Moody's Talks - Inside Economics - Debt and Debt Limits

Episode Date: September 24, 2021

Mark, Ryan, and Cris welcome back Bernard Yaros, an economist from Moody's Analytics to discuss fiscal policy, the odds of a government shutdown, and the debt limit.Full episode transcript can be found here. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics. And look who it is, Mr. DeReedys. Where you've been, Chris? I've been over in Italy, visiting family. So happy to be back, though. Missed the podcast, missed all of you. Yeah, we definitely missed you. We talked about crypto. Were you on the crypto podcast? Did you miss that? I was. I was. I had a special effort to join that one. That's right. Yeah, well, we were glad to have you. And we'll talk a little bit more about that later. But it's good to have you. And the sabbatical was good. It was. Yeah. That worked out. So how long were you, you were gone for like three weeks?

Oh, fell like three years. Geez. Oh, three weeks. Okay. Yeah. Okay.

Yeah. All right. Yeah. I know Ryan missed you. Yeah. Very much. You have someone that can't answer his statistical riddles. So,

yeah, that's you. Oh, did you keep up? Did you, I thought I did pretty well, actually. You did really well. You were on a hot streak. I was on a hot streak.

You missed. Oh, wow. I missed it, Chris. Yeah. I just miss having someone back me up when going back and forth about interest rates and housing starts. That's true. That's true.

We got a lot of talk about with the tenure today. There is a lot, lots of talk about. And, well, you've heard Chris's voice. He's the deputy chief economist and also just Ryan, Ryan's voice, the director of real-time economics. And Ryan has received a order. from our producer ben ben has told ryan not to mute himself i'm not going to go into the reasons why but apparently that's a dangerous thing in your household right it's very dangerous because my uh children are going to come from home from school any minute

it's got it could get loud it could get that's okay i'm all for it yeah i'm all for it yeah uh i've had my problems with my dogs and who knows uh so and we also have our our colleague bernard yaros bernard good to have you back You were on our podcast, not too long ago, a couple months ago, maybe. Back in May, back in May. So it's a couple months ago. Yeah, long ago. Wow.

I can't even believe it. Yeah. And Bernard is a Renaissance man. He's the guy who can speak, if you can recall, like 10 languages or something. One which is Arabic, right? He like roamed around Yemen for a year or something. I think I have that right, right? Yes, yes.

Yeah. And also he's a, I don't know if he still plays squash, but he's like legendary in the Philadelphia squash courts. Are you still like king of the squash courts here in Philly? I have not. I retired my racket several years ago. Actually, when I started at Moody's, so a month when I started Moody's into like my job here at Moody's, I tore my Achilles.

And for like the first year at the job, I was, you know, limping around with the boot and, you know, crutches and all that. And after that, I never wanted to play squash again. You know, at one point, I was a pretty good squash player. Yeah, we used to play at the same club, uh, Berlin, right? Yeah, Berlin. I love Berlin. Yeah.

I'm like, I got to go back. I haven't played in such a long time. I miss it. I really do. Yeah. It's a great sport. Yeah, really great sport. And Bernard, uh, follows everything related to the federal government.

And, of course, uh, that's kind of its front and center here, uh, in the public discourse around, uh, the budget. debt ceiling. We're going to talk about that. Bernard and I wrote a paper about that. Recently, that's on economic view. And government shutdowns in the reconciliation package, lot going on there. So that's the big topic for today, really. Or I should say policy in general, right, right? Because the Fed had a meeting this week, this past week. We want to talk about that as well. So let's just say that the big topic today is policy, monetary and fiscal policy. So we'll get to all of that in just a few minutes. we had a marathon podcast last week on the global supply chains and that lasted, I think, an hour and a half. So I think that's a little long.

Don't you guys? I don't know. I got mixed reviews on that. So we'll try to keep this one a little shorter than an hour and a half. Although with Bernard on, who the hell knows? You know, he goes on and on and on. But we'll try to rein him in. Okay.

Let's talk about the statistics. And, you know, we play a bit of a game here. Bernard, you're going to play this game with us? Of course. Yeah, of course you are. Yeah, absolutely. Okay. And Ryan, as increasingly per tradition, he's going to lead the way, right?

Because he's the king of these statistics. So, Ryan, what's your statistic of the week? 17. I don't want to give you the units because it will give it away. But 17 is the number. 17. 17. 17. It's a statistic that came out, excuse me, this week.

week. It did. 17 days on market or? Bernard, good job. What? Wow. The number of days a existing home has been on the market before it sold in August was 17 days. Bernard, Ryan gave that to you. No, I did not. Nope.

What the heck's that all about? I mean, he said 17 and he just got like right one right. Because I knew. He said days, we'd all know immediately what. Oh, that's right. And that's a statistic that generally would come from Chris, not from Ryan. I picked that one because I was like, let's ease Chris back into this. Here's something housing related.

Right. He's a little rusty. Yeah. Makes a lot of sense. Makes a lot of sense. But 17 is also the size of debt of households. That's where my mind was had. 17.

That's a good one. $17. That is right. That's right. But that wouldn't have been fair for Ryan. say 17 without the, well, no, you're right. He said, I'm not going to tell you the units. Right. If I said trillion, you would have known that right away. Okay. So, so, what's the significance of the 17 days on market? So even, even though the housing market appears

to have cooled a little bit, demand remains very, very strong. It's, it's more a supply side issue, you know, kind of like last week we talked about all the supply chain issues. Housing supply is very, very lean, particularly for the existing home market. And that's starting to, you know, cut into housing demand because affordability is dropping. But if you have it, if you own a house, you put it on the market, it's going to sell very, very quickly in this, in this current environment. Although I think it has cooled a bit, hasn't it, a little less quickly than sort towards the beginning of the year, right? Because it doesn't feel as frenzy to me right now. Yeah, sales have cooled off. But I think that's a reflection of lower affordability because

house prices are rising quickly, but still existing home sales are above well, well, well, above what we saw pre-pandemic. Yeah, right. Chris, you concur with that diagnosis that Ryan just gave on the housing market? I do, but I am concerned that things are slowing down. On the demand side. On the demand side as well, as prices continue to rise, those affordably issues come into play. And we see signs of buyer fatigue and, you know, people just give it.

up and say I'm going to sit this one out after having lost 10 bids, right? So I think there's some of, I agree that supply is the larger factor, but demand is starting to weaken as well as my my read. Did you notice that the share of sales that are going to first time homebuyers is now falling off pretty quickly? Did you catch that? I did. I did. Yeah, from both the realtors data and from, I believe, FHA, they report, this is a, on the secure, on the loan. that they ensure they can identify whether someone's own the home within the past or has purchased a home within the past three years. If they haven't, they call them first-time homebuyers. And the share of loans that are ensuring that meet that qualification are declining.

So it looks like first-time home buyers are really the biggest casualty of this surge in housing values and the decline in affordability. Yeah, supply at the lower end of the market is especially tight. Yeah, right. Some cooling in the housing market is a good thing, as long as it's orderly. I mean, the housing market over the last year was pretty unhealthy. Well, here's my question. What happens when mortgage rate?

I mean, all this has happened without any move in mortgage rates, right? Mortgage rates are still at record low, below 3% for a 30-year fixed rate loan. What happens when mortgage rates just move up a little bit and conflate with these higher house prices? I mean, I don't know. It makes me a little nervous about the market. The adjustment here is not going to be that easy. I don't think. That's the trigger we've built into our forecast, right?

