October 15, 2025 • 21 mins
This week on Trumponomics, we explore the global surge in government debt and why investors still seem unfazed, especially when it comes to the US. Joining the conversation are Jason Furman, former chair of President Barack Obama’s Council of Economic Advisors, and Rupert Harrison, former adviser to UK Chancellor George Osborne. Recorded live in Bloomberg's London offices at an event for the Society of Professional Economists, they discuss whether rising debt levels are finally reaching a breaking point and what it could mean for the world economy.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. I'm Stephanie Flanders, head
of Government and Economics at Bloomberg, and this is Trump Economics,
the podcast that looks at the economic world of Donald Trump,
(00:24):
how he's already shaped the global economy and what on
earth is going to happen next. This week, we're zeroing
in on government debt. Why is it so high and
why do investors not seem to worry about it in
the case of the US. This Monday, October thirteenth, I
had a conversation about that question as part of a
(00:45):
conference we hosted at Bloomberg for professional economists in London.
The panel included two economists who've both been at the
center of economic policy making in the US and the
UK over the years. Jason Furman, now professor at Harvard University,
previously Chairman of the Council of Economic Advisors under President
Barack Obama, and Rupert Harrison, now a senior advisor at PIMCO,
(01:08):
but not so long ago, a senior advisor to the
former UK Chancellor George Osborne in the years after the
global financial crisis, who was also chief economist for the
UK government. Now the level of public debt. Government debt
has surged in the past twenty years, doubled relative to
the size of the economy in many industrial countries, and
for a long time that didn't seem to matter much
(01:29):
because interest rates were so low. In fact, servicing that
debt paying the interest got cheaper even as the amount
of debt took off. We've talked about it before, but
that has changed lately, especially in the UK, where the
burden of paying more and more in debt interest is
now blowing a big hole in the labor government spending ambitions.
In the US too, Uncle Sam's costs have more than
(01:52):
trebled in the last three years to well over one
trillion dollars a year. That bill's heading even higher in
the next few year, partly thanks to the extra debt
associated with the so called Big Beautiful Bill. Yet, despite this,
US treasury bonds US government IOUs remain the anchor of
(02:13):
the global financial system, the risk free asset by which
everything else is judged. The debt trajectory is so unsustainable
in America's place in the global economy, so in flux,
you have to wonder when bond investors might start to
take a different view of US treasuries and start selling them.
But there's not much sign of that happening yet. So
(02:34):
I was fascinated to hear how these two seasoned insiders
from both sides of the Atlantic were thinking about the
risks and potential for accidents. I started by asking Jason Furman,
the central question of our panel is government debt now
too high? And how much should we care?
Speaker 2 (02:56):
Yes?
Speaker 3 (02:56):
And I'm not sure, So let me go through those
I first started working on fiscal policy in the nineteen
nineties in the Clinton administration. At the time, we were
on track to.
Speaker 2 (03:09):
Eliminate the debt within the decade.
Speaker 3 (03:12):
We had balanced the budget multiple years in a row,
and the tenure treasury was at six percent. Now we
have debt one hundred percent to GDP ratio. We have
a deficit above six percent of GDP. As far as
the eyes can see, we're in an enormous boom in
terms of investment demand for AI data centers. We've created
(03:35):
a lot of uncertainty about lending money to the United States,
and the tenure treasury is around four percent. And so
what does all of that tell me? It tells me
that there had been a lot more capacity to borrow
than I had ever appreciated back when I first started
working on this topic more than twenty five years ago,
(03:56):
and frankly then most of us possibly could have thought.
Now we have more capacity than we realized. We also
have more debt than we realized, and so the gap
between where we are and where we can be is
still uncomfortable. I have no doubt that if the United
States or the UK, or France or Belgium or Japan
(04:18):
continue on the fiscal trajectories that they're on, at some
point it will become extremely expensive for them to borrow.
You'll get the type of cycle of higher debt, higher
interest rates, higher debt, higher interest rates, and it will
all be painful to deal with. But I'm not sure
when that date is. I'm not sure if I could.
(04:41):
I'm responsibly tele policy maker that this should be the
number one on your agenda. But at the very least
my view is no one should be making the problem worse.
They should be looking for opportunities to make it better.
And at least in the United States, there's some basically
accounting forcing events around the povency of Social Security and
Medicare which come up in the next decade that I
(05:04):
think are a much better way to deal with it
than waiting for the market to force your hand when
the options will.
Speaker 2 (05:09):
Be less good.
Speaker 1 (05:11):
Just for those who don't get into the details of those,
just unpack that a little bit. That the forcing event
around Medicare and Social Security.
