WEBVTT
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So the old saying is that Democrats believe in tax and spend, and Republicans believe in borrow and spend.
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But either way, you had lots of spending and therefore deficits, and they just keep going up.
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And the big beautiful bill, one big beautiful bill act is not going to do anything to reduce the deficits, anything meaningful.
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You're listening to Bite-Sized Business Law, where we discuss big issues in small doses.
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This podcast is sponsored by the Fordham University School of Law Corporate Law Center, which is run by Fordham Law Professor Richard Squire and me, your host Amy Martella.
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Okay, let's get down to business.
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Welcome back to Bite-Sized Business Law.
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Up until a few weeks ago, another X date was looming on the horizon for the date on which the United States would default on its debt.
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The passage of the big beautiful bill assuaged immediate concerns about the national deficit, but questions remain about whether the bill will put America on a trajectory towards dangerously deeper debt and what the Federal Reserve's role will be in navigating the resulting economic landscape.
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Back with us today is one of my favorite guests, Richard Squire, professor of business law here at Fordham Law School and the faculty director of the Corporate Law Center.
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Richard, welcome back.
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Amy, it's great to be back.
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Thank you.
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And I just need to correct you on one thing.
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It is true that the recent legislation increased the debt ceiling and increased it from 36.1 trillion to 41.1 trillion.
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So a little bit more runway before we run out of borrowing capacity.
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But the name of the bill is the one big beautiful act, the O Triple B A.
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And that is the official name.
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So it's not just the Big Beautiful Bill, it's the One Big Beautiful Bill Act.
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And I love the fact that that is actually became the name of it.
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It's so, I think, emblematic of the Trumpian era that we are in, that even our legislation now has Trump style names.
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You know what?
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So funny about that?
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As I was preparing for this episode, I was doubting that the act was officially called the Big Beautiful Bill or Big Beautiful Act.
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So I went on to Congress.gov.
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Yeah.
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Nope.
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It's called the One Big Beautiful Bill.
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It even has the redundancy at the end.
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Bill Act, the one big, beautiful bill act.
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Yeah.
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Yeah, it's fabulous.
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Never before have we seen a name like that.
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Nope.
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Well, Richard, why don't you start us out by giving us a little background and tell us why we're talking about the national deficit with respect to this new bill?
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Why we're talking about this now?
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The US for a long time kind of prided itself on having a lower amount of outstanding government debt.
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And this is normally measured as percentage of GDP would be the relevant way to think about it, relative to other countries that we might consider to be similar to us, developed countries in Europe or Japan.
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But in the last few years, we've been running deficits at such high levels that now the percentage of total government outstanding debt for the US is depending on how you measure it, but it's about 100% or over now 100% of the GDP.
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So that puts us now very similar to a lot of these countries that we used to hold up our kind of noses at and think, you know, we have much more fiscal restraint, or we're much more prosperous than you all are, so we don't need to run up so much debt.
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So it's over 100% also in the UK, in France, and in Spain.
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It's about 100% of Brazil, which is somewhat of a different category of country.
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Canada, we're now actually by some measures ahead of Canada in terms of outstanding debt.
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We still have a long way to go, however, to Japan, which is 250%, is the figure, the outstanding government debt relative to GDP.
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But you can do much better than these figures.
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Germany, it's only 50%.
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And Sweden, and I know that many Americans look to Sweden as something of an economic kind of nirvana or Valhalla, maybe would be the term, it's only 36% there.
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So countries vary pretty widely in this, even countries that we would consider to be in the developed world.
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But the US now, because of our very high deficits, year after year, we've piled up a huge amount of government debt.
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So how did we get here?
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Because it wasn't that long ago that we had a budget surplus, right?
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I feel like that was a nice compliment to both of us to think that we could remember it, but it actually was 30 years ago.
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So it was a while ago.
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For some listeners, they've never actually in their lifetime seen the U.S.
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government have anything but deficits.
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So surplus actually happened last time under the Clinton administration.
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It was just a few years.
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I think it was kind of a perfect storm of things.
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There was the peace dividend after the end of the Cold War, which allowed for a reduction in defense spending.
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And then you had the government was at loggerheads in Washington.
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You had a Republican-controlled Congress starting in 1994, but a Democratic president in Bill Clinton, which meant they couldn't agree much on spending.
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And so their kind of hands were tied.
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And so spending got tied.
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It was also a boom economy in that time.
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Their tax revenue was coming in.
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And so for a few years, yeah, we did kind of dip up into uh surplus or rise up, I should say, into surplus.
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But no, it started when George Bush, the second Bush, came in to office with Republican Congress.
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Then you had a unified government again, the White House and the Congress with the same party.
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And the Republicans do what they typically do, which is cut taxes and spend.
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So the old saying is that Democrats believe in tax and spend, and Republicans believe in borrow and spend.
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But either way, you had lots of spending and therefore deficits, and they just keep going up.
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And the big beautiful bill, one big beautiful bill act is not going to do anything to reduce the deficits, anything meaningful.
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So even though it raised the debt ceiling, which tell our listeners define the debt ceiling for us, and even though it raised it by$5 trillion, it's not going to help much.
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It won't prevent deficits from occurring.
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It'll just make it possible for the Treasury Department to borrow money to cover those deficits.
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That's what the debt ceiling is.
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So the U.S.
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Treasury Department does borrowing on behalf of the federal government and it issues government bonds, Treasury bonds.
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That's the way it borrows.
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But Congress limits the total amount that it can borrow.
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So the total amount of Treasury bonds outstanding.
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And it was recently 36.1 trillion.
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As I said earlier, now it's 41.1 trillion.
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So it's been raised, as you said, 5 trillion.
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And so that gives the Treasury Department more capacity to borrow more.
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But that borrowing is going to be made necessary by the deficits that the federal government is running.
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The deficit reflects the idea that the Treasury Department is taking in far less in revenues from taxes than it's spending.
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And revenues from taxes and spending, those are set by Congress.
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And so the one big beautiful bill act could have closed those deficits by either raising taxes or decreasing spending.
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Nominally, it didn't really change much in terms of taxes.
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It just perpetuated tax cuts from the first Trump administration back in 2017.
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Then there are some what are portrayed as spending cuts in there, mainly to Medicaid.
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It's not clear, however, how much they will kind of manifest, but we know that some spending increases are going to manifest.
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There's more money for border security and the immigration departments, ICE, and so on.
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And there's also more money for the Pentagon.
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So you have, again, more spending potentially, or maybe not much of a decrease in spending.
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And you also have no increase in taxes.
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And so the deficits are going to continue.
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And a new contributing factor to these higher taxes now is that interest on the old debt, on the old deficits, which have created debt, those interest payments have to be made by the Treasury Department as well.
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And they show up in the deficit.
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Yeah, I mean, I think I'm reading economists from both sides of the aisle agree with that, the idea that this is going to run the deficit higher and higher.
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There's no question about that.
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Yeah, there's no question about it.
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And it's really interesting to think, well, how did the United States get to this place where we have so much outstanding debt?
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And you might think, well, maybe we're just spendthrifts, but we're actually not compared to other countries.
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When I say spendthrifts, I'm thinking about government spending.
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So I've been looking a lot recently at comparing the US to other countries in terms of total spending.
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So if we look at total government spending by in the US, it's a little complex in the US because it's federal, state, and local, and that's the relevant way to look at it is to total it all up.
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But total spending in the US, all government spending, is about 36% of GDP, which as far as I'm concerned is a very high number, but it's actually low compared to these comparison countries that I was talking about earlier.
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Canada spends 42%, Japan spends about that, Germany spends 49%.
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The highest out there is France among this group, which is 57%.
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So compared to these countries, our governments at various levels, most of it is federal, however, spend a lot less.
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So why would it be, even though we have a lot less government spending as a percentage of GDP that these other countries, that we have such high deficits and now as much outstanding debt as them, if not more?
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Again, this is a percentage of GDP.
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And the answer is while our government spends less than they do, it taxes far less than they do.
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Total tax receipts in the US at all levels of government, but most of it's federal, is about 25% of GDP.
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In the UK, it's 38%.
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In France, it's 51%.
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Germany, it's 40%, Sweden, it's 47%.
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The US government at any levels, at all levels, just doesn't take in that much money in taxes.
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And so when you are spending as much as it is, which is actually still a little bit less than other countries, but you're taxing a lot less.
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The only way to make it up is borrowing is the deficits.
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And that's why we have that mounting debt.
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So what can the Federal Reserve do if borrowing is the way to make this up?
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How can they influence the direction of the deficit?
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It's a really interesting question.
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And Senator Cruz from Texas recently made news.
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He was on CNBC and he was talking about in the context of the big beautiful bill legislation, but he floated an idea that kind of scared a lot of people.
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He noticed that the Federal Reserve pays interest on bank reserves and that this costs taxpayers money.
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And he said it's cost taxpayers something like a trillion dollars, or it could save something like a trillion dollars.
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I wasn't sure at first where he got that figure.
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Eventually was able to figure out, I think, what he was talking about.
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But for a long time, the Fed was taking in more money than it was spending.
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Its inflows were greater than its outflows.
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It had net operating profits.
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I think it's the year where you get that trillion dollars is 2009 to 2022.
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It's something like that.
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During those years, in total, it had net operating profits of about a trillion dollars.
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And that's after it operating expenses and also after it pays dividends to its own member banks, which are only about a billion dollars a year, which is a lot of money, obviously, uh, but for the for the um uh Fed its arounding error.
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And under federal law, under the Federal Reserve Act, all of those excess profits, so the net operating profits that the Fed was making, it has to turn them over to the Treasury Department.
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And so the Fed was itself a source of revenue and a big source of revenue.
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And that was helping to defray the government spending that wasn't being covered by borrowing.
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But the Fed has adopted a policy, it actually adopted it in 2008, but it didn't really become consequential in terms of the bottom line until the last few years of paying, like I said, interest on bank reserves.
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Reserves are basically cash and cash equivalents, gold and things like that, that banks don't lend out.
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And so it's basically money in the vault.
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And the question would be well, why doesn't a bank lend out all of its money, right?
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That's how it makes money is by lending out the money it receives through deposits.
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And the answer is that there's always a worry about a bank run.
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You have to worry that your depositors will take out their money all at once, and then you run out of cash.
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And so the reserves are cash that is sitting there against that possibility.
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Now, banks generally don't want to hold very much in reserves because it doesn't pay anything.
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It's inert money.
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And so the game in banking traditionally was how low can I keep my reserves and stay safe?
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Are there laws about how much they need?
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Now, once the Fed came along in the United States, we had a central bank.
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One of its duties is to help stabilize the banking system.
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And so it actually put laws in place, minimum reserve ratios.
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So at that situation, these banks had to keep a certain amount of cash in the vault.
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But the Fed also offered a service.
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It said, you don't have to actually keep that cash, the dollar bills or the gold, if you want to do it that way, but it's mostly uh dollar bills, in your bank vault physically at your on the corner.
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We will let you open up a reserve account here at the Fed.
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So the Fed is the banker to the banks.
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And so when they these banks have reserves, they keep most of it with the Fed.
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And they can make withdrawals at any time.
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So it's just as good for them as having it in the bank, but it's more secure, it's safer, they don't have to move it around amongst branches and so on.
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And they would typically keep in these reserve accounts the minimum that the Fed required them to keep based on their liquidity risk, the risk of a run and how big their deposits were and so on.
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But in the 2008 financial crisis, the Fed became concerned that the normal way that it would try to fight inflation, which is take money out of circulation, it was going to run out of that mechanism.
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It was called open market operations.
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It used a particular type of treasury bond to do it or treasury bill.
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It was worried that it was going to run out of it.
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So Congress had recently empowered it to pay interest on these bank reserves.
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So this was actually something that banks would complain about.
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They say, when I park my money in reserves, either in my vault or at the Fed, but either way, to comply with these reserve ratio laws, I don't make any money on it.
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My shareholders don't do well.
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So the Fed said, fine, we'll start paying you interest on it.
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Now that was good for the banks and for their shareholders.
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But also from the Fed's perspective, they thought, you know, this actually will help fight inflation because money in bank reserves doesn't circulate.
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What causes price inflation?
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Too many dollars chasing too few goods and services.
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Well, it's the chasing part.
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Only dollars in circulation are chasing anything.
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If money is just sitting there in the bank, it doesn't contribute to price inflation.
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So the Fed said, oh, I see what we can do here.
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If we start paying interest, the banks will just start parking their money with us and there will be less circulating money, and that will bring down price inflation.
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Originally it was just a quarter percent, which wasn't that much.
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Now it's 4.4% on bank reserves.
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So bank reserves are now huge.
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They must have used to be very small.
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Now there's more than 4 trillion in bank reserves with the Fed, federal bank reserves, and it's paying all this interest on it, which is why now the Fed doesn't have a profit anymore.
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It has its reporting operating losses.
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So let's go back now to Ted Cruz's idea where he says, this is losing the treasury, basically, all this money.
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Let's just outlaw this.
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Well, think about what would happen.
