Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal.
Speaker 3: And I'm Tracy Alloway.
Speaker 2: So, Tracy, you know, there's obviously a lot of anxiety
Speaker 2: these days, really for a while, but going into the election,
Speaker 2: post about the size of the US debt, the size
Speaker 2: of the US deficit, et cetera.
Speaker 4: And what I the way I like.
Speaker 2: To think of these things is that any discussion of
Speaker 2: federal spending is about a competition for resource allocation. Right,
Speaker 2: So we know that a huge component of what drives
Speaker 2: persistent deficits is the social safety nets, social security, medicare, medicaid,
Speaker 2: et cetera. And when we talk about the debt or
Speaker 2: the deficit in the abstract, and when people talk about
Speaker 2: tackling the debt or the deficit, what they're really talking
Speaker 2: about is freeing up resources somewhere, freeing up consumption somewhere,
Speaker 2: and creating availability for consumption and resources elsewhere in the economy.
Speaker 4: Are they well, I mean, yeah, I think I would say.
Speaker 1: So.
Speaker 3: It seems to me there's a desire to like pay
Speaker 3: down the debt and then not necessarily do anything else,
Speaker 3: like what's the else here?
Speaker 2: Well, So, for example, Secretary of Scott Bestant and some
Speaker 2: of his recent interviews talked about, you know, we want
Speaker 2: to releverage the private sector. It's we want to get
Speaker 2: raids down and therefore that makes investing more appealing for companies,
Speaker 2: et cetera. And so the idea of like, okay, we're
Speaker 2: going to like reduce demand, reduced consumption from various sectors
Speaker 2: of the economy that are perceived to be unproductive, such
Speaker 2: as retirees, et cetera, and then open up expansion so
Speaker 2: then there's less consumption and then that creates resource availability
Speaker 2: for other things which are perceived to be more productive,
Speaker 2: like reindustrialization.
Speaker 3: Okay, maybe what I would say, you know how I
Speaker 3: like to think about those Sure, I like to ask
Speaker 3: like to think about the big picture in bonds, and
Speaker 3: I always say, bonds are built on norms, right, Yeah,
Speaker 3: Government spending is built on norms. So you lend money
Speaker 3: to me and I pay you back. It's basically a promise,
Speaker 3: which means it's a human construct. Yes, and there are
Speaker 3: all these values and norms and narratives that are embedded
Speaker 3: in those constructs, in those promises, and that's what I
Speaker 3: find really fascinating, especially when those values start to change,
Speaker 3: and I think that's what's happening now.
Speaker 2: Yeah, well, you know absolutely, and obviously, you know, we
Speaker 2: did that conversation with Jim Bianco about a you know,
Speaker 2: either a literal or a metanomic moral lago accord, and
Speaker 2: then we talked to Ridalio and he slipped it in there,
Speaker 2: and I thought it was that kind of He's like, well,
Speaker 2: maybe they'll restructure the debt some way or return it out,
Speaker 2: And to me, that screams default, you know. I mean,
Speaker 2: that's just a you know, it's a polite way of
Speaker 2: saying deult.
Speaker 3: But one man's default is another man's restructuring. Jar that's right.
Speaker 2: But I think if I were a treasury holder, I
Speaker 2: would be very upset if the thing that I considered
Speaker 2: to be the most liquid, safe asset of the entire world,
Speaker 2: that the entire finance system runs on, the one thing
Speaker 2: that's perceived to be genuinely risk free from a credit standpoint,
Speaker 2: suddenly gets like, oh, it's this is a five year
Speaker 2: bond and a seven year bond and you're going to
Speaker 2: get the same money in the end. I think that
Speaker 2: would be very disruptive in a way that is not disruptive, say,
Speaker 2: like you know, when a hospital chain has to restructure
Speaker 2: its dead it.
Speaker 3: Is definitely the risk free rate upon which, like all
Speaker 3: the other markets are basically built on. Should I do
Speaker 3: a reminder of what the mar a Lago accord may
Speaker 3: surely says about this point. So the way I think
Speaker 3: about it, it's an attempt to resolve some of the
Speaker 3: tensions embedded in the Trump administration's economic agenda. We about
Speaker 3: it with Jim Bianco, and those tensions are primarily the
Speaker 3: desire to reshore manufacturing and shrink the deficit, and also,
Speaker 3: I guess, address the sort of emotional sense that the
Speaker 3: US isn't getting compensated enough for its role in the
Speaker 3: global economy or global security. Oh wow, all while paying
Speaker 3: down the debt. Right, so having your cake and eating
Speaker 3: it too. And I should just emphasize this isn't a
Speaker 3: hardcore plan. This is based on a paper that Stephn
Speaker 3: Miran put out last year that people started getting very
Speaker 3: interested in and talking about. And that's why we're talking
Speaker 3: about it.
Speaker 2: Well, I want to go to our guess a second.
Speaker 2: But there is something very funny because there's all these
Speaker 2: academic papers that are going out, and it's like, oh,
Speaker 2: there's this big plan, and you know, the exorbitant privilege
Speaker 2: of the dollar makes it so that, you know, it's
Speaker 2: hard to reshore manufacturing in the US, and we need
Speaker 2: to weaken the dollar and decentralize its role. And it's
Speaker 2: like they sort of like intellectualize it five D chests. Meanwhile,
Speaker 2: Trump is like, no, I just want more money from terrorists.
Speaker 2: Like I don't know, he like, there's this intellectual infrastructure
Speaker 2: around it. I'm not sure that Trump himself buys into
Speaker 2: this anyway. We really do have the perfect guest, because
Speaker 2: we're gonna be speaking someone who knows about the intersection
Speaker 2: of finance and politics, someone who knows about debt and
Speaker 2: debt restructuring, someone who actually matters. We've had him on
Speaker 2: the show, sorry my wife, someone whose opinion, someone whose
Speaker 2: opinion actually matters. All of our guests matter, all of
Speaker 2: our guests opinion matters. We're gonna be speaking with Jim Milstein,
Speaker 2: co chair of Googenheim Securities. Jim, thank you so much
Speaker 2: for coming back on ODS My pleasure. We talked about
Speaker 2: your background when we had you on the show last year.
Speaker 2: What do you know about debt restructuring just a little.
Speaker 1: What have you done?
Speaker 2: What have you done in that room?
Speaker 3: You've dabbled.
Speaker 4: Yeah, it's my metier, you know. So I had this
Speaker 4: awful job and a great title called Chief Restructuring Officer
Speaker 4: of the United States Department of the Treasury during the
Speaker 4: Financial crisis.
Speaker 3: That is quite a title.