Speaker 3 (05:20):
Yeah, social Security is our old age and survivors and
disability pension system. It's trust fund is exhausted in twenty
thirty three. Medicare is help for the elderly. That trust
fund is exhausted, believe in twenty thirty four, and so
Congress has to pass a law raising taxes, cutting benefits,
(05:40):
or doing some sort of general revenue transfer gimmick, which
would be the worst option there. You want to deal
with these things in advance, but it's very often that
you almost come right up against the date and deal
with it. And these two problems total about two percent
of GDP, and our fiscal gap is probably about three
percent of GDP. So if you dealt with them, and
(06:02):
that's a very big if, that gets you a decent
fraction of the way to the adjustment, you would need
to put the debt on a sustainable course.
Speaker 1 (06:12):
Rupert, how are you thinking about public debt?
Speaker 4 (06:14):
So? I think the question is it too high?
Speaker 5 (06:16):
I think when you thinking about public finance, you can't
have a test of let is it working now or
if even is it going to work next year or
the year after, because you have to be thinking about
vulnerability and you have to be thinking about much longer
time horizons, because you can only make an impact on
public debt.
Speaker 4 (06:31):
Over decade type horizons.
Speaker 5 (06:33):
So you have to think, like, is this creating vulnerabilities
over the next decade?
Speaker 4 (06:37):
Is going to make three opening points?
Speaker 5 (06:38):
One is like it's clearly it will probably at some
point happen for the US, but it is not happening now.
As Jason just said, the US ten years and four percent,
and the market is not signaling that US boring and
debt is unsustainable, even though if you look at a
chart of deficits and debt in an economics tech book,
it clearly is unsustainable, but the market is not pricing
that yet. The US definitely still has a different environment.
(07:01):
The PIMCO house view is that the dollar is going
to remain the global reserve asset for at least the
next five years. Treasuries will remain the global safe asset
for at least the next five years. There are things
happening around the edges. So you know, there are global
central banks diversifying reserves into gold, so gold is now
over four thousand dollars. There are things interesting things happening
(07:22):
around the edge, and in cryptocurrencies and digital currencies, both
of you know, crypto and central bank digital currencies that
could in the long term.
Speaker 4 (07:31):
Challenge the role of the dollar.
Speaker 5 (07:32):
But actually interestingly, in the short term, maybe the main
effect will be if we get a huge explosion of
stable coins that actually results in an increase in demand
for dollars. So for now that the US is in
a different situation, and maybe Jason's right that domestic politics
is the forcing issue in the US rather than market pressure.
It's clearly not the case of sitting here in the
UK or in Europe that the high deck clearly creates vulnerabilities.
(07:55):
You can see that markets are sensitive to news, and
so you see that in countries like the UK.
Speaker 4 (08:02):
We saw the trust episode.
Speaker 5 (08:03):
Obviously there were some idiosyncratic factors that exacerbated that, but
we've also seen market moves more recently where clearly there's
a high sensitivity. So the day that Rachel Reeves was
seen crying in the House of Commons. Markets reacted quite
significantly because they thought she might be replaced as a
Chancellor by someone who would have a looser approach to
the fiscal rules. That tells you there's a sensitivity in markets.
It tells you that you're vulnerable. And that's what high
(08:26):
debt does, It makes you vulnerable. France is a similar
situation where you clearly have some sensitivity in markets to
political dysfunction and a lack of an obvious way out
of prolonged beficits in France counterbalanced by market fears about
well what is the DCB going to do here? And
that's what's limiting it. So clearly for non US countries
(08:47):
that vulnerability is there, and that's what high debt has done,
it creates vulnerabilities. And I guess the final point, we
are now in a policy world that is the precise
mirror of the twenty tens. So in the twenty tens,
the central banks had run out of.
Speaker 4 (08:59):
Ammunition because ins are on the.
Speaker 5 (09:00):
Floor and the only game in town was governments, so
enormous dependence on fiscal policy. So when the pandemic hits,
for example, fiscal policy is.
Speaker 4 (09:08):
The only game in town. Similarly, in Europe with.
Speaker 5 (09:11):
The energy crisis, fiscal policy is the only game in town.
The next time we have recessions or crises, fiscal policy
is going to be much more constrained because markets are
much more sensitive, at least in the countries that are
now pushing up against the limits. And the opposite is
that it's now the central banks who have all the ammunition,
and so that from a market's point of view, that's
very important.
