October 9, 2025 • 42 mins
What changed between 2019 and 2025? Why are interest rates so much higher? Why does it seem virtually unfathomable that the Fed will return to ZIRP anytime soon? Why do investors expect this rate cut cycle to be so shallow? The answer, theoretically, is that the neutral rate of interest has gone up. But what is the neutral rate of interest, and why has it moved? On this episode, we speak with Jamie Rush of Bloomberg Economics and Tom Orlik, the Chief Economist at Bloomberg Economics. They, along with Bloomberg's Stephanie Flanders, are the editors of a new book titled The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest, in which they attempt to directly identify what the neutral rate of interest actually is. We discuss the big changes over the last several years, including deglobalization, demographics, and datacenters, that are pushing this number higher.
Listen to our sister show Trumponomics: Trump Isn’t the Only Reason the Price of Money Is Rising
Read more:
Trump’s Contradiction: Demanding Steep Rate Cuts for a ‘Booming’ Economy
Fed Set to Drive Global Rate Cuts as Europe Shifts to Pause
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe Whysenthal. Joe, Yeah. Yes.
Speaker 2 (00:26):
Recently, recently Stephen Myron, who is chair of the Council
of Economic Advisors and also the newly confirmed FED Board member,
he made his first public speech since joining the Central Bank.
And do you know what it was about?
Speaker 3 (00:40):
I do but go on the neutral rate, the.
Speaker 2 (00:43):
Natural rate of interest, our stares basically all about our star,
which is like pretty significant for his first speech.
Speaker 4 (00:50):
I mean, to me, this has come up on a
bunch of episodes lately. To me, this is the multi
trillion dollar question, which is recording the September twenty fourth,
twenty twenty five. Why are long term rates so much higher?
Why does the market perceive that rates will have to
be so much higher in order for the FED to
hit its inflation goals than the market perceived in twenty nineteen.
(01:11):
What changed in the last six years or five years
or whatever.
Speaker 2 (01:14):
Well, Also, I mean, our star has always been something
of a controversial idea, and people criticize it for being
this unobservable thing. And you know, it's a hypothetical estimate
that's extracted from all this different stuff like savings and
spending and productivity and demographics, investment. You can go on
and on and on immigration.
Speaker 5 (01:35):
Yeah exactly.
Speaker 2 (01:35):
Yeah, but I think you know, our star is probably
going to get even more controversial, or perhaps more under
the spotlight, is a way of putting it. Given that
people like Myron in his speech where he was arguing
that the natural rate of interest should be zero right now,
which is very, very different than other sort of normal
(01:56):
estimates out there, which has the natural rate of interest
at las three point three or three point nine percent
something like that. And so if you think the neutral
rate of interest is a lot lower, then you would
assume that the FED should be loosening more. And conversely,
if you think our star is high, which a lot
of people have argued in recent years, then you would
(02:18):
argue that interest rates don't look that restrictive at the
moment totally. So we should clearly talk more about this.
And we've actually never done a specific episode just on
the neutral rate.
Speaker 3 (02:28):
So I'll just say two things.
Speaker 4 (02:29):
I'm probably something of an r star truth or in
the specific sense that I doubt like, Okay, everyone agrees
it's like quote unobservable, et cetera. But I doubt that
there is actually some rate that will magically bring the
economy into balance if we knew what it was. That
doesn't mean I don't find this to be a conceptually
useful conversation.
Speaker 2 (02:49):
And yet you don't believe in the term premium.
Speaker 3 (02:52):
I don't really believe in any any of this stuff. No,
that's not true.
Speaker 4 (02:55):
I am very interested in setting aside whether something could
theoretically be observed, whether one number could bring everything into balance,
all of these ex sitting aside that question, something has
changed in the underlying economy. If you want to call
that a neutral rate of interest, I guess I'm totally
fine with that. But something's changed, and I want to
(03:16):
know what it is. But more importantly, I want to
know why.
Speaker 2 (03:18):
All right, Well, we have the perfect guests. We're going
to be speaking with Tom Orlick, who is of course
chief economist at Bloomberg Economics. He's been on a number
of times before, and Jamie Rush, director of Global Economics
at Bloomberg Economics, and together with Stephanie Flanders, who is
the head of Bloomberg Economics and also the host of
the Trumpenomics podcast, have written a book all about the.
Speaker 3 (03:43):
Neutral rate of interest, A whole book about it.
Speaker 2 (03:45):
Yeah, called The Price of Money, A Guide to the past, Present,
and Future of the Natural rate of Interest.
Speaker 3 (03:51):
Amazing. I'm really excited, So.
Speaker 2 (03:52):
Let's get started. Tom and Jamie, thank you so much
for coming on all thoughts.
Speaker 5 (03:56):
Great to be here, Thanks Tracy, thanks Jay, thanks for
having us.
Speaker 2 (04:00):
First of all, congratulations on the new book. And I
got to say, it's kind of ballsy to tackle this
concept that a lot of people don't believe in, excluding Joe,
and you know that tends to generate a lot of criticism.
And maybe it's even ballsier to publish your own model
so that everyone can see what the estimates actually are.
I mean that as a genuine compliment. But why a
(04:22):
book on the neutral rate? What prompted it?
Speaker 6 (04:25):
So?
Speaker 5 (04:25):
I actually recall the tweet from Joe a while ago
where he took aim at books as a concept.
Speaker 4 (04:32):
Oh yeah, So not only do I not believe in
our star or anything, I don't even believe in the
premise of book.
Speaker 3 (04:37):
No, I do believe in it.
Speaker 2 (04:38):
Joe believe all books should be a tweet.
Speaker 3 (04:40):
That's right, Keep going exactly.
Speaker 5 (04:41):
So we've written about a concept Joe doesn't believe in
in a format that Joe doesn't support. So we feel
incredibly lucky to be on the on the podcast. So
why now? I think there's a couple of ways to
answer that question. The first is, I mean, this is
really important, right we talk about the neutral rate of interest,
but really a different way of saying it is it's
(05:02):
the cost of borrowing in the economy, right, and the
cost of borrowing is incredibly consequential for ministers of finance,
it's incredibly consequential for businesses, for households, for investors. So
it's always a good time to write about the neutral
rate interest rates, the cost of borrowing. Why specifically now, well,
(05:24):
is because something really important has changed. From the late
nineteen eighties to the mid twenty tens, the global economy
was characterized by too much saving and not enough investment,
and in that state of affairs, the neutral rate of interest,
the cost of borrowing, was continually falling. What's happened in
(05:44):
the last decade, Well, that dynamic has swung into reverse
and now we have less saving, more investment, and that
means the neutral rate of interest, the cost of borrowing
for the US Treasury and for everyone else is going up.
Speaker 3 (05:59):
I like this frame.
Speaker 4 (06:00):
So it's less about the idea that there is some
rate that will bring everything into balance magically, et cetera,
because I think a lot of people intuitively understand why
you know, that's not such a you know, I think
that probably makes a lot of people uncomfortable. But it
seems objectively true or real that the cost of money
or the cost of borrowing has gone up, and so
(06:22):
we can talk about that specifically. Let's talk about the
cost of borrowing today, like how much more expensive is
it to borrow money today by some measure than it was,
say pre COVID.
Speaker 2 (06:33):
Wait, just before we do this, can we get like
a three sentenced definition of how you view our star?
I feel like we should define our terms before we start.
Speaker 6 (06:41):
Excellent idea, So our star the natural rate of interest
is what balances demand for investment and saving in the economy,
and when those two things have imbalanced, the economy is
on trend and inflation is roughly at target.
Speaker 2 (06:56):
All right, that's a simple definition.
Speaker 3 (06:57):
Okay, I like that. All right, gone up.
Speaker 4 (07:01):
I mean this is the big this is the big
question rate. But actually, before we say, why has it
gone up? How much has it gone up, or has
it in fact gone up versus the pre COVID environment.
Speaker 3 (07:11):
Let's start with that.
Speaker 6 (07:12):
Well, if we cast our mind back to that COVID experience,
there was a period where governments could basically be paid
to borrow in real terms, interest rates were so low
for so far across the Yelk curve that they could
borrow without having to worry about whether they'd pay it back.
So you can see that the real world implications of
that and the behavior that we saw during the pandemic,
(07:33):
the borrowing that happened, the interest rate was enormously consequential,
and a big part of that. We're not in that
world now. Interest rates, treasury yields in excess of four
percent are much higher, much more burdensome, And now we're
seeing that the costs of those policies manifest in budgets today.
Speaker 2 (07:51):
So I remember, way back in twenty sixteen, Goldman Sachs
put out this note arguing that the Fed had a
big new idea to justify keep rates low basically, and
the argument was that our star was low, and so
you know, monetary policy wasn't actually that loose at the time,
even though benchmark rates were already pretty low. And the
(08:12):
Goldman analyst had this chart in their note where they
basically looked at mentions of thematic ideas in FED speeches
and press releases and things like that. And indeed you
could see that starting in twenty sixteen, mentions of our
Star start going up, and you know, they basically came
off of nothing. For like the previous decade, no one
(08:33):
was talking about the natural rate of interest. I know
our Star itself is an old idea because I read
the book and there's a chunky chapter on the history
and development of the entire concept. But am I right
in thinking that there has been a resurgence in interest
in our Star over the past decade or so?
Speaker 5 (08:55):
Chunky seems like a neutral adjective, tracy, right, elanquent.
Speaker 2 (09:00):
An informative chapter, I should say so.
