Moody's Talks - Inside Economics - Debt Isn't Everything

Episode Date: March 15, 2024

Listeners of Inside Economics have been demanding a podcast on the nation’s debt, and now they have it.  At least one side of it. We talk deficits and debt with Paul Sheard, former Chief Economist of S&P Global. To Mark and team’s surprise, Paul explains why he isn’t worried about the nation’s fiscal trajectory. More views on this to come. For more on Paul Sheard's book: Click Here Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. 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 Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host and another colleague, Chris DeRides, Marissa Dina Talley, Matt Collier. Matt Collier. It's impressive, man, isn't it? Yeah, a little hesitation, but sure. Well, you know, come on. I'm an old man.

It takes me a while to figure it all out. But I got it right, right? Collier. Yes. Yeah, you did. That was good. You know how I think I said this last time. You know how I now know how to pronounce your last name?

The Florida geography. Yeah, Calliard County. Yeah. Naples, Florida. Yeah. And I saw Marissa this past week. Yeah, we're Phoenix for the Moody's Summit. That was very good, very enjoyable couple days.

We also have an outside guest. Let's bring the outside guests in a right way. Oh, you know, Paul, just share. I realize I don't really know. I could be screwing up your last name, shared. Is it shared? It's sheared. Shared.

Okay. Which I no longer have. Say that again? It rhymes with beard. Oh, here. Okay, shared. Okay. I'll remember that first.

Well, it's good to have you on board. Thanks very much for having me, Mark. Yeah. And we're going to talk about, well, of course, the inflation statistics that came out this week. But the real reason we have you on is because we want to chat about deficits in debt. There's a lot of interest out there among the, listeners with regard to how to think about, you know, our growing deficits in debt. And of course, you've been thinking about that, that issue globally for a long time. But before we dive into any

of that, can you just give us a little bit of a bio? I was just commenting before we went on. When I was reading your, your history, it feels like you've been the chief economist of almost every financial institution on the planet at some point. Do I have that, I think I have that right. Yeah, well, two or three, maybe four. Not quite sure. Well, yes, I had a pale originally from Australia. I'm Australian-American now. First half of my career was as an academic in Australia, Japan, a little bit in the US.

And then about 1995, I moved into the financial markets. Spent about five years on the by side in Tokyo. And then I moved in 2000 to Lehman Brothers in Tokyo. I was Asia chief economist, then global chief economist, moved to the US in 2006. And of course, my tenure with Lehman Brothers was somewhat interrupted in September 2008. And then I had transitioned through Barclays to numerous securities as their chief economist, but based in New York. And then I moved in 2012 to S&P standard and pause, now known as S&P Global. and, you know, I guess the rating agency sort of keep quite hermetically sealed from one another,

so we overlapped very little. Obviously, it was very much... I know. I know. I think we did... Yeah. ...over at a couple of conferences, but... And then I left in 2018, sorry, 2018, and then I spent about four years at

How about Kennedy School, mainly working on this book. I can give that a plug. Oh, cool. Farrow money. Which, you know, has a little bit about debt in there as well. So that's a thumbnail sketch of yours, truly. I'm so sorry. I didn't know you had a book out.

What's the thesis of the book? Well, it's all about money, sort of how money comes into existence, monetary policy, fiscal policy, and just, you know, everything about money. So sometimes money goes wrong and you have financial crises. A little bit about the Lehman failure in the book as well. Throw my six-pennie's worth into that debate. and, you know, chapter on inequality and international aspects of money.

So it's kind of like from a market's perspective, somebody who spent 25 years in financial markets kind of aimed at a general audience that wants to understand some of these more technical issues rather than just, you know, jumping into the river and everybody's talking about quantitative easing and, you know, all this other stuff and they don't really know kind of how it works. I try to unpack the nuts and bolts a little bit. Very cool. When did you publish the book? May of last year. Okay. So was that a difficult thing, writing the book? It was a bit of a labor of love, but as you know, writing a book takes quite a commitment.

You know, hard work, but I'm glad I did it. Yeah, I describe it like running a marathon. It's like, why am I doing this again? Exactly. What's going on? And then you think it's the cross-finish line, not that I've run a marathon. Really? I'm just saying. I do a fair amount of running, but I've not. I've never run a marathon, but I know when I'm out there, mile five, I'm saying, what am I exactly? Why am I doing this? I find it easier to write books than run marathons.

Very good. Well, congratulations. That's fantastic. And I'll definitely go read it. Did you go into digital currency? I have a chapter on digital currencies as well. Okay. Yeah, I'm very curious about that.

Basically saying, look, interesting innovation, probably going to become a permanent part of the asset ecosystem but you know very unlikely almost impossible to upend the sovereign monetary system that we're used to although it's funny you say that because i was in a cab coming from phoenix sky harbor into the resort and talking to the uh the fellow uh the cab driver a very interesting fellow from uh from the middle east and he just he was railing about you know you guys you you americans are ripping us off with that dollar. Why? What's the value behind the dollar?

I mean, it's just a piece of paper, you know? Yeah. But you explain that. Yeah, I talk a little bit about the reserve currency status and what a reserve currency is and whatnot. So most of those topics are in there one way or another. Cool. Cool.

Okay. Well, it's good to have you on board. And I can't wait to get to all the deficit and debt conversation. Oh, and do you speak Japanese? Because you were on a Moody's. conference call with Stefan on Japan. You speak Japanese. Yeah, I lived in

Japan for 17 years and actually published a couple of books in Japanese. Oh, my goodness. And a lot of my, Mark, a lot of my kind of perspective on money and deficits and, you know, particularly quantitative

easing because the back of Japan kind of invented that, kind of, you know, trace back to my experience in Japan. It's sort of, being in Japan in the 1990s, 2000s, when the Bank of Japan was doing all of this stuff, deflation, you know, a lot of concern about the fiscal deficits, was kind of an advanced training ground to think about these issues before they all kind of went global in 2008 and beyond.

Well, we're definitely coming back to the Japanese the way they're handling deficit debt because, you know, I can't quite get my mind around that. So we'll come back to that. But before we do that, we're going to talk about. the key statistic of the week, and that was consumer price inflation, CPI. We also got PPI, producer price inflation and import export prices today. So a lot of inflation data and to help us kind of understand what the data said is saying with the message is here is Matt Collier. I am really old. He's only worked here for like five years. I just call him Matt.

I just call them Matt. That works. Yeah. To give us the rundown. So, Matt, you want to give us the rundown on the CPI, PPI? Anything else you think is important? Sure. I'm curious if you agree with the characterization that inflation's progress has sputtered a bit in 2024.

I don't know if it's a – I think that's a factual statement, yeah. Sure. So February, the headline CPI, the Consumer Price Index, rose 0.4% from the month before, which is a little bit hotter, a little bit stronger than what we projected, what consensus expectations were, which was 0.3%, which would have been the same as January's increase. So the annual rate went from 3.1% year over year to 3.2% in February. We can break down more of the components, some of the big ones.

Let's get right to the crux of the matter, right? And it feels like it's still the cost of shelter, the growth in the cost of shelter. I mean, there's lots of other things going on. But that feels like that's the reason why inflation hasn't really come back to the Federal Reserve's target. I mean, in fact, I was looking at CPI Consumer Price Index X shelter. I think year over year, it's, I think it's below 2%. Yeah, 1.8 is February. I look at Core CPI X Shelter.