Yeah, exactly. House price growth really decelerating dramatically once interest rates start to rise even 25, 50 basis points. Yeah, yeah, good. And Chris, you brought up $17 trillion is, we'll tell us what that was. Because you're right, it was $17 trillion. What was that? Is that your statistic or do you have a different statistic? I have a different one.

Okay, good. Yeah, let's know. So what was, tell us about the $17 trillion. Okay, the $17 trillion is household debt, total household debt as reported by the Federal Reserve earlier this week. So 11.3 trillion was mortgages. So that's still the dominant piece of it. It's rising, but it's not rising as quickly as assets overall. So my statistics, household zone. Yeah. Yeah. So my statistic actually was 19.6 percent. Oh, is that the growth in net worth or something? Yeah, that is the growth in net worth. So it's related. And net worth is the value of what people own less what they owe. And you're saying that's their wealth.

That, you know, net worth is wealth. Yeah. Assets less liabilities. And that's growing by almost 20% a year, 23 trillion dollars in just one year. That's incredible. Let me ask you a question. Do you think they include crypto? in there? Did you think they capture crypto in that? That's just data from the Federal Reserve, right?

This is the financial accounts from the Federal Reserve that just came out the Q1, excuse me, the Q2-2020-1 data. I bet they don't pick up the crypto. What do you think? Oh, supposedly, there's an other assets category in there. It should be. Yeah. We should look at that. Is that growing really fast? I'll take a look. Take a look. Yeah, I'm really. I usually ignore it, but yeah. Right. It might be. They might not be picking up, you know, all that. movement on the crypto site because I think wasn't the statistic there's two trillion dollars in

crypto outstanding now something like that yeah so pretty amazing yeah there actually was another 17 in that report which also stood out to me in in in the financial accounts from the financial accounts which was really important which was deposits house was going to say that by the way I was going to say that I knew I knew you would And that just blows my mind as well. $17 trillion in essentially cash sitting in people's bank accounts. Yeah, that goes to the excess saving because people have been sheltering and placing all the government support. What was it before the pandemic?

Do you know? I don't. I know over the last year it grew, well, I guess it is before the pandemic. It grew by about $2 trillion. Two trillion. That's pretty close to our estimate of excess saving. I think we're, excess saving is the saving above which people have, would have done if there was no pandemic.

And so we don't know what that exactly would have been, but that's our estimate. I think we are estimating $2.5 trillion in excess saving. So take $500 billion, invest in crypto and stock market and housing. That leaves you $2 trillion for your deposits. That all adds up. It all works out. It all works out somehow. You see how we do that?

Listener, that's how economists make all the numbers work. Yeah. Okay. So we got to your statistic too then, Chris. Yeah, yeah. We fold that in. So let's move on to Bernard, I think. But can I ask on just to flesh that out, just to big picture-esque, so what is the big picture that you got from the financial accounts data?

It's really the financial accounts from the Fed is the balance sheet of the economy. They look at the balance sheet. Everything else we tend to look at income and everything else, profits, that's kind of the income statement for the economy. I mean, this is the balance sheet assets and liabilities. So what was the big picture, you know, a takeaway from that? Yeah, so households in aggregate are in great shape, right? Perhaps the greatest shape they've ever been in in terms of asset growth of the last year. It's been tremendous, $23 trillion.

And liabilities, although they've grown as well by about a trillion dollars, right? It's still relatively small compared to that asset. So that makes me quite optimistic. And then those deposits, right, those liquid deposits being at $17 trillion, that's a lot of powder that can come right back into the economy at some point certainly provides some support to downside risk. What's missing from this report, though, is the distributional accounts. We'll get those in about two weeks. And I suspect what we'll see there is an awful lot of skewing still, right? The gains that we're talking about here in equities and house prices are really extra.

Counts, meaning looking at assets and liabilities and that worth for along the wealth distribution. Correct. Low wealth households versus high wealth households. Yeah. That's pretty cool data, actually. It's very cool data to look at it. That's very timely as well. Usually it's when we've done those studies, we've had to look retrospectively.

Yeah. You know, the financial accounts also provides a window into kind of the business's balance sheets, the corporate balance sheet. Did you happen to take a look at that as well? Any big picture take away from that? I saw some, I didn't do a deep dive into that, but there was some growth in, in debts there as well, but not excessively so. Yeah, it seems as though the businesses have cooled off.

Yeah, they're not taking out a whole lot of new debt, which again, gave me some encouragement. Yeah, you know, I don't take as much encouragement. You know, what happened, I think, is if you go back into the teeth of the pandemic a little over a year ago, debt surge because corporations took down a lot of their credit lines because they were worried about liquidity that they might run out of cash because of the pandemic.

And now they're just letting those lines, you know, get drawn down. But the level of debt, corporate debt is still very, very high compared to pre-pandemic level. So I'm not sure I'd take too much solace in it. Yeah. At least it's not moving up.

At least it's not moving up. Yeah, good point. Yeah, that's a great point. That's an excellent point. Okay. Oh, God. And Bernard, you're up. What's your statistic?

All right. So my statistic of the week is $2.9 trillion. And the hint I'll give is that this is policy related. Oh, thank you for that, Bernard. That was a big hint. Jeez. Thank you so much. 2.9 trillion.

And my guess is it's got to be federal government related. Kind of its fiscal situation, something related to the fiscal situation, right? No? Okay, no. Okay. Okay. It's not that. 2.9 trillion. No. It has nothing to do with the fiscal. Okay. Well, you know, the American Rescue Plan was $1.9 trillion. The reconciliation package they're debating in Congress is $3.5 trillion. That's not $2.9 trillion. Well, I'll give you a further hint. Okay. The source is the Joint Committee on Taxation and the Ways and Means Committee. Oh, so you're saying this is the tax revenue

that they're going to raise to support the $3.5 trillion. Oh, okay. So explain the number for you. I spouted it out, but go ahead and explain the number. So the number, I guess you can decompose a number into two things. So about $2.2 trillion would be the tax increases

that the House Ways and Means Committee, which are essentially the tax writers on the House side of Congress that they're proposing. And then there's about $700 billion that would also be, the other part is the $700 billion that would come from prescription drug reform. So all told you get about $2.9 trillion. And this is to, you know, to offset the roughly $3.5 trillion reconciliation package that's, you know, it's now being debated. Right now we've really only gone to sort of drafts of the legislation from the House,

but we still have yet to really hear details from the Senate. And, you know, this is a bit tantalizing because it's really, you know, at the end of the day, I think it's what the Senate wants is what's, what the ultimate legislation is going to be, end up closer to. But already from what we've seen in the House Ways and Means Committee is that the tax increases that they're proposing are just not as far-reaching. as the ones that Biden proposed. So a couple examples is, you know, they're, they're only raising – Wait a second. Wait, wait, wait, wait, wait, wait. So the $3.5 trillion package that's kind of being debated,

that's about a trillion less than what Biden proposed, right? He proposed $4.5 trillion. So they don't need to raise as much revenue to make it all work out. Okay. So now we're at $2.9 trillion. And of course, this is over 10 years, right? So – Yes, over 10 years. So if you look out past the 10-year horizon, you know, assuming they do everything they say they're going to do and future lawmakers stick to the script, they'll roughly pay for it, right? Exactly, yeah. The $3.5 trillion will be roughly paid for by the tax increases or in other revenue scores. But there's still some major wild cards because there are also Senate Democrats that don't like the prescription drug reform proposal.