Speaker 5 (09:03):
I think that clearly has right. And I think one
of the reasons for that is because the state of
the world has changed. Right, in the run up to
the global financial crisis, didn't feel like there were sort
of fundamental issues with how monetary policy was operating. Right,
interest rates moved up, interest rates moved down, the economy
(09:24):
responded in the way which the textbooks would suggest. But
in the aftermath of the financial crisis, we're in this
extended period of economic malaise, right, and from a monetary
policy perspective, it was hard to explain. Interest rates are
on the floor. There have been a huge amount of
quantitative easing, and yet unemployment rates remained stubbornly high, growth
(09:47):
remained stubbornly low. Why was that? And that's one of
the reasons why this neutral rate of interest rose in
profile as an explanatory factor, because if the neutral rate
of interest has come down, if it's come down very far, well,
that means that central banks have to do a lot
to stimulate the economy. And if the neuturate of interest
(10:08):
is close to zero, well, that effectively means that central
banks are out of fire power. They can't take interest
rates low enough to stimulate growth.
Speaker 4 (10:17):
This is a very important point actually, and again just
let's stay in the twenty tens here, when interest rates
were at zero or near zero for a long time,
You've probably hurt a lot of people in the financial press.
Ao you know, the FED is super loose monetary policy, etc.
How long will the Fed continue to print money or whatever,
(10:38):
and yet looking at the actual results in the real economy,
as you've described, unemployment remaining stubbornly high, inflation consistently undershooting
in retrospect. Very nice problem to have. I think we
should have appreciated it more at the time. Really not
a problem at all in my opinion. The implication, though,
and we could have understood this from Milton Friedman and
(10:59):
some of his talk about you, was that actually, implicitly
we were still running tight monetary policy even with normal
rates basically at their physical floor.
Speaker 3 (11:09):
Yeah.
Speaker 6 (11:09):
So I guess during that period, interest rates were low,
the economy was failing to gain traction, and policymakers were
puzzling over it. And actually the puzzle continues, right, Policymakers
still don't know how restricted policy is. They infer what
they think the natural rates should be by looking around them,
seeing what's happening to unemployment, see what's happening to inflation,
(11:30):
But they don't know. And so one of the things
that we did, and we tried to achieve in our
book is to rather than inferring the natural rate of interest,
we looked over a broader sweep of history and try
to pin down the explanatory drivers of the rate of
interest to try to shed some light on why these
things are as they are, why interest rates fell so much,
why there was an inflection point around the pandemic, and
(11:52):
why we think interest rates may therefore go upwards in
the future. So it was for us the exercise the
book was really about trying to pin down the and
then tell a story about this drive is so you
can think about it in the future.
Speaker 4 (12:20):
I feel tracy like this conversation is really about like
the magical object that you can't look at right because
I'll freeze you, or maybe it's the shining gold and
the briefcase of pulp fiction.
Speaker 3 (12:31):
You can't see it.
Speaker 4 (12:32):
So all we've done historically mostly is we've attempted to
figure out what it is by observing its reflection onto
the world which we observe that reflection.
Speaker 3 (12:41):
And the unemployment.
Speaker 4 (12:42):
And now this is an attempt to see the unseeable
and to actually stare into the abyss at this crucial
number and find out what it truly is.
Speaker 2 (12:51):
Everyone's been wondering what's in the suitcase of cult fiction.
It was our star.
Speaker 3 (12:55):
It was our star all along.
Speaker 2 (12:57):
Okay, Well, on that note, I mean I take the
point that most of the book is about the specific
drivers of our star, but you do come up with
a model, and you do come up with an estimate
for the sort of long run trajectory of our star.
Can you walk us through how your model actually differs
from some of the other models out there, because I
think that might help us to understand, you know, when
(13:18):
people say this is unobservable, or we're sort of staring
at the reflection of the economy trying to come up
with this hypothetical number, what we're actually doing or what
economists are actually doing.
Speaker 6 (13:31):
Yeah, of course, So the conventional way, at least the
way that's been gained a lot of popularity over the
past couple of decades, has been the Lowback and William's
model of the natural rate of interest or neutual rate
of interest. And what they do is they look at
what's going on with inflation, what's going on with unemployment,
and they try to judge from that how far current
(13:52):
interest rates must be away from the neutral rate. So
if interest rates are very restrictive, very far away from
the neutral rate, inflation is going to be very low
and unemployment is going to be very high, and vice aversa.
And this has the benefit of giving you a feel
for what's going on right now based on observable data,
but it doesn't tell you anything about why the interest
(14:13):
rate is what it is or therefore where it may go.
And so what we tried to do was pin the
natural rate down by using some actual data and some theory.
So if we think about what the natural rate is,
what it is that determines well, it's the price of money,
and that's determined by in the same way as anything
else is determined by the supply and the demand. So
(14:34):
on the one hand, you've got investment demand and then
you've got the supply of savings, and when these two
things move, it shifts to the rate of interest. And
because of that fundamental theoretical understanding, you're able to think about, well,
what is it that determines investment, Why do people want
to invest, why do people want to save? What is
it about them or different types of people or different
(14:55):
age people that affects their saving behavior. And so you
go from that theory to these drivers of these theoretical
drivers of behavior, and then you can try and pin
it down empirically, and that's exactly what we did. So
we fed into this model what economists generally think are
the main drivers of these investment and saving decisions. So
there are quite a few of them, and then we
(15:16):
estimate their relationship with the interest rates over the sweep
of say fifty years, and that really was what supported
our results, and it allows us, of course then to
think about how those drivers may change.
Speaker 4 (15:28):
Just keeping in my own trases mentioned in the beginning
of defining terms investment just sort of clear this is
like real investment, right, so this is hiring in Paul's
capital expense, Like, what does investment mean in your terms?
Speaker 6 (15:43):
Yeah, so we're thinking specifically, actually the capital expenditure. OK,
so let's take an example like AI. So AI is great,
I can't do it on a Cassio calculator. I have
to buy something to make it work. I have to
spend money. I have to invest in chips in fabs
to reap the benefits of those frontier technologies. So as
(16:04):
AI lifts the growth rate of the economy, it also
raises the investment needs. And so this is one of
the linkages that we kind of explore, is like, what
is the relationship between overall growth in the economy and
productivity growth, the investment need that creates, and then therefore
the knock on consequence of interest rates. So whether it's
ICT revolution in the nineties, railroads, or anything else, these
(16:29):
things all have impacts on investment and therefore the natural
rates of interest.
Speaker 4 (16:33):
And just to define the other term when you talk
about savings, because you know, in a sense of savings
long toil bank, et cetera. But this is the impulse
to have sort of liquidity right or at any given moment,
the various actors that desire to hold es centrally, dollar
or euro or whatever liquidity.
Speaker 6 (16:52):
Yeah, that's right. I mean, I guess you can think
about it on the individual level. So I want to
save right now. As I get older, I'll want to
spend those savings in my retirement. So that's one of
the key drivers of saving behavior. China used to save
a lot, Now it saves a little. But state actors
also matter to the global supply of saving and investment.
(17:13):
So yes, it's everybody, and it touches on everything. Yeah.
Speaker 2 (17:17):
One of the light bulb moments for me reading this
book was kind of touching the idea of generational warfare
and the idea that from the nineteen eighties onwards, baby
boomers started saving a lot, and so the supply of
savings went up and the neutral rate went down. And
that's the reason why I never earned interest on my
bank account until two years ago. Okay, serious question in
(17:40):
your model, what's the biggest driver of the neutral rate
actually going up in the future.
Speaker 6 (17:45):
Well, and I'm model the main driver really is dissaving
by governments or spending by governments. So there are a
number of I mean, if you look at the recent past,
the experience of the pandemic, if you look at the
path of the deficit in the US and other countries,
then what we've learned is that government's like to spend
and they have continued to do so even though it's
(18:06):
become more costly. And a lot of that reflects politics.
Politics are fragmented. It's hard to get support around closing
budget deficits, and so governance has continue to spend, which
is tilting the balance between investment and saving the global economy.
And of course they have big outlays coming up. Defense
spending is going up in much of the advanced world.
(18:26):
The need to green the energy infrastructure again in some
parts of the world is also crimping saving and they're
just that fundamental point that you've got aging populations, increasing outlays,
for dealing with that, on health, for dealing with that,
on benefits and pensions, all of this is just making
it very difficult to keep spending down.
Speaker 5 (18:44):
It also intersects with the argument which you kicked off
with Joe and Tracy from Stephen Myron. So Stephen Myron,
the new Fed Governor, has made the case that the
policies from the Trump administration are going to have a
big negative impact on the neutral rate of interest. That's
why he's advocating for very aggressive rate cuts to keep
(19:04):
policy accommodative. Now, the argument we make in our book
actually points in the opposite direction. Right, If you think
about the policies of the Trump administration, well, firstly, we've
got the One Big, Beautiful Bill which adds trillions and
trillions of dollars to government borrowing over the next decade.
That significantly pushes up the neutral rate of interest. And
(19:26):
if you think more broadly about Trump policies, well it's
kind of the end of the Grand Bargain which America
is struck with the world. Right, one way of thinking
about the last few decades is America said to the world,
we will buy your stuff and we will defend you,
but you have to finance us. You have to send
(19:46):
your saving to the United States by US treasuries. Well,
what the Trump administration now is saying is, well, we're
not going to buy your stuff and we're not going
to defend you. Right So it wouldn't be that surprising
if the rest of the world said, well, if you're
not going to buy our stuff, you're not going to
defend this, we're not going to finance you anymore. Right So,
Stephen Myron, who's a super smart, super articulate guy, and
(20:07):
if you've not had it on odd Lots already, you
should have.
Speaker 3 (20:10):
The fan favorite episode.
Speaker 5 (20:12):
Makes the case that the Trump administration has significantly lowered
the neutral rate of interest and that's why the Fed
needs to cut aggressively. The model which Jamie developed, the
argument we make in our book, actually points in the
opposite direction.