Speaker 1 (09:30):
As Jason said, you've if you were sort of stepping back,
you said, the debt's gone up a lot in the
last fifteen to twenty years, the cost of financing that debt,
and indeed that the bond deals have not gone up
until recently, but it's been a pretty painful jump, especially
in the case of the UK. I just wonder when
you look at countries sometimes you think they're vulnerable because
the long term trajectory is clearly unsustainable in the case
(09:52):
of the US, for example, in other cases, I think
in Europe more often, and I think now, particularly in
the case of the UK, it's about a high and
increasing amount of financing costs that's having to come out
of the treasurer. A lot of that has to do
with the structure of the debt, and I just wonder
whether it's made you think in retrospect, in twenty ten,
one of the things that made the UK look quite
(10:15):
resilient in these kind of cases was it had a
very high maturity of debt. It's now relatively low, it's
certainly much lower than it used to be, and has
a very high proportion of index link guilt, which in
retrospect has left it very vulnerable to the increase in inflation.
So I just sort of, as a matter of debt management,
are we now looking back and thinking that was not
a very.
Speaker 5 (10:36):
I think it's a really interesting question because it's actually
not that the maturity profile of the debt has got shorter.
It's that QE has massively increased the short term sensitivity
of the broader public sector to short term rates. I
wasn't in government for during the kind of initial QE,
but certainly after twenty ten this was the effective shortening
of the UK's maturity profile through QE, and then the
(10:57):
sensitivity to bank reserves is something that that has sort
of totally missed went through the net I think of
the policy world. I think economists really missed a tricket
that we are actually throwing away one of the UK's
main assets, which is this low maturity profile. I think
that has been that is a real shape.
Speaker 1 (11:15):
I think it was referred to as idiosyncratic factors in
this post. Everyone has said, in different ways, including you,
that the US is in a distinctive position and it
isn't being forced at least by the international markets to
take the unsustainability of its debts seriously. I guess there
were some challenges to that earlier in the year, when
we saw the sort of safe haven status of US
(11:38):
assets and treasuries seemingly being challenged a bit, and the
dollar falling in response to trade uncertainty, and yields at
certain times going up, although it is striking that they've
gone down since the start of the year. Overall, How
firm are you in your view that all the things
that the president's doing and not going to fundamentally in
the next few years change the way that people think
(11:59):
about US as the ultimate sort of asset in the
system of a fixed point.
Speaker 3 (12:05):
One probably should never be particularly firm about anything in economics.
I don't think i'd make an exception for predicting Donald
Trump but yeah, I mean there's a lot to be
nervous about. There's a lot of uncertainty. Certainly earlier this
year it looked that way. And I think we're highlighting
an important point, which is a lot of this is
not just debt to GDP ratios. For each percentage point
(12:28):
that US debt goes up as a share of GDP,
interest rates are two and a half basis points higher.
And just use that as a rule of thumb, and
over the next decade, maybe the debt will rise twenty
percentage points, so interest rates will rise half a percentage point,
And you know, that's what it is. What matters, though, enormously,
are the types of institute that we're talking about. Liz
(12:51):
Trust's many budget, I believe was a percent and a
half of GDP. Presumably everyone in the room knows that
number better than I do. But it wasn't that you
could put that number into an equation and predict what
would happen to guilts. You had to put the full
set of institutional changes, ignoring the OBR talking about the
independence of the Bank of England looking like she might
(13:11):
do more, you know, et cetera, et cetera, add to
the list that looked roughly like what was going on
in the United States earlier this year. But now central
bank independence seems just a little bit safer. But what
I guarantee it, No, I'm much more worried about it
on a five or six year timescale than I am
on a five month to six month timescale. So maybe
(13:33):
Rudbrook was right when he said he had a call
for the next five years for the dollar, and I
don't think he went beyond them.
Speaker 1 (13:40):
Rupert has also pointed, I think you were agreeing with people,
including Treasury sectories got bessent that the stable coin could
in itself provide some underpinning for treasuries.
Speaker 5 (13:51):
I think it's just an interesting short term possibility. Certainly
the Treasury appeared to think that it can.
Speaker 1 (13:57):
Jason, do you think that's the real thing.
Speaker 3 (13:59):
I look at all the different ways the dollar is used.
In most of them it's dominant. But the one place
where it's massively overwhelmingly dominant is stable coins, where it's
ninety nine ninety eight percent of the stable coins. That's
higher than it is for any other purpose. And so
I think that's interesting that the marginal thing, the new
(14:20):
thing that's added to the world, in addition to reserves
and settlement and pricing and all that stuff is even
more dollar dominant than the stuff that came before it.