So I know I'm Xing things out, but just for the sake of argument, core being food and energy prices and that we will tend to look at core to kind of get to the underlying trend. Throughout Shelter, we're at 2.2 percent, something like that here over here. I mean, we're there, you know, is the point. Exclude just the one part of shelter, the owner's equivalent rent, the part that's related to homeowners, evaluating the implicit rent they pay, you exclude that, which would put it on a kind of a harmonized basis with many other ways, other countries in the way they measure CPI inflation. We're at, I think, 2%. We're there, right? Am I wrong? Am I right? Am I right? What do you think?

No, you're right. And I know Chris has this week wrote some interesting stuff on our website about that topic and because of how that owner's equivalent rent has come under such scrutiny because it is what's kind of cropping up core CPI and CPI in the U.S. So yeah, you exclude housing, you exclude shelter, owner's equivalent rent and you're where the Fed wants to be. But the Fed can't certainly communicate that, okay, we're going to stop worrying about that. So it really is imperative for that figure. However, it's calculated to, you know, as you know, to come down. So what we forecast, it's why we're still relatively optimistic about where inflation's headed, but it has been frustratingly slow in February.

It was no different there. Yeah. So, Chris, I mean, I know you Matt mentioned, you've been doing a deeper dive. Every month we do, you seem like you go down another thousand feet in the ocean to figure out what the heck is going on here. Pretty soon, maybe they'll give you the spreadsheets they use the BLS will give you the spreadsheets. I would love that. Yeah, I would too. So now what you're thinking, why is shelter costs owner's equivalent rent, particularly

being, although last month it was rent of shelter. That was where we saw an acceleration. What's going on? Anything you learned recently about that? Maybe just reinforcing some of the things we talked about in the past in terms of just the difficulty in measuring owner's equivalent rent. And conceptually, I think it makes sense. sense. It's a nice idea. You're trying to capture this cost of shelter services, cost of

housing services. But in practice, the way we try to estimate what a homeowner is getting out of their home and the cost of that shelter that they're getting is just very difficult. Try to infer what a homeowner's cost of shelter is from other renters in the area. Just very difficult for difficult for a variety of reasons, not least of which is just their segmentation in these markets. So trying to look at the rental housing population, even if we look at just single-family detached rentals and trying to make an inference of what that means for the owner-occupied market just doesn't work because you have, again, very distinct markets. The owner-occupied part of the market may be higher-end housing, the rental housing may be more

affordable. And so looking at those growth rates and trying to adjust for observable characteristics, just I see it as a very fraught exercise. And for that reason, I'm becoming more and more of a fan of the harmonized index of consumer prices. Just ignore owner's equivalent rent, you know, except that there are difficulties in measuring it and just focus on the rent that we can observe and the other prices, of course. Now, this has been a problem for all. of time. It's not like this is a new problem. So what has changed in the current context that's complicated things as keeping the OER, the owner's equivalent rent and cost of shelter high compared to actual market rents. If you look at actual market rents from

pick your place, Zillow Apartments.com. Rents have been flat to down for more than a year. They're going to be flat to down for another year, given all the supply coming in. What's causing this disconnect? Do you have a sense of that? So I see it as just the extreme tightness of the market that we have today. It's just, you're right. This has always been a problem. The BLS has changed their methodology to try to address some of the issues in capturing or making these estimates. It was a big revision or big change in 1983, for example. And for the most part, as long as the housing market is kind of in range, you know, it's been a question of lags, just a little bit stronger

inflation perhaps due to shelter in some periods, a little weaker. in other periods, but nothing major, unlike what we're seeing today, which I view is tied directly to the fact that we have this record low level of housing inventory. We have very little affordable housing available, and that is causing or juicing up the rents that we see for that part of the market. And when we do this extrapolation, it just gets enhanced, if you will, in the owner's equivalent rent portion. Paul, I'm going to come back to you in just a second. I'm going to bring up this so-called immaculate disinflation argument, which it bothers me to no end. But I'm going to throw it back to you.

Before I do that, I'm going to come right back to Matt because since we're in the weeds. If you had to pick another weed to focus on, we picked on the OER, the cost of shelter in this in this last report, what would that be? What kind of what else was in the report, you know, kind of in the weeds that was important to call out, do you think? I think goods prices. So we've kind of been able to rely on goods prices coming way down after supply chain constraints in 2021, 2022. Belts up to a year ago, they're basically flat.

But in February, core goods prices ticked up. So it's the first time that prices have increased for core goods since May. And it's that support, that disinflation or even deflationary support that goods have been giving to overall CPI is, waning, we forecast out these kinds of things. And we expect a sideways movement. So similar to what we saw in February, modest increase, mostly sideways, which means that you're just relying at services now. So you don't have that support. So really the trend for shelter, the trend for services more broadly, that inflation is going to be clear in center, front and center, because there is no as much need to be parsing out and then to exclude all the types of things.

things because the inflation we're going to see is labor-intensive services inflation, which has been the Fed's priority for a while. This might be an unfair question, but what percent – but that doesn't stop me from asking, but, you know, we'll see. Good, good test. What percent of the overall CPI or core CPI is what you called core goods prices? I mean, which share of the CPI is that? I'd be guessing.

So I appreciate you acknowledging that that's a tough test. Okay, let's see. This is what we're going to do. We're each going to come up with a number. Matt, you can't look. Don't look. Marissa, what do you think it is? What percent core goods is?

You know, what percent of the total CPI is what Matt called core goods? You know, the basic goods, you know, that we consume. One. 20 percent? 20 percent. Okay. Chris? Well, good.

The goods overall is 35%, right? Services 65. Well, you're including energy in that too, right? I am. Yeah. So I need to put that out. You're including energy. Yeah, that's the whole shooting match.

Yeah. So I'm going to strip out food and energy. Well, Chris, you got three seconds. Okay. Three, two, one. 50%. Oh, what? 50% of the CPI is core goods?

No, that doesn't make sense. That doesn't make sense. No, it doesn't make sense at all. You're all. You're all. You're out. What do you think it's going to, what do you think? 15%, I think, if you exclude energy and food is where you'd be, right? I was going to say 20. Paul, what were you going to say? I don't want to embarrass the guest, but what were you going to say? Yeah, I was starting with 30, but as I was listening, I was going down around about 20.

There you go. I say 20, but it could be 15. What is it, Matt? Oh, I didn't look it up. I was told. We'll come back to you. We'll come back to you. Okay. Paul. All right. So, Paul, here's the thing. And I just got, I don't know if I can tell you, the media outlet that just sent me an email, writing a piece about so-called immaculate disinflation, that, you know, that's the way this slowing in inflation over the past 18 months or so has been characterized, which suggests, I think, that this was unexplainable, that it just kind of sort of happened. And no one could have figured this out.

No one could have predicted it. It just, you know, it just is immaculate, you know, a disinflation, which I totally disagree with. I mean, in my mind, you know, the inflation was due, the surge in inflation back in late 21, 22, early 23. That and the subsequent disinflation, that was lots of factors. But at the top of the list was the pandemic and the Russian war and the supply chain disruptions and the conflation of those things because they happened successively, affected inflation expectations when we were off and running. But now as the fallout from the pandemic and Russian were now behind us,

there's still residual effects, you know, vehicle prices and even owners equivalent rent because of the lack of building. But as they go to the rear of mirror, inflation has been able to come in without recession. So that's kind of where my mind is. Very curious, you know, if you're annoyed at this phrase, accurate disinflation as I am or not. Maybe you coined this. Maybe you coined this phrase.