Speaker 4: It is quite a title. It sounds like they might
Speaker 4: have been hiring me to restructure the federal government. In fact,
Speaker 4: I was there to help restructure the TARP investments we
Speaker 4: made during the financial crisis and AIG and Ally Financial
Speaker 4: and City and b of A and the rest of
Speaker 4: that crowd. But before that, you know, I worked on
Speaker 4: the restructuring of Argentina. The Republic of Argentina's one of
Speaker 4: their many restructurings ye debt in two thousand and five,
Speaker 4: we did a big exchange offer for their international bond
Speaker 4: in net and this I worked on Puerto Rico's debt
Speaker 4: default and restructuring back in the odds.
Speaker 3: Wait, were you on the hedge fund side of Argentina.
Speaker 4: Or the republic side?
Speaker 3: Oh? Okay, yeah.
Speaker 4: And then when I was a lawyer back in the eighties,
Speaker 4: my firm Cleary Gottlie worked on all of the Brady
Speaker 4: bond restructurings across Latin America. So you know, I've done
Speaker 4: a bunch of sovereign.
Speaker 3: Yes, yeah, Okay, Shall I just jump into it and
Speaker 3: ask the obvious question or one of the obvious questions?
Speaker 3: But where is the suggestion coming from? A debt restructuring
Speaker 3: is part of a potential Mara Lago accord? And what
Speaker 3: is the problem we're trying to solve?
Speaker 4: So I think there's a clear I mean, I don't
Speaker 4: want to engage in sanewashing, which, yes, you know, there's
Speaker 4: clearly an impetus by the President to impose tariffs. He's
Speaker 4: tariff man, and around him through Bessent and Moran, there
Speaker 4: is some intellectual architecture that suggests that's just a tactic
Speaker 4: towards an end, and the end is to bring manufacturing
Speaker 4: back to the United States. Yeah. Obviously, during this period
Speaker 4: of globalization, we've been running massive trade deficits, particularly in manufacturers,
Speaker 4: where we're importing a number of critical systems to both
Speaker 4: our defense industry and to our manufacturing industry. We once
Speaker 4: dominated the semiconductor trade. We actually created that industry in
Speaker 4: the nineteen sixties through a series of government policies, research
Speaker 4: and development grants to IBM and AT and T that
Speaker 4: created the semiconductor technology. Then a series of procurement policies
Speaker 4: at NASA and the Defense Department to commercialize that industry,
Speaker 4: and eventually we created, you know, the calculator industry and
Speaker 4: the computer industry and the TV industry and all of that.
Speaker 4: But that was all a byproduct of a coordinated set
Speaker 4: of federal policies. Fast forward forty years, fifty years later,
Speaker 4: and you know, semiconductor manufacturing is mostly being done, particularly
Speaker 4: at the high end, in a strategically vulnerable country across
Speaker 4: the Straits of China from China in Taiwan, and that
Speaker 4: has created a sense now going back in the ten
Speaker 4: years in the defense establishment, that we have a problem,
Speaker 4: and not just in semi conductors, but in a number
Speaker 4: of advanced industries where we're really reliant as a country
Speaker 4: on the importation of critical technologies and critical intermediate inputs. Again,
Speaker 4: you know, if you piece together some of the things
Speaker 4: that Bessint has said and some of the things that
Speaker 4: Moran has said, the goal of the tariff play, which
Speaker 4: is really just a tactic, is to bring manufacturing back
Speaker 4: to the United States to hollow in or build out
Speaker 4: the communities that were hollowed out by the wave of
Speaker 4: globalization that occurred after China's admission to the WTO in
Speaker 4: the early two thousands. One of the critical elements or
Speaker 4: transmission mechanisms that they're trying to affect is the exchange
Speaker 4: rate of the dollar. A high dollar means that our
Speaker 4: exports are more expensive and our imports are less expensive.
Speaker 4: So we have been the beneficiary with a strong dollar
Speaker 4: of very cheap imports, you know, moderating the inflation that
Speaker 4: might otherwise occur from domestic manufacturing. But that said, we've
Speaker 4: lost manufacturing. We used forty years ago we represented twenty
Speaker 4: five percent of the manufacturing industry. Now we're a mere
Speaker 4: fifteen percent of global manufacturing. China was nowhere to be seen.
Speaker 4: Now they're thirty five percent of global manufacturing. The goal
Speaker 4: of this Mari Lago accord is to really weaken the
Speaker 4: dollar without upsetting the financial flows that finance our debt.
Speaker 3: And crucially, the manufacturing buildout is supposed to be done
Speaker 3: by private capital. To Joe's point earlier, it's not. You know,
Speaker 3: we've had efforts from the Biden administration, the Chips Act
Speaker 3: to try to boost some of those industries. But the
Speaker 3: emphasis under Trump is really we want to create a
Speaker 3: beneficial market environment so that private capital moves in.
Speaker 4: Yes, there's obviously a kind of you know, traditionally Republican
Speaker 4: bias in favor of private capital and scaling back the
Speaker 4: use of public investment to promote industrial development. But you know,
Speaker 4: raising a tariff wall, a high tariffall is a bet
Speaker 4: that private capital will invest behind it. Biden administration, you know,
Speaker 4: started something that I actually worked on as a graduate
Speaker 4: student back in the seventies called industrial policy. That is
Speaker 4: to use not only tariff barriers, but investment policy, tax policy,
Speaker 4: procurement policy, and R and D policy to promote domestic industry. So,
Speaker 4: you know, Trump has inherited the Chips Act and it
Speaker 4: is making progress. It has spread terrible, Yeah, I know,
Speaker 4: he said it's terrible. But the reality is that there's
Speaker 4: all sorts of activity now both in the under the
Speaker 4: Chips Act subsidies and through the Inflation Reduction Act, which
Speaker 4: was another one of the Biden administration's policies to promote
Speaker 4: investment in the United States. The reality is that those
Speaker 4: investments have been made and are continuing to be made
Speaker 4: around the fifty States, most particularly in the Red States,
Speaker 4: and so there will be political pushback on the Trump
Speaker 4: administration to just zero those out going forward. So going back, though,
Speaker 4: you know, if we really want to restore American manufacturing dominance,
Speaker 4: particularly in critical industries critical to our defense establishment, we're
Speaker 4: going to have to use a mix not only of
Speaker 4: high tariff barriers, but of R and D subsidies, of
Speaker 4: investment subsidies, and use procurement as a way to create
Speaker 4: demand pull for these new industries.
Speaker 2: You use the word sanewashing, which is a good word,
Speaker 2: because there are there's this sort of intellectual as you said,
Speaker 2: architecture around Trump. It's not clear that Trump himself sees
Speaker 2: it this way that this is that this works, that
Speaker 2: you can sort of like reaccelerate US manufacturing simply via
Speaker 2: some sort of weakening of the dollar in a coordinated
Speaker 2: way or tariffs. What is the gap between what you
Speaker 2: see is actually going on and the sort of like
Speaker 2: the white papers that people put out.