So at the margin, yeah, I think that is possibly
as strength. Now there's a big issue of are we
regulating stable coins enough? Are people going to have confidence
in them? Will live be a crisis in them? You know,
(14:41):
do they get bailed out? How much are they used
for criminal activity, et cetera, et cetera. So I'm not
sure that the genius fect we passed here to regulate
them gets all of that right. But yeah, the margin,
it's more dominant than the dollar's ever been in any sphere.
Speaker 1 (14:57):
I know there's also people in this world who lobying
the UK as we speak, to be more open to
developing that market. Is that get out of jail free
card for Rachel Reeves if she pushes ahead with the
UK stable coin.
Speaker 5 (15:09):
Well, like Jason just said, at the moment, most of
the world wants to put money into dollar stable coins.
I'm not sure there is this huge on tap market
for sterling stable coins. But maybe one of the frustrating
things is we don't know, because it's quite striking that
the UK when it comes to digital currency, is absolutely
stuck in the middle because you've got the US going
all in with crypto and stable coins with.
Speaker 4 (15:28):
The Genius Act.
Speaker 5 (15:29):
You've got the ECB still pursuing this concept of a
digital Euro, largely for kind of geopolitical reasons of wanting
to try and help create this alternative to the dollar system,
which is quite deeply embedded in the European institutions.
Speaker 4 (15:41):
And the UK is doing neither.
Speaker 5 (15:42):
And the Governor of the Bank of England has sort
of made some slightly less lukewarm comments about stable coins,
but with so many caveats that, you know, I like
stable coins, but only if we regulate them to the
point that no one's going to use them, was I
think my summary of his article. So the UK is
basically not getting involved in either of these things, and
maybe in ten fifteen years we'll look back and either
(16:03):
with regret or with huge relief about that.
Speaker 4 (16:04):
I don't know which it will be.
Speaker 1 (16:06):
Jason, you talked about when there is pressure, whenever that
pressure is seen, potentially around Medicare and social security. You
talked in terms of tax revenues. If you were just
looking from afar at the US, and certainly at the
political dynamics. Now you would conclude that taxes were never
going to go up again in the US. So how
(16:27):
is that going to shift? Or? Am I right? Do
you think there are a few taxes we might be
able to increase tariffs? I guess we increase tariff Since the.
Speaker 3 (16:34):
Late nineteen seventies, the two parties have agreed that taxes
should go down for the bottom ninety nine percent of
Americans and have disagreed on the top one percent. And
so you get this toggle and tax rates on the
top one percent, and you get this ratchet of each
president lowers them on the bottom ninety nine percent. That
(16:56):
tax phobia, in my view, means the United States has
among the lowest revenue as a share of GDP. So
I think here revenue needs to play a big part
of the solution. Now, interestingly, Donald Trump did just break
that decades and decades of constraint by raising taxes. He
did it without Congress, he did it through tariffs. He
(17:17):
argues that it's paid for by foreign countries, not by Americans.
And you know, I happen to think that's a terribly
design tax. It's a sort of very very poor consumption
plus capital tax that with all sorts of international repercussions
as well. But there's a part of me that admires
that that difficult and painful a thing was actually done.
(17:41):
I just wish it was something else difficult of that.
And then the last thing I should say, though, is
different countries are in a different place. I mean, I'm
sort of flabbergasted that there's any I mean, I shouldn't
be because it's France, but you know, there's any attention
to raising as part of the fiscal solution in France.
Speaker 2 (17:58):
I mean, the United States to move a tiny.
Speaker 3 (18:01):
Fraction of the way towards France and friends should be
thinking about moving a tiny fraction or maybe more.
Speaker 1 (18:07):
Just to spell that, you mean, maybe having more constraints
on spending, Yes.
Speaker 3 (18:11):
More constraints on I mean, was an important part of
the debate in France.
Speaker 2 (18:15):
Just seems to me you should be sitting.
Speaker 3 (18:17):
There worried about productivity growth, worried that revenue is too high,
worried about the reasons your country is unattractive to be in.
And you know, I realize that, you know, the Prime Minister,
the President basically rejected the idea, but it's sort of
amazing that anyone would be thinking that's that's part of
the solution in France. But conversely, in the United States,
(18:39):
we need to figure out how to tacks, including at
least some of the bottom ninety nine percent of Americans.
Speaker 1 (18:46):
And just to draw a link with our previous discussion
we had at this conference, the US has been able
to unilaterally raise tariffs and buy in large major trading partners.
Certainly Europe have not retaliated, and they've sort of accepted
these as deals. And mean, I guess the flip side
of that is if you want the US to lower
those tariffs, they're going to have to do it unilaterally,
(19:06):
and that's even less likely given the revenues that they're raising.
Speaker 4 (19:09):
Is that right?