There's also, we still don't have the salt deduction, which is a very costly measure. And, you know, that is something that could be introduced, you know, towards the end in order to get the final bill. Although we did hear yesterday from Speaker Pelosi and Senate Majority Leader Schumer, the Democrats have agreed, quote, unquote, on a framework for tax increases that will pay for the 3.5. We just, at this point, we don't know what that is exactly, right? Yeah, that was, it was just a very wishy-washy statement. It seems like they are agreeing to. Yeah, right.

Yeah. But still, there are a couple changes, you know, I think a couple of distinct changes from what the ways and means is proposing as opposed to Biden. So, you know, under Biden, he was proposing the top corporate tax rate to go all the way up to 28% from 21% House Democrats instead are proposing to raise it to 26.5. I'd say our baseline forecast is that that even goes down to 25% to be in line with what Joe Manchin has proposing. So that's what's in our baseline forecast. Also, the top capital gains rate, Biden in his budget proposal, called for, you know, for raising it from 20% to 39.6%. Whereas, again, Democrats are only looking for an increase to 25%. So it's much less than, you know, what the Biden administration was doing, was proposing. And also, you know, Democrats are not going as far as Biden did in terms of, you know, proposing greater tax compliance and even reforming, you know, you know, international tax rules. Yeah, and I think at the end of the day, at the end of the day, the 3.5 trillion is not going to stand either, right? I mean, when it gets... No, our assumption is that that gets whittled down to $2.5 trillion. And, you know, next week when we discussed the October baseline forecast,

we may even bring that down to $2 trillion. Oh, you see how he front runs us, guys? He's front running us, saying, oh, look, I'm going to propose this, get ready for it. So we're at it. Yeah, so the Senate has got the reconciliation in the House got a package of $3.5 trillion in tax credits and spending increases over a 10-year period. And just given the politics here, Joe Manchin, the Senate Democrat from West Virginia, who's very moderate, has said I'm only willing to support a $1.5 trillion package. And right now, we are assuming that these guys, you know, everyone splits the difference and we land at 2.5. But you're saying, well, maybe that's even a little high, given the politics here.

Yeah, that's the sentiment I'm feeling right now. All right, fine. That's, you know, let's have that discussion in debate, but 2.5 trillion. Okay. Well, that's good. I've got a statistic. I got three statistics that all relate to each other. And I have to give you all three because it'd be too hard if I just gave you one.

I know that sounds a little weird, doesn't it? These are all hints, by the way. All right, you ready? And this is a statistic that came out this week, and it's a monthly series, so it comes at every month. 0.9, 0.2, and 0.1. Any ideas what that is. Point 9, 0.2, and 0.1.

You can ask me questions. I should know this. Yeah. That means you know it. it. Yeah. No, no, I'm thinking, are you sure it came out this week? I always get worried. Before, I've kind of done a head fake, but no, no, no. This came out this week. Yeah, I think it came out towards the end of the week, too.

Yeah, recently. It's a statistic that people generally, it's an important one, but they don't, when I say statistic, a release, let's say, that comes out, people don't generally follow it that carefully, but I find it quite informative, and I'll explain why once you guys fail to figure it out. Thanks for the confidence. Yeah. Is this St. Louis Financial Stress Index?

No, that would be. 0.9.2.1. So it's three different statistics within this particular release. You tell me when you give. I'm trying to think if I can give you another hint. So you said, business cycle. Oh, I know. It's a conference board leading index.

Ah, yeah. So what is it, Ryan? Leading indicators. Conference board. What's the leading indicator? 0.9. 0.9. What's the point two?

What's the point one? Oh, come on. I'm getting one at a time, this is like I'm spoon feeding you, man. All right. Coincident indicator and the lacking indicator, right? You got the leading indicator, the coincident indicator.

This goes to where we are in the business cycle. And the leading indicators compilation of 10 different statistics that tend to lead contemporary economic activity. The coincident indicator is four indicators that are intended to, that are combined

to reflect what's where the economy is currently and the lagging indicators is what it sounds like. It's a set of indicators that are a bit lagging, which are also important because once they are definitively showing the economy moving in one direction

or another, you know you're done. But I found it took some solace in it because it was a very strong increase, 0.9, in the leading indicator. That's a big increase in the month. And all but one of the 10 components actually rose. So that's an encouraging sign. And a coincident indicator I find useful, too, and that includes personal income, less transfer

payments, jobs, industrial production, measure of sales, of business sales. Because that does a pretty good job, really does a good job of pegging. you know, where you are in the business cycle. And I use this as a way to assess whether the economy is in recession, in recovery, or in expansion. An expansion meaning that the level of the, of the indicator is above its, you know, pre-recession level. And right now it's strongly indicating that the economy is in recovery, but it has still a way to go to get back to pre-pandemic level. So it's in recovery. It's not in expansion. And I really find the lagging indicators particularly useful because, again, it's proof positive of where you are in the business.

you know, if you've made a turning point in the business cycle, either down into recession or back up into recovery. So I do watch it pretty carefully. Very, very useful. Because Ryan's a little, he's just struggling, oh, that's not a good indicator. No, it's a good one. I look at that one, too. You do, you do look at it. I don't look at the lagging indicator as closely as you do. Yeah, I like that one. There's, you know, what's in there is commercial industrial loans. Those are businesses, what business loans that banks make, and I find that to be particularly useful. And inventories also, you know, very, very useful indicators. Okay, before we move on to policy, I did want to call out some of the statistics that we've

been watching on a regular basis. Two of them in particular, one is the tenure treasury yield. So that has been making a move again recently. Ryan has in it. Over the last two trading sessions, it's up 13, 14 basis points. So we're at 1.45% on the 10-year treasury yield right now? close. So it's been quite the move for the last couple of days. And I think part of it, you've seen inflation expectations move higher coinciding with the increase in oil prices. But it seems to be more

of a delayed response to the Fed meeting on Wednesday where they signal that tapering. Delayed response? I mean, like investors sitting there drinking their coffee and like, I don't know what to do. Oh, let me make up my mind. Let's do it. Really? Is that what you said? Remember the trading session closes, not that long after Powell gets done speaking. So it's possible. I mean, I have a hard time trying to explain what else would have driven a move yesterday. What about the debt limit? What about the debt limit? It's too early. Too soon. Really? You think so? And usually the debt ceiling goes the opposite way. It push long-term rates lower. Hey, Bernard, what do you think? Do you think that the markets are starting to react to the debt

limit yet or debt ceiling or not yet? I have seen some, like if you look at 26-week treasury bills that are maturing in late October, early November, you are starting to see a kink in the yield there, which is indicating that there's, you know, investors are trying to avoid some of those bills that are maturing around the potential drop dead date where there could be, you know, a potential default scenario or delayed payment scenario. But it's nothing to. the extent that we saw in 2013 or 2011. Yeah, so still right. But again, the longer we get to, you know, to that date, you know, the more we're going

to see movement there. Yeah, I guess it's hard to read too much in any one, two day movement of Bono's anyway. There's so many technical factors going on that we, it's very difficult to discern. But it, you know, the bottom was what, 1.15, 1.2. So we've moved off that. We're still well below the 1.75. that we were back in, I believe, March of this year when we thought the economy is really rip-worn. But now it's starting to move back up again.