Speaker 4: Of Okay, so so, and this is all coming out
Speaker 4: of Moran's paper. As Tracy indicated at the beginning, I mean,
Speaker 4: he's put together the most kind of comprehensive strategy, and
Speaker 4: he acknowledges this very narrow chord or within which this
Speaker 4: might work, and in some sense the present and it
Speaker 4: has already gotten out ahead with his tariff tactics and
Speaker 4: also his threatening to withdraw the security umbrella from NATO,
Speaker 4: because those are the two critical sticks that Moran advocated
Speaker 4: we use to induce foreign central banks and foreign investors
Speaker 4: to continue to buy treasuries at favorable rates, so it
Speaker 4: is to continue to finance what is really a growing
Speaker 4: and potential as Dalio said in your podcast, debt crisis.
Speaker 4: And then just let me say maybe to frame that problem. Today,
Speaker 4: federal debt to GDP is one to one. Federal debt
Speaker 4: is equal to GDP. We're running deficits at seven percent
Speaker 4: of GDP, and the economy has kind of grown at
Speaker 4: one too little north of two percent. So the debt
Speaker 4: is growing faster as a result of the imbalance in
Speaker 4: the federal budget, where deficits are growing at the rate
Speaker 4: of seven percent of GDP, which means the debt's growing
Speaker 4: at the rate of seven percent of GDP. Where our
Speaker 4: debt is growing now faster than GDP and is becoming
Speaker 4: an increasing overhang to the extent that when you look
Speaker 4: at the federal budget, interest expense has become the second
Speaker 4: largest category of federal spending.
Speaker 3: Issuing bonds to pay off bonds.
Speaker 4: That's right, So we're now we're now issuing bonds to
Speaker 4: pay the interest on our bonds. This is a classic
Speaker 4: recipe for disaster. We're not even treading water. Was now
Speaker 4: slowly sinking behind a huge under a huge pile of debt.
Speaker 4: So we have to get that fiscal imbalance corrected. And
Speaker 4: as you were saying at the beginning of the podcast, Joe,
Speaker 4: you know, now some very tough allocation decisions need to
Speaker 4: be made with regard to federal spending because someone joked
Speaker 4: that the federal when you look at the federal government,
Speaker 4: it's really a retirement program attached to an army, right,
Speaker 4: I mean the largest ever. Yeah, it's exactly. You have
Speaker 4: you have, you know, income security in the form of
Speaker 4: Social Security for retirement, and you have medical security in
Speaker 4: the form of Medicare for retirement. But when you add
Speaker 4: it all up, the parts of the budget that you know,
Speaker 4: Elon musk Is and his merry band of pranksters are
Speaker 4: off trying to slash is a relatively small part of
Speaker 4: federal spending, but it is the stuff that actually you know,
Speaker 4: supports education, transportation, housing, infrastructure, right.
Speaker 3: The wider economy, some sort of stuff.
Speaker 4: That you know, is building human capital, building physical public capital,
Speaker 4: building housing structure. That part of the budget is a
Speaker 4: mere seven hundred billion out of a total spending of
Speaker 4: six point seventy five trillion. The rest of it is
Speaker 4: interest on the debt, retirement, security, defense, and healthcare support.
Speaker 4: And so we're really we're really in a pickle. We're
Speaker 4: going to see in the fall or maybe sooner when
Speaker 4: the reconciliation bills finally make their way to a vote
Speaker 4: on the floor of the House in the Senate, we're
Speaker 4: going to see whether or not this Congress really has
Speaker 4: the courage to deal with the allocation issues that you mentioned.
Speaker 4: Because in the House that in the framework for the
Speaker 4: House Reconciliation Bill, they call for eight hundred and eighty billion.
Speaker 4: That's over ten years, so it's really not a lot.
Speaker 4: It's really like about one hundred billion of spending cuts
Speaker 4: annually in medicaid, transportation, housing, and education. You know, out
Speaker 4: of that Medicaid is about six hundred billion a year,
Speaker 4: and the housing, transportation, education, that part of the budget
Speaker 4: is about seven hundred billion, so there's a they're calling
Speaker 4: for a reduction of one hundred billion a year against
Speaker 4: that one point three billion of medicaid and social the
Speaker 4: other social spending. So it's not it's not a big ticket,
Speaker 4: and it's not going to make a massive change in
Speaker 4: the deficit, particularly if they add incremental tax cuts on tips,
Speaker 4: on over time, on social security as they've talked about.
Speaker 4: You know, they're not really attacking the deficit. So we're
Speaker 4: going to continue to need to sell a lot of debt.
Speaker 3: So you've laid out the pickle problem very well, perfectly
Speaker 3: laid out the pickle problem perfectly.
Speaker 4: Say that.
Speaker 3: The idea here embedded in the mar Lago Accord is
Speaker 3: that the US could bring down its det costs by
Speaker 3: getting foreign investors to swap some of their current treasuries
Speaker 3: into century bonds that would be less expensive for the
Speaker 3: US to actually pay back.
Speaker 4: That's right, And so how do we induce them to
Speaker 4: engage in that exchange? So the two primary tactics that
Speaker 4: Moran lays out in his paper are sort of, you know,
Speaker 4: the way you do exchange offers in the private markets
Speaker 4: that eye traffic in the way you do in exchange
Speaker 4: offers with carrots and sticks. You offer a sweetener and
Speaker 4: you threaten, you know, doom and gloom. So the two
Speaker 4: primary tactics here are that you foreign country are going
Speaker 4: to face, on the one hand, a high tarerfall unless
Speaker 4: you play ball, and on the other hand, the withdrawal
Speaker 4: of our security umbrella. So if you want the protect
Speaker 4: action of the largest and most powerful military in the
Speaker 4: world to protect your borders against a Russian invasion, you're
Speaker 4: going to have to swap your debt that you currently hold,
Speaker 4: which is generally short term bills, into what they're calling
Speaker 4: century bonds, a you know, one hundred year bond at
Speaker 4: a low interest rate, which takes the refinancing risk of
Speaker 4: an indebted country away from it because we don't have
Speaker 4: to touch that debt for underdal, turning out duration, turning
Speaker 4: out duration on the one hand, and reducing the interest
Speaker 4: burden of servicing that debt over time. So there are
Speaker 4: a couple of problems with this. One problem is that
Speaker 4: when you look at who holds US government debt, not
Speaker 4: more than fifteen percent of it today is held offshore
Speaker 4: and mutting down a lot. Yeah, it's come down a
Speaker 4: lot and much of that fifteen percent is not in
Speaker 4: the hands of you know, government instrumentalities, but rather than
Speaker 4: foreign private investors. So inducing that crowd to come in
Speaker 4: to this exchange offer, even if you could succeed, you're
Speaker 4: touching a very small part of the debt. So where's
Speaker 4: the rest of it? Where's the other eighty five percent
Speaker 4: of our thirty six trillion dollars of outstanding debt? It's
Speaker 4: basically owned by us. Some of it's owned and government
Speaker 4: accounts and the Social Security and Medicare trust funds, but
Speaker 4: some of it is owned by banks and insurance companies.