No, I'm not going to claim credit for that, Mark. But no, I think I agree with you. So we had a big shock to the economy, kind of, you know, largely self-induced through the way that the, you know, COVID policies were implemented and, you know, essentially printing. We'll get to this in a minute with the debt issue. but, you know, bringing a huge amount of money, just sort of necessary to keep the economy on suspended animation

through the lockdowns, etc. But what everybody, I think, underestimated, except a few people, was the kind of semi-perman, at least for a few years, massive damage done to the supply side, particularly the labour market and supply chain. So a lot more money, constricted supply,

you get inflation. And, you know, the Fed completely missed that. and, you know, so did a lot of people. So did I. I was writing pieces in 2021 saying, you know, don't worry too much about inflation. But two reasons. One is I thought it was, to a large extent, temporary relative price shifts that would sort of self-correct.

But I ended all my op-eds by saying, but, you know, if that's wrong, if we do get elevated inflation, the job of the Federal Reserve is to hike interest rates, tighten monetary policy, and, you know, bring that inflation down again. you know, they will do that. So there's a timing issue. How long does it take? But, you know, in theory, this was always going to happen. Inflation was going to peak. You know, the Federal Reserve was going to have tight monetary policy. Inflation was going to come down. Now, the big question, I think that you're getting at is, well, can all of that be done without the economy going into recession? And in theory, there's absolutely no reason why it can't be done. And I think, but a lot of

people were, perhaps their thinking was coloured by two things. One is the historical experience. So if you go back and you look, most of the time when the Fed hikes interest rate and tightens dramatically, you get a recession at some point. And it's sort of the dirty and easy way of bringing demand back in line with supply. But there's nothing kind of God-given about that. I think the second thing that was coloring people's views was that, well, if the Fed had made such a colossal error in its own monetary policy and inflation forecasting, which it did, go back and look at the forecasts that the Fed had for inflation, one or two years ahead,

its own interest rate stance colossally wrong. That's just a fact. It's not necessarily a criticism. But having made that mistake, he then said, well, how likely is it that they're able to now get out of that hole, tighten monetary policy, and with all the uncertainties in the system around the lags with which monetary policy works, the economy, you know, what is the right terminal rate? Five and a quarter to five and a half percent?

or 6%, the chances that the Fed was able to pinpoint that and get the economy on this glide down to 2% inflation again without tipping into recession. I think a lot of people just thought, the odds of that are kind of pretty slim. But from a kind of a theoretical analytical perspective, there's no reason why not.

And the view that says, let me finish here, is like what's the theory that's being tested here? I think a lot of the people who are saying there has to be a recession associated with this had some kind of Phillips curve model in their head. You've got to create some slack to disinflate the economy. But I think that this whole period has been a pretty good test of what you might call the inflation expectations management theory of inflation targeting. That's a real mouthful.

But basically says the key to central banks being able to achieve their inflation targets is their credibility in the eyes of the public as inflation targeters, which means they have to anchor and manage the public's inflation expectations. And one thing that has been very notable through this whole four-year period now is that inflation expectations have remained pretty well anchored around the Fed's target. In other words, when inflation spiked up to 5, 6, 7, 8%, that the public's inflation expectations, did not ratchet up with them. And if they had, that maybe would have put you in a world where the Fed would have to prove

we're really dead serious about this. It takes a recession, Volker-like, will do it. But they never had to go there because inflation expectations remain very well anchored. So, you know, it could still happen. But, you know, I'm not sure it's an immaculate, what did you call it? Immaculate disinflation. Disinflation. It's something that, you know, Central Bank should be able to pull off, and it looks like the Fed is actually doing it.

Yeah. You said a bunch of stuff there. It's hard. I don't think we can have time to unpack at all. But one thing you said where you were talking about inflation back in 2021, and you thought it was temporary. And, of course, it ended up lasting longer. He kind of said it made it sound like you made a forecast error. But I would argue against that as well, because how could you have forecasted a Russian war in Ukraine in the impact that had on oil prices, natural gas prices, agricultural prices, other commodity prices?

I mean, it felt like to me we got hit by two shocks that were kind of one right after the other. And the reason why inflation wasn't as transitory as we thought it was after the first shock is because we got the second shot. No, that was not even on the radar screen until February 2022. Yeah, that one you'd have to be some kind of geopolitical genius to forecast that. But a lot of the inflation was the initial post-COVID kind of response up until February 2020 when the invasion happened. But if we talk to that bit, I mean, again, I would put myself in the category of people that underestimated the damage that had been done to the supply side of the economy.

And demand collapsed with the COVID lockdowns, about 10% in two quarters. Then it bounced back very quickly. And, you know, fiscal and monetary policy did their job in putting enough money into the system to keep demand up and ready, you know, to come back when the lockdowns sort of dissipated. But, you know, one number that I focused on ex post, not at the time so much. I mean, we saw this incredible data, you know, all over the place, unemployment going from 3.5 to 14.7 in two months between February and April, 2020. That should have been a bit of a clue, but a number that was available,

but I didn't focus on enough, was the number of people not in the workforce. It's not a statistic we usually, you know, most people look at. But that went February, 2022 from 95 million, April, that was 103 million. So in the space of two months, eight million people told the statisticians, I guess, were kind of out of the labor market. Well, that number never normalized. It came back to about 100 million, and it's still around about 100 million today. So five million people kind of taken it. I mean, this is the great, what do they call it, the great retrenchment, the great retirement, the great disappearance of the workforce.

But that bit of it, I think, if the Federal Reserve and macroeconomists had been a bit more. had more supply-side expertise in their toolkit, rather than being macroeconomists focused on forecasting demand, probably would have bought that bit a little bit earlier. Yeah, agreed, agreed. So looking forward, now the debate is, will inflation close that so-called last mile? that, you know, we're kind of hanging around 3% of CPI inflation, core PCE deflator inflation. That's the consumer expenditure deflator the Fed looks at for setting its target. It feels like that's somewhere two and a half to three, and it has to be at two to hit the Fed's target. So that's the last bit here.

What's your sense of that? Do you think that's going to close here over the next, well, foreseeable future? What's your sense of that? You know, it should, but, you know, I gave an interview on the floor of the New York Stock Exchange. I think it was towards the end of last year. And I sort of quipped on the way out. It wasn't on tape, but I said, you know, I wouldn't be totally surprised if the next move from the Fed is upwards. Because there's nothing magical about 5.4 to 5.5%.

The theory is, that's enough monetary tightening. to put into the system that, you know, it gradually, you know, inflation will decelerate down to where inflation expectations are well anchored. But, you know, if the economy kind of, an agent's in the economy sort of shrug it off and say, well, I feel pretty good. Unemployment's low. Yeah, inflation's coming down. That's good. And again, all of that money that was put into the economy, when I talk about money here, I'm not really talking about the Fed's quantitative of easing. I'm talking about the printing of money that came through budget deficits. That money is still in the system. And so there's a lot of purchasing power in this economy.