Speaker 2 (19:10):
Yeah, I mean there's two things.
Speaker 3 (19:11):
One is the Supreme Court is going to be hearing
the case and they may decide that a bunch of
these tariffs are illegal. Now, there's other legal courses that
the Trump administration can and has said it will do,
but it's hard to get up to quite as much
as the current tariff right through those, so there's a
legal avenue. They do remain quite unpopular with people, and
(19:33):
the next president if they're especially they're from a different
party might find it quite attractive that on their first
day in office they could sign an executive order that
would basically lower prices for American families. So that's a
little bit of an open question. I do think the
more dominant thing will be if they're in effect for
three straight years, people will really believe them. The last
(19:55):
thing though, in terms of the geopolitical dynamic, cause I
think Donald Trump credibly had a threat, for example, with
the European Union, that the United States is going to
set tariffs at whatever the European Union does plus fifteen,
and so if the European Union had retaliated with fifteen
percent tariffs, we would have gone to thirty. They'd gone
to thirty, we would have gone to forty five. I
(20:16):
don't know that any other president could carry that threat
out in a credible way. And so the United States
has established that it could have unilateral tariffs for three years.
While Donald Trump isn't president, I don't think it's established
it can have unilateral tariffs without retaliation forever. The dynamic
to me, feels quite different with almost anyone else in
(20:37):
the way house.
Speaker 1 (20:38):
So to your point, they will still need the money.
I mean they have managed to actually increase revenues, and
that would be another hole.
Speaker 4 (20:43):
In the budget.
Speaker 1 (20:45):
I think we've actually run out of time, but I
think we've had a pretty wide discussion. Jason, thank you
very much for joining us from the US. Rupert, thanks again,
(21:11):
thanks for listening to Trumponomics from Bloomberg. It was hosted
by me, Stephanie Flanders, and I was in conversation with
Harvard professor Jason Furman and Pimco advisor Rupert Harrison. Trumponomics
was produced by Summer Sadi and Moses and Dam with
help from Amy Keen special thanks to the Society for
Professional Economists. Sound design is by Blake Maples and Kelly Gary,
(21:33):
and Sage Bowman is Bloomberg's head of podcasts. To help
others find it, please rate it and review it highly
wherever you listen to podcasts.
Bloomberg Audio Studios, podcasts, radio news. I'm Stephanie Flanders, head
of Government and Economics at Bloomberg, and this is Trump Economics,
the podcast that looks at the economic world of Donald Trump,
(00:24):
how he's already shaped the global economy and what on
earth is going to happen next. This week, we're zeroing
in on government debt. Why is it so high and
why do investors not seem to worry about it in
the case of the US. This Monday, October thirteenth, I
had a conversation about that question as part of a
(00:45):
conference we hosted at Bloomberg for professional economists in London.
The panel included two economists who've both been at the
center of economic policy making in the US and the
UK over the years. Jason Furman, now professor at Harvard University,
previously Chairman of the Council of Economic Advisors under President
Barack Obama, and Rupert Harrison, now a senior advisor at PIMCO,
(01:08):
but not so long ago, a senior advisor to the
former UK Chancellor George Osborne in the years after the
global financial crisis, who was also chief economist for the
UK government. Now the level of public debt. Government debt
has surged in the past twenty years, doubled relative to
the size of the economy in many industrial countries, and
for a long time that didn't seem to matter much
(01:29):
because interest rates were so low. In fact, servicing that
debt paying the interest got cheaper even as the amount
of debt took off. We've talked about it before, but
that has changed lately, especially in the UK, where the
burden of paying more and more in debt interest is
now blowing a big hole in the labor government spending ambitions.
In the US too, Uncle Sam's costs have more than
(01:52):
trebled in the last three years to well over one
trillion dollars a year. That bill's heading even higher in
the next few year, partly thanks to the extra debt
associated with the so called Big Beautiful Bill. Yet, despite this,
US treasury bonds US government IOUs remain the anchor of
(02:13):
the global financial system, the risk free asset by which
everything else is judged. The debt trajectory is so unsustainable
in America's place in the global economy, so in flux,
you have to wonder when bond investors might start to
take a different view of US treasuries and start selling them.
But there's not much sign of that happening yet. So
(02:34):
I was fascinated to hear how these two seasoned insiders
from both sides of the Atlantic were thinking about the
risks and potential for accidents. I started by asking Jason Furman,
the central question of our panel is government debt now
too high? And how much should we care?
Speaker 2 (02:56):
Yes?
Speaker 3 (02:56):
And I'm not sure, So let me go through those
I first started working on fiscal policy in the nineteen
nineties in the Clinton administration. At the time, we were
on track to.