Speaker 4: Some of it's owned by endowments and wealthy individuals. Some
Speaker 4: of it's in the bond in the mutual fund market,
Speaker 4: you know, underwriting our money market funds. So the reality
Speaker 4: is we're to get this done. We're really doing it
Speaker 4: with ourselves. What we really need to do is turn
Speaker 4: out our debt. And the problem we're facing right now
Speaker 4: is that, you know, the debt, the cost of debt,
Speaker 4: the interest cost of our debt is relatively high. You know,
Speaker 4: the ten years at four point three, the thirty year
Speaker 4: put its outis what you'd pay for a century bond.
Speaker 4: Thirty year is even higher. And the current average interest
Speaker 4: rate on our outstanding thirty six trillion dollars of debt
Speaker 4: is three point three percent, So to term it out
Speaker 4: in this market would take that one point one trillion
Speaker 4: dollars of annual interest expence up. You know, if we
Speaker 4: had to term it out at four point three or
Speaker 4: four point six, we'd be talking about increasing the interest
Speaker 4: expense we're facing. So there, you know. So this intellectual
Speaker 4: architecture around the so called Mara Lago accord has many
Speaker 4: flaws now, at least among which is we're in targeting
Speaker 4: foreign holders of our debt, We're targeting a relatively small
Speaker 4: part of it. If the game plan here of that
Speaker 4: Mara lagocord is to weaken the dollar so is to
Speaker 4: improve the competitiveness of US domestic manufacturing. There is another
Speaker 4: approach and that you've also heard rumor of from the
Speaker 4: Trump administration, and that is the creation of a sovereign
Speaker 4: wealth fund to take assets that the US government currently owns,
Speaker 4: dump them in a central fund managed by the Treasury Department,
Speaker 4: and allowing the Treasury Department then to intervene directly into
Speaker 4: the currency of the foreign exchange markets to try and
Speaker 4: push the dollar down. I see.
Speaker 2: It's interesting because so you know, historically, right, like sovereign
Speaker 2: wealth funds in resource rich countries are often about stable
Speaker 2: keeping the currency strong, etcetera, especially for countercyclical elements, and
Speaker 2: so the idea that we would use it to intervene
Speaker 2: and in foreign exchange is interesting twists. You know, you
Speaker 2: said something about restructuring, and you said there's carrots and
Speaker 2: sticks in a typical restructuring, and imagine the sticks are, Look,
Speaker 2: you don't want to go along with this restructuring plan,
Speaker 2: then you're going to end up with like some sort
Speaker 2: of asset and a bankrupt company and it's going to
Speaker 2: be pretty bad for you and you're gonna get less
Speaker 2: money and it's going to take a long time. And
Speaker 2: so come on, go with the deal. It seems to
Speaker 2: be part of the problem. Like just conceptually with the
Speaker 2: carrot and sticks approach is like, you can't really threaten
Speaker 2: a stick if you're the US government without immolating yourself.
Speaker 4: Yeah, I mean the latter you really want to see
Speaker 4: rates blow out? Have the federal government of threatened to
Speaker 4: not pay its debts, that would be uh, that would
Speaker 4: be an event from which the financial markets might not recover.
Speaker 3: Does the carrot hold any water here either, because the
Speaker 3: carrot's supposed to be like, Okay, maybe you don't get tariffs,
Speaker 3: maybe you get US security. But that maybe is really
Speaker 3: important because what we've seen so far, it's only been
Speaker 3: two months, but we've seen Trump go back and forth,
Speaker 3: back and forth, back and forth. I think a lot
Speaker 3: of trust has been lost.
Speaker 4: Yeah. Well, and you know, if you were going to
Speaker 4: use tariffs or the threat of tariffs and the threat
Speaker 4: of the loss of the security umbrella as the inducement
Speaker 4: to the exchange, he's already gotten out ahead of himself, right.
Speaker 4: I mean, he's on again, off again with the tariffs.
Speaker 4: So the threat isn't isn't imminent, it's extant, and as
Speaker 4: you say, the trust that he might change his mind
Speaker 4: the day after the exchange is consummated is real. And similarly,
Speaker 4: with regard to NATO, you know, it's not obvious if
Speaker 4: I were a NATO country that I can rely on
Speaker 4: the United States any longer. You saw what happened in Germany.
Speaker 4: You know, they've gotten rid of their debt limited and
Speaker 4: are now going to massively increase defense spending in order
Speaker 4: to you know, potentially defend themselves without the benefit of
Speaker 4: the United States security umbrella. Poland's already done this their
Speaker 4: way there, increased their defense spending, and basically the countries
Speaker 4: on the border of the of Russia, the Baltics, Poland
Speaker 4: have all increased their defense spending recognizing that they may
Speaker 4: not be able to rely on US any longer. So,
Speaker 4: as you say, Tracy, he may have gotten out ahead
Speaker 4: of this to the point where this really can't be
Speaker 4: used as an inducement for an exchange of short term
Speaker 4: to long term debt.
Speaker 3: Jo, you know what I was just thinking, say more,
Speaker 3: what if China exchanged its bills and treasuries for century
Speaker 3: bonds in exchange for NATO protection.
Speaker 2: First of all, you know, there's obviously that history of
Speaker 2: the fact that at one point in time China perceived
Speaker 2: its main adversaries the Soviet Union and did you know,
Speaker 2: try to have that protection with the United States. So
Speaker 2: there is not zero history for that. Maybe a slightly
Speaker 2: realistic version of that is swap out your debt and
Speaker 2: will let you build byd plants. Then you get that
Speaker 2: technology transfer and you sort of do the whole classic
Speaker 2: thing where the high tech country brings in their manufacturing
Speaker 2: and teaches you how to build giggle plants and stuff.
Speaker 2: I would be into that. Do you see more though,
Speaker 2: about an event from which the markets may never recover.
Speaker 2: That's not a term you hear. They always recover. But
Speaker 2: you know, like when you get into existential questions about
Speaker 2: the sort of safety and risk freeness of US debt,
Speaker 2: what do we talk about here?
Speaker 4: Yeah, I mean the when you think once we went
Speaker 4: off the gold standard, once you know, our currency and
Speaker 4: our debt was not convertible into gold into a hard commodity.
Speaker 4: The reliability of the US government debt is really a
Speaker 4: bet on the US government economy that the economy is
Speaker 4: going to be so strong and generate the capacity to
Speaker 4: pay taxes to support the repayment of the debt. And
Speaker 4: so these two things, now it's a confidence game and
Speaker 4: they're intricately linked. You know, the the dynamism of the
Speaker 4: US economy is ultimately what supports the credit worthiness of
Speaker 4: the debt. But you know, as your debt and this
Speaker 4: is what Dalia was talking about, you know, as your
Speaker 4: debt levels increase to the point where your ability to
Speaker 4: service the debt is called into question, or your ability
Speaker 4: to service the debt is squeezing out the role that
Speaker 4: the government plays in buttressing, undergirding the dynamism of the economy.