It's a very productive economy, but there's a lot of purchasing power. So the question really is, what's magical about five and a quarter of, or five point four percent on the interest rate on reserves that the Fed has set? You know, again, I'm not forecasting it, but one shouldn't be, I think there was a little bit of perhaps too much complacency in the forecasting last year saying, well, feds, you know, let's face it, Mark, we economic forecasters, market forecasters, tend to take a cue off the Fed. So the Fed says, you know, we've got three or four hundred PhDs in economics and econometrics. We're stopping at five and a quarter to five and a half percent.

Inflation's coming down. There's a tendency to say, well, yeah, that's the peak level. And the question is, when do they start cutting? Is it sooner? Is it later? Everyone seems to be pushing back now. But again, I would not be totally surprised if we got a rate height. Well, Paul, I think that's where I'm going to part company with you, you know, in terms of the Fed.

It feels like to me they've achieved their goals. The full employment, the sub 4% unemployment rate, rock solid two years plus. And wage growth has been coming in, you know, gracefully. It feels like full employment. inflation, we talked about that, I think, outside of the shelter costs were there. Inflation expectations, as you pointed out, they're nailed down, their lockdown. Financial conditions, it feels like they're roughly where they should be. Of course, stock market's up, but bond yields, mortgage rates are up.

You know, credit spreads are narrow, but lending by banks is constrained because of the banking crisis. So I think they're kind of roughly where they need to be. kind of add it all up, all the things that go into the so-called reaction function the Fed uses, it feels like we're there. So why do we need a five and a half percent target? Unless you think the so-called equilibrium rate, the R-star, is a lot higher than what the Fed thinks it is, which is at two and a half percent. So just curious how you respond. No, again, I'm not, I wouldn't argue against any of that. But all I'm saying, and, you know, most likely the next move is down, maybe second half of the year.

But I just wouldn't, given the strength of the economy, and if you get a bit of, you know, irrational exuberance coming into the economy again, consumption, etc. Surprising on the upside, you know, I don't think the Fed sort of unpicks the PCE and says, well, we're there because this component's like unusually high. So I just note my point simply that I think we should be a little bit agnostic. about this and the kind of this once, if I was like managing money of a sort of advising a portfolio team, I'd be saying, let's run a scenario where the next move from the Fed is actually, you know, 25 basis point hike or something.

I got it. So you're saying that my baseline is, okay, it feels like they're going to start cutting rates here in the next few months. But I wouldn't be surprised. There's a scenario with a reasonable probability that in fact they're going to have to start raising interest. The economy. And it's almost, yeah, that's right.

And it's sort of a corollary of that immaculate disinflation that you talked about, that this is going so well. And if people kind of feel that and that money that has been injected in the economy, just starts to get released into purchasing power. And a given some of a lot of the labor market numbers have kind of normalized. But, you know, as I said, that there's a few. that, you know, I think job offering is still pretty high still. The labor market looks pretty tight. So, you know, you could get another forecasting error from the Fed, which is, gee,

the economy is turning out to be much more resilient. We just need to perhaps just dial up a little bit one more time to make sure that everybody gets the message, hey, cool down a little bit here. Yeah, got it. Kind of, I think that's called the no landing scenario that we kind of don't really land and we start to take off again. And you know, you mentioned our start. That would became like this popular kind of term and everybody jumped on the R-star bandwagon and remembered like Witzel and all this of the stuff. But, you know, again, you know, we were told a few years ago the robots are coming and, you know, all the jobs are going to be wiped out. And here we are, you know, with this 500 basis points hike in, or 525 basis point hike in the federal funds rate. and still this very, very strong labor market.

So I don't know, maybe the natural rate of interest, no one's got a clue what it is really. Let's face it, the Fed in its forecasting, a lot of it is kind of adaptive forecasting, right? Who says the natural rate of interest, which nobody can observe is really only half a percent? Maybe it's 2%. Yeah, yeah, yeah, right. You mean on a real basis, 2%. Right, yeah. Yeah.

Yeah. So nominal would be four-ish or four-and-a-half, something like that. Yeah. Yeah. Yeah. I just think, again, there's more mystique in this Fed watching and inflation forecasting. And, you know, forecasters tend to hug the Fed. And I guess I've got a disproportionately contrarian streak in me. So I hear you. It's definitely higher than two and a half. It's just a question of what. And I, you know, in our official, in our baseline forecast, We have three as the nominal three. But, you know, four, yeah, maybe, but I still go back to where five and a half, that's still, you know, and if you've achieved your goals. But you make a point, Fed won't parse the data like I just did, even though I think they should. They're not part. They won't force it that way.

So let's play the statistics game. The game is we each come forward with a statistic that the rest of the group tries to figure out through clues and deductive reasoning and questions. The, you don't want a stat that's so easy that. We all get it and you certainly don't want one that's so hard that we never get it. And if it's apropos to the topic at hand, that that would be great. And the goal here is to come up with a stat that Marissa can't get. So we'll all work on that one.

But before we get there, Marissa, as tradition has it, you are the first person to go here on the game. So what's your stat? Okay. This is hard because I had a lot to choose from that I want to do. But I'll choose this one because it makes a point. Four and a half percent. Inflation related? Yes.

From the CPI report? Yes. Is it like year over your inflation for some component of CPI? It is year over year inflation. Yeah. Of some component. Mm-hmm. Oh, okay.

So, okay, so four and a half percent. Guys. Super core? Yes. Ah, Supercore, you said? Yeah. Okay, you want to explain? Sure.

So this is services inflation, excluding energy services and shelter. So we've been talking about how shelter is the next leg down, the final leg down in inflation. But actually, Supercore has been moving upward on a year-over-year basis since September, every month, steadily. So even when you take out shelter from services, And even when you take out energy services, there are other services that have actually been moving up. Now, this is when you take, we talked about how big shelter is, right, as a share of inflation. So this is smaller. But economists like to look at super core because it kind of goes to wage inflation,

because these are services where the biggest part, the biggest cost within these services that business has. have are the wage bill, the wage they're paying workers. So this has been moving upward. So my point is, it's not just shelter that's been coming in hot. There are other components within services that have been moving up. And I'll give you an example, and I hope I'm not taking anybody's statistic. But this is something I looked at for myself the other day. Auto insurance is up almost 21% over the year, it's up 40% since before the pandemic. So if we go back to February of 2020, car insurance prices are up 40%. They're up 21% just in the last year. I got my new auto insurance policy the other day, so I decided to look at it. And mine was up 26% over the

year. So, you know, there are, there's medical insurance has been rising. Medical insurance. costs have been rising, the cost of pharmaceuticals have been rising. So there's other stuff going on that I want to make sure is on our radar other than just shelter. Yeah, I got my insurance bill too. When I got it, I go, I got an email from the insurance company. And I see the, well, first of all, my wife got it. And she says, Mark, you have to pay kind of rental insurance. My daughter has a, my daughter has a. an apartment and you got to pay rent. I go, oh, okay, you know, that's usually like $100.

And I look at it, it's almost, I'm not even going to tell you what the number was, but it was thousands of dollars. Really? And I go, I go, I nearly choked. I can't possibly be the renter's insurance. I go, no way. So I go, look, it's my auto insurance. Yeah.