Okay. And Ryan, you think it's going to continue to move higher? Through the rest of the year? No, I think it's going to head back down. I think the debt ceiling will take some steam out of the bond market. Oh, just, oh, you're saying just the opposite of what I'm saying. Yeah, if you look at back 2011, 2013, you know, the initial thought was when you get close to the debt ceiling, interest rates are going to rise.

Yeah. But it's the opposite. The bond market starts pricing in the apocalypse and rates actually go lower. Wait, wait, wait. You, I think, did a study back on the 2013 debt limit and rates rose. You said six to ten basis points. He doesn't even remember, Bernard, he doesn't even remember his own study. No, I remember that.

I thought I looked at it. It was actually a damn good study. Yeah, it was looking at the cost to the taxpayer. of the debt ceiling fight. And I think we used short-term rates as well. I think it was all in. I can go back and look. Take a look.

If I had to bet, 10 years coming back down over the next few months. Okay. So you're saying, okay, there's two countervailing forces here. One will lead to higher rates, that is, I'm nervous that I'm not going to get paid on time. I'm Mr. Bond investor. Therefore, I'm going to start selling or I'm not going to stop buying as much. Yields rise. and the other countervailing force is the one you're describing, well, the debt limit is bad for the economy.

It's going to take steam out of the economy, makes it less likely the Fed's going to raise interest rates, takes the knots out of potentially out of inflation expectations because of the weaker growth, and that lowers your yields. And you're saying if you had to take one side of that or the other, it's the lower yields that's going to prevail here, the worries about growth. Yeah. I think we'll give back some of these gains in the tenure over the next few weeks. And then towards the end of the year, we'll see rates rise as the Fed actually begins to taper their 120 billion in asset purchases. Interesting. Right.

We've been a little bit of a roller coaster ride. It all depends on what happens with Washington. I mean, if they botch and we have a government shutdown or a nasty debt ceiling flight, they're not going to taper. Sure. Yeah, that's interesting. So you're saying, oh, if we actually have a nasty dead ceiling battle and we come up right to the, we head towards the, the drop dead date, which we'll come back to when we get to this is a big topic. The Fed's going to delay when it starts, it's tapering, and that will be a reason for lower yields.

Yields will go down. Correct. Interesting. Okay. And this isn't the beginning of a taper tantrum. This is very orderly. This isn't 2013 all over again. Right.

It's communicated well. What were you going to say, Chris? I said it was communicated well. Yeah. It was very clear. Yeah, we'll come back to that. Okay. Interesting.

I don't know. That makes me even more nervous because policymakers see interest rates go down and they go, what do you, what are economists talking about? You know, and raises the odds they actually do breach the debt limit. Default. Interesting. Okay. The other statistic we've been following that I want to call out is unemployment insurance claims.

Chris, that was your, that's been your. your statistic. It's been, it actually moved back up in a pretty definitive way last week, right? Yeah, 351,000 last week, up from 335,000. So wrong direction. And then if you look at some of the state level detail, California, was it, California and Virginia had some of the largest gains. And so that suggests, at least that COVID, the Delta variant may be playing here in terms of deterioration in the economy, people having to apply for insurance due to that weakness. What about Ida? We had this hurricane blow through during this period, scrambled things.

Do you think that played a role at all? Could you see it? I don't know, Ryan, you look at this really carefully. Did you see it, Ida in there at all? Two weeks ago. So we went from claims that were like $30,000 up to $3.30, somewhere around there. That was Ida. Because you look at Louisiana, you saw a big increase in, in,

unemployment insurance benefits there. This past week that Chris referenced when we went up to 351, Louisiana actually saw a decline in unemployment insurance benefits. It's California, Virginia. There was no hurricane Idaho effect. Okay. So should we be at all nervous about what's going on with the UI claims? You know, it's kind of look, 350 is a high, you know, our kind of breaky, our benchmark for really good is at least 250, right? We debate it, but say 250. So we're 100K above what we consider great or good, and it's moving up a little bit, or is it just, you know, the data? A little bit of a noise.

If you look at the four-week moving average, it's flat. Okay. I would say it's in the yellow zone, caution. But assuming COVID, some of the more recent trends continue, we get some improvement there. We should see some pick up in employment, and that should temper things. down her type. Okay. Tap things. Why last week's number was important is it includes the September payroll reference period. And if you look at claims between August and September payroll periods, it's flatish like Chris described. So it would at face value suggest that we're not going to get,

you know, a big bounce back and job growth from September. Yeah, I was going to say that. So what do you think? Are we like in August, we got a gain of 250K, I believe, in payroll. I mean, in the month before we got a million, the month before that, we got close to a million. So August is really disappointing. So what do you, I mean, are we lining up for 250K or maybe not that? It's hard to say. I'm still digging into it because we have the Hurricane Idaho effect. So it's going to take me a little bit longer to pinpoint that number.

Yeah. Okay. All right. Hey, Chris, I wanted to ask you one other thing. I believe the state level employment data came out for the month of August. And we've been scouring that data to get a sense of whether the supplemental unemployment insurance program has distorted, you know, decisions by workers to go back to work. There's been a lot of debate about that. The July data showed that there was no difference in

employment growth in states that held on to the supplemental UI to the end, to the, ended in early September, compared to those states that ended the supplemental UI early, leading to the conclusion, or at least the tentative conclusion, that the supplemental unemployment insurance had no meaningful effect on the job market, that it wasn't constraining job creation. Did you look at the August data by chance? Yeah, I did. And my colleague, Adam Kamens also had a really nice write-up on the economic view on this topic. So if you want more details. But the August data also refutes the notion that extended UI benefits holding back this search of employment.

We just didn't see that. So if you look at employment from May to August across the different states, you actually see that employment growth was weaker in those states that ended the extended benefits early. So again, refuting this theory that if we cut the benefits, then folks will work. rush back in the labor market. Actually, the bottom 10 performance, eight of the worst performance in terms of employment growth were those states that had terminated the unemployment insurance benefits early. Is that right? Oh, geez.

Yeah, so it's just the opposite. You know, there are some other factor that I won't say it's different. You have to control for a lot of things, but at least on the surface, there's very, I don't see any evidence to suggest the opposite. It seems like a policy mistake. was made here to come those benefits early. Okay. Anything else to add on that, Ryan, that point, that question? No, I agree with Chris that. You know, if rank ordered why people are not reentering the labor force,

and that was at the bottom of the barrel. I think number one is child care issues, and then right behind it is concerns about COVID. But what is interesting, if you look at some of the summaries of corporate earning calls, they are blaming UI benefits. Are they? No, really. It's like this disconnect between the data and what you hear. The anecdotes. Yeah. I go with the data. Of course, I say that with some trepidation because it could be revised, I guess, right?

So we'll see. Hey, before we move on to policy, monitoring fiscal policy, one last topic I wanted to ask about is what's going on in China, the Evergrand Carfuffle. This is the big real estate company, Chinese real estate company that I guess is defaulted now. right. They missed a debt payment, I believe. They're in a grace period when they can kind of make it up, but it doesn't look like they're going to. It seemed to be creating some consternation in markets. The stock market goes down a few days ostensibly because of that. Who knows, but ostensibly. Any points you want to make about that? Any insight with regard to Evergrand? Let me ask it this way. Do you think there's any connection between what Evergrand and what's

going on in China and what it means for the U.S. or the rest of the global economy? Anything at all? I mean, we're stock investors right to be worried about this? Chris, do you have any views on that? I think it's part of that broader narrative in terms of concerns about the opacity of data in China overall. So this is a manifestation of some of those concerns that, you know, there's more below the surface than what we're seeing. So I think that is certainly continuing to drive investors away or think twice about investments in China. Yeah, there was a clear market reaction, but the good news is the high yield corporate bond spread, it didn't blow out. It didn't increase substantially. It did widen, but overall, it seems like the corporate bond market took the Evergrand issue in stride, the U.S. corporate bond market.