Speaker 4: You get to a point where, you know, investors start
Speaker 4: to worry about the ability of the debt, the ability
Speaker 4: of the government to pay the debt, and so the
Speaker 4: debt overhang itself becomes a retardant to economic growth. So
Speaker 4: if if the dynamos of the economy is what undergirds
Speaker 4: people's confidence in our ability to repay our debts when due,
Speaker 4: we're in a world of hurt. I mean, I went
Speaker 4: to the speech of Bessing gave at the Economic Club
Speaker 4: of New York, and he talked a lot about, you know,
Speaker 4: unleashing the private sector, reducing regulation, freeing the banks to
Speaker 4: once again lend to the private sector, and withdrawing the
Speaker 4: Biden stimulus to you know, the various subsidies and procurement
Speaker 4: policies that were his attempt at restoring to withdraw the
Speaker 4: heavy hand of government from overriding the economy the private sector.
Speaker 4: You know, that's all fine and well, but the reality
Speaker 4: is that you know, government's play an important part in
Speaker 4: promoting the growth of their domestic economies as from as
Speaker 4: simple as you know, connecting people and markets through roads
Speaker 4: and airports and railroads, to ensuring that there is a
Speaker 4: healthy and educated workforce for private employers to be able
Speaker 4: to hire. You know, these are really essential functions of government,
Speaker 4: not least and including the develop their investment and research
Speaker 4: and development and novel technologies that the private sector won't
Speaker 4: invest in because the commercial potential of them isn't obvious. Right,
Speaker 4: So the basic research that we do through NIH and
Speaker 4: the National Academy of Science.
Speaker 3: We've done an episode on this.
Speaker 4: Yeah, this is a really essential function. So there's a balance, right,
Speaker 4: I mean, and the success of the United States is
Speaker 4: a demonstration of the balance between private and public investment.
Speaker 4: The risk that we are in now given the massive
Speaker 4: amount of debt we've accumulated, and more importantly, the continuous
Speaker 4: reliance on deficits, on debt to fund our spending is
Speaker 4: putting us in a place where we really do need
Speaker 4: a fiscal consolidation plan. We have to balance revenues and spending.
Speaker 4: It doesn't have to be one to one, but the
Speaker 4: deficit can't be growing faster than the economy or we're
Speaker 4: just you know, piling up debt that will become increasingly
Speaker 4: more difficult to sustain.
Speaker 3: I want to go back to the sovereign wealth fund idea,
Speaker 3: because when I hear that, it sounds like basically a
Speaker 3: shift from the US issuing unsecured treasuries to secured debt.
Speaker 3: And when I hear that, I think back to a
Speaker 3: term that I used to encounter a lot when I
Speaker 3: was covering European covered bonds, encumbrance, like there's a limited
Speaker 3: amount of collateral that you can put up into a
Speaker 3: bond and at some point you start to run out
Speaker 3: of it. How much collateral? I get that the US
Speaker 3: is the biggest economy in the world, and probably if
Speaker 3: anyone's going to collateralize their debt, maybe it's the US.
Speaker 3: But what exactly would they use to secure these things?
Speaker 4: Okay, so you know there's there's loan to value, and
Speaker 4: then there's cash flow coverage. Right, So the ballot tuet
Speaker 4: of the United States has a variety of hidden assets
Speaker 4: that are not really marked to market. You've heard a
Speaker 4: lot of talk recently about our gold stocks, right that
Speaker 4: are I think at forty two dollars an ounce when
Speaker 4: the price of gold is you know, north of three thousand.
Speaker 4: If you we marked the tons of gold at Fort
Speaker 4: Knox that we own to market, it's probably eight nine
Speaker 4: hundred billion dollars. That's against a thirty six trillion dollar
Speaker 4: debt balance. That's a drop in the bucket. But it's
Speaker 4: not nothing. It's not nothing. We own probably a third
Speaker 4: of the land west of the Mississippi. You know, the
Speaker 4: Western States complain about this all the time with the
Speaker 4: federal government and the Bureau of Land Management is an absent.
Speaker 3: Landlord national park backed bond.
Speaker 4: Yeah, god forbid that Teddy Rosselts legacy, great legacy would
Speaker 4: be somehow undone. But put aside the national parks. Yeah,
Speaker 4: I mean Utavada, Wyoming. Right, and then there's the vast
Speaker 4: expanse of Alaska, most of which is owned by the
Speaker 4: federal government. So there are those kinds of resources. Now
Speaker 4: they don't cash flow today, but there are mineral rights
Speaker 4: on these lands that could be like you know, the
Speaker 4: many other countries in the world do with their mineral
Speaker 4: rights that they you know, give private developers the right
Speaker 4: to extract and they create cash flows for the government
Speaker 4: on whose lands they're doing the extraction. We have, you know,
Speaker 4: a variety of enterprises, commercial enterprises that we own equity
Speaker 4: in or own outright. You know, the Tennessee Valley Authority
Speaker 4: is a huge electrical generation and distribution system in Appalachia.
Speaker 4: Fanny and Freddy taken over during the financial crisis where
Speaker 4: the government owns not withstanding what Bill l Ackman is asserting,
Speaker 4: where the government fundamentally owns ninety to ninety five percent
Speaker 4: of the equity value in them. You know, there are
Speaker 4: those sorts of things that the government could try to
Speaker 4: monetize and capitalize a sovereign wealth fund with. Now having
Speaker 4: done that, let's say there's a two trillion dollars of
Speaker 4: land values, mineral rights, ownership, and commercial enterprises that could
Speaker 4: be that could capitalize a sovereign wealth fund, and some
Speaker 4: of those things cashflow, or you could design them to
Speaker 4: cash flow, so the sovereign wealth fund would actually have income.
Speaker 4: And some of those assets could actually be monetized, like
Speaker 4: the equity in Fanny and Ready and the equity and
Speaker 4: the TVA, you could actually privatize them, sell them into
Speaker 4: the public markets and create actual cash and the sovereign
Speaker 4: wealth fund as opposed to just asset value. So there
Speaker 4: you would have, you know, two trillion dollar fund that
Speaker 4: could intervene in the foreign exchange markets to try to
Speaker 4: intentionally weaken the dollar without having to engage in this
Speaker 4: exchange offer and turn out our debt and try to
Speaker 4: you know, browbeat with security umbrellas and tariff walls foreign
Speaker 4: countries to help us in that endeavor.
Speaker 3: It's still a big bet on economic growth, though, right,
Speaker 3: because the US has to grow enough to pay off
Speaker 3: what it owes, and if it doesn't, then at some
Speaker 3: point you have to hand back the collateral. And I
Speaker 3: think people would be sad slash annoyed if they were
Speaker 3: handing over all the gold or national parks, probably not
Speaker 3: national parks, but land and things like that.