And yeah. So it was crazy number. And so I'm going back and forth with the insurance company now trying to, and I have gotten it down, you know, because. now what you do is you go look at, well, what am I buying exactly? And you say, oh, I don't need that. I don't need that. I don't need that.

Anyway, but that goes back, just to point it out to the pandemic, all roads lead back because, you know, vehicle production collapsed. There are no chips, global vehicle production collapse, inventories evaporated, new vehicle prices go skyward. So anything related to a new vehicle, including the insurance on that vehicle, is going to see prices rise, right? With a long, long lag in the case of vehicle insurance and vehicle maintenance. So even there, I'd say, okay, you know, the Fed can't do anything about that, you know, so, you know, I'm not, but anyway, but it was a good statistic, a good statistic.

Paul, we'll do one more and then I'll come to you so you can see how we're doing this. And I'll go to Matt. Matt, what's your stat? 0.3%. inflation? Yes. Month over month? Not CPI and yes month over month.

PPI? Yes. Oh gosh. Is a component of PPI? But not like five digits. Oh, you're saying some measure of core PPI, a core final demand or something. No.

Close. Not. Core goods? No. Final goods? Final Demand Services. Oh, same ballpark, the same part. Yeah.

Yeah. And which we didn't talk about PPI, top line PPI was up 0.6%, which is a relatively big, scary number. But within the PPI, it's a similar story to the CPI, which was good prices aren't falling sharply like they had been and are no longer dragging down overall PPI inflation. like they are in CPI and underneath the hood services PPI inflation was 0.3%, not great, but down from the month before and relatively modest. So not a three alarm fire like the top line number would potentially indicate rising 0.6%,

which was twice as fast as the month before and twice expectations. So similar story. Goods no longer delivering the deflation, disinflation, that they had been. Hey, Matt, let me ask, now that we have CPI and PPI for the month of February, what's our estimate for the consumer expenditure deflator, core X-food and energy PCE deflator, which is what the Fed targets the 2%. What do you expect for the month?

The point three, which for the headline PC would be same as the month before. And for core, it's point three as well, which would be a slight tick down. So, yeah, and that's like you said, mapping CPI and PPI components to their relevant PCE. 203. Yeah. And then what would that mean? Do you, I know I'm pressing, but I'll do it anyway.

What does that mean for year over a year? Core PC? We're, it's two weeks out and the, so I don't have any, like that would require. It's pretty sensitive to decimal points there. So. Yeah. Yeah. Okay.

Okay. Very enough. Oh, and Matt, did you look up the, because I did. And I want you to look up what the share of core goods in the CPA? Oh, yeah. What was it? I did. I was going to use that as my number.

number, 18.8 is. Way to go. You were right. Yeah. Very good. Very good. Well, you know, 18.8. If you had said 18.8, I would have been really impressed.

But, you know, I'm just impressed now. That was, yeah, 1.2 percentage points off. Very good. All right, Dr. Doridi. Oh, no, I was going to go to Paul next. Paul. What's your stat? This is fun.

Is that? Yeah, it's a lot of fun. I'm going to move away. I'm going to move away. Yeah. economics can be fun. I'm going to move away from percentages and talking dollars. This is just kind of a round rounding here, one and a half trillion dollars.

Is it related to the deficit? Only very indirectly to the deficit. Not really. Not really. It is, but that's a deeper conversation. It's not like, no, it's not a deficit number. Yeah. Is it related to the Fed's balance sheet in some way, Paul?

Yeah. Marissa has the golden touch. I told you. She's like she's, she's the god, goddess here. The Fed balance sheet, one and a half triangle. So Marissa, what would that be? Because the balance sheet is. Is it how much it's shrunk in the past?

Who's going to believe that we didn't, you know, to elude on this? Oh, gosh, that is great. Way to go. We talked a lot about the Fed hiking, but of course we have quantitative tightening going on at the same time. And roughly, you know, the Fed's ballot sheet peaked at just a tad shy of $9 trillion, and it's down to about $7.5 trillion now.

And with their runoff program, it's sort of shrinking at the rate of about $1.1 trillion per year. So $1.5 trillion is back in the hands of the market. That is so cool. Well done, Marissa. That's really very good. And when the Fed start, do you have any expectations? around when the Fed's going to end its QT and how it's going to do that? Well, that's a very interesting point, Mark, because, you know, the Fed kind of quietly,

you know, for the, I mean, the Fed watchers know this, but after the financial crisis and all the QE, QE1, 2, or whatever, did we get up to 3, they struck the balance sheet. They didn't go back to their pre-financial crisis operating regime, which would have been a regime of eliminating excess reserves and just targeting the federal funds rate, they implemented a policy called an ample reserves regime. And they stopped the balance sheet unwind at that point, roughly what was it, around about $3 trillion issue or so. Now, if the Fed would go back to normal, I think their balance sheet would be around about $2.5 to $3 trillion. They're at $7.5 trillion. Who knows where they're going to stop? Probably, I'd guess, around about $4.5.5.5.

four, four and a half trillion, something like that, because they'll continue with this ample reserves regime. And of course, the key factor here is that the Fed now pays interest on reserves. And so there's no need for them to eliminate excess reserves in order to get their control back again over the federal funds rate. They've got a lot more optionality now between balance sheet management and interest rate targeting. But before the Fed paid interest on reserves, and this goes for other central banks as well, if they wanted to target the federal funds rate, they had to make sure there were no excess reserves in the system. But what that's done is introduce a kind of level of sort of opakness into the Fed's balance sheet

management, because where they finish their QT effectively is an arbitrary point. It's just, well, we think it's ample now. But what's that? Right. And just for the listener, QT, quantitative tightening. So they bought a lot of securities to bring down long-term interest rates back in the teeth of the pandemic. Now they're allowing those securities to run off through maturation and prepayment if it's mortgage security and the balance sheet's shrinking. But as you're saying, they're not going to let it shrink all the way back because they have to maintain, as you say, ample, quote unquote.

And that makes it difficult to gauge because it's a matter of judgment, you know. Yeah. By the way, just to plug my book. again, if you don't mind. Yeah, yeah. In my book is on QE and QT. QT. Yeah, no, yeah, I can't wait to read it.

Okay. Chris, you want to do one more before we move on? Sure, this is a quick one and a good segue, I think. Yeah, okay. 100 days. Is that how long it took the Treasury to the deficit to be larger than last year or something like that? Oh, in that spirit.

Yeah. Amide of time for something to rise by someone out. For the deficit to rise more than a trillion dollars? For the national debt to rise by a trillion dollars. Oh, for the national debt to rise. Oh, very cool. Very good. Yeah.

Why did you pick that? Just in honor of the topic here. I listen to you. Very good. Okay, well, that's a good segue. I have a statistic, but I think we should move on, you know, because we played the game to death. And I don't want Marissa to win again.