Speaker 2 (20:24):
Yeah, on this note, do you get the sense that
central bankers, policymakers, economists sometimes use our star as a
crutch to justify whatever they're doing. Like, if you think
rates should be lower, then you can just argue that
our star is in fact low, and our star is
this unobservable thing that's based on your own estimates, So
you can argue about it, but no one's ever going
(20:45):
to prove what our star actually is. And if you
think that rates should be higher, then you just argue that, well,
actually something has structurally changed and the natural rate of
interest is in fact quite high. Do people use it
in that way? It feels like it.
Speaker 6 (21:00):
One thing I suppose is with our star, you're never
beholden to a prediction, really, are you. So if you
say I think interest atech should be lower because the
economy is going to tank, and then the economy doesn't tank,
you just look like a bit of an idiot. But
if you say I think RAG should be lower because
our star is actually lower, then no one's ever going
to come along and say, oh, actually, you are completely wrong,
because I've got a refusable proof that our star will
(21:20):
actually in fact higher. So I think it's probably a
safe way to express your views if you just have
a belief, and in a belief that rates needs to
be lower, But it is perhaps one that's less easy
to help to.
Speaker 4 (21:30):
Account when we talk about Trump policies and their effect
on our star. Another thing that I think about a
lot is you talk about this grand bargain following part
the trade and every country wanting to be increasingly more
self sufficient in various goods, which strikes me as something
that once again adds to the investment impulse. The US
(21:54):
is worried that maybe one day we won't be able
to rely on Taiwan friendships. Europe might be worry the
US may not be a great supplier for whatever the
US supplies to Europe, etc. Does this sort of fracturing
of global trade, which may or may not be happening,
contribute to a positive investment impulse in a sense and
(22:14):
therefore raise our star?
Speaker 6 (22:17):
Yeah.
Speaker 5 (22:17):
I think there's a couple of dynamics that work there, Joe.
So the first one is the one you mentioned. If
everyone wants to make their own stuff at home, then
clearly there has to be a massive amount of capital
spending so everyone can build their own everything.
Speaker 3 (22:31):
Right.
Speaker 5 (22:31):
We can't just have semiconductive fabs in Taiwan. We need
semiconductive fabs in Germany and Japan and the United States,
and that means there needs to be much more investment spending.
The second dynamic, and this is something which one of
our co authors, Dan Hanson, gets into in the book,
is around globalization and the cost of investment goods. Right,
(22:55):
think about how much more computing power you get for
your money today thing you did in nineteen eighty. Right,
There's just been a massive increase in productivity, a massive
increase in the amount of computing power you get for
a certain amount of money, and that means you don't
have to spend as much in order to buy investment goods. Well,
(23:16):
if globalization now breaks down and we come to the
end of that kind of productivity miracle in technology, well
that means that the cost of investment goods is going
to stop falling. You're going to need to pay more
to buy a certain amount of technology, a certain amount
of investment goods, and that is also going to be
a factor pushing up the natural ry.
Speaker 2 (23:38):
So on a related note, we have had a number
of supply shocks in recent years, during the pandemic, during
the Russian invasion of Ukraine, all that stuff, which has
led a lot of governments to start thinking about how
to solve these sort of choke points or shortages in
the system. What does that actually mean for central bank policy?
(24:00):
If perhaps the neutral rate of interest is going up
because of these supply shocks because you need more investment.
But at the same time, the central bank raising rates
doesn't necessarily produce more wheat or more shipping capacity and
things like that. How should central banks respond?
Speaker 6 (24:17):
There are obviously going to be periods where inflation just
moves higher because of the supply shocks you mentioned, I think,
and we should expect those to happen with increasing frequency.
Speaker 1 (24:28):
Right.
Speaker 6 (24:28):
So climate change is going to make it harder to
produce stuff, it's going to make food price shocks more common,
it's going to create other distortions which hit production. So
central banks in the future will perhaps have to keep
interest rates higher anyway, just to kind of prevent those
shocks from feeding through to inflation expectations and therefore keeping
(24:50):
inflation away from targets. Is because supply shocks really are
very different from demand shocks. As you guys know, I'm sure,
and you know, history was dominated at least in the
last couple of decades by demand shots, and now we're
seeing a world which is dominated increasingly by suppier shocks.
And actually it's just a different playbook for central banks.
Speaker 5 (25:08):
I agree with all of that. I think there's also
another dynamic for central banks which is also going to
be a force for higher interest rates going forwards. And
that's the challenge to central bank independence. Right We've talked
about Stephen Myron coming onto the Board of Governors at
the FED. Well, guess what he's still holding onto his
position as the chair of the Council of Economic Advisors,
(25:30):
senior member of Donald Trump's economic policy team. Having someone
from the President's team serve on the FED concurrently, that's
unprecedented going back to nineteen thirty six and raises significant
questions about FED independence and so the Fed's credibility as
an inflation fighter. Right now, we've not really seen this
(25:52):
in markets so far. Markets have been paying surprisingly little
attention to this dynamic. But if the FED does lose
its independence, if the FED does lose its credibility as
an inflation fighter, then markets are going to start demanding
an additional premium to hold long term US treasury debt. Right, So,
you're going to have all of these structural forces, less saving,
(26:14):
more investment. You're going to have the greater preponderance of
supply shocks, which Jamie spoke about as an additional driver
of higher inflation, and you're going to have risks to
FED independence. And all of these are forces which are
going to be pushing up long term borrowing costs for
the US Treasury, and because the treasury rate is the
anchor for global markets, also pushing up borrowing costs for
(26:38):
everybody else.
Speaker 4 (26:54):
Even setting aside the sort of formal risks to FED independent,
there are other ERUs who question the degree to which
the FED still takes its own two percent inflation targeting
targets seriously, including our own colleague here, Anna Wong, who
says implicitly, if you look at what's going on, it
looks like they're no longer targeting two percent. They're targeting
two point eight percent. Tim Dewey, an economist we've had, says,
(27:17):
you know what, as long as inflation is below three percent,
we think the FED is mostly concerned about the labor
side of the mandate. So, setting aside Myron's role or
Trump's truth social posts, when you look at markets, is
there this sort of growing belief that the FED just
does not take two percent as seriously as once it did.
Speaker 6 (27:38):
Yees.
Speaker 5 (27:38):
So it's a powerful argument which Anna, our chiefs economist, makes,
and part of that argument is that this divergence between
what the FED should be doing if they take two
percent inflation seriously, and what they're actually doing didn't start
under Trump. It started under Biden. And actually it was
(27:58):
those rate cuts in the run up to the twenty
twenty four election which were the beginning of the FED
diverging from a kind of pure apolitical tailor rule path. Right. So,
as I'm sure you've seen Joe and Tracy, there's not
much which Republicans and Democrats agree on in America right now.
(28:20):
One point of bipartisan consensus, unfortunately, is that there's too
much politics in the FED.
Speaker 3 (28:27):
Tracy. Someone once told me that the two things.
Speaker 4 (28:30):
That everyone agrees on, by the way, in America are
that Dolly Partner is good and that Epstein didn't kill himself.
We can add a third that there is too much
politics in monetary policy making. So the three points of
bipartisan agreement.
Speaker 2 (28:44):
That's going to be my new conversation starter at dinners
for everyone. Just ask them if they think there's too
much politics in FED policy. Okay, Joe mentioned markets just then. So,
I think when people think of the era of low
interest rates and low natural rates, people think about high
asset prices. Right there tends to be a correlation there.
(29:04):
If the price of money is going up, what does
that actually mean for asset prices.
Speaker 6 (29:09):
Well, it kind of depends on the reason. And as
we sort of talks about earlier about the kind of
role of AI, Well, AI can raise equity values because
it's a frontier technology that's going to potentially transform the
way the economy operates and create lots of profits along
the way. It's also going to suck in a load
of capital and make it less available for others, which
(29:30):
is going to drive up interest rates. So if that's
the source you can see this world continuing. You can
see that interest rates will continue to rise as investments
sucked into the AI nexus. But if someone's the actual
promise is realized, you see equity values going up as well,
which is kind of a slightly unusual arrangement. But then
we don't have technological revolutions every day.
Speaker 4 (29:52):
I'm glad you brought up there, because I wanted to
go there. You know, I've seen Jason Furman, he has
characterized AI spending as being almost quae fiscal in nature
because it has this we haven't got the productivity payoff yet,
but there's this incredible flood of money coming in, so
it sort of has this perhaps crowding out effect.
Speaker 3 (30:09):
Neil kash Kari gave an.
Speaker 4 (30:11):
Interesting posted I guess there's a blog post called three Questions.
I think he posted it last week, but he talks
about our star about how this higher neutral rate of
interest may be appropriate given the intense pace of AI
investment that's going on, but also it may not be appropriate,
you know, for the housing sector. That's not what's bringing
(30:32):
to balance, and we see this decline. Could there be
two our stars? Could there be this our star that's
sort of the high tech economy booming, but it's not
the our star that brings the rest of the economy
into balance.
Speaker 6 (30:43):
It's a good question, Jay, and I think people do
you think about this concept quite a lot, in the
sense that there's a maybe there's an our star which
keeps the economy balanced, and maybe there's an our star
which keeps the financial sector and financial markets balanced and
not getting carried away with themselves. And there's no guarantee
or in a particular reason to think that they should
be the same, which implies then that you've got this
(31:06):
policy trade off you've got what's good for the economy
may not be good for financial stability, and so that's
another thing for central banks to be grappling with in
the years to come.