Speaker 4: Yeah. No, I you know, first of all, we never
Speaker 4: pay off the debt, right, We just outgrow it. That's
Speaker 4: the key here. The stock of debt is just refinanced
Speaker 4: and rolled over continuously. You know, it'd be great to
Speaker 4: pay it down one day, but we actually don't have
Speaker 4: to do it. We just have to outgrow it. And
Speaker 4: there are a couple of different ways that countries have
Speaker 4: done this, some of which are more dangerous than others. Right,
Speaker 4: you can inflate your way out of the debt. You
Speaker 4: just you know, devalue your currency over time, and the
Speaker 4: debt stock shrinks relative to the then current value of
Speaker 4: your productive enterprises because you've devalued your currency, and so
Speaker 4: the debt stock, which is fixed in amount, shrinks as
Speaker 4: a relative to the size of the economy, now denominated
Speaker 4: in much weaker currencies. You can try this kind of
Speaker 4: marl lago, you know, exchange offer, and then, of course
Speaker 4: the worst of all outcomes is an outright default where
Speaker 4: you restructure the debt.
Speaker 2: You know, it seems to me, and I said in
Speaker 2: the beginning, I sort of conceptualize these things in terms
Speaker 2: of resource allocation and who gets what, and it seems
Speaker 2: to me, you know, yeah, you could revalue the gold
Speaker 2: in Fort Knox, And probably people are sitting here thinking like,
Speaker 2: why wouldn't you do that if it's you know, it's
Speaker 2: three thousand dollars and we have it at forty or whatever.
Speaker 2: Of course, no, just do it. But that doesn't produce
Speaker 2: more doctors, it doesn't produce more beds for hospitals, it
Speaker 2: doesn't produce more food for senior citizens. You know, like
Speaker 2: when we're talking about these resource constraints, which is how
Speaker 2: I sort of think about it, it's an accounting trick, right,
Speaker 2: because it doesn't ultimately it doesn't create any new factories,
Speaker 2: It does not do any of that. Anyway, Let's talk
Speaker 2: a little bit more. You know a lot about Fanny
Speaker 2: and Freddy, and you've made a reference there to Bill
Speaker 2: Ackman and the thing that I'm trying. You know, there's
Speaker 2: obviously big profits being generated by these government owned enterprises,
Speaker 2: and private investors would like access to those profits so
Speaker 2: that they don't just get to the treasury. But then
Speaker 2: to me, there's the question of, like, can you do
Speaker 2: that in a way to avoid the problem, which is
Speaker 2: that investors get access to those cash flows or access
Speaker 2: to those profits without the implicit guarantee of the government.
Speaker 2: Because you know, obvious like you'd love to keep both, right,
Speaker 2: you'd love to privatize the profits and keep that backstop.
Speaker 2: Is there any conceivable way to privatize them and actually
Speaker 2: not have that backstop in place anymore?
Speaker 3: I think the expectation is they would implicitly keep the backstop,
Speaker 3: like that's what investors fare well. This begs the question
Speaker 3: why bother doing it at all?
Speaker 1: Right?
Speaker 2: Is there a way to do it that's not just
Speaker 2: a giveaway?
Speaker 4: Yes there is? Okay, So there's a lot of history here. Yeah,
Speaker 4: So before the financial crisis. These government sponsored, government chartered
Speaker 4: entities had a special charter that enabled them to borrow
Speaker 4: from the Treasury Department, and that was the source of
Speaker 4: their being viewed session ultimately backed by the Treasury Department,
Speaker 4: even though what they could get from the Treasury Department
Speaker 4: was a mere fraction of their balance sheet size. But
Speaker 4: the fact that they had that entitlement gave investors the
Speaker 4: confidence that in a pinch, the government would step in
Speaker 4: and take them over. And we had a pinch in
Speaker 4: two thousand and eight, and the government did in fact
Speaker 4: step in and put them into a conservatorship. The conservatorship
Speaker 4: was structured to make that implicit backstop explicit, and the
Speaker 4: Treasure Department entered into a preferred stock purchase agreement with
Speaker 4: each of the entities under conservatorship pursue it, to which
Speaker 4: the government actually purchased one hundred and ninety two billion
Speaker 4: dollars of preferred stock in the two entities, infusing one
Speaker 4: hundred and ninety two billion dollars worth of cash of
Speaker 4: Treasure Department cash authorized by Congress under the Housing and
Speaker 4: Economic Revery Act of two thousand and eight into the enterprises.
Speaker 3: In exchange for equity as well, right, they.
Speaker 4: Got preferred stock back, right, a senior preferred stock. That
Speaker 4: senior preferred stock carried a fixed dividend which was converted
Speaker 4: into a variable dividend in twenty twelve in order to
Speaker 4: keep them from having just to borrow more prefer to
Speaker 4: pay off the dividend. And so they were only then
Speaker 4: required to pay a dividend to the extent that they
Speaker 4: were profitable out of their net profits. And were they profitable.
Speaker 4: They have paid the Treasury Department back now three hundred
Speaker 4: and two billion dollars on that characterized as dividends on
Speaker 4: that one hundred and ninety two billion dollar par investment.
Speaker 3: Yet not only are they profitable, they've also, as I
Speaker 3: understand it, kind of restructured their business and increased their
Speaker 3: capital basically like gotten ready for a sale while generating
Speaker 3: a profit, which is pretty impressive.
Speaker 4: Yeah, So that the dividend stream to Treasury, which generated
Speaker 4: three hundred and two billion dollars, was turned off in
Speaker 4: twenty eighteen to allow them to build capital in anticipation
Speaker 4: in Trump administration one that they would be privatized, and
Speaker 4: so they allowed them to build capital. And so the
Speaker 4: Treasure Department hasn't received any dividends since twenty eighteen, so
Speaker 4: seven years ago. And during that seven year period, Fanny
Speaker 4: and Freddie have built between the two of them almost
Speaker 4: two hundred billion dollars of capital. That's still short of
Speaker 4: the capital rule, the capital regulation that was created for
Speaker 4: them during the conservatorship, but they're pretty damn close, probably
Speaker 4: two years away from being meeting their minimum capital. There's
Speaker 4: so called cet I capital levels. You know, there are
Speaker 4: many of us who think that the capital rule that
Speaker 4: was created for them grossly oversolved for their how much
Speaker 4: capital they should carry.
Speaker 3: Right after the financial crisis, everyone's nervous.
Speaker 4: Exactly, and so you know, the as with the big banks,
Speaker 4: the so called cithies, Fanny and Freddy have been subject
Speaker 4: to so called stress tests to see how they would
Speaker 4: fare in a severely adverse scenario where you know, the
Speaker 4: financial markets declined by twenty percent, the interest rates go
Speaker 4: up by ten percent, unemployment skyrocks, housing prices collapse, blah
Speaker 4: blah blah. They've been subjected to stress tests over the
Speaker 4: last couple of years, and those stress tests show that
Speaker 4: basically their losses would be less than like ten billion dollars,
Speaker 4: and so to have them carrying around in Fanny's case,
Speaker 4: one hundred and fifty six billion of capital and in
Speaker 4: Freddie's case, one hundred and twenty billion of capital against
Speaker 4: what the stress test show would be negligible losses. Seems
Speaker 4: like pretty a waste of that capital, just grossly over
Speaker 4: solving them. But I'll get off my high hours on that.