Yeah, I find it hard to connect the dots, certainly directly connect the dots between Evergrands. and the obvious broader stress in related to the high leverage in China and the U.S. economy or even the global economy. I assume there's indirect effects if, you know, Evergrand suggests that the Chinese economy is going to grow more slowly because it has to adapt and adjust to the kind of writing the wrongs that's been engaged in with regard to over borrowing. but those are more indirect. I don't see them as a direct effect. You would agree? Yeah, I agree with that. Unless it really causes a sustained response in U.S. financial markets.

But why? I'm saying I don't think it would, but that's the only dot that I can connect. Yeah, there's no, there's no, that Evergrand has three, at least the reports are 300 billion in liabilities debt. and it doesn't appear that the U.S. or other developed world financial institutions have any real exposure to that. That's mostly, that's almost entirely domestic. Correct. So the other thing I'd say is I can't imagine Chinese authorities allowing it to get to a place where it's going to do any real damage to the Chinese economy.

I mean, they, you know, they have bailed out of their companies. So if it looked like this is going to be a systemic problem, meaning the default on that debt takes out Chinese bank. institutions and other financial institutions, and this becomes kind of a self-reinforcing, you know, mess, like our financial crisis a decade ago, Chinese would step, the Chinese authorities would step in right away, I would think. I can't imagine they wouldn't. So hard to see the fallout here. But anyway, okay. All right, let's turn to policy. Let's begin with monetary policy. And the Fed met this week and, you know, kind of advanced the ball on the, they're thinking around QE and their forecasts around future rate increases.

Ryan, you follow the Fed closely. You want to fill us in on what they said and what your interpretation is of what they have in mind here going forward? Of course. So all eyes were on any indication that the Fed was going to announce any tapering plans? They didn't, but they took the long anticipated first step. in their advanced notice that tapering is coming, and that was included in the statement.

And it seems like they're going to start tapering either in November or December, depending on what happens in financial market conditions, what happens out of D.C. But it seems like we're headed for an eight-month tapering process, so roughly $15 billion reduction per month in their asset purchases. The other notable thing in the FOMC is meeting, was they released their updated summary of economic projections. This includes their projections for

GDP, unemployment, inflation, and the so-called dot plot, which shows participants' expected path of the Fed Funds Rate, and they're divided. So nine participants expect the first rate hike in 2022, and nine expected in 2023. Yeah. And the Fed Funds rates the rate they control. So you're saying they, I guess, 18. members on the Federal Open Market Committee, FOMC, that's the Policymaking Committee of the Federal Reserve, said that they think the first rate increase will occur in 2022, and nine said first rate increase in 2023. So it's kind of evenly split. And our forecast is still for, what, January of 2023? Correct. And that's where I think the Powell's, the brainers, the claretos, the ones that really matter on the FOMC, I think that's where they are right now. So those dots are not all equal. They're not.

One dot is not as heavily weighted as another dot. Every summary of economic projections, I kind of put names on dots. So when your wife asks you what you do for a living, you say, I look at dots and I decide, you know, which dot is J. Powell and which dot is Brainerd. Brainerd and Kaplan.

and so forth and so on. That's what I do. That's what I do. And people pay you for that. Well, you ask me what's going to happen on interest rates and you've got to know who's dots who. Can you imagine that's what someone does for a living? Can you imagine that?

It kind of looks like my first grader's artwork. Pretty funny, actually. Yeah. So on QE, quantitative easing, that's bond buying. They've been buying $120 billion in Treasury securities and mortgage-backed securities a month. since early on in the pandemic, and they're now signaling that they're going to start

so-called tapering, which means reduce the amount of bonds they are buying. And right now, you think they are, that process of reducing the bond buying will be, will be when? Is it December of this year? December of 2021?

I think it's November. They want to wrap this up by mid next year. And if you listen to Powell's press conference, and yes, of course, I listen to Powell's press conference and put names on thoughts. he kind of had like a wink wink moment where he was like you know he was reading between the lines it seems like he wants to go in November barring you know any issues on the debt ceiling and at least a decent September employment report yeah I suspect though you know just you know I you know who knows but I suspect that the September job number is going to be on the soft side too going back to the UI claims and given other evidence that Delta has done some real to the economy. And also this brinkmanship over government shutdown and debt ceiling, that's going to be

like, that's going to be pretty messy, I think, don't you think? So don't you think the eyes are pretty high here? If I were them, why wouldn't you wait a month just to make sure we're on the other side of the debt limit and the government shutdown and we're on the other side of the Delta? Why not? Why wouldn't You do that. I think that's why we keep our forecast. I mean, as of today, I think it's possible. So our forecast is still December of 2021. I would not change it.

Yep. You would not change it. Okay. I think they want to go in November. But in reality, given all the headwinds over the next few weeks, it's going to be December. Right. Okay. Anything in the statement, in the forecast that they put out in the and Powell's press conference

afterwards that surprised you or, you know, you just said, oh, that's interesting. I didn't know that or that's an interesting way of looking at it. Anything like anything that's done out? I mean, I think they are still buying into the transitory argument. They revise higher their forecast for. Transitory argument. Like nobody knows what the heck you're talking about. All right. Temporary what? I'm getting there. Okay, sorry. Go ahead. I get impatient. Bernard knows. Did you have your Wawa coffee yet today? The problem is I had too much while. Oh, there you go.

Inflation has accelerated noticeably this year, and it's transitory factors, so temporary factors are behind the increase. And as those fade, so the reopening the economy, the supply chain issues that's driving used car, new car prices higher, once we're on the other side of that,

inflation's going to moderate. It's going to slow down. And the Fed boosted their inflation forecast for this year, just reflecting new data that came in. And they really didn't adjust their forecast for inflation over the next few years, which has it coming back down towards their 2% target. So they're not wavering yet on the transitory inflation view. Hey, I got a good question. One more question on monetary policy and we'll get to fiscal policy.

How would you define transitory? What is transitory exactly? When does it become non-transitory or persistent? That's a great question. and I get that one a lot from clients. So I think I've got an answer, by the way. Yeah, I want to compare mine to yours, DeVos, and Bernard. I say nine to 12 months.

Oh, you actually have a time, there's a time dimension, nine to 12 months. Where are you approaching this? You're talking about the rate of inflation? I'll let you know in just a second. I just want to hear what Bernard and, if Bernard of Chris have a different definition of transitory. I was thinking 12 months. still. So what does that mean?

So you mean 12 months from now, inflation has to be back to target or? No, no. It's not going to be moderating. Moderating, yeah. Definite and your forecast is for it to get back to target. Yes. Correct. Okay, that's my definition.

That inflation expectations are, you know, stable, firm. People believe still that inflation is going to come right, you know, is going to come back into the Fed's target. And the other is, it's kind of a more fundamental definition. The other is labor costs, that, you know, if labor costs, meaning wage growth less, the growth in productivity or unit labor costs, use a technical description of labor costs, that that's stable, that, you know, it's not accelerating an independent way. So if those two conditions are holding, then this is transitory.