Speaker 2 (03:09):
Eliminate the debt within the decade.
Speaker 3 (03:12):
We had balanced the budget multiple years in a row,
and the tenure treasury was at six percent. Now we
have debt one hundred percent to GDP ratio. We have
a deficit above six percent of GDP. As far as
the eyes can see, we're in an enormous boom in
terms of investment demand for AI data centers. We've created
(03:35):
a lot of uncertainty about lending money to the United States,
and the tenure treasury is around four percent. And so
what does all of that tell me? It tells me
that there had been a lot more capacity to borrow
than I had ever appreciated back when I first started
working on this topic more than twenty five years ago,
(03:56):
and frankly then most of us possibly could have thought.
Now we have more capacity than we realized. We also
have more debt than we realized, and so the gap
between where we are and where we can be is
still uncomfortable. I have no doubt that if the United
States or the UK, or France or Belgium or Japan
(04:18):
continue on the fiscal trajectories that they're on, at some
point it will become extremely expensive for them to borrow.
You'll get the type of cycle of higher debt, higher
interest rates, higher debt, higher interest rates, and it will
all be painful to deal with. But I'm not sure
when that date is. I'm not sure if I could.
(04:41):
I'm responsibly tele policy maker that this should be the
number one on your agenda. But at the very least
my view is no one should be making the problem worse.
They should be looking for opportunities to make it better.
And at least in the United States, there's some basically
accounting forcing events around the povency of Social Security and
Medicare which come up in the next decade that I
(05:04):
think are a much better way to deal with it
than waiting for the market to force your hand when
the options will.
Speaker 2 (05:09):
Be less good.
Speaker 1 (05:11):
Just for those who don't get into the details of those,
just unpack that a little bit. That the forcing event
around Medicare and Social Security.
Speaker 3 (05:20):
Yeah, social Security is our old age and survivors and
disability pension system. It's trust fund is exhausted in twenty
thirty three. Medicare is help for the elderly. That trust
fund is exhausted, believe in twenty thirty four, and so
Congress has to pass a law raising taxes, cutting benefits,
(05:40):
or doing some sort of general revenue transfer gimmick, which
would be the worst option there. You want to deal
with these things in advance, but it's very often that
you almost come right up against the date and deal
with it. And these two problems total about two percent
of GDP, and our fiscal gap is probably about three
percent of GDP. So if you dealt with them, and
(06:02):
that's a very big if, that gets you a decent
fraction of the way to the adjustment, you would need
to put the debt on a sustainable course.
Speaker 1 (06:12):
Rupert, how are you thinking about public debt?
Speaker 4 (06:14):
So? I think the question is it too high?
Speaker 5 (06:16):
I think when you thinking about public finance, you can't
have a test of let is it working now or
if even is it going to work next year or
the year after, because you have to be thinking about
vulnerability and you have to be thinking about much longer
time horizons, because you can only make an impact on
public debt.
Speaker 4 (06:31):
Over decade type horizons.
Speaker 5 (06:33):
So you have to think, like, is this creating vulnerabilities
over the next decade?
Speaker 4 (06:37):
Is going to make three opening points?
Speaker 5 (06:38):
One is like it's clearly it will probably at some
point happen for the US, but it is not happening now.
As Jason just said, the US ten years and four percent,
and the market is not signaling that US boring and
debt is unsustainable, even though if you look at a
chart of deficits and debt in an economics tech book,
it clearly is unsustainable, but the market is not pricing
that yet. The US definitely still has a different environment.
(07:01):
The PIMCO house view is that the dollar is going
to remain the global reserve asset for at least the
next five years. Treasuries will remain the global safe asset
for at least the next five years. There are things
happening around the edges. So you know, there are global
central banks diversifying reserves into gold, so gold is now
over four thousand dollars. There are things interesting things happening
(07:22):
around the edge, and in cryptocurrencies and digital currencies, both
of you know, crypto and central bank digital currencies that
could in the long term.
Speaker 4 (07:31):
Challenge the role of the dollar.
Speaker 5 (07:32):
But actually interestingly, in the short term, maybe the main
effect will be if we get a huge explosion of
stable coins that actually results in an increase in demand
for dollars. So for now that the US is in
a different situation, and maybe Jason's right that domestic politics
is the forcing issue in the US rather than market pressure.
It's clearly not the case of sitting here in the
UK or in Europe that the high deck clearly creates vulnerabilities.
(07:55):
You can see that markets are sensitive to news, and
so you see that in countries like the UK.
Speaker 4 (08:02):
We saw the trust episode.