Speaker 4: On that leave them with those capital levels one hundred
Speaker 4: and fifty six and one hundred and twenty billion, respectively,
Speaker 4: they will be They would need another four years of
Speaker 4: retained earnings to reach that. So if you were really,
Speaker 4: if you weren't prepared to let them out of conservatorship
Speaker 4: until they were fully capitalized, you'd wait four years and
Speaker 4: then they'd be fully capitalized under that rule. And then
Speaker 4: the question goes to the backstop. You know, why privatize them?
Speaker 4: And can they be privatized without an explicit government guarantee. Well,
Speaker 4: there's no reason in law or fact that would prohibit
Speaker 4: them from carrying that preferred stock purchase agreement, that equity
Speaker 4: backstop out of conservatorship and having the Treasury stand behind
Speaker 4: this two hundred and seventy billion dollars worth of capital
Speaker 4: with a commitment to buy two hundred and fifty billion
Speaker 4: of capital should the need arise. So you know, if
Speaker 4: in my view, Fanny carrying one hundred and sixty and
Speaker 4: Freddy carry one hundred and twenty billion is already over capitalized,
Speaker 4: well we're going to almost double that with the treasury backstop,
Speaker 4: and Treasury should be paid for the privilege of standing
Speaker 4: behind them a commitment fee, and could the earnings would
Speaker 4: support a commitment fee, but that would give comfort to
Speaker 4: the markets that you know, there's enough capital behind them
Speaker 4: to ensure the prompt payment of principle and interest on
Speaker 4: the underlying mortgages, that they guarantee. The benefit to the
Speaker 4: government of doing this of instead of leaving them in
Speaker 4: conservatorship in perpetuity, is that the government owns ninety odd
Speaker 4: percent of the equity. They own the senior preferred stock.
Speaker 4: They have a warrant to purchase eighty percent of the
Speaker 4: stock for a penny you do you know, a classic
Speaker 4: recapitalization turn the preferred stock into common, diluting the exists
Speaker 4: in common and the Treasury Department's warrant, and Fanny, the
Speaker 4: Treasury Department will end up owning ninety to ninety four
Speaker 4: percent of the total common stock of cleanly capitalized companies.
Speaker 4: What's that worth? The CBO did a recent analysis and said, well,
Speaker 4: this is the Congressional Budget Office did a recent analysis,
Speaker 4: and it's filled with lots of assumptions, and you could
Speaker 4: quibble with some of them. But it's a dividend discount model,
Speaker 4: which isn't you know, unheard of in the valuation of
Speaker 4: financial institutions. And you know, they suggested the equity, the
Speaker 4: total equity of which I think the government ends up
Speaker 4: with at least ninety percent when you recapitalize, and the
Speaker 4: total equities were somewhere between three hundred and five hundred
Speaker 4: billion dollars.
Speaker 3: That's a decent number.
Speaker 4: That's a decent number to put in your softign wealth
Speaker 4: fund or to pay down some of the deficit.
Speaker 3: The one question I have is, Okay, if the gsees
Speaker 3: are privatized, the government gets a payout of an unknown amount,
Speaker 3: but it could be pretty decent. As we said, is
Speaker 3: there anything that Fanny and Freddy actually start doing differently
Speaker 3: once they're privatized, so they get an influx of private capital,
Speaker 3: what do they do with it?
Speaker 4: Okay, So this is a critical question of whether they're
Speaker 4: going to be allowed to go back and do the
Speaker 4: kinds of crazy things they did prior to the financial
Speaker 4: crisis that got them into hot water. One of the
Speaker 4: great innovations, along with Dodd Frank, coming out of the
Speaker 4: financial crisis, was a new statute governing both the federal
Speaker 4: home loan banks and Fanny and Freddy. It's this Housing
Speaker 4: and Economic Recovery Act of two thousand and eight, which
Speaker 4: created a new, stronger regulator called the Federal Housing Finance Agency.
Speaker 4: This is the agency to which Bill Pulti has just
Speaker 4: been confirmed as the director. But that agency has significant
Speaker 4: supervisory and regulatory powers to constrain the business model that
Speaker 4: Fanny and Freddy can pursue. So, I mean, just to
Speaker 4: do it just a touch little more history. If you
Speaker 4: look back to two thousand and three through to two
Speaker 4: thousand and eight, you know what really got Fanny and
Speaker 4: Freddy into trouble is they were running hedge funds. They
Speaker 4: were a government sponsored hedge fund. Beyond the basic business
Speaker 4: of securitizing so called conforming mortgages, you know, eighty LTV
Speaker 4: or less safe mortgages, besides packaging them and securitizing them
Speaker 4: and guaranteeing the prompt payment of principle and interest on
Speaker 4: those mortgage backed securities, of which they are now seven
Speaker 4: and a half trillion outstanding, so that they are the
Speaker 4: big factor in that conventional mortgage market. In the run
Speaker 4: up to the crisis, they also expanded their balance sheets.
Speaker 4: They borrowed money at government rates, levered themselves up, and
Speaker 4: bought all day subprime no dock private labeled securities in
Speaker 4: order to goose their earnings, and they did it on
Speaker 4: a highly levered basis. One of the great reforms that
Speaker 4: has occurred during the conservatorships is those portfolios have been
Speaker 4: completely wound down and so today the only balanced sheet
Speaker 4: that they have is to facilitate a securitization business. Therein so,
Speaker 4: they buy mortgages that have been originated by someone else,
Speaker 4: they pull them, and then they securitize them, and with
Speaker 4: the proceeds of the securitization, they repay the debt that
Speaker 4: they incurred to buy the mortgages in the first place.
Speaker 4: And similarly, when mortgages go bad in the MBS and
Speaker 4: the securitizations, in order to fulfill their guarantee of prompt
Speaker 4: payment of principle and interest on those securities, they buy
Speaker 4: the mortgages out of the pools, restructure them, and modify them.
Speaker 3: Which is why agency MBS is treated as a very
Speaker 3: safe and liquid asset for bank capital purposes.