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If the Fed suddenly lost its power to pay interest on these reserves, the$4 trillion in bank reserves would then all drain out, or all of it would drain out that the Fed would allow.
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It'd probably put a new reserve ratio law in, but it would be a lot lower.
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All of that would drain out because banks would say, well, I'm not going to sit here and make no money on this when I can lend it out to Amy to buy a new home, let's say, or I can pay it as dividends to my shareholders, for example.
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That money will start circulating again, and then you'll have a huge amount of inflation, right?
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So there's a couple groups that won't like that proposal.
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One is the banks themselves.
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Like this is a this is free money right now, huge amounts of free money on this interest on the bank reserves.
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But also it would be very inflationary, which would be very damaging from an economic perspective, but also from a political perspective.
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So I don't think it's going to happen.
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I don't think that now that the Fed has gained that power, it's one of these government programs, or once it's enacted, it's very hard to repeal it.
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I can see a different fix.
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And I've never heard anybody talk about this, but it's not impossible.
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Congress could change the Federal Reserve Act to say it doesn't matter, Fed, if you are running a surplus or a deficit in your operating profits or your net income.
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Every dollar that the US that you receive an interest on US Treasury debt, you do have to redeem that back to the Treasury, just like you were doing before, before you were started reporting these losses.
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And so that would bring money back into Treasury.
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And so that would help with the deficits a bit and wouldn't require basically what would be something like a bank run by the banks on the Fed itself, which is what would happen if the Fed suddenly stopped paying interest on reserves.
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And it wouldn't be a bank run in the sense that the Fed would run out of cash because we know it can't, but it would have those inflationary consequences.
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Yeah.
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And I would think the entire banking industry would oppose this.
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Absolutely.
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They would stand shoulder to shoulder and they would say, this is the greatest gravy train we've ever had.
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And they'll say things, of course, like, you know, this will destabilize the banking system, you know, this will be bad for the economy, our shareholders, you know, and so on.
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And it's not a complete lie.
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There would be a little bit of that.
00:16:11.679 --> 00:16:17.600
But I think the main effect actually would not be destabilizing of the banking sector so much as a massive price inflation.
00:16:17.840 --> 00:16:23.279
There's one thing that the proposal that I just described would do, and this may be politically difficult.
00:16:23.600 --> 00:16:27.919
We don't officially in this country monetize the debt.
00:16:28.080 --> 00:16:31.360
You won't see that term used by politicians or anybody at the Fed.
00:16:31.519 --> 00:16:33.120
It doesn't appear in legislation.
00:16:33.360 --> 00:16:35.840
Economists recognize that that's what's happening and so on.
00:16:36.000 --> 00:16:51.279
But when you have the idea that the Fed is monetizing the debt, it does call into question a little bit the notion that the Fed is an independent agency, or even some people say it's a private company because it has private banks that hold its shares, rather than being just another government agency.
00:16:51.519 --> 00:17:02.799
And if the law were to be changed to say, look, you Fed, any money you get from the Treasury Department in interest on treasury debt that you own, you just pay, you just remit that is the verb that's used back to Treasury.
00:17:02.960 --> 00:17:07.759
If you make it any other way, because the Fed also owns mortgage-backed securities and it receives interest on those.
00:17:07.920 --> 00:17:08.799
So you can keep that.
00:17:08.880 --> 00:17:14.319
You can pay that out on bank reserves if you want, but anything that comes in from Treasury, you just give it right back to us.
00:17:14.480 --> 00:17:19.759
That would make very transparent what's happening, which is the Fed is simply monetizing the debt.
00:17:19.839 --> 00:17:21.119
Because think about it this way.
00:17:21.279 --> 00:17:22.640
Let's say you have some rich uncle.
00:17:22.880 --> 00:17:28.480
The rich uncle would be Fed here, Uncle Jerome, and he says, Amy, I'm willing to lend you a million dollars.
00:17:28.559 --> 00:17:31.359
You know, I know you want to buy a house or you know, you want to do some things.
00:17:31.519 --> 00:17:34.079
And you say, Wow, that's nice, but what's the interest going to be?
00:17:34.160 --> 00:17:35.759
And he says, Oh, no, no interest.
00:17:36.000 --> 00:17:38.880
Technically, you can pay me interest, but I'll hand it right back to you.
00:17:38.960 --> 00:17:40.079
So basically, it's no interest.
00:17:40.160 --> 00:17:41.119
And then you say, Oh, wow.
00:17:41.200 --> 00:17:42.480
And when do I have to pay it back?
00:17:42.720 --> 00:17:47.920
Nominally, it's due in 10 years, but if at 10 years you want to roll it over, you can do that.
00:17:48.079 --> 00:17:53.279
And you can roll it over, meaning you don't have to pay, we'll just re-extend the deadline, the maturity date, another 10 years.
00:17:53.359 --> 00:17:54.480
You can do that forever.
00:17:54.720 --> 00:17:57.920
It's clear then that your uncle has not lent you a million dollars.
00:17:58.000 --> 00:17:59.440
He's given you a million dollars, right?
00:17:59.519 --> 00:18:00.559
That's a gift, right?
00:18:00.720 --> 00:18:11.359
And so if it becomes completely transparent that the Fed, when it buys US Treasury bonds, is basically handing cash through the markets, but it's ultimately handing it ultimately over to the Treasury Department.
00:18:11.519 --> 00:18:13.440
The Treasury doesn't have to pay interest on it.
00:18:13.599 --> 00:18:20.000
And everybody knows that when that debt comes due, those treasury bonds come due, the Treasury can issue new ones and the Fed will buy those.
00:18:20.160 --> 00:18:23.680
Then it really is clear that the Fed is giving money to the Treasury Department.
00:18:23.920 --> 00:18:25.599
It really is just monetizing the debt.
00:18:25.680 --> 00:18:30.880
And that might be just too transparent money printing for the political system to tolerate.
00:18:31.039 --> 00:18:34.079
So that could be a possible objection to my proposal.
00:18:34.319 --> 00:18:37.039
I don't know how many people out there would really care that much, however.
00:18:37.200 --> 00:18:46.319
I mean, does it upset you as an American citizen that a little bit, some percentage of the, or maybe eventually a large amount of the debt every year is converted into cash.
00:18:46.640 --> 00:18:47.279
It's printed.
00:18:47.440 --> 00:18:50.160
I mean, especially when you think, well, it's either that or it's taxes.
00:18:50.240 --> 00:18:52.240
You know, it is it clearly that it's worse.
00:18:52.400 --> 00:18:59.519
Maybe if it's not going to have been hyperinflation, a little bit of taxes, a little bit of money printing, you know, as the best mix to go.
00:18:59.599 --> 00:19:00.480
What do you think?
00:19:00.799 --> 00:19:02.400
Yeah, no, I'm not bothered by that at all.
00:19:02.559 --> 00:19:07.359
First of all, I think most people don't realize that the Fed isn't officially a government agency, you know.
00:19:07.680 --> 00:19:08.720
Oh, that's a really great point.
00:19:08.799 --> 00:19:14.799
Like the whole notion that it's independent or to even a private, that's a fiction that only government officials or Fed officials themselves indulge in.
00:19:14.880 --> 00:19:16.880
Everybody knows, of course, it's part of the federal government.
00:19:16.960 --> 00:19:17.200
Yes.
00:19:17.279 --> 00:19:17.440
Yeah.
00:19:17.599 --> 00:19:18.960
It's right there on the name, right?
00:19:19.039 --> 00:19:19.599
That the Fed.
00:19:20.000 --> 00:19:20.880
It's on your dollar bill.
00:19:21.039 --> 00:19:21.920
Yeah, right, exactly.
00:19:22.240 --> 00:19:25.759
Yeah, but I hear you that optically that's politicians, that's all they care about.
00:19:25.920 --> 00:19:27.359
So I don't know if they would go for it.
00:19:27.440 --> 00:19:30.559
Aaron Powell It would really be kind of saying the quiet part out loud the way they say it.
00:19:30.720 --> 00:19:38.400
But I think that it certainly would be better than the massive amount of inflation I think that would occur if what were enacted what Senator Cruz suggested.
00:19:38.559 --> 00:19:42.160
And between you and me, I'm not sure he realized that would be the implication of that.
00:19:42.400 --> 00:19:47.039
He just may have said, hey, there used to be all this money coming into the Treasury Department, now it's not coming in anymore.
00:19:47.119 --> 00:19:50.880
Instead, it's going to the banks, that feels like a populist kind of objection, right?
00:19:51.039 --> 00:19:52.720
Like, aren't the banks rich enough already?
00:19:52.880 --> 00:19:54.880
Why is the US taxpayer funding the banks?
00:19:55.279 --> 00:20:00.640
When you frame it that way, you can see why maybe people on both sides of the aisle will be like, yeah, this thing's kind of fishy.
00:20:00.799 --> 00:20:12.000
But when you realize now it's actually an anti-inflationary mechanism, and it's because you, Senator Cruz and everybody else in Congress can't get a balanced budget passed that it suddenly becomes more complicated.
00:20:12.400 --> 00:20:17.119
So what about the idea that if most of our debt is issued in US dollars?
00:20:17.440 --> 00:20:17.680
Yes.
00:20:18.079 --> 00:20:19.359
I think it all is at the federal level.
00:20:19.599 --> 00:20:19.680
Right.
00:20:19.839 --> 00:20:19.920
Yeah.
00:20:20.000 --> 00:20:22.079
And probably the state and local levels too, yes.
00:20:22.799 --> 00:20:27.039
We're kind of a lucky country in that way in that we don't have to borrow in foreign currencies like Argentina does.
00:20:27.440 --> 00:20:27.680
Right.
00:20:28.000 --> 00:20:33.279
So how can we ever default on debt that's denominated in our own currency if we could just print more to service?
00:20:33.759 --> 00:20:34.720
It's a great question.
00:20:35.039 --> 00:20:43.599
It's very unusual for a country to default in a fiat currency when it has its own fiat currency and its debt is denominated in that currency.
00:20:43.680 --> 00:20:46.160
So a fiat currency is a currency that's not backed by anything.
00:20:46.319 --> 00:20:47.920
The US dollar used to be backed by gold.
00:20:48.079 --> 00:20:49.839
Now there's nothing back in it that's real.
00:20:49.920 --> 00:20:52.880
So that means that the US government could, in theory, print as much as it wants.
00:20:53.039 --> 00:20:55.279
Now, the printer here is the Fed.
00:20:55.440 --> 00:20:59.920
But if you look in your wallet, I look at a$20 bill, it says Federal Reserve Note.
00:21:00.079 --> 00:21:02.000
They're actually claims against the Fed.
00:21:02.079 --> 00:21:05.359
They used to be redeemable in gold from the Fed, but they're not anymore.
00:21:05.440 --> 00:21:09.119
So there's a theory an infinite capacity to produce this.
00:21:09.359 --> 00:21:21.759
There's a political and economic constraint because when more money is generated by the central bank and other central banks do the same thing as our central bank, which is the Fed, it causes price inflation in the economy, which has economic and political consequences.
00:21:21.920 --> 00:21:23.920
But that's not a physical constraint.
00:21:24.000 --> 00:21:26.880
There's no physical constraint on generating as much cash as you want.
00:21:26.960 --> 00:21:30.480
So you might think, okay, well, how could you ever default on a debt?
00:21:30.640 --> 00:21:33.440
Let's treat the Fed now as part of the US government, which I do.
00:21:33.519 --> 00:21:35.359
I think that's the right way to think about it ultimately.
00:21:35.440 --> 00:21:41.599
And say, look, the government borrows, it borrows in dollars, but it has to repay people on US Treasury debt in dollars.
00:21:41.680 --> 00:21:42.720
But it could just print more.
00:21:42.799 --> 00:21:44.160
You know, it's like eat as many as you want.
00:21:44.240 --> 00:21:45.759
There's like those ads for Doritos.
00:21:45.920 --> 00:21:46.720
We'll just make more, right?
00:21:46.799 --> 00:21:48.640
Like we can just print as much as we want.
00:21:48.880 --> 00:21:54.240
It would be very unusual for a country like the US to default because it ran out of dollars.
00:21:54.400 --> 00:21:57.759
Because if there's a dollar deficit or shortage, you can just print more.
00:21:58.000 --> 00:21:59.680
Interestingly, Russia.
00:22:00.160 --> 00:22:03.519
Did default on ruble denominated debt in 1998.
00:22:03.599 --> 00:22:05.119
And it was also a fiat currency.
00:22:05.200 --> 00:22:06.480
The ruble wasn't backed by anything.
00:22:06.559 --> 00:22:10.079
It wasn't backed by rubies or anything else, precious metal.
00:22:10.240 --> 00:22:16.799
So it could have printed more, but its own central bank was so concerned about hyperinflation.
00:22:17.039 --> 00:22:20.240
Russia had gone through hyperinflation in the early 1990s.
00:22:20.400 --> 00:22:27.039
When this debt was coming due and the government was unable to roll it over, the Russian central bank said, yeah, we're not going to print anymore.
00:22:27.119 --> 00:22:28.400
We'll just let you default.