Speaker 5 (31:14):
So I was trying to remember, I was grasping for
that famous quote from I Think is it Benjamin Strong,
the head of the FED in the late late nineteen twenties,
and he said something like, must the FED be responsible
for all the problems in the economy? If I have
to set an interest rate for all the different sectors separately,
it's like spanking all of my children individually.
Speaker 2 (31:34):
Or something like that, Oh dear. When it comes to
the composition of investment, one topic that gets a lot
of attention nowadays is the idea of dedollarization and perhaps
people buying fewer US assets, perhaps people choosing to hedge
those US assets, And we have seen some very big
buyers of securities, like foreign central banks actually slow down
(31:59):
their purchases of US treasuries or US mortgage bonds and
things like that. How would that affect the neutral rate
of interest if you know, there's less money flowing into
dollars specifically, or dollar assets.
Speaker 5 (32:14):
So I think there's a number of reasons why we
would expect less money flowing into dollars, right. So one
really big reason is that China has changed its FX policy.
For more than a decade, China was pegging the yuan
to the dollar, and that meant the PBAC needed to
hoover up the whole trade surplus and park that in
(32:35):
treasuries to stop the yuan appreciating. Second big important reason
is that shift in the Grand Bargain between the US
and the rest of the world. Think about how the
US and Europe acted to freeze rushes FX reserves following
Putin's full scale invasion of Ukraine. That's a kind of
(32:58):
shift in the Grand bargain in and it tells Russia
but also everybody else. Guess what, There's geopolitics in the dollar, right,
and if you put your assets in the United States,
there's a risk you might lose them. And of course
the tariffs themselves are a factor. That huge hiking tariffs
that we saw on Liberation Day, well that's the US
(33:20):
saying we're going to play a smaller part in the
global trade system in the future. And if the US
is going to play a smaller part in the global
trade system, well, the utility of holding dollars as a
way of settling important export transactions goes down. So there's
a lot of reasons to be concerned about this dedollarization trend.
(33:41):
And Jamie may have a more sophisticated way of thinking
about this than me, But basically, I think about buying
dollars and buying treasuries has pretty strongly correlated in this context.
So if the rest of the world is dedollarizing, that
also means they're buying less US treasuries. That means less
demand for US treasure, and so it's another force pushing
(34:02):
US borrowing costs higher.
Speaker 6 (34:05):
I think all that is all entirely true. And I
guess one thing when you're trying to think next to
the linkage with global borrowing costs is what happens to
those savings instead. Now, if you can't find anywhere else
any other assets to buy in place of US treasuries,
what are you going to do? Well, quite possibly you
will end up spending them. And particularly if you think
(34:25):
about the giopilisical context, you think about the impact of
tariff's on China, for example, well, now there's actually an
extra incentive to spend more. And if you think about it,
in those terms. Then actually that policy itself is going
to shift the international balance of investment in saving again
away from savings, partly because it's just too hard to
save them.
Speaker 4 (34:43):
An US save my computer just for a force reboot.
I had a great charte on most streams, but now
I can't look at it. But December twenty seventh or whatever,
the last day of trading was. In twenty nineteen, the
US tenure was about one point eight and today it's
probably four point one two percent. Maybe both of you
(35:03):
list your five reasons in order. I know this, the
tenure is not the our star, but you know, for
our purposes for podcast talk, we could just sort.
Speaker 2 (35:12):
Of our star is everywhere.
Speaker 4 (35:14):
Yeah, like R five for both of you, in order
ranked the five major things or however men you want
to that have contributed most significantly to this regime change
or price change.
Speaker 5 (35:27):
Maybe I'll take the easy ones and force hard ones.
So here's my three. So firstly, it's demographics. For decades,
we had the baby boomers in prime working age saving
money for retirement. That pushed the neutral rate down. Now
they're retiring, spending down their savings. That's a powerful force
(35:47):
pushing the neutral rate up. Second is debt for decades
from the nineteen eighties to the global financial crisis, borrowing
from the US and from other major advanced economies. Leaving
a side, Japan was low and stable. Since the global
financial crisis, and again since the COVID pandemic, there's been
a massive increase in government borrowing. And when there's more
(36:10):
government borrowing, that pushes the natural rate of interest higher.
And then the third deglobalization. So one of the factors
driving neutral rates lower was that ben Bernanke savings glut hypothesis,
Chinese saving, Petro States saving from Saudi and others heading
into the United States. The forces of deglobalization have now
(36:32):
brought that to an end, so conveniently three d's demographics, debt,
deglobalization all pushing neutral rates higher.
Speaker 2 (36:41):
Very good, Jamie, you have to beat that now.
Speaker 6 (36:44):
I think I'd only had one extra to be honest,
and that's Ai. So we when we were putting Pen's
paper for the book, chat GPT wasn't really a thing.
That's when we started out. By the time we published
the book, it's very much a thing. And I think
we can already see that the transformational impact that's having
on the investment landscape. Whether that has a transformational impact
on the economic landscape remains to be seen, but I
(37:07):
think that is now playing out faster than we thought.
We had a scenario in our book about what that
could do to the natural rate. No surprise pushes it up,
and I think we're actually in a world now with
that scenario is basically coming to pass.
Speaker 4 (37:19):
I'm going to help everyone out here with a little
bit of marketing. So, Tom, you mentioned the three d's debt, demographics, deglobalization, AI,
we can rebrand as data centers, so that's a fourth D.
And then the fifth one which you guys talked about
but you didn't hit your list, and that is defense spending.
So really we can talk about the five to five
(37:40):
d's debt, demographics, deglobalization, data centers, and defense. This week
we've come to something we could really market this. I
think the four of us together, the five d's that
have caused the price of money to get so much
higher in the last six.
Speaker 2 (37:55):
Years, Well, that can be the next book, yeah, although
the current one talks a lot about all of these.
Speaker 3 (38:00):
I think that could be the title.
Speaker 2 (38:02):
Of this episode.
Speaker 3 (38:03):
The five d's, the five d's causing up the price
for money. Yeah, yeah, that would work.
Speaker 6 (38:08):
Okay.
Speaker 2 (38:09):
Well, on that note, Tom and Jamie, thank you so
much for joining Odd Thoughts. Really appreciate it.
Speaker 3 (38:14):
Thank you so much. That was great.
Speaker 5 (38:15):
Thanks so much for having us Jakes, Boys of Bust Pleasure.
Speaker 6 (38:19):
Thanks coming Joe.
Speaker 2 (38:32):
That was very fun. Always a fun time having our
Bloomberg Economics colleagues on the podcast.
Speaker 3 (38:38):
I think I'm mar star pilled. I believe in it now.
Speaker 4 (38:40):
I believe that there is some number that if only
we could stare at it directly, we could kind of
bring things into balance.
Speaker 2 (38:47):
I think it's a useful concept, yeah, for sure. And
it's something to aim for. And it's kind of a
framework under which, like an umbrella under which you can
put all your thoughts about the economy. Basically that said,
I mean, Tom and Jamie and Stephanie lay out a
very convincing argument from why they think our Star is
going to be higher in the future. Meanwhile, you have
(39:07):
people like Myrone arguing the exact opposite. We can debate
whether it's convincing or not, but it does feel like
our Star is not a method of achieving consensus. Let's
just put it that way.
Speaker 3 (39:20):
No, it's not.
Speaker 4 (39:20):
But and to your point, if you can't make an
argument for either our star going higher or lower in
the future, it's like an intelligence test. Any intelligent person
should be able to argue both sides.
Speaker 2 (39:34):
Yeah, exactly, exactly.
Speaker 4 (39:35):
You could always come up with an eloquent, nice sounding
argument for any direction.
Speaker 3 (39:40):
This is true.
Speaker 4 (39:40):
The one thing I'll say is that while our star
may not truly be observable, et cetera, and maybe there
isn't one number that satisfies the whole economy.
Speaker 3 (39:49):
What's that line?
Speaker 4 (39:49):
It's like all models are fake, but some are at
least useful. It strikes me that it may be a
fake concept, but a useful concept, and that plugging some
of these factors in, can we anticipate about where defense
spending is going to go? What can we anticipate about
the nature of savings or spending decisions among an aging population?
(40:09):
These are useful things to try to wrap our head
around it. And maybe this could be a useful exercise,
even if the underlying concept is still like a little
you know.
Speaker 2 (40:18):
Yeah, except that a lot of people argue that the
models are garbage too. No, of course, except for this
one obviously is for everything.
Speaker 4 (40:25):
But I'm just saying, like, I mean, you just go
total nihilists and think that the profession of economics is nonsense.
But it does strike me as useful to say there
is going to be a lot more spending here because
real reasons that are happening. What is that going to
do to the availability of money or capital or whatever.
Speaker 2 (40:42):
I think that makes sense. Although one thing I would
like to see more study of is like maybe not
necessarily our star and whether it's too high or too low,
but like the actual impact of interest rates on economic growth,
like the sensitivity of growth to rate.
Speaker 4 (40:57):
It's a great question, and that's I think one of
the other big sort of mysteries of the last several years, Yeah,
which is, how do you get the biggest interest rake
hike in decades and the growth trajectory barely budges and
the employment trajectory barely budges. These are like things, you know,
I think a lot of people would have thought in retrospect, oh,
we're definitely going to go to recession with this rapid
(41:19):
base of rad hikes. The degree to which policy actually
affects the real economy in predictable ways highly contested.
Speaker 2 (41:27):
Yeah, well maybe that can be Tom and Jamie's next book. Yeah,
all right, shall we leave it there?
Speaker 3 (41:31):
Let's leave it there.
Speaker 2 (41:32):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (41:37):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Check out the book The Price of Money from our
colleagues Jamie Rush, Tom Orlick, and Stephanie Flanders. Follow our
producers Carmen Rodriguez at Carman armand Dashel Bennett at dashbod
and Cail Brooks at Cail Brooks. For more Oddloss content,
go to Bloomberg dot com slash odd Lots, where the
daily newsletter and all of our episodes, and you can
(41:58):
chat about all of these topics twenty four seven in
our discord Discord do gg slash offline.