Speaker 4: Exactly because Fanny and Freddie are there to guarantee the
Speaker 4: prompt payment of principle and interest. And now if we
Speaker 4: go back to the privatization, right, what will back that
Speaker 4: guarantee is both the two hundred and eighty billion of
Speaker 4: capital directly on their balance sheets as well as the
Speaker 4: preferred stock purchase agreement with two hundred and fifty billion
Speaker 4: of unused capacity. So behind that guarantee will stand more
Speaker 4: than half a trillion dollars of capital. And so that
Speaker 4: this is you know, when I get into debates with
Speaker 4: people about people who are opposed to the privatizations, about
Speaker 4: whether or not the privatization would create instability in the
Speaker 4: MBS market, because would they suffer a ratings decline and
Speaker 4: therefore attract higher capital for anyone who owned them, and
Speaker 4: therefore higher rates on the mortgage backed securities which translate
Speaker 4: into higher rates on the mortgages themselves. You know, that
Speaker 4: is the big question. Is half a trillion dollars of
Speaker 4: capital standing behind the guarantees enough to keep the credit
Speaker 4: ratings on the MBS stable and in place. I think
Speaker 4: it is. But you know, at the end of the
Speaker 4: day there'll be a conversation with Moody's and S and
Speaker 4: P and Fitch. Then they'll have to decide whether they
Speaker 4: remain near sovereign credit.
Speaker 3: Oh, it's kind of funny that the credit rating agencies
Speaker 3: are like, it's still in control.
Speaker 4: Yeah, exactly.
Speaker 1: Okay.
Speaker 3: So we've talked a lot about creative ways for the
Speaker 3: US government to raise money and pay off its debt.
Speaker 3: There's one we haven't talked about which is one of
Speaker 3: my favorite financial topics of all time, and that is
Speaker 3: the bonds owned by the US issued by other countries,
Speaker 3: really old ones, Oh, like Chinese imperial debt or did
Speaker 3: you know the UK owes the US a lot of
Speaker 3: money from like World War Two loans?
Speaker 4: Oh, stell, I didn't know that.
Speaker 3: I didn't know that now, and as an intellectual curiosity,
Speaker 3: I find it really interesting to think about the question
Speaker 3: of what would happen if Trump decided to go after
Speaker 3: those as a way of raising money. And this actually
Speaker 3: came up in the first Trump administration. The Treasury was
Speaker 3: looking at ways to get a payout on the Chinese bonds,
Speaker 3: and funnily enough, it was doing that at the same
Speaker 3: time that the SEC was prosecuting someone for selling those
Speaker 3: bonds to investors and promising a payout. That's fun. That
Speaker 3: could be fun.
Speaker 4: So these are I don't know anything about this. These
Speaker 4: are bonds is issued by predecessor governments in China. Yeah,
Speaker 4: you know there is some history of I'm aware of
Speaker 4: some Czarist Russia bonds, Yeah, that are out there. Shortly
Speaker 4: after the collapse of the Soviet Union, the French government
Speaker 4: and the British government, representing French and British bond holders,
Speaker 4: got the Russian Federation to acknowledge those bonds and make
Speaker 4: a paud on them because the Russian Federation was desirous
Speaker 4: of having access to the capital markets in Europe, and
Speaker 4: the quid pro quo was to pay off the debts
Speaker 4: of Czarist Russia.
Speaker 2: Well, we're in unshorted territory. This little like intellectual exercise
Speaker 2: at the end of the conversation may one day not
Speaker 2: just be an intellectual curiosity. Jim Millstein, so great to
Speaker 2: have you back. We could just talk to you for hours.
Speaker 3: Thank you so much.
Speaker 2: Yeah, but that was a fantastic conversation.
Speaker 4: I appreciate you coming back on upline into it though.
Speaker 2: That's great, Tracy. I love talking to Jim.
Speaker 3: He's so good. He's great, and he lays everything out
Speaker 3: so clearly, which is very useful when we're talking about
Speaker 3: a hypothetical like this. The one thing, well, there are
Speaker 3: a lot of things that I think are funny or
Speaker 3: ironic in some of this discussion. But one of the
Speaker 3: big ironies I think about is treasuries are kind of
Speaker 3: the US's biggest export. Yeah, and Trump is obsessed with export,
Speaker 3: I know, but he doesn't want to export those particular things,
Speaker 3: even though you could make an argument that debt helps
Speaker 3: to grow the private economy. As Jim was discussing.
Speaker 2: Uh, it is funny. I mean, look, I guess i'd
Speaker 2: rather US export real things that employee.
Speaker 3: People that he could just take the win, right.
Speaker 2: Take the wind. Yeah, we're a big Uh, we're a
Speaker 2: big exporter of these pieces of paper, not even pieces
Speaker 2: of paper anymore.
Speaker 1: No.
Speaker 2: I thought there was like a great conversation. And look
Speaker 2: the way I see it is some of this stuff
Speaker 2: could be playing with fire, like we really don't know
Speaker 2: how some of you know, some of these goals is
Speaker 2: like we're going to like, you know, we're the fact
Speaker 2: that Germany itself is rearming, and that for decades and
Speaker 2: decades and decades, this sort of entire premise of sort
Speaker 2: of Western geopolitics was preventing Germany from rearming.
Speaker 1: That was in.
Speaker 2: Itself this sort of is sort of like this like
Speaker 2: massive pivot in world history feels like for me, and
Speaker 2: you know, who knows decades from now, you know, we don't.
Speaker 2: We might not know how the consequences of the ways
Speaker 2: geopolitics have been reshaped by that decision.
Speaker 3: Well, this is the norm's point, right, Yes, Like norms,
Speaker 3: it turns out, are actually pretty important, and there's a
Speaker 3: risk of what happens once they're gone or they start
Speaker 3: to change.
Speaker 2: Yeah, I would say two points. I mean one is, yes,
Speaker 2: norms themselves I think are pretty important. And then you
Speaker 2: get into things that are sort of beyond norms, questions
Speaker 2: like once you bring in the conversation about and again
Speaker 2: I don't know how serious it, but like restructuring debt
Speaker 2: or et cetera, you're like, go beyond norms and you
Speaker 2: actually like you could trigger trigger formal things.
Speaker 3: No, that's still a norm though, I guess it's like
Speaker 3: historically has not defaulted on its death.
Speaker 2: No, but it's like there are things in pieces of paper,
Speaker 2: right that like when you don't when you like try
Speaker 2: to change.
Speaker 3: There are legalities, yeah, but frankly, legalities are being treated
Speaker 3: as norms now right, I suppose so, yes, I suppose,
Speaker 3: so shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the ad Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2: I'm joll Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman armand dash Ol
Speaker 2: Bennett at Dashbot and Keil Brooks at Kelbrooks. More Oddlots
Speaker 2: content go to Bloomberg dot com slash odd Lots. We
Speaker 2: have all of our episodes in a daily newsletter, and
Speaker 2: you can chat about all of these things twenty four
Speaker 2: to seven in our discord with fellow listeners at discord
Speaker 2: dot gg slash od lots.
Speaker 3: And if you enjoy odd Lots, if you like it
Speaker 3: when we talk about US debt restructuring potential US debt restructuring,
Speaker 3: then please leave us a positive review on your favorite
Speaker 3: podcast platform. And remember If you are a Bloomberg subscriber,
Speaker 3: you can listen to all of our episodes absolutely ad free.
Speaker 3: All you need to do is find the Bloomberg channel
Speaker 3: on Apple Podcasts and follow the instructions there. Thanks for
Speaker 3: listening in