It's going to fade away, you know, inflation is going to come back to. maybe six months and maybe nine months and maybe 12 months. It could be 24 months, but I still view it as transitory. You know, it's not persistent, it's not going to be persistent, elevated level of inflation. So, you know, because I don't, you know, I'm not sure if it's nine or 12 or 18. So what do you think of that way of thinking about? I'm surprised by that. They don't put a time. I thought you would have a time dimension on transitory. Because I got you pinned as an inflation hawk. I am an inflation hawk. So if you were on the Fed, I know exactly what dot you would be. Really?

So would I be into 2022 or 23? Yeah, I'd be in 22. I would be in 22. You're right about that. Yeah. But I'd be a flexible hawk, you think? I mean, the facts, man. Yeah.

Realistic. Yeah. Okay. All right. Well, this is, anything else on monetary posse? Anything else? No? Okay.

I mean, if you want to go international. the Bank of England meeting was pretty interesting. Oh, why? They really boosted their inflation forecast. And unlike the Fed, they're getting nervous about inflation. So a rate hike this year is on the table for the Bank of England. And they're also doing something different than the Fed where they will start raising interest rates before they start reducing their monthly asset purchases. So we kind of have a hawks.

Yeah, exactly. What's the deal there? I don't know. It kind of reminds me of what the ECB did. back in, was it, 2013 when they saw the first width of inflation and they started raising interest rates and then we know what happened after that. Yeah, that's crazy. Huh. All right.

That's good to know. All right. Fiscal policy. So, Bernard, how scared should we be here, right? I mean, we've got the government is going to shut down on August 1, excuse me, October 1, then you started the new fiscal. year for the federal government, if there's not a piece of legislation that provides funding, at least for some period of time. And by our calculation, I should say your calculation, by October 20th, the Fed, excuse me, the Treasury will run out of cash to pay everyone on time.

Someone's not going to get paid. And actually, I was looking at data you put together. On October 20th, there's a big payment to Social Security recipients, I believe a $20 billion payment on that day. And they might not get paid. It's October 15th. You get some interest payments. The child tax credits go out. I'm telling you, I'm telling you.

It's October 15th, there's a big payment. And then they have a cash surplus on this 17th and 18th. You're talking to a guy who just looked at this data. Yeah. Like, you're telling me I'm wrong. Is that what you're saying, in mid-October it's really the 15th that I see like the biggest you know pressure point for for cash reserves at the treasury are you you think drop dead date is the 15 no no no so I'm just saying the what really what really leads up to that October 20th oh I see drop dead date is that you know on the 15th you get a lot of payments and that just really whittles you know the borrowing capacity under under the debt limit to just you know dangerously low levels and then we finally hit the, you know, the X-Date on the 20th. Yeah, X-state. Everyone was calling it the X-State. Okay, so, all right,

bottom line, what's, how nervous should we be here? What's, what's going to happen? So I'm not nervous at all about a government shutdown. I'm a bit more worried about the, about the debt limit. So with the government shut down, the House recently passed legislation that would fund the government past October 1st, through early December. And then they paired that with a debt limit suspension. So, you know, suspending the debt limit through December 2022. So that passed in the House with, you know, I think it was a very, you know, it was a party line vote. I don't think you had any Republicans support that. And now it's going to the Senate where Republicans have vowed to block it.

And I think the block it means filibuster it. filibuster it or yeah not not till yeah filibuster it and i don't you know i think that the what democrats were trying to do is or what they're trying to do is to get republicans on record that they're willing to risk a shutdown just because they don't want to raise the debt limit and you know they're also trying to dare them to you know uh block a package that would also provide hurricane assistance for idam you know which affected red states like louisiana um and then There's also, you know, some, you know, popular provisions that would provide, you know, assistance to Afghanistan, Afghani refugees. But I still don't think, I don't think Republicans are going to cave.

I think they're going to block it. They're going to follow through with. Block it means, just I want to make absolutely clear, they're going to filibuster this. Exactly. They're going to filibuster this. And then at that point, Democrats, you know, they're going to have really have no other choice but to, you know, redo that bill, just make it a clean, continuing resolution that just extends the, you know, funding for the government through early December, provides hurricane assistance, you know, assistance to Afghani refugees and so on and so forth, but without any debt limit suspension. And they should be able to do it in time. If not, you know, at the very worst, I would say. Yeah. In the next few days. Yeah. Next week, yeah, the next week. Next week, they got to do that. Okay, so this is all going to play out. Well, you just described, this scenario is going to play out next week. And by the next week, yeah.

Yeah, by, I don't know when October 1 is. I guess it's the following Monday. It's a Friday, I think. Oh, it's on the next Friday. Okay. By, that's right. You know, we could potentially have a shutdown, a one day shutdown. So, you know, Friday, you get a shutdown.

And then on Monday, you know, over the weekend, you know, they get together and, you know, they pass this continuation resolution and everyone's back to work in the federal government on Monday. So, you know, if we were to get a, you know, In 2018, we did have a, I think it was like a one or two day shutdown. And, you know, it's the economic effects of that is almost, it's so on the market. Yeah, it's not a deal. It's not going to show up. You really need to have two to four weeks of a shutdown for that to really show up.

And even there, that's not a, that's not. Well, I think in 2013, and this is work we did back in 2013. 2013 was the last time we shut the government down. I think we're 16 days. No, no, no. No, no, we law in 2019, but that was also, and that was the record long shutdown. That was the longest shutdown we ever had. I'm sorry.

Yeah, that's also, though, when we had the last real debate over the debt limit was 2013. And we combined with. Yeah. Yeah. So it was government shutdown. Similar kind of environment as we have today. I'd actually say the closest environment to the one where today is 2017, because we also had, you know, in various aspects. So you had a shutdown risk, also a debt limit risk.

Then you had Hurricane Harvey, Irma, Maria, and there was a lot of pressure to provide aid there. And then also at that same time, just like now, Republicans were considering reconciliation to the tax cuts and jobs tax. But just to go back to the question about the economic impact of government shutdown, we didn't do a study on the 2017 or 19 shutdowns. But on the 2013, when the government was shut down 16 days, we found that it shaped almost a half a point off of that growth in the fourth quarter of 2013. So, you know, it was meaningful. It was small in the grand scheme of things, certainly in the current context, but, you know, not inconsequential.

Yeah. Yeah. Okay. So the definitely is. Go ahead. Yeah. What is the rule of thumb is a tenth of percent off GDP per week of a government shut down? Oh, that, yeah.

That's a pretty good one. Yeah, it's pretty good one. So it's kind of easier to think about it on a week-to-week basis. How much is it good-year? There's a good rule of some. Yeah. Okay, so the debt limit will not be part of the so-called continuing resolution. That's the short-term funding bill.

You think they get that through. Republicans want to shut the government down. That isn't great politics. And, of course, there's money in there for, particularly because there's money in there for Ida hurricane victims. So there and so you're saying the debt limit increase will be then folded into the reconciliation package. That's the $3.5 trillion package that's before Congress. Exactly. Exactly. And this is where, you know, this is something that, you know, you and I

dug into over the past couple weeks because the media really hasn't been talking about, you know, all the procedural hurdles it would be to do this through reconciliation. It's not as, it's really not as easy as I think people think. So, you know, to start the reconciliation process, which is, you know, passing spending tax legislation with only a simple majority and with a philobuster proof, you know, a simple majority in the Senate, you have first have to pass a annual budget resolution, which essentially is, you know, sets the priorities for fiscal policy over the next several years. And you can only pass one budget resolution per fiscal year. So they've only done, so They've already passed the, in August, they already passed the budget resolution for fiscal 2022.