So we're going to keep going. We're going to keep going. So let's turn to deficits in debt. And just as a frame for folks, you know, obviously we're running large deficits. I think as a share of GDP, the nation, U.S. deficit is about 6%. I think the primary, so-called primary deficit, so that's excluding interest payments on the existing debt is closer to three percent, still very wide by historical standards. The debt load is rising very rapidly. If you go back pre-financial crisis, I think it was

hovering 40 percent-ish of GDP. That's publicly traded debt to GDP. We're now at 100 percent close to. And according to the congressional budget office of CBO, the nonpartisan folks that put the nation's budget together, no change in policy. If we have no change in policy tax, spending policy going forward, which, by the way, would include the reinstatement of a higher tax rates on high income individuals because they got cut under President Trump. Those cuts expire at the end of 2025. The debt-to-GDP ratio goes to 115-ish, 10 years from now, 180 percent, 30 years from now, and that's when the forecast ends, but you can do your own forecast and, you know, obviously

continues to rise. So Paul, with that as kind of the backdrop, first of all, anything you want to add to that to provide context. But, you know, there's a lot of angst out there. Every time I give a speech, I say, what's bothering you? And invariably, this is one of the things that are really bothering people. How do you think about this? How worried are you about, you know, our fiscal situation?

If I said not at all, that might be a slight exaggeration. But you get the point. And again, there's got a chapter in my book about this as well. You know, we all know about MMT modern monetary theory. I think it's not a bit of a bad rap. I don't like, I don't kind of advertise myself as an MMT. I don't like being put in boxes. But, you know, I started thinking about this stuff as I've sort of intimated earlier back in Japan.

Huey started in 2001 in Japan. I had to sort of figure out what's going on with Huey and how does the monetary policy. relate to the fiscal policies, et cetera. But I think a lot of the way we kind of think about, it's like a category error. We call it government debt, and of course debt means that it has to be repaid. And if something is getting bigger and bigger all the time,

and it has to be repaid, then it sounds like you're on a road to somewhere bad. But what I would argue is that, you know, what we call government debt, and by the way, just on some numbers here, we're up to 34 trillion. That, of course, is the headline number. If you look at debt which is held by the public, that's $27 trillion,

because quite a bit of debt is held within the government. The 100% of GDP. You worry about it's 27. And then you've got a $28 trillion economy as well. So, again, there is a tendency in this debate to pick a number and it says, oh, my God, let's call it 27 trillion. That sounds like a huge amount of money. Well, actually the US economy is a $28 trillion economy, so it's kind of, you know, it's kind of proportionate to that.

The other thing that I don't like is that we're talking about metrics, debt to GDP ratio. And everybody talks about that in percent terms. And when you say, gee, 100 percent, somehow it just cognitively feels like this is unsustainable. As you know, Mark, the debt to GDP ratio, the correct units is number of years equivalent of GDP. So it's a stock over a flow and the correct unit is. So if you said the GDP, the debt to GDP ratio was 100%. What that tells you is that the stock of debt, government debt, is equivalent to one year's flow of GDP, just kind of apples and oranges.

But getting back to the point that I think the way to think about government debt is, it is essentially government created money. And that's what debt is. It's the cumulative budget deficits. And what a budget deficit does is the government creates more money than it withdraws or destroys when it withdraws from the economy. So it's essentially purchasing power. And it's, you know, if it's held in the form of treasuries, people who own treasuries are transferring purchasing power into the future. And so the question in my mind is not the question of how are we ever going to repay this debt, but rather, is there too much purchasing power being created?

and residing in the economy relative to the capacity of the economy to produce goods and services now and into the future. So rising deficits are kind of, or rising debt, is kind of like a race between government's printing too much money and creating too much purchasing power or a lot of purchasing power versus the ability of the economy to innovate and create goods and services at a at a faster rate. So it's not really debt. It's not something that has to be repaid. It's not something that's really a burden on our grandchildren,

because intergenerationally, the stock of debt is both on the asset side and the liability side of society's balance sheet. There are distributional issues obviously associated with it. So the big question is, you know, is it going to be inflationary? And if it is, getting back to our Fed discussion earlier, that would mean the Fed is going to have to,

tighten monetary policy more than it otherwise would have to do. And we've had, of course, an example that we've just been talking about in the first half of the show of what can go wrong when the government is printing too much money relative to the capacity of the economy. You get inflation. Then we know what happens next. The Fed has to tighten monetary policy. We get a slowdown and maybe you get a recession.

So to me, that's the biggest issue. Is it inflationary or not? Not so much, is it some kind of burden on a future generation? That's interesting. That's not what I expected. But I hear you. I guess two areas that we can explore. The first is if the economy is at full employment,

and I think we're there, you know, it feels like we're at full employment, sub-4%, you know, past two years, that kind of thing. It doesn't feel like, it feels like we're kind of there in terms of what the federal government can do or should do in terms of running these large budget deficits, right? Because if they run large budget deficits and they're increasing, that means tax cuts and or spending increases that's juicing up the economy, going beyond full employment, and creating those inflationary pressures that you said. Let me stipulate. I agree with you,

the constraint, the limitation, limiting factor here is inflation. I mean, if you juice up your economy with large budget deficits and you generate inflationary pressures, higher interest rates, that's the, that's kind of the governor here that, you know, ultimately matters. But aren't we already there, you know, in the current context? Well, I think that kind of gets back to the discussion we had before that, you know, is the Fed on course to achieve its inflation target? And if it is, you know, in the short to medium term, that would kind of imply, well, the kind of government spending we have at the moment is fine. The economy is at full employment. We've got inflation where we want it. And the Fed is regulating demand in the economy appropriately.

You know, I think another angle, maybe two angles on this with the related is it's not. Another issue, of course, is, you know, do you want such a big government? And there's two ways which the government, and I think that's the political argument here, rather than the sort of economic argument per se. Well, no, there's an economic aspect to that too, right? I mean, you hear that the, in the CBO would, in its estimates, would say that the government is less productive than the private sector, all else being equal. Therefore, you don't want to err on the side of big budget deficits.

You want to err aside on, you know, more balanced budget, so the private sector can take more the government, the economy's resources, and it's more productive that way. That's the argument. Right, right. So that's definitely one of the arguments is, so to me, that's the more, more important argument. Okay. And that has to be the battlefield for that is obviously the political system. But, you know, government. Again, though, I mean, like, for example, you look at infrastructure spending, and you go look at the CBO, and I'm just using the CBO because they're viewed to be nonpartisan, nonpolitical, and I think that's true. And you look at their studies on infrastructure spending, they'll say that, you know, those investment dollars that the government's spending

on infrastructure are less productive than the investment dollars the private sector could have used, if not for the government taking it for infrastructure. So they, the kind of the general thinking is the government, and certainly it's on the margin, it depends, lots of factors, but generally the thinking is that you want to shepherd the government's resources so you can have more resources for the public sector to invest? No, you don't buy into that? No, I mean, I think that's that's that's kind of right in the sense that ultimately, um, so if the government is is doing a whole lot of infrastructure investment, think about it in terms of these investment dollars, I would think about it more in terms of

the, the government then is making, is commanding real resources in the economy. And those, obviously the resources that the government commands are not going to be available for the private sector to command. And then the question is, so who would you have rather commanding the resources, the government or the private sector? Now, some people would argue, well, if it's a private good, you want the private sector. If it's a public good, maybe you want the government

doing it more because the private sector is not going to build the bridges and the infrastructure. So you get into that sort of argument. But that's one area. The other area that is kind of blighted over a little bit when we have these budgetary discussions and you look at revenues and you look at expenditure breaks down,

is the government does two things. It transfers income. And that's social security, Medicare. Once that income gets transferred, of course, those dollars then get released into the economy and command resources. But there's this other issue of how big a role do you think the government should have

in income distribution? And that has an economic dimension to it as well because economists would say, well, The bleeding heart side of me says we should do a lot of that. The government can create dollars instantaneously. Creates too many. It'll get inflation, but it can create the dollars. On the other hand, if you create welfare dependencies, you're going to also probably end up

with a less efficient economy, which is not good for anybody in the long run as well. So again, to me, those are the interesting debates, very complicated debates. but too often this debt issue is sort of short-circuited by people saying, oh, look at that number, 34 trillion, look at the debt clock, it's unsustainable. I don't think that's the right way to think about it. Yeah, so, okay, so just to put it into Zandi's mind, the way you're thinking about it is the deficit debt debate, it's not really about a debt, it shouldn't be a debate about deficit and debt.