00:22:28.559 --> 00:22:37.920
And so that was a decision, kind of an economic and political decision made saying we think the pain to our society of a government debt default is less than the pain of hyperinflation.
00:22:38.160 --> 00:22:47.519
So if there ever were a US government default, because the government had run out of dollars, and there's other technical ways that defaults can occur, but that's the big one that people worry about.
00:22:47.680 --> 00:22:57.440
It would be because the Fed decided that we're not going to keep monetizing the debt, because we are, like the Russian central bank was in the late 1990s, worried about too much inflation.
00:22:57.599 --> 00:23:00.079
But in the absence of that, it's a pretty safe bet.
00:23:00.160 --> 00:23:06.160
And this is why US Treasury debt is still considered to be, or the yield on it is still considered to be the risk-free rate.
00:23:06.400 --> 00:23:12.240
The default risk on it is considered to be effectively zero, at least for the for the foreseeable future.
00:23:12.559 --> 00:23:23.200
So what's worse, like continuing to move the goalpost with the debt ceiling and ballooning this deficit out of control, or issuing more money and creating an enormous amount of inflation?
00:23:23.519 --> 00:23:29.440
Yeah, it's a really good question because every dollar that the US government spends has to be paid for.
00:23:29.519 --> 00:23:30.960
There's a way of describing this that I like.
00:23:31.119 --> 00:23:32.559
This isn't in any way original.
00:23:32.880 --> 00:23:38.240
Ultimately is going to take the form of, or there's going to be a tax on somebody to come up with that dollar.
00:23:38.480 --> 00:23:43.599
Now, most of the spending is now covered by actual present taxes collected by the federal government.
00:23:43.759 --> 00:23:50.160
Those are payroll taxes, those are income taxes, corporate income taxes are a little bit, tariffs might be a bigger factor going forward.
00:23:50.400 --> 00:23:51.599
That is most of it.
00:23:51.759 --> 00:23:54.160
That's a tax on present taxpayers.
00:23:54.319 --> 00:23:57.119
There's also a part that is through borrowing.
00:23:57.359 --> 00:24:09.039
Now, borrowing can be thought of, however, as just a tax on future taxpayers, because ultimately that money will have to be paid back unless the government defaults on that debt, in which case that's a tax on the bondholders, right?
00:24:09.119 --> 00:24:10.640
They're the ones who take the hit.
00:24:11.039 --> 00:24:17.759
And then the fourth option is that the debt is monetized, it's converted into cash by the Federal Reserve.
00:24:18.000 --> 00:24:25.279
And then that converting it into cash or into money creates more dollar bills in circulation, which is inflationary.
00:24:25.359 --> 00:24:30.720
So that's basically a tax on people who either hold dollar bills or owe dollar bills or owe dollars.
00:24:30.799 --> 00:24:32.319
So anybody who has money, basically.
00:24:32.480 --> 00:24:33.440
There's no free lunch.
00:24:33.519 --> 00:24:36.000
Somebody is always going to be paying for it no matter what.
00:24:36.160 --> 00:24:43.920
And it's an interesting question about which of these is the least burdensome kind of to the economy or to individuals.
00:24:44.160 --> 00:24:58.079
It almost certainly is true that when you get to a point where you have hyperinflation, let's say you're trying to monetize most of the debt, and consumer prices are rising at double digits every month, that really is a full-scale economic disaster.
00:24:58.400 --> 00:25:04.240
Economies often break down, people don't use the currency anymore, they go to a barter system or other kinds of things.
00:25:04.400 --> 00:25:11.039
And so it almost certainly is true that in the long run, you can't monetize most of the debt when the debt is of this size.
00:25:11.279 --> 00:25:18.240
Maybe a little monetization with a little inflation is something that the economy and the body politic will tolerate.
00:25:18.480 --> 00:25:26.000
But I don't think the Fed's going to be able to convert it all into dollars, and nor would the Feds be willing to do so, just print the money.
00:25:26.160 --> 00:25:37.440
And so it is going to be have to be paid for, but through some combination of higher taxes in the future or spending cuts, which are very politically unpopular, or potentially a debt default.
00:25:37.759 --> 00:25:37.920
Yeah.
00:25:38.160 --> 00:25:39.920
Seems like there's no really good options there.
00:25:40.079 --> 00:25:42.720
Painful cuts, especially high taxes.
00:25:43.039 --> 00:25:43.680
That's right.
00:25:43.839 --> 00:25:44.000
Right.
00:25:44.319 --> 00:25:51.440
When a nation defaults the way Russia did, do they go into some sort of bankruptcy situation where they can get out from those obligations?
00:25:51.759 --> 00:26:04.319
For governments, for sovereigns, there's no process whereby they say, okay, here are all our assets, and our creditors can come and we'll liquidate, you know, we'll sell the Grand Canyon and all the gold in Fort Knox and just turn it over to our creditors with Russia.
00:26:04.480 --> 00:26:06.240
It wasn't like, yeah, sorry, we can't pay you.
00:26:06.319 --> 00:26:07.759
We have these really nice nuclear weapons.
00:26:07.839 --> 00:26:11.119
They're, you know, let's sell those at an auction, you know, raise some cash that way.
00:26:11.359 --> 00:26:14.480
Governments, when they default, they don't go into a bankruptcy proceeding.
00:26:14.559 --> 00:26:16.000
They don't liquidate their assets.
00:26:16.160 --> 00:26:20.000
It's just that the investors don't get paid and they have to take their lumps.
00:26:20.160 --> 00:26:20.400
Yeah.
00:26:20.559 --> 00:26:20.799
Yeah.
00:26:20.880 --> 00:26:22.960
Now that doesn't mean there's no consequences for the government.
00:26:23.039 --> 00:26:24.880
It makes it harder for the government to borrow in the future.
00:26:24.960 --> 00:26:26.640
Obviously, there's a huge reputational cost.
00:26:26.799 --> 00:26:32.160
And so when it does borrow in the future, it will have to pay higher interest rates because of the perceived higher risk.
00:26:32.319 --> 00:26:42.400
In some countries, there's so little confidence in the ability of the governments and the value of its currency because it's known to print so much money and it'll have like hyperinflation or very high inflation.
00:26:42.559 --> 00:26:44.559
Argentina, I pick on Argentina, it's a beautiful country.
00:26:44.640 --> 00:26:48.400
I don't mean to, but it comes to mind because it seems like it's always defaulting on its debts.
00:26:48.640 --> 00:26:58.880
Argentina has a hard time getting foreigners to buy peso-denominated debts because they just think that the Argentinian central bank is going to print so many pesos that the peso isn't worth very much.
00:26:59.119 --> 00:27:03.279
Like I said, inflation or money printing hurts people who are owed that currency.
00:27:03.519 --> 00:27:10.799
So if you buy a debt that's denominated in pesos and then Argentina prints a bunch more, the central bank, your payments are going to be worth very much.
00:27:11.119 --> 00:27:16.480
So foreign investors will lend to the Argentinian government, but the debt is dollar denominated.
00:27:16.559 --> 00:27:17.759
It's denominated in US dollars.
00:27:17.920 --> 00:27:21.359
That means the Argentinian government has to come up with US dollars, which they can't print.
00:27:21.599 --> 00:27:24.480
That puts a great deal of discipline on the government, right?
00:27:24.559 --> 00:27:25.920
It can't print its way out of it.
00:27:26.000 --> 00:27:32.319
But we've seen many times that it can't often, let's say, through tariffs or excise taxes, raise those dollars in other ways.
00:27:32.400 --> 00:27:34.079
And so as it ends up defaulting.
00:27:34.240 --> 00:27:38.240
But Argentina doesn't, and it hasn't then gone to any kind of bankruptcy process.
00:27:38.400 --> 00:27:53.519
There have been a few court cases in which bondholders for Argentinian sovereign debt, that's what sovereign debt's the term where a government's borrowing in another currency other than its own, will try to seize assets in other places, like an Argentinian government's bank account here in New York, maybe seize.
00:27:53.680 --> 00:28:04.720
And it is also possible for a government, when it borrows, to say these bonds are backed by certain assets that we will put in escrow or we'll put in a bank in a foreign country to try to build some confidence.
00:28:04.960 --> 00:28:07.839
That's kind of like secured lending or secured borrowing, right?
00:28:08.000 --> 00:28:09.119
But that's the extent of it.
00:28:09.200 --> 00:28:20.960
So, no, we're not going to see the United States government itself filing a Chapter 11 petition here in the Southern District of New York to reorganize as much fun as that might be for a bankruptcy scholar like me.
00:28:21.200 --> 00:28:21.519
Yeah.
00:28:22.000 --> 00:28:27.519
So every president this century has come into office and spent a lot of money.
00:28:28.079 --> 00:28:30.960
And yet we've always avoided a default.
00:28:31.200 --> 00:28:31.519
Yeah.
00:28:31.839 --> 00:28:34.799
But you know, now we're on this trajectory where it is getting quite large.
00:28:34.880 --> 00:28:39.680
And as you said, there might be these drawing blood from one part of the body or the other, but somebody's gotta pay.
00:28:40.000 --> 00:28:40.559
At some point, right?
00:28:40.799 --> 00:28:41.759
There will be some reckoning.
00:28:42.000 --> 00:28:42.240
Right.
00:28:42.480 --> 00:28:47.920
Now, what if this happens in like, let's say, 20 years and we're retired on a beach somewhere?
00:28:48.079 --> 00:28:49.119
Who does it hurt most?
00:28:49.440 --> 00:28:54.799
Well, when you say this happens, I think you're imagining a crisis of some type.
00:28:54.960 --> 00:29:01.119
And it you could have, and that that can be a real nightmare, something where there's a crisis and the system breaks.
00:29:01.359 --> 00:29:06.240
And a crisis could be hyperinflation where people are no longer using the currency.
00:29:06.400 --> 00:29:13.519
Another crisis could be an actual default where the Fed refuses to print any more dollars and the Treasury Department just says we're out of money.
00:29:13.680 --> 00:29:17.759
And then there's a lot of questions about what does the Treasury Secretary do in that case?
00:29:17.839 --> 00:29:19.920
Which bills does he pay and which ones are not paid?
00:29:20.000 --> 00:29:23.279
There's no actual federal law that dictates what to do in that situation.
00:29:23.440 --> 00:29:29.279
But that would certainly be a crisis because let's say it's Social Security beneficiaries are not getting their checks, right?
00:29:29.359 --> 00:29:31.200
That's a political crisis, certainly.
00:29:31.440 --> 00:29:35.440
So you could have the system break in some kind of dramatic way.
00:29:35.759 --> 00:29:52.319
I think, though, that it's maybe just as likely that we will just have continuing kind of a drag on economic growth because all of this spending has to be paid for in some combination of those three methods other than the actual default, which I'm saying, let's assume it isn't very likely.
00:29:52.400 --> 00:29:56.079
So present taxes, future taxes, and money printing, which leads to inflation.
00:29:56.319 --> 00:30:00.799
And so it could be simply that the US government just continues to kind of limp along.
00:30:01.039 --> 00:30:14.160
The people who live 20 years hence, and I certainly hope I'm among them, will be poorer than they would be otherwise because the country they're in would be poorer because it has all the spending that it's not paying for in a responsible way.
00:30:14.400 --> 00:30:21.599
But if there is something like a crisis, let's say, let's let's assume the crisis mode, if it's hyperinflation, that is most damaging to people who have savings.
00:30:21.759 --> 00:30:23.839
Savings, the value of savings just gets wiped out.
00:30:24.000 --> 00:30:25.839
Lots of other calamities happen too.
00:30:26.000 --> 00:30:28.400
There's lots of economic activity and so on.
00:30:28.480 --> 00:30:30.960
But that's really bad for pensioneers, for savers.
00:30:31.119 --> 00:30:39.680
I think the poor do worse than that because if you own real assets like land or gold, that's still gonna retain its value even after a hyperinflation.
00:30:39.920 --> 00:30:50.480
If it is the Congress finally says we just have to cut spending, and then there's a big, let's say, spending cut, then it's whoever are the recipients of government spending, are really gonna take the hit in 20 years.
00:30:50.640 --> 00:30:54.640
That could be people who receive Social Security, people who receive Medicare, people who receive Medicaid.
00:30:54.799 --> 00:30:59.359
Those are the big recipients of spending above and beyond the Pentagon.
00:30:59.759 --> 00:31:13.599
So who feels the pain in a crisis-like situation, or let's say a situation where the system that you are describing, where the debt just keeps mounting year after year, we have these periodic, almost yearly now arguments about, oh, are we going to hit the debt ceiling?
00:31:13.680 --> 00:31:15.359
And then invariably it's extended.
00:31:15.519 --> 00:31:16.720
But that scares everybody.
00:31:16.799 --> 00:31:19.759
Eventually that system proves to be unsustainable and we go to something else.
00:31:19.839 --> 00:31:23.599
And so there's a real kind of inflection point in the trajectory.
00:31:23.839 --> 00:31:26.160
It's not clear who is going to take the hit the most.
00:31:26.240 --> 00:31:29.680
It kind of depends on what is the weakest point in this system where it breaks.