You know, they can't do another one. So they have to amend this current budget resolution and include instructions to raise the debt limit by, you know, by a certain amount. So, you know, and this is where, you know, it starts, you know, and this is where the Senate parliamentarian who, you know, interprets the rules of the Senate starts to come in place. So, you know, if the parliamentarian says, okay, Democrats, you can make that. revision. You know, I'd say Democrats would be able to pass, you know, pass the reconciliation bill that addresses the debt limit, I'd say, in one or two weeks. But this still assumes Republicans don't obstruct the process, you know, by denying the McCorm in the Senate Budget Committee or offering unlimited amendments that really gum up the works. But even in this case,

I don't think Republicans would be obstructive. You know, while Republicans don't want to help Democrats raise the debt limit, they're not going to prevent them from doing it. so because as I said, you know, they want Democrats to 100% own this debt limit increase so they can attack them in next year's midterms for being fiscally irresponsible. But then there's this other scenario that, you know, wait a second, before you go on, before you go on, the one nuance here is that in this reconciliation package, it's very unlikely they could actually suspend the debt limit, like they have been doing for, for a decade, they're going to have to increase the debt limit.

And it's going to be a big increase, right? Yes, yes, yeah, yeah. And that complicates the politics of this even more, right? Because, you know, getting 50 Democrats, 50 Democratic senators to agree, even without this debt limit increase is, you know, we're watching it. It's not easy, right? Because you've got progressive Democrats, you've got moderate Democrats, finding the middle ground is, you know, as you can imagine, a process.

And then you throw into the whole mix, you've got to raise the debt limit, increase it, which is politically not a great thing. Yeah. It complicates it even more. So that does raise the degree of difficulty. This is like a gymnast, you know, on the parallel bars, you know, and this is high level. The degree of difficulty was already, I don't know what the numbers are, but let's say in a 9.5. And now it's like a 9.9 kind of do we get that right? You get my drift, right?

Do we have a Simone Biles? Exactly. And if they get the twisties, we're doomed, right? Right, we're doomed. So do I have that right? Did I get that right? Yeah, you got that right. Because, I mean, if they have, so if you suspend the dead limit,

you kind of, you know, wash your hands and walk away. And you don't really know, no one can tell how long, know, how much the debt is going to increase over that suspension period. But if you say we're going to increase it by a dollar amount, let's say by $1 trillion, that's where next year Republicans can come at Democrats and say, hey, they, you know, increase the debt by $1 trillion. And again, it's a good soundbite that really hurts Democrats, even though, as we all know, raising the debt limit doesn't approve new spending.

It only helps pay for, allows the Treasury to pay for bills that have already been approved by Congress. So it's it's it's it's but again that's you know that's too that's too much for a sound bite in you know on the political trail. Okay. So so so you're saying I'm not worried because I do think this is the way it's going to play out. It's going to feel uncomfortable. Come down to the ninth hour. What do they say? The 10th hour?

11th hour. 11th hour. I knew there was a number 11th hour. 11th hour. And they're going to figure this all out and you know, life goes on. Okay. Is there any, though, downside to this? I mean, does this have any longer-term implications?

If that's the scenario, the most likely scenario, does that have any fallout? Yeah, so it basically, it means that from now on, whenever a party is fully in control of the White House and Congress, and there's a debt limit standoff, it means that the party and the minority is going to say, I don't want to help you. I don't want to help the majority out. You guys do it on your own. We're not going to be part of this. And so in that sense, going forward, debt limit episodes are going to just, it's, there's not going to be any really will to, any bipartisan will to, you know, to help each other. And also, you know, it could also, you know, this scenario could also turn a darker turn.

So let's say the parliamentarian, who I, who I just mentioned, let's say they say, you can't actually revise the budget. And there's the parliament, parliament has given some guidance that's, suggest that she may even actually rule against this. You could have a case where the vice president, who is the presiding officer in the Senate, actually overrules the parliamentarian. And this would also be just a very rare occasion, you know, something that we haven't seen in decades. So that would also sort of set a bad president that I don't think Democrats would want to. Yeah. So what you're saying, just to reiterate is, okay, even if you get this what you consider to be a reasonably graceful scenario,

there's fallout because going forward, the precedent has been set that the party in power is going to have to do this on their own, which means it's going to be the degree of difficulty going forward is now perpetually higher. Exactly. That means more uncertainty, and that may mean by definition economic implications, higher interest rates, all that stuff. Yeah. Very unfortunate.

Okay. And we did consider the kind of the darker alternative. One variation of a darker alternative scenario where they don't agree, they can't figure it out for whatever reason. They can't raise the debt limit in time. And they do default. And this drags on basically through Thanksgiving. That was a pretty, that's a pretty dark scenario, right? Exactly.

Hard to imagine. Yeah. So if we are right in October 20th is the drop dead date. which the Treasury can no longer meet all of its obligations on time and in full. Because we run annual deficits, that means that on the day-to-day basis, the Treasury is going to have to cut its spending in order to match incoming revenues. And over this period, over, let's say, from October 20th through the end of November, revenues, the Treasury should, we're estimating that the Treasury should receive enough

revenues to pay for about 60% of the bills that are going to need to be paid. But that's still a 40% decline in spending. And based on the math that we did, that would equate to more than $200 billion in unpaid bills over this period of time, which if you annualize it, you know, that comes to about, you know, a whopping 10% of GDP. And this is where you get into all sorts of prioritization scenarios, there's just, which are really impracticable or even illegal. I mean, you know, I think, you know, it'd be easy for them to to prioritize interest and, you know, and debt payments just because all that's managed through a different computer system known as FedWire. But everything else is very highly computerized and, you know, it would be just

technologically very difficult to say, okay, we're not going to be paying, you know, social security beneficiaries this day, but we'll pay, you know, veterans benefits and just sorting through the millions of payments that go on each month is just impossible. Yeah. So the, I mean, the, the, the point is that, you know, going down the dark path is so dark, there's no chance they're going to go down it. That's four percent. Yeah. Yeah. Hey, have you heard about this a trillion dollar platinum coin? You've been following this? Yeah, that's, I've been hearing that, but that's, I, what I've heard is that's impractical. Well, what is it? Explain what it is. And then, tell me why you think it's a hairbrained idea as you i'm guessing you think it's a hairbrained idea

so i think it's it's as calling for the treasury to mint a trillion dollar platinum coin which they would then you know use to posit at the fed the fed and then use that as you know cash to pay their bills um you know that apparently in parallel the way the law is written it actually says the treasury can mint a platinum coin of any denomination i mean it's it's it's It's actually there. You know, it's actually there. But you don't, you don't, so let's say they can do that. Let's say they practically legally can do that, which I guess is going to still be a question.

Someone I suppose will challenge it, but although I don't know who has the standing to challenge it, I'm not sure. But let's just say that it was challenging. But regardless, why wouldn't that work? I, or don't tell me you think it is going to work. It's going to work. I think again, it's just another president that they don't want to establish. It's just very, it's not going to work, guys. It's not going to work.

I'll tell you why it's not going to work because a global investor is going to see that. Are you guys out of your mind? That's not sustainable. But it's exactly what we need to get rid of this crazy debt ceiling discussion every few years. We should just eliminate the debt ceiling. I think that's the thing. Oh, for that. No, I think global investors look at that and they throw up all over it.