What is the debate over is the size of government, the role of government. You mentioned income distribution, but the role of government, and also this governor around inflation. I mean, if the government starts running these huge budget deficits in the context of a full employment economy, you've got a problem because inflation interest are going to rise and going to get a recession. Yeah, and that's a great point, Mark, and it segues into another point that I've sort of made for the last few years, is that fiscal policy, as well, we're going to be a good question.

we're talking about can be inflationary and sometimes very inflationary. But when you step back and look at the macro economic policy framework that we have in the Western world and here in the US, we have this separation of monetary and fiscal policy. And there's an aggregate demand and inflation control element to fiscal policy. But we don't give that to the Fed. We don't give that to the technocrats. We say that's political. That's something that the that the government has to deal with. And we give the Fed the job, although it doesn't have all the tools, it doesn't control a large part of the picture of how that money is coming into the economy. We give it to the Fed to do. So what I've argued a number of pieces over the years,

a little bit of this is in my book as well, that we need at some point to step back and have a a sort of whiteboard discussion about what does the sensible optimal framework of macroeconomic policy management, which includes monetary policy and fiscal policy look like? And shouldn't there be more coordination, communication and joint responsibility between what we call the fiscal and the monetary arms of that process? Rather than just, you know, under the, under the of rubric of, well, we have to keep monetary policy independent and isolated from political influences. Let's not have that coordination. Because at the moment, the de facto framework is the fiscal, you know, the politicians make their decisions about how much spending they're going to do,

how much taxing they're going to do, and therefore net net, how much purchasing power is injected into the economy. And the Fed has to take that as a given and say, okay, while they're spending too much, that's going to overheat the economy. We're going to have to tighten monetary policy to offset that. And there are distributional consequences of that. So this argument that says, you know, we shouldn't bring fiscal policy under that purview because there's distributional issues, and that's not the role of technocrats to worry about that or to weigh in on that.

Monetary policy implicitly does have a distributional effect or set of implications, you can't get away from that just by saying, well, the Fed is independent of the government. So I don't have all the answers here, but I think a debate needs to be opened up to say, this is not the best framework in the world that we have at the moment, and how could we improve it? Yeah, although, I mean, you don't, I think that's a really, the Fed's got a complicated job already. I got to achieve full employment and I got to keep inflation low and stable. pretty hard to throw another objective, you know,

worry about the income distribution at the same time. Okay, you know, so I hear you, but that's a pretty tough one. Can I, let me push back a little bit more, though. The other argument you hear,

which I'm somewhat sympathetic to, is that goes to interest payments, okay, that real cash out. And here's, here's the, Statistics I was going to give you with this big, the big hint I just gave you. So here's the two statistics.

Tell me what they are. $860 billion, $775 billion. $860 billion, $775. Go ahead, Chris. I'm going to say one is interest payments and the other is defense. Exactly. $775 is interest payments. That's the in the year ending in February of 2024.

$860 billion is, do I get that right? Yeah, $860 billion is defense year end. But the trajectory here is that these lines are going to cross here in the not-to-distance future because all you have to do is go back a few years ago and interest payments were half of what they are today. So you look out a couple of years from now, maybe even a year from now, you know, given the trend lines, we're going to be shelling out as a nation more on interest payments than our own defense.

And that's never happened in our history. The last time we even came close was back in the 90s. And that's when we made some pretty tough fiscal choices to kind of rein in spending and raise taxes. And the U.S., unlike I think this is where U.S. and Japan kind of part company, a lot of those bonds are owned by foreign investors. U.S. Treasury bonds that are issued to finance the deficit are owned by overseas investors, I think about a third of the debt. And we're talking about the Japanese. They're the one of the, they may be the largest, you know, foreign investor, the Chinese, the, you know, folks from the Middle East, you know, these are people who are shilling out. And I think in the Kate, Craigman,

you know this much better than I, Paul, but I think the Japanese JGBs are much more owned, There are much fewer owners outside of Japan. These are Japanese households that are effectively, you know, buying that debt. So isn't that a matter of some concern here that at some point we're going to be shelling out, you know, more on our interest on the debt than to, you know, to maintain our own defense? I think, well, I think that's a little bit of apples and oranges, but it's a little bit one of these, again, one of these kind of like stark numbers, but you said, well, you know, is that really the issue, there's some kind of race between interest payments and defense spending. By the way,

I think I'm correct in saying that if you look at the fourth quarter interest payments number in the US and annualize it, it's now over a trillion. I think it is over a trillion. Yeah, annualized it. And so obviously, obviously, so that's one of the issues. Now, again, there's a, the apples and orange bid here is that interest payments are a monetary transfer. The government creates money out of thin air, including the interest payments, and transfers that to the public. So it's money injected into the economy. It's a little bit like a fiscal transfer. We think of it as a concomitant of monetary policy. So, you know, the interest on the debt goes up when the Fed raises interest rates because, you know, coupons go up and that's what happens.

But it's really a kind of a fiscal transfer. So that bit of it, you could argue, is actually kind of, you know, stimulatory to the economy, but it goes essentially to the rich people, a very low marginal propensity to consume. So again, I would look at that issue more from the viewpoint of not like it's a big number, yes, it's a big number, but it's really an income transfer to the people who hold the bonds and the bonds there because of prior budget deficits, that money's moved around the system. But I don't think there's any intrinsically right or wrong about that number being bigger or smaller than defense spending. I think you could. No, it's just, that's a didactic tool to just drive home. Right, right. Yeah.

I think you could turn it on its head and say, is the U.S. spending too much on defense? I mean, they are real resources, and they are resources that are not then available for the New York subway. Getting back to the, your car insurance, Mark, my car insurance bill is zero. Right. Because I live in New York and I don't have a car. But I do worry about the state of the New York subway. So again, I think we get. What about the point? I'm, you know, I think I'm writing this.

I, you know, at least one third of the payments are not going to American, at least nominally American investors are going to the Chinese. They're going to the Saudis. You know, should we, should that enter into the calculation at all? I don't. You're right. So that 34 trillion, take out the internal debt. You're down to 27 trillion.

About $8 trillion is held by foreigners. Right. So about one third or so, a little more maybe. And you mentioned Japan. Japan, that number historically, of course, Japan has a lot, like relative to the economy, a lot more debt, accumulated, you know, something like 1,200 trillion yen. I mean, it's a mind-boggling number. And that used to be typically, you know, about 5% or so.