00:31:36.240 --> 00:31:42.880
It could very well be economic growth is not robust as what you and I have been used to in our lifetimes, what our parents were used to.
00:31:43.119 --> 00:31:55.440
And certainly if there is a loss of confidence in the US dollar, that and so that the dollar is no longer what's known as the world's reserve currency, then that would make Americans as a whole, in many ways, poorer.
00:31:55.839 --> 00:31:56.000
Okay.
00:31:56.160 --> 00:31:58.640
Talk to us for one minute about the interest rates.
00:31:58.880 --> 00:32:02.960
Everyone likes to predict what the Fed is going to do with interest rates in the near future.
00:32:03.200 --> 00:32:07.200
Does this passage of this bill have any impact on what they'll do to interest rates?
00:32:07.599 --> 00:32:10.640
Yeah, so I would never try to predict specific movements in that.
00:32:10.720 --> 00:32:12.480
I'm not a Fed watcher on that level.
00:32:12.559 --> 00:32:17.839
You know, some people like watch very closely the Fed chairman, what he says, and try to parse his language and so on.
00:32:18.079 --> 00:32:25.599
But there's a couple of factors that to me are suggesting that we're going to have more inflation in the future.
00:32:25.759 --> 00:32:31.839
And when there's more inflation, the main way it fights that is by actually doing the opposite of money printing.
00:32:31.920 --> 00:32:39.359
It actually tries to suck money out of the economy because price inflation, the old way of saying it, is too many dollars chasing too few goods and services.
00:32:39.440 --> 00:32:46.160
And so one way you can reduce the ratio to make it more favorable, make goods and services cheaper, is to have fewer dollars in circulation.
00:32:46.319 --> 00:32:49.200
In fact, that's why the Fed now pays interest on bank reserves.
00:32:49.279 --> 00:32:56.079
That interest keeps bank reserves in Fed accounts rather than allowing it to circulate in the economy where it would drive up prices.
00:32:56.319 --> 00:33:09.359
But we still might have inflation, and then the Fed may raise interest rates, which really is the consequence of reducing the amount of money in circulation, sucking money out of circulation, which is a contractionary policy.
00:33:09.519 --> 00:33:12.559
Why do I think that there might be kind of inflation on the horizon?
00:33:12.799 --> 00:33:17.119
The biggest immediate threat, I think, is that the tariffs that President Trump keeps talking about.
00:33:17.279 --> 00:33:23.200
And I know maybe just even today or yesterday, he's announcing that he is slapping big tariffs on several countries.
00:33:23.519 --> 00:33:26.559
Tariffs raise the cost of imported goods and services.
00:33:26.720 --> 00:33:29.920
Now, people may switch then to domestic goods and services instead.
00:33:30.079 --> 00:33:33.920
But then competition, new competition for those, causes those to be more expensive as well.
00:33:34.160 --> 00:33:42.400
So in a way, when you think of as price inflation is too many dollars chasing too few goods and services, tariffs basically reduce the volume of available goods and services.
00:33:42.480 --> 00:33:47.200
It substitutes less efficiently made domestic goods for more efficiently made foreign goods.
00:33:47.359 --> 00:33:49.839
And so that causes then price inflation.
00:33:49.920 --> 00:33:52.559
And you can fight it by sucking dollars out of the economy.
00:33:52.720 --> 00:33:54.160
And so the Fed may have to do that.
00:33:54.240 --> 00:34:06.400
So I think that as long as we have this kind of looming over our heads, this possibility of tariffs and high tariffs, I think that inflation is on the horizon and therefore a rise in interest rates.
00:34:06.799 --> 00:34:16.320
Now, do you have any sense for how Wall Street is receiving the passage of this bill or these predictions about how the Fed will act or the growing deficit or any of that?
00:34:16.639 --> 00:34:21.840
So far, it's been a good year on Wall Street, with the exception of when the tariffs are announced.
00:34:22.079 --> 00:34:25.679
Wall Street then freaks out because it realizes that that's bad for economic activity.
00:34:26.000 --> 00:34:31.599
But there was this incredible, I'm not saying anybody actually did this, although I wouldn't put it past my fellow humans.
00:34:31.760 --> 00:34:37.039
There was a credible opportunity to bet on the market if you had inside information just about what Trump was going to say about tariffs.
00:34:37.199 --> 00:34:42.159
When he announced that he was going to slap tariffs like on China, the more than 100%, the stock market collapsed.
00:34:42.239 --> 00:34:45.679
And then he would say a few days later, I'm going to put that on hold for 60 days, and then it would surge.
00:34:45.760 --> 00:34:48.079
And if you knew that ahead of time, you could make a killing.
00:34:48.239 --> 00:34:54.079
And so it has been volatile in response to this news with respect to the tariffs.
00:34:54.320 --> 00:35:07.360
Putting that aside, however, if we think, well, okay, what we're going to be continuing to see is high deficits, which does mean that the Fed is probably going to be engaging in money printing again in the future to monetize some of those deficits.
00:35:07.599 --> 00:35:15.840
That actually is good for people who own stocks because when you have price inflation, the price of everything eventually rises, including stocks.
00:35:16.000 --> 00:35:17.519
We don't think of it this way.
00:35:17.760 --> 00:35:23.840
But a lot of the growth you see in Wall Street in the recent decades is not because of real economic fundamentals.
00:35:24.000 --> 00:35:28.320
Some of it is, these companies really are becoming more profitable, but some of it is just there's more money circulating.
00:35:31.280 --> 00:35:38.800
And so anticipated increases in the money supply will translate into higher stock prices, just like they translate into higher home prices.
00:35:39.039 --> 00:35:51.760
So there's something that's very regressive about inflation through money printing, which is that for people who own real assets, things like stocks and gold or whatever, something like that, very few people own that in the same degree they own the other things.
00:35:51.840 --> 00:35:56.159
But let's say, let's look at look at the big things that Americans typically own if they have real savings.
00:35:56.320 --> 00:35:59.199
It's their house, it's real estate, and it's on the stock market.
00:35:59.519 --> 00:36:09.360
A lot of the price inflation which you would be suffering at the grocery store, it's kind of made up to a large extent in the value of your home, the price of your home at least, and in the value of your stock portfolio.
00:36:09.679 --> 00:36:22.639
The people who are really hurt are people who don't have those assets that inflate as prices inflate, but they do have to, like the rest of us, pay more at the grocery store for food, or they have to pay more for medicine or for tuition and so on.
00:36:22.800 --> 00:36:31.119
So it really is the people who don't have a lot of savings who tend to be poor, and also younger people tend to have less savings than older people who tend to get hit by price inflation.
00:36:31.199 --> 00:36:34.480
They're the real ones, they bear the cost of money printing.
00:36:34.639 --> 00:36:39.840
If we could pull them, they would be, I think, less uh sanguine, maybe about the future than Wall Street is.
00:36:40.079 --> 00:36:49.039
Well, that's why we love having you on, because you always take a much more meaningful look at all of these issues and help us understand them on a level that the headlines will never give us.
00:36:49.280 --> 00:36:50.000
Thank you, Amy.
00:36:50.159 --> 00:36:52.000
Last time you were on the show was March 18th.
00:36:52.079 --> 00:36:53.039
That was way too long ago.
00:36:53.280 --> 00:36:53.440
Okay.
00:36:53.599 --> 00:36:55.039
So don't stay away for that long again.
00:36:55.440 --> 00:36:56.400
I wasn't avoiding you.
00:36:56.559 --> 00:36:56.800
Why not?
00:36:57.199 --> 00:37:03.440
I was I sit by I I go out to the mailbox every day waiting for my next invitation to be on Bite-sized business law podcast.
00:37:03.599 --> 00:37:04.400
So keep them coming, Amy.
00:37:04.719 --> 00:37:05.199
Okay, thank you.
00:37:05.360 --> 00:37:06.239
Bye-bye.
00:37:09.119 --> 00:37:14.480
Thanks to everyone at Fordham Law School, especially the Dean's Office and our corporate law center donors for supporting this podcast.
00:37:14.719 --> 00:37:17.599
Bite-sized business law is produced by We Edit Podcasts.
00:37:17.679 --> 00:37:22.320
Listen and subscribe to Bite-Sized Business Law on Spotify, Apple, or wherever you get your podcasts.
00:37:22.480 --> 00:37:32.400
The information in this podcast is for educational, informational, and entertainment purposes only, and does not constitute legal advice, nor is it intended to promote the organizations with which our guests are affiliated.
00:37:32.639 --> 00:37:36.159
For more information, check out our show notes, and thanks for listening.
00:00:00.000 --> 00:00:06.400
So the old saying is that Democrats believe in tax and spend, and Republicans believe in borrow and spend.
00:00:06.480 --> 00:00:11.039
But either way, you had lots of spending and therefore deficits, and they just keep going up.
00:00:11.199 --> 00:00:17.120
And the big beautiful bill, one big beautiful bill act is not going to do anything to reduce the deficits, anything meaningful.
00:00:19.920 --> 00:00:24.559
You're listening to Bite-Sized Business Law, where we discuss big issues in small doses.
00:00:24.719 --> 00:00:34.079
This podcast is sponsored by the Fordham University School of Law Corporate Law Center, which is run by Fordham Law Professor Richard Squire and me, your host Amy Martella.
00:00:34.240 --> 00:00:36.880
Okay, let's get down to business.
00:00:39.840 --> 00:00:42.079
Welcome back to Bite-Sized Business Law.
00:00:42.240 --> 00:00:49.200
Up until a few weeks ago, another X date was looming on the horizon for the date on which the United States would default on its debt.
00:00:49.359 --> 00:01:04.799
The passage of the big beautiful bill assuaged immediate concerns about the national deficit, but questions remain about whether the bill will put America on a trajectory towards dangerously deeper debt and what the Federal Reserve's role will be in navigating the resulting economic landscape.
00:01:05.120 --> 00:01:12.319
Back with us today is one of my favorite guests, Richard Squire, professor of business law here at Fordham Law School and the faculty director of the Corporate Law Center.
00:01:12.480 --> 00:01:13.280
Richard, welcome back.
00:01:13.599 --> 00:01:14.879
Amy, it's great to be back.
00:01:15.040 --> 00:01:15.359
Thank you.
00:01:15.519 --> 00:01:17.519
And I just need to correct you on one thing.
00:01:17.680 --> 00:01:25.200
It is true that the recent legislation increased the debt ceiling and increased it from 36.1 trillion to 41.1 trillion.
00:01:25.280 --> 00:01:28.560
So a little bit more runway before we run out of borrowing capacity.
00:01:28.799 --> 00:01:34.640
But the name of the bill is the one big beautiful act, the O Triple B A.
00:01:34.879 --> 00:01:36.159
And that is the official name.
00:01:36.239 --> 00:01:39.680
So it's not just the Big Beautiful Bill, it's the One Big Beautiful Bill Act.
00:01:40.000 --> 00:01:43.599
And I love the fact that that is actually became the name of it.
00:01:43.840 --> 00:01:51.840
It's so, I think, emblematic of the Trumpian era that we are in, that even our legislation now has Trump style names.
00:01:52.079 --> 00:01:52.560
You know what?
00:01:52.879 --> 00:01:53.760
So funny about that?
00:01:53.920 --> 00:02:00.079
As I was preparing for this episode, I was doubting that the act was officially called the Big Beautiful Bill or Big Beautiful Act.
00:02:00.319 --> 00:02:01.840
So I went on to Congress.gov.
00:02:02.079 --> 00:02:02.319
Yeah.
00:02:02.480 --> 00:02:02.640
Nope.
00:02:02.719 --> 00:02:04.000
It's called the One Big Beautiful Bill.
00:02:04.319 --> 00:02:05.920
It even has the redundancy at the end.
00:02:06.159 --> 00:02:08.639
Bill Act, the one big, beautiful bill act.
00:02:08.800 --> 00:02:09.199
Yeah.
00:02:09.439 --> 00:02:10.479
Yeah, it's fabulous.
00:02:10.800 --> 00:02:12.159
Never before have we seen a name like that.
00:02:12.319 --> 00:02:12.479
Nope.
00:02:12.719 --> 00:02:19.039
Well, Richard, why don't you start us out by giving us a little background and tell us why we're talking about the national deficit with respect to this new bill?
00:02:19.120 --> 00:02:20.159
Why we're talking about this now?
00:02:20.639 --> 00:02:28.960
The US for a long time kind of prided itself on having a lower amount of outstanding government debt.
00:02:29.120 --> 00:02:40.479
And this is normally measured as percentage of GDP would be the relevant way to think about it, relative to other countries that we might consider to be similar to us, developed countries in Europe or Japan.
00:02:40.719 --> 00:02:54.479
But in the last few years, we've been running deficits at such high levels that now the percentage of total government outstanding debt for the US is depending on how you measure it, but it's about 100% or over now 100% of the GDP.
00:02:54.639 --> 00:03:06.400
So that puts us now very similar to a lot of these countries that we used to hold up our kind of noses at and think, you know, we have much more fiscal restraint, or we're much more prosperous than you all are, so we don't need to run up so much debt.