They'll say that's even worse because you guys are going to turn yourself into a pretzel to do that. That's just not, that's not going to. And so it's not going to work. And at the same time, you destroy our system of government, right? Because at that point, president is completely, can you imagine President Trump, I guess, could have issued a platinum coin to fund the building of the wall? Right? Is that what we're saying? Yeah.

Right? Chris, you're the defender of this policy. Yeah. Yeah. That makes sense to anyone that we, the president can completely unfettered here, can do whatever he wants. So that completely blows apart the system government. Are you defending the debt ceiling?

No, I hate the debt ceiling. I say, get rid of the debt ceiling, but I'm not saying this is a mechanism to spur that change, right? Oh, are you kidding me? This is going to do that. It won't spur that. It'll just create even more acid politics. I mean, it'll send us way off the rails. Well, you know, this is, but I've seen, like, I think Krugman endorsed it, I believe.

Paul Krugman, you know, the New York Times columns. I know about Lurian economics, yeah. So it's gained some traction, I guess. This guy, Chris over here is a convert. Ryan, do you have a view on this, platinum coin? I think, I think, I think we lost Ryan. We lose him? Yeah, he's frozen.

I've got an improvement on it, though. Oh, well, okay, what is it? Two trillion dollar. A trillion dollar. This is you, crypto. No. Two coins. Two coins. Okay. Yeah, I like that idea. That's a great idea. In the conclusion, we wrote a paper on this going through the dark side scenario. And it's, as I mentioned earlier, it's on that economic view. And I just wanted to ask about the way I wrote the conclusion, what you think? I thought it was very eloquent. My own personal view. I don't know what you think. Yeah, about how this is, you know, the full faith in credit and, you know, defending that is, you know, really... Well, I brought up Alexander Hamilton.

Yeah, yeah. Hamilton paid off the Revolutionary War bonds, 100 cents on the dollar since that day, you know, he established the credit of the United States. If you invest in the debt of the United States of America, it is money good. You're going to get your principal interest on time. That has led to very low interest rates, lowest in the world. It's established the U.S. dollars is a reserve currency. and the benefits of this are incalculable, and we are going to give this up,

all of this up for what exactly, because of a debt limit that never worked in the first place? I mean, it's just mind-boggling. I do want to make a point. So when the debt limit was originally conceived, I think it was around World War I, it actually was a good idea and it did, or it was an improvement upon the prior situation

that gave more flexibility to the Treasury to manage the nation's debt. And that's because prior to World War I, Congress had to approve each, you know, the dollar amount of every debt issuance, as well as the purpose that that issuance would serve. So that was just a very, you know, cumbersome process. So around World War II, they said, okay, we're just going to put an aggregate limit. And, you know, it's up to the Treasury to, you know, to issue the debt that it wants for the purpose that it wants. And then, you know, every now and then we'll, you know, when the debt limit needs to be raised, we'll come back and, and, you know, we'll come back and. you know, and address it there. And, you know, I think until the 90s, this never really was much of a contentious issue, but it was really, I think, with when you had President Bill, former President Bill Clinton going head to head with Gingrich, who at the time was trying to push through his contract with America, which were, you know, spending cuts and tax cuts, that's where it started to become weaponized or being used as a political football, the debt

limit standoffs. Hey, I got, I got what proposal for you, though. How about if we and then we'll call it a podcast. How about if we, it'll always change, no debt limit, at least as currently design structure, but with each spending or tax bill where the CBO, the Congressional Budget Office, the folks that do the forecast here on the budget, determine that there's going to be a deficit as a result of the spending or tax bill, at that point in time, with that legislation, Congress and the president have, to agree to raise the debt limit sufficient to pay for what they just voted for. That, to me, seems reasonable.

That's the best proposal I've seen, yeah. Because the whole idea is that by the time... Oh, I thought that was my proposal. What the heck? You seen that proposal? Yeah, I've seen it. Yeah, Committee for Responsible Federal Budget they've put out. No, no.

There's really? It was theirs? That was their idea? I think it's, yeah, it's a... It's been around. It's been out there a lot. Yeah. Yeah.

And I think, again, in a alternative unit, where there's a lot of where there's constructive debate over budgets and fiscal policy, I think that would be fine because it would matter, you know, as soon as people are making changes to taxes and spending that are going to affect the long-term, you know, debt trajectory, they're going to have to, you know, they're going to see the implications right, right away on the debt limit. Whereas now it's, you know, it's so after the fact, you know, by the time we're dealing with the debt limit, all these decisions have already been made years or months ago. Well, so bottom line, we're saying we're going to get a funding bill to keep the government open.

Maybe it's closed for a day or so that we are going to get a debt limit increase, and that will be part of the reconciliation package that the Democrats get through ultimately through Congress and signed by the president. And then we'll get the reconciliation bill. It won't be $3.5 trillion, but it'll be something we're, you know, still a matter of, you know, a debate, but say about $2.5 trillion. So at the end of the day, this is, this is, you know, not pretty to watch, but it's, it's not going to be, it's not going to change our forecast anyway. That's our forecast. That's where we land.

Okay. All right. Very good. Well, you know, the United States of America, if you're a Game of Thrones fan, and I guess I was until the last episode, but I've used the the United States of America is the Lannisters, we pay our debts. And to even contemplate not paying our debts is just plain dumb, just plain dumb, because it's going to cost us as taxpayers and American households, just the economics of it, it's going to cost us a lot.

And not for a little bit of time for generations, right? Because it tick us generations to build up our credit and get us to a place where everyone and trusts us. By the way, the only beneficiary of this in my mind is Chris. You know why?

Crypto. His crypto is going to be worth more because the base is the value. It goes right to what the crypto guys say about fiat currency, about, you know, look, these guys are going to screw it up

because they can and they will ultimately screw it up. And that's why you need crypto because people aren't involved. They're not going to be able to mess up, mess with it. So on the day, if we ever defaulted

on our debt, that's the day crypto goes to, what is it now? $40,000, it go to $80,000 or something. Maybe that's a reason to invest. I'm not sure. Yeah, this is, this is. Janet Yellen will save it the day. Yeah, Jenny Ellen will say. Okay.

All right, guys. I promise this wasn't going to be the marathon that the last one was. We have been chatting for a bit, though. So any last words? Anything anybody wants to say? This goes, that, that offer does not extend to Bernard. He's not permitted to answer that question because then he'll start speaking in Arabic or some other 10 languages he knows. Anything?

Ryan? I think we're good. We're good. Chris, you good. Good to have you back, Chris. I missed you. You're back with your howdy duty shirts.

You know, we needed the little howdy duty shirt there. I'm telling you, right? Am I, look at, howdy do it? How is this a howdy duty shirt? Button down collar. and, you know, blue. And anyway, I'm only joking. I miss the teasing.

All right. All right, listener. I hope you enjoyed the podcast. Give us ideas. Go to Economic View. Not economic view. Economy.com. Go to economy.com.

Click on the inside economics button and vote. Hey, I just had a debate on ESG investing. The proposition was ESG investing is, will undermine the American economy. I did not support that proposition. I was against that proposition. How about that for a topic? That's kind of cool. Should we have that as a topic?

All right, listeners, if that's a good topic, let me know. That'd be good to debate that one anyway. All right, take care now. Until next week.