I think it's actually moved up. A number I saw recently was more like 15%, even a little bit higher because, you know, portfolio decisions that investors are making globally. You know, the way I kind of look at it, particularly when you look at Japan and the US, is I like to fall back on the national accounting identity. I'm sure you, you know, it's bread and butter to you guys as well. but, you know, the current account balance is your, is the country's essentially their net savings rate, if you like, net of investment. And you can split that into private and public.

So if a country is running a current account surplus, now Japan historically has run a current account surplus of about 3% of GDP on average over the last 40 years or so, 2.9, something like that. That means that net net, Japan is actually accumulating claims on foreigners, if you like, lending to foreigners. So it's the government. The government looks like it has a debt problem, but Japan is a country doesn't. The US is very different because it's almost mirror image. The US historically has run the current account deficit of about 3% of GDP. I think that's around about right, roughly 3%. Yeah.

And let's say the budget deficit now. I was talking about 6% of GDP, something like that, negative. The missing component is the private sector is running a surplus, which is covering part of the government's deficit, but not enough to be a net lender to the rest of the world. So cut a long story short, yes, net net, when you take everything into account, the US is essentially importing more than it's exporting.

So the rest of the world is accumulating plans. dollar claims on the US. You know, is that Trippin's dilemma? Is that what the US, the price, if you like, that the US has to pay to be the reserve currency, which gives a lot of benefits to the US? I think there's, you know, some people say, no, that doesn't follow.

I think it more or less does. So if the rest of the world is going to be demanding the safe asset of treasuries, essentially the US has to be running a current account deficit to be a net supplier of dollar claims. So I think when you get into question, if you dig into that, then you say, well, hold on, that means some money is going from the treasury to Chinese investors, Japanese investors, Saudi investors.

I guess my reaction is, yes, but that is the way in which a globalized economy and financial system operates. And I don't think you can just, you know, it almost feels a little bit, I don't want to use the word racist or xenophobic, but it's like to pull out that bit and say, oh, Why is money going to the Chinese? I mean, at the end of the day, I mean, you understand the argument. I mean, right? I mean, you got voting Americans saying, I'm interested in America.

You know, yeah, but those voting Americans, but it's reality. Those voting Americans are also helping the U.S. run a current account deficit to be China. Yeah, true. If China is going to have a trade surplus vis-a-vis the U.S., which it still does, yeah, whose fault is that? It just makes you, it's not even that. It's like, okay, we're now in this pitched battle with the Chinese, the U.S. and China.

It's not a commentary, good, bad, or whatever. It is what it is. Chinese own a lot of treasury bonds and accumulating a lot of treasury bonds. Feels like, you know, I was going to say it feels like we should be worried about. Now, on one hand, will the Chinese actually shoot themselves in the foot? I mean, that's what they would be doing if they kind of sold or. didn't buy or whatever. But on the other hand, push comes to shove, they might.

They might use that as a tool because they know it's going to hurt the U.S. as well. So it's a vulnerability, right? But you're saying that's a price for globalization. Yeah, but I think in some ways they're more vulnerable than we are. And bear in mind that those interest payments that go to the Chinese because they're holding treasury debt are dollar interest payments that they have to deploy in the U.S. economy or find somebody else through the foreign exchange markets who is prepared to hold those dollars instead of the Chinese, which means going into euro or yen or, you know, Aussie dollars

or Kiwi dollars, you rapidly run out of big liquid, you know, number two, number three, number four reserve currencies that China can offload those dollars into. So, you know, ultimately that purchasing power that the Chinese are getting their dibs into is purchasing power that's going to have to be released back into the US economy at some point. Now, it does mean that maybe our grandchildren, I don't know what sort of factories they're going to be working in in the future if the robots have not completely taken every job. But they're working in some factory.

They're churning out products, you know, electric vehicles or solar panels or whatever we're producing in that period. And some of that stuff will be going to Chinese consumers rather than American consumers. Then you ask yourself, again, you talk about voters, but do our grandchildren care too much about that? Or are they more interested in having a job and working for a company that's selling and shipping product out the door? And of course, all of that is the reversal on the flip side of the current generation today, you know, importing a lot more from China than we're exporting to them. So that's sort of the intergenerational transfer bit, but it's a little bit more subtle than just

the debt being a burden on the grandchildren. You know, I just looked at the clock and I think, oh, my gosh, like we've been chatting a while. But I, and we're running out of time. But one quick question. Is there any, assuming that fiscal. policy is running in a way that we're not generating inflationary pressures. And is there any kind of fiscal situation, deficit debt or any other measure you want to use,

where you'd say, okay, this is a problem or not? I mean, can we be Japanese-like, have a 225% debt-to-GDP ratio? No problem. Yeah, absolutely. I mean, it should be able to blow through Japanese numbers because the U.S. is the reserve currency. Okay, okay. But what would you worry about? I think what you would worry about is a breakdown in the institutions,

a loss of confidence in the dollar and the institutions that produce the dollar. So underlying all of everything that I've said is this implicit assumption that the Fed is there, it's independent, it will do its job, and it can do its job. It might mean if you get too much fiscal spending, you're going to end up with a higher R-star in some sense. That would be one thing that, you know, too big a government, too much intrusion, too much spending might push that R-star up, that natural rate of interest.

But in any case, cyclically, that Fed will have to raise interest rates higher as a cyclical peak to quell inflation. And that will have all sorts of impacts on all these invisible people that we don't even think about. People are going to pay the price for that. So it is an issue to think about. But if we moved into Banana Republic territory and you had a breakdown of the institutions, and at some point people said, wow, I just, I don't trust these jokers. I'm losing confidence in the fabric, the social contract almost.

then you get into, so again, another one of the underlying assumptions, Mark, is that we are prepared to deal in dollars and to hold dollars. You've mentioned your taxi driver in, was it Atlanta or Phoenix? Yeah, I was in Phoenix. You know, that is the scenario in which cryptocurrencies and whatnot sort of come into play that people, you know, Argentina and dollarization of the economy. But I think we're way, way, way, way away from that kind of scenario. Very interesting. I knew you knew a lot about this and I thought about it deeply, but I didn't know where you stood. So I am surprised.

But very fascinating discussion. And I have to, I think I'm going to hear from the listeners and they're going to say, bring the other side of this on the conversation on. But I thought it was a very interesting, very fascinating the way you thought about it and framed it. Well, one last thing. You want to give us the title of your book again? Oh, yeah, sure.

So if you can see it, the power of money, how governments and banks create money and help us all prosper. So it's a kind of a positive spin. You know, Wall Street gets a lot of beating up. You know, money helps the world go around. We didn't have money. You know, we wouldn't have this thriving economy producing $28 trillion of goods and services. I opened the book with a quote from Hobbs.

That's how we'd be miserable and whatnot without money. But it's a kind of a bit of a primer on money and how it all works and what's the right way to think about it. Cool. Is I remember, was this the same Hobbs that says no man's an island under themselves? Probably. I'm talking about the Leviathan Hobbs. Oh, the Leviathan Hobbs.

Yeah, right, right. Okay. Well, so good to have you on, Paul. I really appreciate you taking the time. And I think, guys, we've taken our fair share here. We better move on. So, dear listener, economics hasn't been this much fun for a long time. Oh, that's a real endorsement.

We'll have to put that somewhere on a tweet or something or, you know, one of those on X or LinkedIn or something. I appreciate that. And with that, dear listener, we're going to call it a podcast. Talk to you next week.