00:03:06.560 --> 00:03:11.919
So it's over 100% also in the UK, in France, and in Spain.
00:03:12.080 --> 00:03:16.319
It's about 100% of Brazil, which is somewhat of a different category of country.
00:03:16.560 --> 00:03:20.719
Canada, we're now actually by some measures ahead of Canada in terms of outstanding debt.
00:03:20.960 --> 00:03:30.000
We still have a long way to go, however, to Japan, which is 250%, is the figure, the outstanding government debt relative to GDP.
00:03:30.159 --> 00:03:32.479
But you can do much better than these figures.
00:03:32.639 --> 00:03:34.000
Germany, it's only 50%.
00:03:34.400 --> 00:03:43.520
And Sweden, and I know that many Americans look to Sweden as something of an economic kind of nirvana or Valhalla, maybe would be the term, it's only 36% there.
00:03:43.680 --> 00:03:48.159
So countries vary pretty widely in this, even countries that we would consider to be in the developed world.
00:03:48.319 --> 00:03:53.840
But the US now, because of our very high deficits, year after year, we've piled up a huge amount of government debt.
00:03:54.159 --> 00:03:55.199
So how did we get here?
00:03:55.280 --> 00:03:58.319
Because it wasn't that long ago that we had a budget surplus, right?
00:03:58.719 --> 00:04:05.280
I feel like that was a nice compliment to both of us to think that we could remember it, but it actually was 30 years ago.
00:04:05.439 --> 00:04:06.800
So it was a while ago.
00:04:07.039 --> 00:04:10.719
For some listeners, they've never actually in their lifetime seen the U.S.
00:04:10.800 --> 00:04:12.719
government have anything but deficits.
00:04:12.879 --> 00:04:16.240
So surplus actually happened last time under the Clinton administration.
00:04:16.480 --> 00:04:17.600
It was just a few years.
00:04:17.680 --> 00:04:19.439
I think it was kind of a perfect storm of things.
00:04:19.519 --> 00:04:24.399
There was the peace dividend after the end of the Cold War, which allowed for a reduction in defense spending.
00:04:24.560 --> 00:04:27.360
And then you had the government was at loggerheads in Washington.
00:04:27.439 --> 00:04:35.199
You had a Republican-controlled Congress starting in 1994, but a Democratic president in Bill Clinton, which meant they couldn't agree much on spending.
00:04:35.360 --> 00:04:37.040
And so their kind of hands were tied.
00:04:37.120 --> 00:04:38.240
And so spending got tied.
00:04:38.319 --> 00:04:40.000
It was also a boom economy in that time.
00:04:40.160 --> 00:04:41.680
Their tax revenue was coming in.
00:04:41.759 --> 00:04:47.439
And so for a few years, yeah, we did kind of dip up into uh surplus or rise up, I should say, into surplus.
00:04:47.519 --> 00:04:52.639
But no, it started when George Bush, the second Bush, came in to office with Republican Congress.
00:04:52.800 --> 00:04:57.680
Then you had a unified government again, the White House and the Congress with the same party.
00:04:57.920 --> 00:05:02.639
And the Republicans do what they typically do, which is cut taxes and spend.
00:05:02.879 --> 00:05:09.279
So the old saying is that Democrats believe in tax and spend, and Republicans believe in borrow and spend.
00:05:09.439 --> 00:05:14.000
But either way, you had lots of spending and therefore deficits, and they just keep going up.
00:05:14.079 --> 00:05:19.439
And the big beautiful bill, one big beautiful bill act is not going to do anything to reduce the deficits, anything meaningful.
00:05:19.839 --> 00:05:28.720
So even though it raised the debt ceiling, which tell our listeners define the debt ceiling for us, and even though it raised it by$5 trillion, it's not going to help much.
00:05:29.199 --> 00:05:31.839
It won't prevent deficits from occurring.
00:05:32.000 --> 00:05:36.959
It'll just make it possible for the Treasury Department to borrow money to cover those deficits.
00:05:37.040 --> 00:05:38.319
That's what the debt ceiling is.
00:05:38.480 --> 00:05:39.279
So the U.S.
00:05:39.360 --> 00:05:44.480
Treasury Department does borrowing on behalf of the federal government and it issues government bonds, Treasury bonds.
00:05:44.639 --> 00:05:46.000
That's the way it borrows.
00:05:46.240 --> 00:05:49.360
But Congress limits the total amount that it can borrow.
00:05:49.439 --> 00:05:51.920
So the total amount of Treasury bonds outstanding.
00:05:52.160 --> 00:05:54.800
And it was recently 36.1 trillion.
00:05:54.959 --> 00:05:57.120
As I said earlier, now it's 41.1 trillion.
00:05:57.199 --> 00:05:59.120
So it's been raised, as you said, 5 trillion.
00:05:59.279 --> 00:06:04.720
And so that gives the Treasury Department more capacity to borrow more.
00:06:04.959 --> 00:06:10.480
But that borrowing is going to be made necessary by the deficits that the federal government is running.
00:06:10.639 --> 00:06:17.439
The deficit reflects the idea that the Treasury Department is taking in far less in revenues from taxes than it's spending.
00:06:17.600 --> 00:06:21.040
And revenues from taxes and spending, those are set by Congress.
00:06:21.120 --> 00:06:27.839
And so the one big beautiful bill act could have closed those deficits by either raising taxes or decreasing spending.
00:06:28.079 --> 00:06:30.959
Nominally, it didn't really change much in terms of taxes.
00:06:31.120 --> 00:06:35.600
It just perpetuated tax cuts from the first Trump administration back in 2017.
00:06:35.759 --> 00:06:40.800
Then there are some what are portrayed as spending cuts in there, mainly to Medicaid.
00:06:40.879 --> 00:06:46.480
It's not clear, however, how much they will kind of manifest, but we know that some spending increases are going to manifest.
00:06:46.560 --> 00:06:51.519
There's more money for border security and the immigration departments, ICE, and so on.
00:06:51.680 --> 00:06:53.519
And there's also more money for the Pentagon.
00:06:53.680 --> 00:06:59.199
So you have, again, more spending potentially, or maybe not much of a decrease in spending.
00:06:59.360 --> 00:07:02.399
And you also have no increase in taxes.
00:07:02.480 --> 00:07:04.959
And so the deficits are going to continue.
00:07:05.120 --> 00:07:14.399
And a new contributing factor to these higher taxes now is that interest on the old debt, on the old deficits, which have created debt, those interest payments have to be made by the Treasury Department as well.
00:07:14.480 --> 00:07:15.759
And they show up in the deficit.
00:07:16.079 --> 00:07:23.519
Yeah, I mean, I think I'm reading economists from both sides of the aisle agree with that, the idea that this is going to run the deficit higher and higher.
00:07:23.600 --> 00:07:24.399
There's no question about that.
00:07:24.639 --> 00:07:25.759
Yeah, there's no question about it.
00:07:25.839 --> 00:07:32.240
And it's really interesting to think, well, how did the United States get to this place where we have so much outstanding debt?
00:07:32.480 --> 00:07:38.079
And you might think, well, maybe we're just spendthrifts, but we're actually not compared to other countries.
00:07:38.240 --> 00:07:41.120
When I say spendthrifts, I'm thinking about government spending.
00:07:41.279 --> 00:07:46.480
So I've been looking a lot recently at comparing the US to other countries in terms of total spending.
00:07:46.560 --> 00:07:55.439
So if we look at total government spending by in the US, it's a little complex in the US because it's federal, state, and local, and that's the relevant way to look at it is to total it all up.
00:07:55.600 --> 00:08:07.120
But total spending in the US, all government spending, is about 36% of GDP, which as far as I'm concerned is a very high number, but it's actually low compared to these comparison countries that I was talking about earlier.
00:08:07.360 --> 00:08:12.319
Canada spends 42%, Japan spends about that, Germany spends 49%.
00:08:13.040 --> 00:08:16.879
The highest out there is France among this group, which is 57%.
00:08:18.000 --> 00:08:24.959
So compared to these countries, our governments at various levels, most of it is federal, however, spend a lot less.
00:08:25.199 --> 00:08:35.600
So why would it be, even though we have a lot less government spending as a percentage of GDP that these other countries, that we have such high deficits and now as much outstanding debt as them, if not more?
00:08:35.759 --> 00:08:37.440
Again, this is a percentage of GDP.
00:08:37.600 --> 00:08:43.679
And the answer is while our government spends less than they do, it taxes far less than they do.
00:08:44.000 --> 00:08:50.960
Total tax receipts in the US at all levels of government, but most of it's federal, is about 25% of GDP.
00:08:51.120 --> 00:08:52.480
In the UK, it's 38%.
00:08:52.879 --> 00:08:54.399
In France, it's 51%.
00:08:54.960 --> 00:08:57.759
Germany, it's 40%, Sweden, it's 47%.
00:08:58.320 --> 00:09:03.600
The US government at any levels, at all levels, just doesn't take in that much money in taxes.
00:09:03.840 --> 00:09:10.879
And so when you are spending as much as it is, which is actually still a little bit less than other countries, but you're taxing a lot less.
00:09:11.039 --> 00:09:13.759
The only way to make it up is borrowing is the deficits.
00:09:13.919 --> 00:09:15.840
And that's why we have that mounting debt.
00:09:16.159 --> 00:09:19.440
So what can the Federal Reserve do if borrowing is the way to make this up?
00:09:19.600 --> 00:09:22.480
How can they influence the direction of the deficit?
00:09:22.799 --> 00:09:24.320
It's a really interesting question.
00:09:24.399 --> 00:09:27.519
And Senator Cruz from Texas recently made news.
00:09:27.600 --> 00:09:36.159
He was on CNBC and he was talking about in the context of the big beautiful bill legislation, but he floated an idea that kind of scared a lot of people.
00:09:36.480 --> 00:09:45.600
He noticed that the Federal Reserve pays interest on bank reserves and that this costs taxpayers money.
00:09:45.759 --> 00:09:50.879
And he said it's cost taxpayers something like a trillion dollars, or it could save something like a trillion dollars.
00:09:50.960 --> 00:09:52.960
I wasn't sure at first where he got that figure.
00:09:53.440 --> 00:09:56.480
Eventually was able to figure out, I think, what he was talking about.
00:09:56.639 --> 00:10:02.080
But for a long time, the Fed was taking in more money than it was spending.
00:10:02.240 --> 00:10:04.399
Its inflows were greater than its outflows.
00:10:04.559 --> 00:10:06.320
It had net operating profits.
00:10:06.559 --> 00:10:11.440
I think it's the year where you get that trillion dollars is 2009 to 2022.
00:10:11.519 --> 00:10:12.480
It's something like that.
00:10:12.720 --> 00:10:18.080
During those years, in total, it had net operating profits of about a trillion dollars.
00:10:18.240 --> 00:10:29.519
And that's after it operating expenses and also after it pays dividends to its own member banks, which are only about a billion dollars a year, which is a lot of money, obviously, uh, but for the for the um uh Fed its arounding error.
00:10:29.679 --> 00:10:38.559
And under federal law, under the Federal Reserve Act, all of those excess profits, so the net operating profits that the Fed was making, it has to turn them over to the Treasury Department.
00:10:38.720 --> 00:10:42.720
And so the Fed was itself a source of revenue and a big source of revenue.
00:10:42.879 --> 00:10:48.080
And that was helping to defray the government spending that wasn't being covered by borrowing.
00:10:48.320 --> 00:10:59.279
But the Fed has adopted a policy, it actually adopted it in 2008, but it didn't really become consequential in terms of the bottom line until the last few years of paying, like I said, interest on bank reserves.
00:10:59.519 --> 00:11:06.320
Reserves are basically cash and cash equivalents, gold and things like that, that banks don't lend out.
00:11:06.480 --> 00:11:08.480
And so it's basically money in the vault.
00:11:08.639 --> 00:11:11.919
And the question would be well, why doesn't a bank lend out all of its money, right?
00:11:12.000 --> 00:11:15.440
That's how it makes money is by lending out the money it receives through deposits.
00:11:15.679 --> 00:11:18.720
And the answer is that there's always a worry about a bank run.
00:11:18.799 --> 00:11:22.320
You have to worry that your depositors will take out their money all at once, and then you run out of cash.
00:11:22.399 --> 00:11:26.240
And so the reserves are cash that is sitting there against that possibility.
00:11:26.480 --> 00:11:30.639
Now, banks generally don't want to hold very much in reserves because it doesn't pay anything.
00:11:30.799 --> 00:11:32.240
It's inert money.
00:11:32.399 --> 00:11:38.240
And so the game in banking traditionally was how low can I keep my reserves and stay safe?
00:11:38.720 --> 00:11:40.399
Are there laws about how much they need?
00:11:40.879 --> 00:11:44.240
Now, once the Fed came along in the United States, we had a central bank.
00:11:44.399 --> 00:11:47.200
One of its duties is to help stabilize the banking system.
00:11:47.360 --> 00:11:51.039
And so it actually put laws in place, minimum reserve ratios.
00:11:51.200 --> 00:11:55.440
So at that situation, these banks had to keep a certain amount of cash in the vault.