Speaker 2 (42:03):
And if you enjoy odd Lots, if you like it
when we talk about what our star actually is, then
please leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, you can
listen to all of our episodes absolutely ad free. All
you need to do is find the Bloomberg channel on
Apple Podcasts and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe Whysenthal. Joe, Yeah. Yes.
Speaker 2 (00:26):
Recently, recently Stephen Myron, who is chair of the Council
of Economic Advisors and also the newly confirmed FED Board member,
he made his first public speech since joining the Central Bank.
And do you know what it was about?
Speaker 3 (00:40):
I do but go on the neutral rate, the.
Speaker 2 (00:43):
Natural rate of interest, our stares basically all about our star,
which is like pretty significant for his first speech.
Speaker 4 (00:50):
I mean, to me, this has come up on a
bunch of episodes lately. To me, this is the multi
trillion dollar question, which is recording the September twenty fourth,
twenty twenty five. Why are long term rates so much higher?
Why does the market perceive that rates will have to
be so much higher in order for the FED to
hit its inflation goals than the market perceived in twenty nineteen.
(01:11):
What changed in the last six years or five years
or whatever.
Speaker 2 (01:14):
Well, Also, I mean, our star has always been something
of a controversial idea, and people criticize it for being
this unobservable thing. And you know, it's a hypothetical estimate
that's extracted from all this different stuff like savings and
spending and productivity and demographics, investment. You can go on
and on and on immigration.
Speaker 5 (01:35):
Yeah exactly.
Speaker 2 (01:35):
Yeah, but I think you know, our star is probably
going to get even more controversial, or perhaps more under
the spotlight, is a way of putting it. Given that
people like Myron in his speech where he was arguing
that the natural rate of interest should be zero right now,
which is very, very different than other sort of normal
(01:56):
estimates out there, which has the natural rate of interest
at las three point three or three point nine percent
something like that. And so if you think the neutral
rate of interest is a lot lower, then you would
assume that the FED should be loosening more. And conversely,
if you think our star is high, which a lot
of people have argued in recent years, then you would
(02:18):
argue that interest rates don't look that restrictive at the
moment totally. So we should clearly talk more about this.
And we've actually never done a specific episode just on
the neutral rate.
Speaker 3 (02:28):
So I'll just say two things.
Speaker 4 (02:29):
I'm probably something of an r star truth or in
the specific sense that I doubt like, Okay, everyone agrees
it's like quote unobservable, et cetera. But I doubt that
there is actually some rate that will magically bring the
economy into balance if we knew what it was. That
doesn't mean I don't find this to be a conceptually
useful conversation.
Speaker 2 (02:49):
And yet you don't believe in the term premium.
Speaker 3 (02:52):
I don't really believe in any any of this stuff. No,
that's not true.
Speaker 4 (02:55):
I am very interested in setting aside whether something could
theoretically be observed, whether one number could bring everything into balance,
all of these ex sitting aside that question, something has
changed in the underlying economy. If you want to call
that a neutral rate of interest, I guess I'm totally
fine with that. But something's changed, and I want to
(03:16):
know what it is. But more importantly, I want to
know why.
Speaker 2 (03:18):
All right, Well, we have the perfect guests. We're going
to be speaking with Tom Orlick, who is of course
chief economist at Bloomberg Economics. He's been on a number
of times before, and Jamie Rush, director of Global Economics
at Bloomberg Economics, and together with Stephanie Flanders, who is
the head of Bloomberg Economics and also the host of
the Trumpenomics podcast, have written a book all about the.
Speaker 3 (03:43):
Neutral rate of interest, A whole book about it.
Speaker 2 (03:45):
Yeah, called The Price of Money, A Guide to the past, Present,
and Future of the Natural rate of Interest.
Speaker 3 (03:51):
Amazing. I'm really excited, So.
Speaker 2 (03:52):
Let's get started. Tom and Jamie, thank you so much
for coming on all thoughts.
Speaker 5 (03:56):
Great to be here, Thanks Tracy, thanks Jay, thanks for
having us.
Speaker 2 (04:00):
First of all, congratulations on the new book. And I
got to say, it's kind of ballsy to tackle this
concept that a lot of people don't believe in, excluding Joe,
and you know that tends to generate a lot of criticism.
And maybe it's even ballsier to publish your own model
so that everyone can see what the estimates actually are.
I mean that as a genuine compliment. But why a
(04:22):
book on the neutral rate? What prompted it?
Speaker 6 (04:25):
So?
Speaker 5 (04:25):
I actually recall the tweet from Joe a while ago
where he took aim at books as a concept.
Speaker 4 (04:32):
Oh yeah, So not only do I not believe in
our star or anything, I don't even believe in the
premise of book.
Speaker 3 (04:37):
No, I do believe in it.
Speaker 2 (04:38):
Joe believe all books should be a tweet.
Speaker 3 (04:40):
That's right, Keep going exactly.
Speaker 5 (04:41):
So we've written about a concept Joe doesn't believe in
in a format that Joe doesn't support. So we feel
incredibly lucky to be on the on the podcast. So
why now? I think there's a couple of ways to
answer that question. The first is, I mean, this is
really important, right we talk about the neutral rate of interest,
but really a different way of saying it is it's
(05:02):
the cost of borrowing in the economy, right, and the
cost of borrowing is incredibly consequential for ministers of finance,
it's incredibly consequential for businesses, for households, for investors. So
it's always a good time to write about the neutral
rate interest rates, the cost of borrowing. Why specifically now, well,
(05:24):
is because something really important has changed. From the late
nineteen eighties to the mid twenty tens, the global economy
was characterized by too much saving and not enough investment,
and in that state of affairs, the neutral rate of interest,
the cost of borrowing, was continually falling. What's happened in
(05:44):
the last decade, Well, that dynamic has swung into reverse
and now we have less saving, more investment, and that
means the neutral rate of interest, the cost of borrowing
for the US Treasury and for everyone else is going up.
Speaker 3 (05:59):
I like this frame.
Speaker 4 (06:00):
So it's less about the idea that there is some
rate that will bring everything into balance magically, et cetera,
because I think a lot of people intuitively understand why
you know, that's not such a you know, I think
that probably makes a lot of people uncomfortable. But it
seems objectively true or real that the cost of money
or the cost of borrowing has gone up, and so
(06:22):
we can talk about that specifically. Let's talk about the
cost of borrowing today, like how much more expensive is
it to borrow money today by some measure than it was,
say pre COVID.
Speaker 2 (06:33):
Wait, just before we do this, can we get like
a three sentenced definition of how you view our star?
I feel like we should define our terms before we start.
Speaker 6 (06:41):
Excellent idea, So our star the natural rate of interest
is what balances demand for investment and saving in the economy,
and when those two things have imbalanced, the economy is
on trend and inflation is roughly at target.
Speaker 2 (06:56):
All right, that's a simple definition.
Speaker 3 (06:57):
Okay, I like that. All right, gone up.
Speaker 4 (07:01):
I mean this is the big this is the big
question rate. But actually, before we say, why has it
gone up? How much has it gone up, or has
it in fact gone up versus the pre COVID environment.
Speaker 3 (07:11):
Let's start with that.
Speaker 6 (07:12):
Well, if we cast our mind back to that COVID experience,
there was a period where governments could basically be paid
to borrow in real terms, interest rates were so low
for so far across the Yelk curve that they could
borrow without having to worry about whether they'd pay it back.
So you can see that the real world implications of
that and the behavior that we saw during the pandemic,
(07:33):
the borrowing that happened, the interest rate was enormously consequential,
and a big part of that. We're not in that
world now. Interest rates, treasury yields in excess of four
percent are much higher, much more burdensome, And now we're
seeing that the costs of those policies manifest in budgets today.
Speaker 2 (07:51):
So I remember, way back in twenty sixteen, Goldman Sachs
put out this note arguing that the Fed had a
big new idea to justify keep rates low basically, and
the argument was that our star was low, and so
you know, monetary policy wasn't actually that loose at the time,
even though benchmark rates were already pretty low. And the
(08:12):
Goldman analyst had this chart in their note where they
basically looked at mentions of thematic ideas in FED speeches
and press releases and things like that. And indeed you
could see that starting in twenty sixteen, mentions of our
Star start going up, and you know, they basically came
off of nothing. For like the previous decade, no one
(08:33):
was talking about the natural rate of interest. I know
our Star itself is an old idea because I read
the book and there's a chunky chapter on the history
and development of the entire concept. But am I right
in thinking that there has been a resurgence in interest
in our Star over the past decade or so?
Speaker 5 (08:55):
Chunky seems like a neutral adjective, tracy, right, elanquent.
Speaker 2 (09:00):
An informative chapter, I should say so.
Speaker 5 (09:03):
I think that clearly has right. And I think one
of the reasons for that is because the state of
the world has changed. Right, in the run up to
the global financial crisis, didn't feel like there were sort
of fundamental issues with how monetary policy was operating. Right,
interest rates moved up, interest rates moved down, the economy
(09:24):
responded in the way which the textbooks would suggest. But
in the aftermath of the financial crisis, we're in this
extended period of economic malaise, right, and from a monetary
policy perspective, it was hard to explain. Interest rates are
on the floor. There have been a huge amount of
quantitative easing, and yet unemployment rates remained stubbornly high, growth
(09:47):
remained stubbornly low. Why was that? And that's one of
the reasons why this neutral rate of interest rose in
profile as an explanatory factor, because if the neutral rate
of interest has come down, if it's come down very far, well,
that means that central banks have to do a lot
to stimulate the economy. And if the neuturate of interest
(10:08):
is close to zero, well, that effectively means that central
banks are out of fire power. They can't take interest
rates low enough to stimulate growth.