Speaker 5 (08:03):
Obviously there were some idiosyncratic factors that exacerbated that, but
we've also seen market moves more recently where clearly there's
a high sensitivity. So the day that Rachel Reeves was
seen crying in the House of Commons. Markets reacted quite
significantly because they thought she might be replaced as a
Chancellor by someone who would have a looser approach to
the fiscal rules. That tells you there's a sensitivity in markets.
It tells you that you're vulnerable. And that's what high
(08:26):
debt does, It makes you vulnerable. France is a similar
situation where you clearly have some sensitivity in markets to
political dysfunction and a lack of an obvious way out
of prolonged beficits in France counterbalanced by market fears about
well what is the DCB going to do here? And
that's what's limiting it. So clearly for non US countries
(08:47):
that vulnerability is there, and that's what high debt has done,
it creates vulnerabilities. And I guess the final point, we
are now in a policy world that is the precise
mirror of the twenty tens. So in the twenty tens,
the central banks had run out of.
Speaker 4 (08:59):
Ammunition because ins are on the.
Speaker 5 (09:00):
Floor and the only game in town was governments, so
enormous dependence on fiscal policy. So when the pandemic hits,
for example, fiscal policy is.
Speaker 4 (09:08):
The only game in town. Similarly, in Europe with.
Speaker 5 (09:11):
The energy crisis, fiscal policy is the only game in town.
The next time we have recessions or crises, fiscal policy
is going to be much more constrained because markets are
much more sensitive, at least in the countries that are
now pushing up against the limits. And the opposite is
that it's now the central banks who have all the ammunition,
and so that from a market's point of view, that's
very important.
Speaker 1 (09:30):
As Jason said, you've if you were sort of stepping back,
you said, the debt's gone up a lot in the
last fifteen to twenty years, the cost of financing that debt,
and indeed that the bond deals have not gone up
until recently, but it's been a pretty painful jump, especially
in the case of the UK. I just wonder when
you look at countries sometimes you think they're vulnerable because
the long term trajectory is clearly unsustainable in the case
(09:52):
of the US, for example, in other cases, I think
in Europe more often, and I think now, particularly in
the case of the UK, it's about a high and
increasing amount of financing costs that's having to come out
of the treasurer. A lot of that has to do
with the structure of the debt, and I just wonder
whether it's made you think in retrospect, in twenty ten,
one of the things that made the UK look quite
(10:15):
resilient in these kind of cases was it had a
very high maturity of debt. It's now relatively low, it's
certainly much lower than it used to be, and has
a very high proportion of index link guilt, which in
retrospect has left it very vulnerable to the increase in inflation.
So I just sort of, as a matter of debt management,
are we now looking back and thinking that was not
a very.
Speaker 5 (10:36):
I think it's a really interesting question because it's actually
not that the maturity profile of the debt has got shorter.
It's that QE has massively increased the short term sensitivity
of the broader public sector to short term rates. I
wasn't in government for during the kind of initial QE,
but certainly after twenty ten this was the effective shortening
of the UK's maturity profile through QE, and then the
(10:57):
sensitivity to bank reserves is something that that has sort
of totally missed went through the net I think of
the policy world. I think economists really missed a tricket
that we are actually throwing away one of the UK's
main assets, which is this low maturity profile. I think
that has been that is a real shape.
Speaker 1 (11:15):
I think it was referred to as idiosyncratic factors in
this post. Everyone has said, in different ways, including you,
that the US is in a distinctive position and it
isn't being forced at least by the international markets to
take the unsustainability of its debts seriously. I guess there
were some challenges to that earlier in the year, when
we saw the sort of safe haven status of US
(11:38):
assets and treasuries seemingly being challenged a bit, and the
dollar falling in response to trade uncertainty, and yields at
certain times going up, although it is striking that they've
gone down since the start of the year. Overall, How
firm are you in your view that all the things
that the president's doing and not going to fundamentally in
the next few years change the way that people think
(11:59):
about US as the ultimate sort of asset in the
system of a fixed point.
Speaker 3 (12:05):
One probably should never be particularly firm about anything in economics.
I don't think i'd make an exception for predicting Donald
Trump but yeah, I mean there's a lot to be
nervous about. There's a lot of uncertainty. Certainly earlier this
year it looked that way. And I think we're highlighting
an important point, which is a lot of this is
not just debt to GDP ratios. For each percentage point
(12:28):
that US debt goes up as a share of GDP,
interest rates are two and a half basis points higher.