00:11:55.519 --> 00:11:56.960
But the Fed also offered a service.
00:11:57.039 --> 00:12:06.159
It said, you don't have to actually keep that cash, the dollar bills or the gold, if you want to do it that way, but it's mostly uh dollar bills, in your bank vault physically at your on the corner.
00:12:06.399 --> 00:12:10.080
We will let you open up a reserve account here at the Fed.
00:12:10.240 --> 00:12:12.639
So the Fed is the banker to the banks.
00:12:12.879 --> 00:12:18.080
And so when they these banks have reserves, they keep most of it with the Fed.
00:12:18.320 --> 00:12:20.000
And they can make withdrawals at any time.
00:12:20.080 --> 00:12:26.559
So it's just as good for them as having it in the bank, but it's more secure, it's safer, they don't have to move it around amongst branches and so on.
00:12:26.799 --> 00:12:37.200
And they would typically keep in these reserve accounts the minimum that the Fed required them to keep based on their liquidity risk, the risk of a run and how big their deposits were and so on.
00:12:37.440 --> 00:12:48.799
But in the 2008 financial crisis, the Fed became concerned that the normal way that it would try to fight inflation, which is take money out of circulation, it was going to run out of that mechanism.
00:12:48.879 --> 00:12:50.480
It was called open market operations.
00:12:50.559 --> 00:12:53.759
It used a particular type of treasury bond to do it or treasury bill.
00:12:53.840 --> 00:12:55.679
It was worried that it was going to run out of it.
00:12:55.919 --> 00:13:00.480
So Congress had recently empowered it to pay interest on these bank reserves.
00:13:00.639 --> 00:13:02.879
So this was actually something that banks would complain about.
00:13:03.039 --> 00:13:10.639
They say, when I park my money in reserves, either in my vault or at the Fed, but either way, to comply with these reserve ratio laws, I don't make any money on it.
00:13:10.720 --> 00:13:11.840
My shareholders don't do well.
00:13:12.000 --> 00:13:14.399
So the Fed said, fine, we'll start paying you interest on it.
00:13:14.480 --> 00:13:16.720
Now that was good for the banks and for their shareholders.
00:13:16.879 --> 00:13:24.080
But also from the Fed's perspective, they thought, you know, this actually will help fight inflation because money in bank reserves doesn't circulate.
00:13:24.320 --> 00:13:25.519
What causes price inflation?
00:13:25.679 --> 00:13:28.399
Too many dollars chasing too few goods and services.
00:13:28.559 --> 00:13:29.840
Well, it's the chasing part.
00:13:30.000 --> 00:13:32.639
Only dollars in circulation are chasing anything.
00:13:32.799 --> 00:13:36.240
If money is just sitting there in the bank, it doesn't contribute to price inflation.
00:13:36.320 --> 00:13:38.720
So the Fed said, oh, I see what we can do here.
00:13:38.879 --> 00:13:46.240
If we start paying interest, the banks will just start parking their money with us and there will be less circulating money, and that will bring down price inflation.
00:13:46.399 --> 00:13:48.960
Originally it was just a quarter percent, which wasn't that much.
00:13:49.120 --> 00:13:52.080
Now it's 4.4% on bank reserves.
00:13:52.159 --> 00:13:53.840
So bank reserves are now huge.
00:13:53.919 --> 00:13:55.039
They must have used to be very small.
00:13:55.200 --> 00:14:03.279
Now there's more than 4 trillion in bank reserves with the Fed, federal bank reserves, and it's paying all this interest on it, which is why now the Fed doesn't have a profit anymore.
00:14:03.360 --> 00:14:05.600
It has its reporting operating losses.
00:14:05.840 --> 00:14:11.120
So let's go back now to Ted Cruz's idea where he says, this is losing the treasury, basically, all this money.
00:14:11.279 --> 00:14:12.159
Let's just outlaw this.
00:14:12.320 --> 00:14:13.600
Well, think about what would happen.
00:14:13.840 --> 00:14:25.120
If the Fed suddenly lost its power to pay interest on these reserves, the$4 trillion in bank reserves would then all drain out, or all of it would drain out that the Fed would allow.
00:14:25.200 --> 00:14:28.159
It'd probably put a new reserve ratio law in, but it would be a lot lower.
00:14:28.399 --> 00:14:38.480
All of that would drain out because banks would say, well, I'm not going to sit here and make no money on this when I can lend it out to Amy to buy a new home, let's say, or I can pay it as dividends to my shareholders, for example.
00:14:38.720 --> 00:14:42.960
That money will start circulating again, and then you'll have a huge amount of inflation, right?
00:14:43.039 --> 00:14:45.360
So there's a couple groups that won't like that proposal.
00:14:45.440 --> 00:14:46.480
One is the banks themselves.
00:14:46.720 --> 00:14:51.200
Like this is a this is free money right now, huge amounts of free money on this interest on the bank reserves.
00:14:51.360 --> 00:14:57.759
But also it would be very inflationary, which would be very damaging from an economic perspective, but also from a political perspective.
00:14:58.000 --> 00:14:59.759
So I don't think it's going to happen.
00:14:59.840 --> 00:15:05.919
I don't think that now that the Fed has gained that power, it's one of these government programs, or once it's enacted, it's very hard to repeal it.
00:15:06.159 --> 00:15:07.759
I can see a different fix.
00:15:07.919 --> 00:15:11.120
And I've never heard anybody talk about this, but it's not impossible.
00:15:11.360 --> 00:15:20.559
Congress could change the Federal Reserve Act to say it doesn't matter, Fed, if you are running a surplus or a deficit in your operating profits or your net income.
00:15:20.879 --> 00:15:30.879
Every dollar that the US that you receive an interest on US Treasury debt, you do have to redeem that back to the Treasury, just like you were doing before, before you were started reporting these losses.
00:15:31.120 --> 00:15:34.480
And so that would bring money back into Treasury.
00:15:34.639 --> 00:15:46.559
And so that would help with the deficits a bit and wouldn't require basically what would be something like a bank run by the banks on the Fed itself, which is what would happen if the Fed suddenly stopped paying interest on reserves.
00:15:46.639 --> 00:15:52.879
And it wouldn't be a bank run in the sense that the Fed would run out of cash because we know it can't, but it would have those inflationary consequences.
00:15:53.120 --> 00:15:53.360
Yeah.
00:15:53.519 --> 00:15:56.480
And I would think the entire banking industry would oppose this.
00:15:56.720 --> 00:15:57.279
Absolutely.
00:15:57.360 --> 00:16:02.000
They would stand shoulder to shoulder and they would say, this is the greatest gravy train we've ever had.
00:16:02.159 --> 00:16:08.799
And they'll say things, of course, like, you know, this will destabilize the banking system, you know, this will be bad for the economy, our shareholders, you know, and so on.
00:16:08.879 --> 00:16:10.240
And it's not a complete lie.
00:16:10.320 --> 00:16:11.519
There would be a little bit of that.
00:16:11.679 --> 00:16:17.600
But I think the main effect actually would not be destabilizing of the banking sector so much as a massive price inflation.
00:16:17.840 --> 00:16:23.279
There's one thing that the proposal that I just described would do, and this may be politically difficult.
00:16:23.600 --> 00:16:27.919
We don't officially in this country monetize the debt.
00:16:28.080 --> 00:16:31.360
You won't see that term used by politicians or anybody at the Fed.
00:16:31.519 --> 00:16:33.120
It doesn't appear in legislation.
00:16:33.360 --> 00:16:35.840
Economists recognize that that's what's happening and so on.
00:16:36.000 --> 00:16:51.279
But when you have the idea that the Fed is monetizing the debt, it does call into question a little bit the notion that the Fed is an independent agency, or even some people say it's a private company because it has private banks that hold its shares, rather than being just another government agency.
00:16:51.519 --> 00:17:02.799
And if the law were to be changed to say, look, you Fed, any money you get from the Treasury Department in interest on treasury debt that you own, you just pay, you just remit that is the verb that's used back to Treasury.
00:17:02.960 --> 00:17:07.759
If you make it any other way, because the Fed also owns mortgage-backed securities and it receives interest on those.
00:17:07.920 --> 00:17:08.799
So you can keep that.
00:17:08.880 --> 00:17:14.319
You can pay that out on bank reserves if you want, but anything that comes in from Treasury, you just give it right back to us.
00:17:14.480 --> 00:17:19.759
That would make very transparent what's happening, which is the Fed is simply monetizing the debt.
00:17:19.839 --> 00:17:21.119
Because think about it this way.
00:17:21.279 --> 00:17:22.640
Let's say you have some rich uncle.
00:17:22.880 --> 00:17:28.480
The rich uncle would be Fed here, Uncle Jerome, and he says, Amy, I'm willing to lend you a million dollars.
00:17:28.559 --> 00:17:31.359
You know, I know you want to buy a house or you know, you want to do some things.
00:17:31.519 --> 00:17:34.079
And you say, Wow, that's nice, but what's the interest going to be?
00:17:34.160 --> 00:17:35.759
And he says, Oh, no, no interest.
00:17:36.000 --> 00:17:38.880
Technically, you can pay me interest, but I'll hand it right back to you.
00:17:38.960 --> 00:17:40.079
So basically, it's no interest.
00:17:40.160 --> 00:17:41.119
And then you say, Oh, wow.
00:17:41.200 --> 00:17:42.480
And when do I have to pay it back?
00:17:42.720 --> 00:17:47.920
Nominally, it's due in 10 years, but if at 10 years you want to roll it over, you can do that.
00:17:48.079 --> 00:17:53.279
And you can roll it over, meaning you don't have to pay, we'll just re-extend the deadline, the maturity date, another 10 years.
00:17:53.359 --> 00:17:54.480
You can do that forever.
00:17:54.720 --> 00:17:57.920
It's clear then that your uncle has not lent you a million dollars.
00:17:58.000 --> 00:17:59.440
He's given you a million dollars, right?
00:17:59.519 --> 00:18:00.559
That's a gift, right?
00:18:00.720 --> 00:18:11.359
And so if it becomes completely transparent that the Fed, when it buys US Treasury bonds, is basically handing cash through the markets, but it's ultimately handing it ultimately over to the Treasury Department.
00:18:11.519 --> 00:18:13.440
The Treasury doesn't have to pay interest on it.
00:18:13.599 --> 00:18:20.000
And everybody knows that when that debt comes due, those treasury bonds come due, the Treasury can issue new ones and the Fed will buy those.
00:18:20.160 --> 00:18:23.680
Then it really is clear that the Fed is giving money to the Treasury Department.
00:18:23.920 --> 00:18:25.599
It really is just monetizing the debt.
00:18:25.680 --> 00:18:30.880
And that might be just too transparent money printing for the political system to tolerate.
00:18:31.039 --> 00:18:34.079
So that could be a possible objection to my proposal.
00:18:34.319 --> 00:18:37.039
I don't know how many people out there would really care that much, however.
00:18:37.200 --> 00:18:46.319
I mean, does it upset you as an American citizen that a little bit, some percentage of the, or maybe eventually a large amount of the debt every year is converted into cash.
00:18:46.640 --> 00:18:47.279
It's printed.
00:18:47.440 --> 00:18:50.160
I mean, especially when you think, well, it's either that or it's taxes.
00:18:50.240 --> 00:18:52.240
You know, it is it clearly that it's worse.
00:18:52.400 --> 00:18:59.519
Maybe if it's not going to have been hyperinflation, a little bit of taxes, a little bit of money printing, you know, as the best mix to go.
00:18:59.599 --> 00:19:00.480
What do you think?
00:19:00.799 --> 00:19:02.400
Yeah, no, I'm not bothered by that at all.
00:19:02.559 --> 00:19:07.359
First of all, I think most people don't realize that the Fed isn't officially a government agency, you know.
00:19:07.680 --> 00:19:08.720
Oh, that's a really great point.
00:19:08.799 --> 00:19:14.799
Like the whole notion that it's independent or to even a private, that's a fiction that only government officials or Fed officials themselves indulge in.
00:19:14.880 --> 00:19:16.880
Everybody knows, of course, it's part of the federal government.
00:19:16.960 --> 00:19:17.200
Yes.
00:19:17.279 --> 00:19:17.440
Yeah.
00:19:17.599 --> 00:19:18.960
It's right there on the name, right?
00:19:19.039 --> 00:19:19.599
That the Fed.
00:19:20.000 --> 00:19:20.880
It's on your dollar bill.
00:19:21.039 --> 00:19:21.920
Yeah, right, exactly.
00:19:22.240 --> 00:19:25.759
Yeah, but I hear you that optically that's politicians, that's all they care about.
00:19:25.920 --> 00:19:27.359
So I don't know if they would go for it.
00:19:27.440 --> 00:19:30.559
Aaron Powell It would really be kind of saying the quiet part out loud the way they say it.
00:19:30.720 --> 00:19:38.400
But I think that it certainly would be better than the massive amount of inflation I think that would occur if what were enacted what Senator Cruz suggested.
00:19:38.559 --> 00:19:42.160
And between you and me, I'm not sure he realized that would be the implication of that.