Speaker 4 (10:17):
This is a very important point actually, and again just
let's stay in the twenty tens here, when interest rates
were at zero or near zero for a long time,
You've probably hurt a lot of people in the financial press.
Ao you know, the FED is super loose monetary policy, etc.
How long will the Fed continue to print money or whatever,
(10:38):
and yet looking at the actual results in the real economy,
as you've described, unemployment remaining stubbornly high, inflation consistently undershooting
in retrospect. Very nice problem to have. I think we
should have appreciated it more at the time. Really not
a problem at all in my opinion. The implication, though,
and we could have understood this from Milton Friedman and
(10:59):
some of his talk about you, was that actually, implicitly
we were still running tight monetary policy even with normal
rates basically at their physical floor.
Speaker 3 (11:09):
Yeah.
Speaker 6 (11:09):
So I guess during that period, interest rates were low,
the economy was failing to gain traction, and policymakers were
puzzling over it. And actually the puzzle continues, right, Policymakers
still don't know how restricted policy is. They infer what
they think the natural rates should be by looking around them,
seeing what's happening to unemployment, see what's happening to inflation,
(11:30):
But they don't know. And so one of the things
that we did, and we tried to achieve in our
book is to rather than inferring the natural rate of interest,
we looked over a broader sweep of history and try
to pin down the explanatory drivers of the rate of
interest to try to shed some light on why these
things are as they are, why interest rates fell so much,
why there was an inflection point around the pandemic, and
(11:52):
why we think interest rates may therefore go upwards in
the future. So it was for us the exercise the
book was really about trying to pin down the and
then tell a story about this drive is so you
can think about it in the future.
Speaker 4 (12:20):
I feel tracy like this conversation is really about like
the magical object that you can't look at right because
I'll freeze you, or maybe it's the shining gold and
the briefcase of pulp fiction.
Speaker 3 (12:31):
You can't see it.
Speaker 4 (12:32):
So all we've done historically mostly is we've attempted to
figure out what it is by observing its reflection onto
the world which we observe that reflection.
Speaker 3 (12:41):
And the unemployment.
Speaker 4 (12:42):
And now this is an attempt to see the unseeable
and to actually stare into the abyss at this crucial
number and find out what it truly is.
Speaker 2 (12:51):
Everyone's been wondering what's in the suitcase of cult fiction.
It was our star.
Speaker 3 (12:55):
It was our star all along.
Speaker 2 (12:57):
Okay, Well, on that note, I mean I take the
point that most of the book is about the specific
drivers of our star, but you do come up with
a model, and you do come up with an estimate
for the sort of long run trajectory of our star.
Can you walk us through how your model actually differs
from some of the other models out there, because I
think that might help us to understand, you know, when
(13:18):
people say this is unobservable, or we're sort of staring
at the reflection of the economy trying to come up
with this hypothetical number, what we're actually doing or what
economists are actually doing.
Speaker 6 (13:31):
Yeah, of course, So the conventional way, at least the
way that's been gained a lot of popularity over the
past couple of decades, has been the Lowback and William's
model of the natural rate of interest or neutual rate
of interest. And what they do is they look at
what's going on with inflation, what's going on with unemployment,
and they try to judge from that how far current
(13:52):
interest rates must be away from the neutral rate. So
if interest rates are very restrictive, very far away from
the neutral rate, inflation is going to be very low
and unemployment is going to be very high, and vice aversa.
And this has the benefit of giving you a feel
for what's going on right now based on observable data,
but it doesn't tell you anything about why the interest
(14:13):
rate is what it is or therefore where it may go.
And so what we tried to do was pin the
natural rate down by using some actual data and some theory.
So if we think about what the natural rate is,
what it is that determines well, it's the price of money,
and that's determined by in the same way as anything
else is determined by the supply and the demand. So
(14:34):
on the one hand, you've got investment demand and then
you've got the supply of savings, and when these two
things move, it shifts to the rate of interest. And
because of that fundamental theoretical understanding, you're able to think about, well,
what is it that determines investment, Why do people want
to invest, why do people want to save? What is
it about them or different types of people or different
(14:55):
age people that affects their saving behavior. And so you
go from that theory to these drivers of these theoretical
drivers of behavior, and then you can try and pin
it down empirically, and that's exactly what we did. So
we fed into this model what economists generally think are
the main drivers of these investment and saving decisions. So
there are quite a few of them, and then we
(15:16):
estimate their relationship with the interest rates over the sweep
of say fifty years, and that really was what supported
our results, and it allows us, of course then to
think about how those drivers may change.
Speaker 4 (15:28):
Just keeping in my own trases mentioned in the beginning
of defining terms investment just sort of clear this is
like real investment, right, so this is hiring in Paul's
capital expense, Like, what does investment mean in your terms?
Speaker 6 (15:43):
Yeah, so we're thinking specifically, actually the capital expenditure. OK,
so let's take an example like AI. So AI is great,
I can't do it on a Cassio calculator. I have
to buy something to make it work. I have to
spend money. I have to invest in chips in fabs
to reap the benefits of those frontier technologies. So as
(16:04):
AI lifts the growth rate of the economy, it also
raises the investment needs. And so this is one of
the linkages that we kind of explore, is like, what
is the relationship between overall growth in the economy and
productivity growth, the investment need that creates, and then therefore
the knock on consequence of interest rates. So whether it's
ICT revolution in the nineties, railroads, or anything else, these
(16:29):
things all have impacts on investment and therefore the natural
rates of interest.
Speaker 4 (16:33):
And just to define the other term when you talk
about savings, because you know, in a sense of savings
long toil bank, et cetera. But this is the impulse
to have sort of liquidity right or at any given moment,
the various actors that desire to hold es centrally, dollar
or euro or whatever liquidity.
Speaker 6 (16:52):
Yeah, that's right. I mean, I guess you can think
about it on the individual level. So I want to
save right now. As I get older, I'll want to
spend those savings in my retirement. So that's one of
the key drivers of saving behavior. China used to save
a lot, Now it saves a little. But state actors
also matter to the global supply of saving and investment.
(17:13):
So yes, it's everybody, and it touches on everything. Yeah.
Speaker 2 (17:17):
One of the light bulb moments for me reading this
book was kind of touching the idea of generational warfare
and the idea that from the nineteen eighties onwards, baby
boomers started saving a lot, and so the supply of
savings went up and the neutral rate went down. And
that's the reason why I never earned interest on my
bank account until two years ago. Okay, serious question in
(17:40):
your model, what's the biggest driver of the neutral rate
actually going up in the future.
Speaker 6 (17:45):
Well, and I'm model the main driver really is dissaving
by governments or spending by governments. So there are a
number of I mean, if you look at the recent past,
the experience of the pandemic, if you look at the
path of the deficit in the US and other countries,
then what we've learned is that government's like to spend
and they have continued to do so even though it's
(18:06):
become more costly. And a lot of that reflects politics.
Politics are fragmented. It's hard to get support around closing
budget deficits, and so governance has continue to spend, which
is tilting the balance between investment and saving the global economy.
And of course they have big outlays coming up. Defense
spending is going up in much of the advanced world.
(18:26):
The need to green the energy infrastructure again in some
parts of the world is also crimping saving and they're
just that fundamental point that you've got aging populations, increasing outlays,
for dealing with that, on health, for dealing with that,
on benefits and pensions, all of this is just making
it very difficult to keep spending down.
Speaker 5 (18:44):
It also intersects with the argument which you kicked off
with Joe and Tracy from Stephen Myron. So Stephen Myron,
the new Fed Governor, has made the case that the
policies from the Trump administration are going to have a
big negative impact on the neutral rate of interest. That's
why he's advocating for very aggressive rate cuts to keep
(19:04):
policy accommodative. Now, the argument we make in our book
actually points in the opposite direction. Right, If you think
about the policies of the Trump administration, well, firstly, we've
got the One Big, Beautiful Bill which adds trillions and
trillions of dollars to government borrowing over the next decade.
That significantly pushes up the neutral rate of interest. And
(19:26):
if you think more broadly about Trump policies, well it's
kind of the end of the Grand Bargain which America
is struck with the world. Right, one way of thinking
about the last few decades is America said to the world,
we will buy your stuff and we will defend you,
but you have to finance us. You have to send
(19:46):
your saving to the United States by US treasuries. Well,
what the Trump administration now is saying is, well, we're
not going to buy your stuff and we're not going
to defend you. Right So it wouldn't be that surprising
if the rest of the world said, well, if you're
not going to buy our stuff, you're not going to
defend this, we're not going to finance you anymore. Right So,
Stephen Myron, who's a super smart, super articulate guy, and
(20:07):
if you've not had it on odd Lots already, you
should have.
Speaker 3 (20:10):
The fan favorite episode.
Speaker 5 (20:12):
Makes the case that the Trump administration has significantly lowered
the neutral rate of interest and that's why the Fed
needs to cut aggressively. The model which Jamie developed, the
argument we make in our book, actually points in the
opposite direction.
Speaker 2 (20:24):
Yeah, on this note, do you get the sense that
central bankers, policymakers, economists sometimes use our star as a
crutch to justify whatever they're doing. Like, if you think
rates should be lower, then you can just argue that
our star is in fact low, and our star is
this unobservable thing that's based on your own estimates, So
you can argue about it, but no one's ever going
(20:45):
to prove what our star actually is. And if you
think that rates should be higher, then you just argue that, well,
actually something has structurally changed and the natural rate of
interest is in fact quite high. Do people use it
in that way? It feels like it.
