0:23:53.640 --> 0:23:56.080 said something about restructuring, and you said there's carrots and 0:23:56.119 --> 0:23:59.760 sticks in a typical restructuring, and imagine the sticks are, Look, 0:23:59.880 --> 0:24:02.359 you don't want to go along with this restructuring plan, 0:24:02.720 --> 0:24:04.680 then you're going to end up with like some sort 0:24:04.680 --> 0:24:07.040 of asset and a bankrupt company and it's going to 0:24:07.080 --> 0:24:08.920 be pretty bad for you and you're gonna get less 0:24:08.920 --> 0:24:11.040 money and it's going to take a long time. And 0:24:11.080 --> 0:24:13.560 so come on, go with the deal. It seems to 0:24:13.600 --> 0:24:15.840 be part of the problem. Like just conceptually with the 0:24:15.880 --> 0:24:19.600 carrot and sticks approach is like, you can't really threaten 0:24:19.640 --> 0:24:24.760 a stick if you're the US government without immolating yourself. 0:24:24.880 --> 0:24:28.440 Yeah, I mean the latter you really want to see 0:24:28.520 --> 0:24:32.119 rates blow out? Have the federal government of threatened to 0:24:32.119 --> 0:24:36.920 not pay its debts, that would be uh, that would 0:24:36.920 --> 0:24:42.840 be an event from which the financial markets might not recover. 0:24:44.200 --> 0:24:47.919 Does the carrot hold any water here either, because the 0:24:47.960 --> 0:24:51.119 carrot's supposed to be like, Okay, maybe you don't get tariffs, 0:24:51.280 --> 0:24:55.040 maybe you get US security. But that maybe is really 0:24:55.080 --> 0:24:58.400 important because what we've seen so far, it's only been 0:24:58.440 --> 0:25:00.920 two months, but we've seen Trump go back and forth, 0:25:00.960 --> 0:25:03.359 back and forth, back and forth. I think a lot 0:25:03.440 --> 0:25:05.120 of trust has been lost. 0:25:05.560 --> 0:25:08.879 Yeah. Well, and you know, if you were going to 0:25:09.119 --> 0:25:15.840 use tariffs or the threat of tariffs and the threat 0:25:16.000 --> 0:25:20.760