00:19:42.400 --> 00:19:47.039
He just may have said, hey, there used to be all this money coming into the Treasury Department, now it's not coming in anymore.
00:19:47.119 --> 00:19:50.880
Instead, it's going to the banks, that feels like a populist kind of objection, right?
00:19:51.039 --> 00:19:52.720
Like, aren't the banks rich enough already?
00:19:52.880 --> 00:19:54.880
Why is the US taxpayer funding the banks?
00:19:55.279 --> 00:20:00.640
When you frame it that way, you can see why maybe people on both sides of the aisle will be like, yeah, this thing's kind of fishy.
00:20:00.799 --> 00:20:12.000
But when you realize now it's actually an anti-inflationary mechanism, and it's because you, Senator Cruz and everybody else in Congress can't get a balanced budget passed that it suddenly becomes more complicated.
00:20:12.400 --> 00:20:17.119
So what about the idea that if most of our debt is issued in US dollars?
00:20:17.440 --> 00:20:17.680
Yes.
00:20:18.079 --> 00:20:19.359
I think it all is at the federal level.
00:20:19.599 --> 00:20:19.680
Right.
00:20:19.839 --> 00:20:19.920
Yeah.
00:20:20.000 --> 00:20:22.079
And probably the state and local levels too, yes.
00:20:22.799 --> 00:20:27.039
We're kind of a lucky country in that way in that we don't have to borrow in foreign currencies like Argentina does.
00:20:27.440 --> 00:20:27.680
Right.
00:20:28.000 --> 00:20:33.279
So how can we ever default on debt that's denominated in our own currency if we could just print more to service?
00:20:33.759 --> 00:20:34.720
It's a great question.
00:20:35.039 --> 00:20:43.599
It's very unusual for a country to default in a fiat currency when it has its own fiat currency and its debt is denominated in that currency.
00:20:43.680 --> 00:20:46.160
So a fiat currency is a currency that's not backed by anything.
00:20:46.319 --> 00:20:47.920
The US dollar used to be backed by gold.
00:20:48.079 --> 00:20:49.839
Now there's nothing back in it that's real.
00:20:49.920 --> 00:20:52.880
So that means that the US government could, in theory, print as much as it wants.
00:20:53.039 --> 00:20:55.279
Now, the printer here is the Fed.
00:20:55.440 --> 00:20:59.920
But if you look in your wallet, I look at a$20 bill, it says Federal Reserve Note.
00:21:00.079 --> 00:21:02.000
They're actually claims against the Fed.
00:21:02.079 --> 00:21:05.359
They used to be redeemable in gold from the Fed, but they're not anymore.
00:21:05.440 --> 00:21:09.119
So there's a theory an infinite capacity to produce this.
00:21:09.359 --> 00:21:21.759
There's a political and economic constraint because when more money is generated by the central bank and other central banks do the same thing as our central bank, which is the Fed, it causes price inflation in the economy, which has economic and political consequences.
00:21:21.920 --> 00:21:23.920
But that's not a physical constraint.
00:21:24.000 --> 00:21:26.880
There's no physical constraint on generating as much cash as you want.
00:21:26.960 --> 00:21:30.480
So you might think, okay, well, how could you ever default on a debt?
00:21:30.640 --> 00:21:33.440
Let's treat the Fed now as part of the US government, which I do.
00:21:33.519 --> 00:21:35.359
I think that's the right way to think about it ultimately.
00:21:35.440 --> 00:21:41.599
And say, look, the government borrows, it borrows in dollars, but it has to repay people on US Treasury debt in dollars.
00:21:41.680 --> 00:21:42.720
But it could just print more.
00:21:42.799 --> 00:21:44.160
You know, it's like eat as many as you want.
00:21:44.240 --> 00:21:45.759
There's like those ads for Doritos.
00:21:45.920 --> 00:21:46.720
We'll just make more, right?
00:21:46.799 --> 00:21:48.640
Like we can just print as much as we want.
00:21:48.880 --> 00:21:54.240
It would be very unusual for a country like the US to default because it ran out of dollars.
00:21:54.400 --> 00:21:57.759
Because if there's a dollar deficit or shortage, you can just print more.
00:21:58.000 --> 00:21:59.680
Interestingly, Russia.
00:22:00.160 --> 00:22:03.519
Did default on ruble denominated debt in 1998.
00:22:03.599 --> 00:22:05.119
And it was also a fiat currency.
00:22:05.200 --> 00:22:06.480
The ruble wasn't backed by anything.
00:22:06.559 --> 00:22:10.079
It wasn't backed by rubies or anything else, precious metal.
00:22:10.240 --> 00:22:16.799
So it could have printed more, but its own central bank was so concerned about hyperinflation.
00:22:17.039 --> 00:22:20.240
Russia had gone through hyperinflation in the early 1990s.
00:22:20.400 --> 00:22:27.039
When this debt was coming due and the government was unable to roll it over, the Russian central bank said, yeah, we're not going to print anymore.
00:22:27.119 --> 00:22:28.400
We'll just let you default.
00:22:28.559 --> 00:22:37.920
And so that was a decision, kind of an economic and political decision made saying we think the pain to our society of a government debt default is less than the pain of hyperinflation.
00:22:38.160 --> 00:22:47.519
So if there ever were a US government default, because the government had run out of dollars, and there's other technical ways that defaults can occur, but that's the big one that people worry about.
00:22:47.680 --> 00:22:57.440
It would be because the Fed decided that we're not going to keep monetizing the debt, because we are, like the Russian central bank was in the late 1990s, worried about too much inflation.
00:22:57.599 --> 00:23:00.079
But in the absence of that, it's a pretty safe bet.
00:23:00.160 --> 00:23:06.160
And this is why US Treasury debt is still considered to be, or the yield on it is still considered to be the risk-free rate.
00:23:06.400 --> 00:23:12.240
The default risk on it is considered to be effectively zero, at least for the for the foreseeable future.
00:23:12.559 --> 00:23:23.200
So what's worse, like continuing to move the goalpost with the debt ceiling and ballooning this deficit out of control, or issuing more money and creating an enormous amount of inflation?
00:23:23.519 --> 00:23:29.440
Yeah, it's a really good question because every dollar that the US government spends has to be paid for.
00:23:29.519 --> 00:23:30.960
There's a way of describing this that I like.
00:23:31.119 --> 00:23:32.559
This isn't in any way original.
00:23:32.880 --> 00:23:38.240
Ultimately is going to take the form of, or there's going to be a tax on somebody to come up with that dollar.
00:23:38.480 --> 00:23:43.599
Now, most of the spending is now covered by actual present taxes collected by the federal government.
00:23:43.759 --> 00:23:50.160
Those are payroll taxes, those are income taxes, corporate income taxes are a little bit, tariffs might be a bigger factor going forward.
00:23:50.400 --> 00:23:51.599
That is most of it.
00:23:51.759 --> 00:23:54.160
That's a tax on present taxpayers.
00:23:54.319 --> 00:23:57.119
There's also a part that is through borrowing.
00:23:57.359 --> 00:24:09.039
Now, borrowing can be thought of, however, as just a tax on future taxpayers, because ultimately that money will have to be paid back unless the government defaults on that debt, in which case that's a tax on the bondholders, right?
00:24:09.119 --> 00:24:10.640
They're the ones who take the hit.
00:24:11.039 --> 00:24:17.759
And then the fourth option is that the debt is monetized, it's converted into cash by the Federal Reserve.
00:24:18.000 --> 00:24:25.279
And then that converting it into cash or into money creates more dollar bills in circulation, which is inflationary.
00:24:25.359 --> 00:24:30.720
So that's basically a tax on people who either hold dollar bills or owe dollar bills or owe dollars.
00:24:30.799 --> 00:24:32.319
So anybody who has money, basically.
00:24:32.480 --> 00:24:33.440
There's no free lunch.
00:24:33.519 --> 00:24:36.000
Somebody is always going to be paying for it no matter what.
00:24:36.160 --> 00:24:43.920
And it's an interesting question about which of these is the least burdensome kind of to the economy or to individuals.
00:24:44.160 --> 00:24:58.079
It almost certainly is true that when you get to a point where you have hyperinflation, let's say you're trying to monetize most of the debt, and consumer prices are rising at double digits every month, that really is a full-scale economic disaster.
00:24:58.400 --> 00:25:04.240
Economies often break down, people don't use the currency anymore, they go to a barter system or other kinds of things.
00:25:04.400 --> 00:25:11.039
And so it almost certainly is true that in the long run, you can't monetize most of the debt when the debt is of this size.
00:25:11.279 --> 00:25:18.240
Maybe a little monetization with a little inflation is something that the economy and the body politic will tolerate.
00:25:18.480 --> 00:25:26.000
But I don't think the Fed's going to be able to convert it all into dollars, and nor would the Feds be willing to do so, just print the money.
00:25:26.160 --> 00:25:37.440
And so it is going to be have to be paid for, but through some combination of higher taxes in the future or spending cuts, which are very politically unpopular, or potentially a debt default.
00:25:37.759 --> 00:25:37.920
Yeah.
00:25:38.160 --> 00:25:39.920
Seems like there's no really good options there.
00:25:40.079 --> 00:25:42.720
Painful cuts, especially high taxes.
00:25:43.039 --> 00:25:43.680
That's right.
00:25:43.839 --> 00:25:44.000
Right.
00:25:44.319 --> 00:25:51.440
When a nation defaults the way Russia did, do they go into some sort of bankruptcy situation where they can get out from those obligations?
00:25:51.759 --> 00:26:04.319
For governments, for sovereigns, there's no process whereby they say, okay, here are all our assets, and our creditors can come and we'll liquidate, you know, we'll sell the Grand Canyon and all the gold in Fort Knox and just turn it over to our creditors with Russia.
00:26:04.480 --> 00:26:06.240
It wasn't like, yeah, sorry, we can't pay you.
00:26:06.319 --> 00:26:07.759
We have these really nice nuclear weapons.
00:26:07.839 --> 00:26:11.119
They're, you know, let's sell those at an auction, you know, raise some cash that way.
00:26:11.359 --> 00:26:14.480
Governments, when they default, they don't go into a bankruptcy proceeding.
00:26:14.559 --> 00:26:16.000
They don't liquidate their assets.
00:26:16.160 --> 00:26:20.000
It's just that the investors don't get paid and they have to take their lumps.
00:26:20.160 --> 00:26:20.400
Yeah.
00:26:20.559 --> 00:26:20.799
Yeah.
00:26:20.880 --> 00:26:22.960
Now that doesn't mean there's no consequences for the government.
00:26:23.039 --> 00:26:24.880
It makes it harder for the government to borrow in the future.
00:26:24.960 --> 00:26:26.640
Obviously, there's a huge reputational cost.
00:26:26.799 --> 00:26:32.160
And so when it does borrow in the future, it will have to pay higher interest rates because of the perceived higher risk.
00:26:32.319 --> 00:26:42.400
In some countries, there's so little confidence in the ability of the governments and the value of its currency because it's known to print so much money and it'll have like hyperinflation or very high inflation.
00:26:42.559 --> 00:26:44.559
Argentina, I pick on Argentina, it's a beautiful country.
00:26:44.640 --> 00:26:48.400
I don't mean to, but it comes to mind because it seems like it's always defaulting on its debts.
00:26:48.640 --> 00:26:58.880
Argentina has a hard time getting foreigners to buy peso-denominated debts because they just think that the Argentinian central bank is going to print so many pesos that the peso isn't worth very much.
00:26:59.119 --> 00:27:03.279
Like I said, inflation or money printing hurts people who are owed that currency.
00:27:03.519 --> 00:27:10.799
So if you buy a debt that's denominated in pesos and then Argentina prints a bunch more, the central bank, your payments are going to be worth very much.
00:27:11.119 --> 00:27:16.480
So foreign investors will lend to the Argentinian government, but the debt is dollar denominated.
00:27:16.559 --> 00:27:17.759
It's denominated in US dollars.
00:27:17.920 --> 00:27:21.359
That means the Argentinian government has to come up with US dollars, which they can't print.
00:27:21.599 --> 00:27:24.480
That puts a great deal of discipline on the government, right?
00:27:24.559 --> 00:27:25.920
It can't print its way out of it.
00:27:26.000 --> 00:27:32.319
But we've seen many times that it can't often, let's say, through tariffs or excise taxes, raise those dollars in other ways.
00:27:32.400 --> 00:27:34.079
And so as it ends up defaulting.
00:27:34.240 --> 00:27:38.240
But Argentina doesn't, and it hasn't then gone to any kind of bankruptcy process.
00:27:38.400 --> 00:27:53.519
There have been a few court cases in which bondholders for Argentinian sovereign debt, that's what sovereign debt's the term where a government's borrowing in another currency other than its own, will try to seize assets in other places, like an Argentinian government's bank account here in New York, maybe seize.
00:27:53.680 --> 00:28:04.720
And it is also possible for a government, when it borrows, to say these bonds are backed by certain assets that we will put in escrow or we'll put in a bank in a foreign country to try to build some confidence.