Speaker 6 (21:00):
One thing I suppose is with our star, you're never
beholden to a prediction, really, are you. So if you
say I think interest atech should be lower because the
economy is going to tank, and then the economy doesn't tank,
you just look like a bit of an idiot. But
if you say I think RAG should be lower because
our star is actually lower, then no one's ever going
to come along and say, oh, actually, you are completely wrong,
because I've got a refusable proof that our star will
(21:20):
actually in fact higher. So I think it's probably a
safe way to express your views if you just have
a belief, and in a belief that rates needs to
be lower, But it is perhaps one that's less easy
to help to.
Speaker 4 (21:30):
Account when we talk about Trump policies and their effect
on our star. Another thing that I think about a
lot is you talk about this grand bargain following part
the trade and every country wanting to be increasingly more
self sufficient in various goods, which strikes me as something
that once again adds to the investment impulse. The US
(21:54):
is worried that maybe one day we won't be able
to rely on Taiwan friendships. Europe might be worry the
US may not be a great supplier for whatever the
US supplies to Europe, etc. Does this sort of fracturing
of global trade, which may or may not be happening,
contribute to a positive investment impulse in a sense and
(22:14):
therefore raise our star?
Speaker 6 (22:17):
Yeah.
Speaker 5 (22:17):
I think there's a couple of dynamics that work there, Joe.
So the first one is the one you mentioned. If
everyone wants to make their own stuff at home, then
clearly there has to be a massive amount of capital
spending so everyone can build their own everything.
Speaker 3 (22:31):
Right.
Speaker 5 (22:31):
We can't just have semiconductive fabs in Taiwan. We need
semiconductive fabs in Germany and Japan and the United States,
and that means there needs to be much more investment spending.
The second dynamic, and this is something which one of
our co authors, Dan Hanson, gets into in the book,
is around globalization and the cost of investment goods. Right,
(22:55):
think about how much more computing power you get for
your money today thing you did in nineteen eighty. Right,
There's just been a massive increase in productivity, a massive
increase in the amount of computing power you get for
a certain amount of money, and that means you don't
have to spend as much in order to buy investment goods. Well,
(23:16):
if globalization now breaks down and we come to the
end of that kind of productivity miracle in technology, well
that means that the cost of investment goods is going
to stop falling. You're going to need to pay more
to buy a certain amount of technology, a certain amount
of investment goods, and that is also going to be
a factor pushing up the natural ry.
Speaker 2 (23:38):
So on a related note, we have had a number
of supply shocks in recent years, during the pandemic, during
the Russian invasion of Ukraine, all that stuff, which has
led a lot of governments to start thinking about how
to solve these sort of choke points or shortages in
the system. What does that actually mean for central bank policy?
(24:00):
If perhaps the neutral rate of interest is going up
because of these supply shocks because you need more investment.
But at the same time, the central bank raising rates
doesn't necessarily produce more wheat or more shipping capacity and
things like that. How should central banks respond?
Speaker 6 (24:17):
There are obviously going to be periods where inflation just
moves higher because of the supply shocks you mentioned, I think,
and we should expect those to happen with increasing frequency.
Speaker 1 (24:28):
Right.
Speaker 6 (24:28):
So climate change is going to make it harder to
produce stuff, it's going to make food price shocks more common,
it's going to create other distortions which hit production. So
central banks in the future will perhaps have to keep
interest rates higher anyway, just to kind of prevent those
shocks from feeding through to inflation expectations and therefore keeping
(24:50):
inflation away from targets. Is because supply shocks really are
very different from demand shocks. As you guys know, I'm sure,
and you know, history was dominated at least in the
last couple of decades by demand shots, and now we're
seeing a world which is dominated increasingly by suppier shocks.
And actually it's just a different playbook for central banks.
Speaker 5 (25:08):
I agree with all of that. I think there's also
another dynamic for central banks which is also going to
be a force for higher interest rates going forwards. And
that's the challenge to central bank independence. Right We've talked
about Stephen Myron coming onto the Board of Governors at
the FED. Well, guess what he's still holding onto his
position as the chair of the Council of Economic Advisors,
(25:30):
senior member of Donald Trump's economic policy team. Having someone
from the President's team serve on the FED concurrently, that's
unprecedented going back to nineteen thirty six and raises significant
questions about FED independence and so the Fed's credibility as
an inflation fighter. Right now, we've not really seen this
(25:52):
in markets so far. Markets have been paying surprisingly little
attention to this dynamic. But if the FED does lose
its independence, if the FED does lose its credibility as
an inflation fighter, then markets are going to start demanding
an additional premium to hold long term US treasury debt. Right, So,
you're going to have all of these structural forces, less saving,
(26:14):
more investment. You're going to have the greater preponderance of
supply shocks, which Jamie spoke about as an additional driver
of higher inflation, and you're going to have risks to
FED independence. And all of these are forces which are
going to be pushing up long term borrowing costs for
the US Treasury, and because the treasury rate is the
anchor for global markets, also pushing up borrowing costs for
(26:38):
everybody else.
Speaker 4 (26:54):
Even setting aside the sort of formal risks to FED independent,
there are other ERUs who question the degree to which
the FED still takes its own two percent inflation targeting
targets seriously, including our own colleague here, Anna Wong, who
says implicitly, if you look at what's going on, it
looks like they're no longer targeting two percent. They're targeting
two point eight percent. Tim Dewey, an economist we've had, says,
(27:17):
you know what, as long as inflation is below three percent,
we think the FED is mostly concerned about the labor
side of the mandate. So, setting aside Myron's role or
Trump's truth social posts, when you look at markets, is
there this sort of growing belief that the FED just
does not take two percent as seriously as once it did.
Speaker 6 (27:38):
Yees.
Speaker 5 (27:38):
So it's a powerful argument which Anna, our chiefs economist, makes,
and part of that argument is that this divergence between
what the FED should be doing if they take two
percent inflation seriously, and what they're actually doing didn't start
under Trump. It started under Biden. And actually it was
(27:58):
those rate cuts in the run up to the twenty
twenty four election which were the beginning of the FED
diverging from a kind of pure apolitical tailor rule path. Right. So,
as I'm sure you've seen Joe and Tracy, there's not
much which Republicans and Democrats agree on in America right now.
(28:20):
One point of bipartisan consensus, unfortunately, is that there's too
much politics in the FED.
Speaker 3 (28:27):
Tracy. Someone once told me that the two things.
Speaker 4 (28:30):
That everyone agrees on, by the way, in America are
that Dolly Partner is good and that Epstein didn't kill himself.
We can add a third that there is too much
politics in monetary policy making. So the three points of
bipartisan agreement.
Speaker 2 (28:44):
That's going to be my new conversation starter at dinners
for everyone. Just ask them if they think there's too
much politics in FED policy. Okay, Joe mentioned markets just then. So,
I think when people think of the era of low
interest rates and low natural rates, people think about high
asset prices. Right there tends to be a correlation there.
(29:04):
If the price of money is going up, what does
that actually mean for asset prices.
Speaker 6 (29:09):
Well, it kind of depends on the reason. And as
we sort of talks about earlier about the kind of
role of AI, Well, AI can raise equity values because
it's a frontier technology that's going to potentially transform the
way the economy operates and create lots of profits along
the way. It's also going to suck in a load
of capital and make it less available for others, which
(29:30):
is going to drive up interest rates. So if that's
the source you can see this world continuing. You can
see that interest rates will continue to rise as investments
sucked into the AI nexus. But if someone's the actual
promise is realized, you see equity values going up as well,
which is kind of a slightly unusual arrangement. But then
we don't have technological revolutions every day.
Speaker 4 (29:52):
I'm glad you brought up there, because I wanted to
go there. You know, I've seen Jason Furman, he has
characterized AI spending as being almost quae fiscal in nature
because it has this we haven't got the productivity payoff yet,
but there's this incredible flood of money coming in, so
it sort of has this perhaps crowding out effect.
Speaker 3 (30:09):
Neil kash Kari gave an.
Speaker 4 (30:11):
Interesting posted I guess there's a blog post called three Questions.
I think he posted it last week, but he talks
about our star about how this higher neutral rate of
interest may be appropriate given the intense pace of AI
investment that's going on, but also it may not be appropriate,
you know, for the housing sector. That's not what's bringing
(30:32):
to balance, and we see this decline. Could there be
two our stars? Could there be this our star that's
sort of the high tech economy booming, but it's not
the our star that brings the rest of the economy
into balance.
Speaker 6 (30:43):
It's a good question, Jay, and I think people do
you think about this concept quite a lot, in the
sense that there's a maybe there's an our star which
keeps the economy balanced, and maybe there's an our star
which keeps the financial sector and financial markets balanced and
not getting carried away with themselves. And there's no guarantee
or in a particular reason to think that they should
be the same, which implies then that you've got this
(31:06):
policy trade off you've got what's good for the economy
may not be good for financial stability, and so that's
another thing for central banks to be grappling with in
the years to come.
Speaker 5 (31:14):
So I was trying to remember, I was grasping for
that famous quote from I Think is it Benjamin Strong,
the head of the FED in the late late nineteen twenties,
and he said something like, must the FED be responsible
for all the problems in the economy? If I have
to set an interest rate for all the different sectors separately,
it's like spanking all of my children individually.
Speaker 2 (31:34):
Or something like that, Oh dear. When it comes to
the composition of investment, one topic that gets a lot
of attention nowadays is the idea of dedollarization and perhaps
people buying fewer US assets, perhaps people choosing to hedge
those US assets, And we have seen some very big
buyers of securities, like foreign central banks actually slow down
(31:59):
their purchases of US treasuries or US mortgage bonds and
things like that. How would that affect the neutral rate
of interest if you know, there's less money flowing into
dollars specifically, or dollar assets.