00:28:04.960 --> 00:28:07.839
That's kind of like secured lending or secured borrowing, right?
00:28:08.000 --> 00:28:09.119
But that's the extent of it.
00:28:09.200 --> 00:28:20.960
So, no, we're not going to see the United States government itself filing a Chapter 11 petition here in the Southern District of New York to reorganize as much fun as that might be for a bankruptcy scholar like me.
00:28:21.200 --> 00:28:21.519
Yeah.
00:28:22.000 --> 00:28:27.519
So every president this century has come into office and spent a lot of money.
00:28:28.079 --> 00:28:30.960
And yet we've always avoided a default.
00:28:31.200 --> 00:28:31.519
Yeah.
00:28:31.839 --> 00:28:34.799
But you know, now we're on this trajectory where it is getting quite large.
00:28:34.880 --> 00:28:39.680
And as you said, there might be these drawing blood from one part of the body or the other, but somebody's gotta pay.
00:28:40.000 --> 00:28:40.559
At some point, right?
00:28:40.799 --> 00:28:41.759
There will be some reckoning.
00:28:42.000 --> 00:28:42.240
Right.
00:28:42.480 --> 00:28:47.920
Now, what if this happens in like, let's say, 20 years and we're retired on a beach somewhere?
00:28:48.079 --> 00:28:49.119
Who does it hurt most?
00:28:49.440 --> 00:28:54.799
Well, when you say this happens, I think you're imagining a crisis of some type.
00:28:54.960 --> 00:29:01.119
And it you could have, and that that can be a real nightmare, something where there's a crisis and the system breaks.
00:29:01.359 --> 00:29:06.240
And a crisis could be hyperinflation where people are no longer using the currency.
00:29:06.400 --> 00:29:13.519
Another crisis could be an actual default where the Fed refuses to print any more dollars and the Treasury Department just says we're out of money.
00:29:13.680 --> 00:29:17.759
And then there's a lot of questions about what does the Treasury Secretary do in that case?
00:29:17.839 --> 00:29:19.920
Which bills does he pay and which ones are not paid?
00:29:20.000 --> 00:29:23.279
There's no actual federal law that dictates what to do in that situation.
00:29:23.440 --> 00:29:29.279
But that would certainly be a crisis because let's say it's Social Security beneficiaries are not getting their checks, right?
00:29:29.359 --> 00:29:31.200
That's a political crisis, certainly.
00:29:31.440 --> 00:29:35.440
So you could have the system break in some kind of dramatic way.
00:29:35.759 --> 00:29:52.319
I think, though, that it's maybe just as likely that we will just have continuing kind of a drag on economic growth because all of this spending has to be paid for in some combination of those three methods other than the actual default, which I'm saying, let's assume it isn't very likely.
00:29:52.400 --> 00:29:56.079
So present taxes, future taxes, and money printing, which leads to inflation.
00:29:56.319 --> 00:30:00.799
And so it could be simply that the US government just continues to kind of limp along.
00:30:01.039 --> 00:30:14.160
The people who live 20 years hence, and I certainly hope I'm among them, will be poorer than they would be otherwise because the country they're in would be poorer because it has all the spending that it's not paying for in a responsible way.
00:30:14.400 --> 00:30:21.599
But if there is something like a crisis, let's say, let's let's assume the crisis mode, if it's hyperinflation, that is most damaging to people who have savings.
00:30:21.759 --> 00:30:23.839
Savings, the value of savings just gets wiped out.
00:30:24.000 --> 00:30:25.839
Lots of other calamities happen too.
00:30:26.000 --> 00:30:28.400
There's lots of economic activity and so on.
00:30:28.480 --> 00:30:30.960
But that's really bad for pensioneers, for savers.
00:30:31.119 --> 00:30:39.680
I think the poor do worse than that because if you own real assets like land or gold, that's still gonna retain its value even after a hyperinflation.
00:30:39.920 --> 00:30:50.480
If it is the Congress finally says we just have to cut spending, and then there's a big, let's say, spending cut, then it's whoever are the recipients of government spending, are really gonna take the hit in 20 years.
00:30:50.640 --> 00:30:54.640
That could be people who receive Social Security, people who receive Medicare, people who receive Medicaid.
00:30:54.799 --> 00:30:59.359
Those are the big recipients of spending above and beyond the Pentagon.
00:30:59.759 --> 00:31:13.599
So who feels the pain in a crisis-like situation, or let's say a situation where the system that you are describing, where the debt just keeps mounting year after year, we have these periodic, almost yearly now arguments about, oh, are we going to hit the debt ceiling?
00:31:13.680 --> 00:31:15.359
And then invariably it's extended.
00:31:15.519 --> 00:31:16.720
But that scares everybody.
00:31:16.799 --> 00:31:19.759
Eventually that system proves to be unsustainable and we go to something else.
00:31:19.839 --> 00:31:23.599
And so there's a real kind of inflection point in the trajectory.
00:31:23.839 --> 00:31:26.160
It's not clear who is going to take the hit the most.
00:31:26.240 --> 00:31:29.680
It kind of depends on what is the weakest point in this system where it breaks.
00:31:36.240 --> 00:31:42.880
It could very well be economic growth is not robust as what you and I have been used to in our lifetimes, what our parents were used to.
00:31:43.119 --> 00:31:55.440
And certainly if there is a loss of confidence in the US dollar, that and so that the dollar is no longer what's known as the world's reserve currency, then that would make Americans as a whole, in many ways, poorer.
00:31:55.839 --> 00:31:56.000
Okay.
00:31:56.160 --> 00:31:58.640
Talk to us for one minute about the interest rates.
00:31:58.880 --> 00:32:02.960
Everyone likes to predict what the Fed is going to do with interest rates in the near future.
00:32:03.200 --> 00:32:07.200
Does this passage of this bill have any impact on what they'll do to interest rates?
00:32:07.599 --> 00:32:10.640
Yeah, so I would never try to predict specific movements in that.
00:32:10.720 --> 00:32:12.480
I'm not a Fed watcher on that level.
00:32:12.559 --> 00:32:17.839
You know, some people like watch very closely the Fed chairman, what he says, and try to parse his language and so on.
00:32:18.079 --> 00:32:25.599
But there's a couple of factors that to me are suggesting that we're going to have more inflation in the future.
00:32:25.759 --> 00:32:31.839
And when there's more inflation, the main way it fights that is by actually doing the opposite of money printing.
00:32:31.920 --> 00:32:39.359
It actually tries to suck money out of the economy because price inflation, the old way of saying it, is too many dollars chasing too few goods and services.
00:32:39.440 --> 00:32:46.160
And so one way you can reduce the ratio to make it more favorable, make goods and services cheaper, is to have fewer dollars in circulation.
00:32:46.319 --> 00:32:49.200
In fact, that's why the Fed now pays interest on bank reserves.
00:32:49.279 --> 00:32:56.079
That interest keeps bank reserves in Fed accounts rather than allowing it to circulate in the economy where it would drive up prices.
00:32:56.319 --> 00:33:09.359
But we still might have inflation, and then the Fed may raise interest rates, which really is the consequence of reducing the amount of money in circulation, sucking money out of circulation, which is a contractionary policy.
00:33:09.519 --> 00:33:12.559
Why do I think that there might be kind of inflation on the horizon?
00:33:12.799 --> 00:33:17.119
The biggest immediate threat, I think, is that the tariffs that President Trump keeps talking about.
00:33:17.279 --> 00:33:23.200
And I know maybe just even today or yesterday, he's announcing that he is slapping big tariffs on several countries.
00:33:23.519 --> 00:33:26.559
Tariffs raise the cost of imported goods and services.
00:33:26.720 --> 00:33:29.920
Now, people may switch then to domestic goods and services instead.
00:33:30.079 --> 00:33:33.920
But then competition, new competition for those, causes those to be more expensive as well.
00:33:34.160 --> 00:33:42.400
So in a way, when you think of as price inflation is too many dollars chasing too few goods and services, tariffs basically reduce the volume of available goods and services.
00:33:42.480 --> 00:33:47.200
It substitutes less efficiently made domestic goods for more efficiently made foreign goods.
00:33:47.359 --> 00:33:49.839
And so that causes then price inflation.
00:33:49.920 --> 00:33:52.559
And you can fight it by sucking dollars out of the economy.
00:33:52.720 --> 00:33:54.160
And so the Fed may have to do that.
00:33:54.240 --> 00:34:06.400
So I think that as long as we have this kind of looming over our heads, this possibility of tariffs and high tariffs, I think that inflation is on the horizon and therefore a rise in interest rates.
00:34:06.799 --> 00:34:16.320
Now, do you have any sense for how Wall Street is receiving the passage of this bill or these predictions about how the Fed will act or the growing deficit or any of that?
00:34:16.639 --> 00:34:21.840
So far, it's been a good year on Wall Street, with the exception of when the tariffs are announced.
00:34:22.079 --> 00:34:25.679
Wall Street then freaks out because it realizes that that's bad for economic activity.
00:34:26.000 --> 00:34:31.599
But there was this incredible, I'm not saying anybody actually did this, although I wouldn't put it past my fellow humans.
00:34:31.760 --> 00:34:37.039
There was a credible opportunity to bet on the market if you had inside information just about what Trump was going to say about tariffs.
00:34:37.199 --> 00:34:42.159
When he announced that he was going to slap tariffs like on China, the more than 100%, the stock market collapsed.
00:34:42.239 --> 00:34:45.679
And then he would say a few days later, I'm going to put that on hold for 60 days, and then it would surge.
00:34:45.760 --> 00:34:48.079
And if you knew that ahead of time, you could make a killing.
00:34:48.239 --> 00:34:54.079
And so it has been volatile in response to this news with respect to the tariffs.
00:34:54.320 --> 00:35:07.360
Putting that aside, however, if we think, well, okay, what we're going to be continuing to see is high deficits, which does mean that the Fed is probably going to be engaging in money printing again in the future to monetize some of those deficits.
00:35:07.599 --> 00:35:15.840
That actually is good for people who own stocks because when you have price inflation, the price of everything eventually rises, including stocks.
00:35:16.000 --> 00:35:17.519
We don't think of it this way.
00:35:17.760 --> 00:35:23.840
But a lot of the growth you see in Wall Street in the recent decades is not because of real economic fundamentals.
00:35:24.000 --> 00:35:28.320
Some of it is, these companies really are becoming more profitable, but some of it is just there's more money circulating.
00:35:31.280 --> 00:35:38.800
And so anticipated increases in the money supply will translate into higher stock prices, just like they translate into higher home prices.
00:35:39.039 --> 00:35:51.760
So there's something that's very regressive about inflation through money printing, which is that for people who own real assets, things like stocks and gold or whatever, something like that, very few people own that in the same degree they own the other things.
00:35:51.840 --> 00:35:56.159
But let's say, let's look at look at the big things that Americans typically own if they have real savings.
00:35:56.320 --> 00:35:59.199
It's their house, it's real estate, and it's on the stock market.
00:35:59.519 --> 00:36:09.360
A lot of the price inflation which you would be suffering at the grocery store, it's kind of made up to a large extent in the value of your home, the price of your home at least, and in the value of your stock portfolio.
00:36:09.679 --> 00:36:22.639
The people who are really hurt are people who don't have those assets that inflate as prices inflate, but they do have to, like the rest of us, pay more at the grocery store for food, or they have to pay more for medicine or for tuition and so on.
00:36:22.800 --> 00:36:31.119
So it really is the people who don't have a lot of savings who tend to be poor, and also younger people tend to have less savings than older people who tend to get hit by price inflation.
00:36:31.199 --> 00:36:34.480
They're the real ones, they bear the cost of money printing.
00:36:34.639 --> 00:36:39.840
If we could pull them, they would be, I think, less uh sanguine, maybe about the future than Wall Street is.
00:36:40.079 --> 00:36:49.039
Well, that's why we love having you on, because you always take a much more meaningful look at all of these issues and help us understand them on a level that the headlines will never give us.
00:36:49.280 --> 00:36:50.000
Thank you, Amy.
00:36:50.159 --> 00:36:52.000
Last time you were on the show was March 18th.
00:36:52.079 --> 00:36:53.039
That was way too long ago.
00:36:53.280 --> 00:36:53.440
Okay.
00:36:53.599 --> 00:36:55.039
So don't stay away for that long again.
00:36:55.440 --> 00:36:56.400
I wasn't avoiding you.
00:36:56.559 --> 00:36:56.800
Why not?
00:36:57.199 --> 00:37:03.440
I was I sit by I I go out to the mailbox every day waiting for my next invitation to be on Bite-sized business law podcast.
00:37:03.599 --> 00:37:04.400
So keep them coming, Amy.
00:37:04.719 --> 00:37:05.199
Okay, thank you.
00:37:05.360 --> 00:37:06.239
Bye-bye.
00:37:09.119 --> 00:37:14.480
Thanks to everyone at Fordham Law School, especially the Dean's Office and our corporate law center donors for supporting this podcast.
00:37:14.719 --> 00:37:17.599
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00:37:17.679 --> 00:37:22.320
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00:37:22.480 --> 00:37:32.400
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