Speaker 5 (32:14):
So I think there's a number of reasons why we
would expect less money flowing into dollars, right. So one
really big reason is that China has changed its FX policy.
For more than a decade, China was pegging the yuan
to the dollar, and that meant the PBAC needed to
hoover up the whole trade surplus and park that in
(32:35):
treasuries to stop the yuan appreciating. Second big important reason
is that shift in the Grand Bargain between the US
and the rest of the world. Think about how the
US and Europe acted to freeze rushes FX reserves following
Putin's full scale invasion of Ukraine. That's a kind of
(32:58):
shift in the Grand bargain in and it tells Russia
but also everybody else. Guess what, There's geopolitics in the dollar, right,
and if you put your assets in the United States,
there's a risk you might lose them. And of course
the tariffs themselves are a factor. That huge hiking tariffs
that we saw on Liberation Day, well that's the US
(33:20):
saying we're going to play a smaller part in the
global trade system in the future. And if the US
is going to play a smaller part in the global
trade system, well, the utility of holding dollars as a
way of settling important export transactions goes down. So there's
a lot of reasons to be concerned about this dedollarization trend.
(33:41):
And Jamie may have a more sophisticated way of thinking
about this than me, But basically, I think about buying
dollars and buying treasuries has pretty strongly correlated in this context.
So if the rest of the world is dedollarizing, that
also means they're buying less US treasuries. That means less
demand for US treasure, and so it's another force pushing
(34:02):
US borrowing costs higher.
Speaker 6 (34:05):
I think all that is all entirely true. And I
guess one thing when you're trying to think next to
the linkage with global borrowing costs is what happens to
those savings instead. Now, if you can't find anywhere else
any other assets to buy in place of US treasuries,
what are you going to do? Well, quite possibly you
will end up spending them. And particularly if you think
(34:25):
about the giopilisical context, you think about the impact of
tariff's on China, for example, well, now there's actually an
extra incentive to spend more. And if you think about it,
in those terms. Then actually that policy itself is going
to shift the international balance of investment in saving again
away from savings, partly because it's just too hard to
save them.
Speaker 4 (34:43):
An US save my computer just for a force reboot.
I had a great charte on most streams, but now
I can't look at it. But December twenty seventh or whatever,
the last day of trading was. In twenty nineteen, the
US tenure was about one point eight and today it's
probably four point one two percent. Maybe both of you
(35:03):
list your five reasons in order. I know this, the
tenure is not the our star, but you know, for
our purposes for podcast talk, we could just sort.
Speaker 2 (35:12):
Of our star is everywhere.
Speaker 4 (35:14):
Yeah, like R five for both of you, in order
ranked the five major things or however men you want
to that have contributed most significantly to this regime change
or price change.
Speaker 5 (35:27):
Maybe I'll take the easy ones and force hard ones.
So here's my three. So firstly, it's demographics. For decades,
we had the baby boomers in prime working age saving
money for retirement. That pushed the neutral rate down. Now
they're retiring, spending down their savings. That's a powerful force
(35:47):
pushing the neutral rate up. Second is debt for decades
from the nineteen eighties to the global financial crisis, borrowing
from the US and from other major advanced economies. Leaving
a side, Japan was low and stable. Since the global
financial crisis, and again since the COVID pandemic, there's been
a massive increase in government borrowing. And when there's more
(36:10):
government borrowing, that pushes the natural rate of interest higher.
And then the third deglobalization. So one of the factors
driving neutral rates lower was that ben Bernanke savings glut hypothesis,
Chinese saving, Petro States saving from Saudi and others heading
into the United States. The forces of deglobalization have now
(36:32):
brought that to an end, so conveniently three d's demographics, debt,
deglobalization all pushing neutral rates higher.
Speaker 2 (36:41):
Very good, Jamie, you have to beat that now.
Speaker 6 (36:44):
I think I'd only had one extra to be honest,
and that's Ai. So we when we were putting Pen's
paper for the book, chat GPT wasn't really a thing.
That's when we started out. By the time we published
the book, it's very much a thing. And I think
we can already see that the transformational impact that's having
on the investment landscape. Whether that has a transformational impact
on the economic landscape remains to be seen, but I
(37:07):
think that is now playing out faster than we thought.
We had a scenario in our book about what that
could do to the natural rate. No surprise pushes it up,
and I think we're actually in a world now with
that scenario is basically coming to pass.
Speaker 4 (37:19):
I'm going to help everyone out here with a little
bit of marketing. So, Tom, you mentioned the three d's debt, demographics, deglobalization, AI,
we can rebrand as data centers, so that's a fourth D.
And then the fifth one which you guys talked about
but you didn't hit your list, and that is defense spending.
So really we can talk about the five to five
(37:40):
d's debt, demographics, deglobalization, data centers, and defense. This week
we've come to something we could really market this. I
think the four of us together, the five d's that
have caused the price of money to get so much
higher in the last six.
Speaker 2 (37:55):
Years, Well, that can be the next book, yeah, although
the current one talks a lot about all of these.
Speaker 3 (38:00):
I think that could be the title.
Speaker 2 (38:02):
Of this episode.
Speaker 3 (38:03):
The five d's, the five d's causing up the price
for money. Yeah, yeah, that would work.
Speaker 6 (38:08):
Okay.
Speaker 2 (38:09):
Well, on that note, Tom and Jamie, thank you so
much for joining Odd Thoughts. Really appreciate it.
Speaker 3 (38:14):
Thank you so much. That was great.
Speaker 5 (38:15):
Thanks so much for having us Jakes, Boys of Bust Pleasure.
Speaker 6 (38:19):
Thanks coming Joe.
Speaker 2 (38:32):
That was very fun. Always a fun time having our
Bloomberg Economics colleagues on the podcast.
Speaker 3 (38:38):
I think I'm mar star pilled. I believe in it now.
Speaker 4 (38:40):
I believe that there is some number that if only
we could stare at it directly, we could kind of
bring things into balance.
Speaker 2 (38:47):
I think it's a useful concept, yeah, for sure. And
it's something to aim for. And it's kind of a
framework under which, like an umbrella under which you can
put all your thoughts about the economy. Basically that said,
I mean, Tom and Jamie and Stephanie lay out a
very convincing argument from why they think our Star is
going to be higher in the future. Meanwhile, you have
(39:07):
people like Myrone arguing the exact opposite. We can debate
whether it's convincing or not, but it does feel like
our Star is not a method of achieving consensus. Let's
just put it that way.
Speaker 3 (39:20):
No, it's not.
Speaker 4 (39:20):
But and to your point, if you can't make an
argument for either our star going higher or lower in
the future, it's like an intelligence test. Any intelligent person
should be able to argue both sides.
Speaker 2 (39:34):
Yeah, exactly, exactly.
Speaker 4 (39:35):
You could always come up with an eloquent, nice sounding
argument for any direction.
Speaker 3 (39:40):
This is true.
Speaker 4 (39:40):
The one thing I'll say is that while our star
may not truly be observable, et cetera, and maybe there
isn't one number that satisfies the whole economy.
Speaker 3 (39:49):
What's that line?
Speaker 4 (39:49):
It's like all models are fake, but some are at
least useful. It strikes me that it may be a
fake concept, but a useful concept, and that plugging some
of these factors in, can we anticipate about where defense
spending is going to go? What can we anticipate about
the nature of savings or spending decisions among an aging population?
(40:09):
These are useful things to try to wrap our head
around it. And maybe this could be a useful exercise,
even if the underlying concept is still like a little
you know.
Speaker 2 (40:18):
Yeah, except that a lot of people argue that the
models are garbage too. No, of course, except for this
one obviously is for everything.
Speaker 4 (40:25):
But I'm just saying, like, I mean, you just go
total nihilists and think that the profession of economics is nonsense.
But it does strike me as useful to say there
is going to be a lot more spending here because
real reasons that are happening. What is that going to
do to the availability of money or capital or whatever.
Speaker 2 (40:42):
I think that makes sense. Although one thing I would
like to see more study of is like maybe not
necessarily our star and whether it's too high or too low,
but like the actual impact of interest rates on economic growth,
like the sensitivity of growth to rate.
Speaker 4 (40:57):
It's a great question, and that's I think one of
the other big sort of mysteries of the last several years, Yeah,
which is, how do you get the biggest interest rake
hike in decades and the growth trajectory barely budges and
the employment trajectory barely budges. These are like things, you know,
I think a lot of people would have thought in retrospect, oh,
we're definitely going to go to recession with this rapid
(41:19):
base of rad hikes. The degree to which policy actually
affects the real economy in predictable ways highly contested.
Speaker 2 (41:27):
Yeah, well maybe that can be Tom and Jamie's next book. Yeah,
all right, shall we leave it there?
Speaker 3 (41:31):
Let's leave it there.
Speaker 2 (41:32):
This has been another episode of the Oudlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (41:37):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Check out the book The Price of Money from our
colleagues Jamie Rush, Tom Orlick, and Stephanie Flanders. Follow our
producers Carmen Rodriguez at Carman armand Dashel Bennett at dashbod
and Cail Brooks at Cail Brooks. For more Oddloss content,
go to Bloomberg dot com slash odd Lots, where the
daily newsletter and all of our episodes, and you can
(41:58):
chat about all of these topics twenty four seven in
our discord Discord do gg slash offline.
Speaker 2 (42:03):
And if you enjoy odd Lots, if you like it
when we talk about what our star actually is, then
please leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, you can
listen to all of our episodes absolutely ad free. All
you need to do is find the Bloomberg channel on
Apple Podcasts and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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