And just use that as a rule of thumb, and
over the next decade, maybe the debt will rise twenty
percentage points, so interest rates will rise half a percentage point,
And you know, that's what it is. What matters, though, enormously,
are the types of institute that we're talking about. Liz
(12:51):
Trust's many budget, I believe was a percent and a
half of GDP. Presumably everyone in the room knows that
number better than I do. But it wasn't that you
could put that number into an equation and predict what
would happen to guilts. You had to put the full
set of institutional changes, ignoring the OBR talking about the
independence of the Bank of England looking like she might
(13:11):
do more, you know, et cetera, et cetera, add to
the list that looked roughly like what was going on
in the United States earlier this year. But now central
bank independence seems just a little bit safer. But what
I guarantee it, No, I'm much more worried about it
on a five or six year timescale than I am
on a five month to six month timescale. So maybe
(13:33):
Rudbrook was right when he said he had a call
for the next five years for the dollar, and I
don't think he went beyond them.
Speaker 1 (13:40):
Rupert has also pointed, I think you were agreeing with people,
including Treasury sectories got bessent that the stable coin could
in itself provide some underpinning for treasuries.
Speaker 5 (13:51):
I think it's just an interesting short term possibility. Certainly
the Treasury appeared to think that it can.
Speaker 1 (13:57):
Jason, do you think that's the real thing.
Speaker 3 (13:59):
I look at all the different ways the dollar is used.
In most of them it's dominant. But the one place
where it's massively overwhelmingly dominant is stable coins, where it's
ninety nine ninety eight percent of the stable coins. That's
higher than it is for any other purpose. And so
I think that's interesting that the marginal thing, the new
(14:20):
thing that's added to the world, in addition to reserves
and settlement and pricing and all that stuff is even
more dollar dominant than the stuff that came before it.
So at the margin, yeah, I think that is possibly
as strength. Now there's a big issue of are we
regulating stable coins enough? Are people going to have confidence
in them? Will live be a crisis in them? You know,
(14:41):
do they get bailed out? How much are they used
for criminal activity, et cetera, et cetera. So I'm not
sure that the genius fect we passed here to regulate
them gets all of that right. But yeah, the margin,
it's more dominant than the dollar's ever been in any sphere.
Speaker 1 (14:57):
I know there's also people in this world who lobying
the UK as we speak, to be more open to
developing that market. Is that get out of jail free
card for Rachel Reeves if she pushes ahead with the
UK stable coin.
Speaker 5 (15:09):
Well, like Jason just said, at the moment, most of
the world wants to put money into dollar stable coins.
I'm not sure there is this huge on tap market
for sterling stable coins. But maybe one of the frustrating
things is we don't know, because it's quite striking that
the UK when it comes to digital currency, is absolutely
stuck in the middle because you've got the US going
all in with crypto and stable coins with.
Speaker 4 (15:28):
The Genius Act.
Speaker 5 (15:29):
You've got the ECB still pursuing this concept of a
digital Euro, largely for kind of geopolitical reasons of wanting
to try and help create this alternative to the dollar system,
which is quite deeply embedded in the European institutions.
Speaker 4 (15:41):
And the UK is doing neither.
Speaker 5 (15:42):
And the Governor of the Bank of England has sort
of made some slightly less lukewarm comments about stable coins,
but with so many caveats that, you know, I like
stable coins, but only if we regulate them to the
point that no one's going to use them, was I
think my summary of his article. So the UK is
basically not getting involved in either of these things, and
maybe in ten fifteen years we'll look back and either
(16:03):
with regret or with huge relief about that.
Speaker 4 (16:04):
I don't know which it will be.
Speaker 1 (16:06):
Jason, you talked about when there is pressure, whenever that
pressure is seen, potentially around Medicare and social security. You
talked in terms of tax revenues. If you were just
looking from afar at the US, and certainly at the
political dynamics. Now you would conclude that taxes were never
going to go up again in the US. So how
(16:27):
is that going to shift? Or? Am I right? Do
you think there are a few taxes we might be
able to increase tariffs? I guess we increase tariff Since the.
Speaker 3 (16:34):
Late nineteen seventies, the two parties have agreed that taxes
should go down for the bottom ninety nine percent of
Americans and have disagreed on the top one percent. And
so you get this toggle and tax rates on the
top one percent, and you get this ratchet of each
president lowers them on the bottom ninety nine percent. That
(16:56):
tax phobia, in my view, means the United States has
among the lowest revenue as a share of GDP. So
I think here revenue needs to play a big part
of the solution. Now, interestingly, Donald Trump did just break
that decades and decades of constraint by raising taxes. He
did it without Congress, he did it through tariffs. He
(17:17):
argues that it's paid for by foreign countries, not by Americans.
And you know, I happen to think that's a terribly
design tax. It's a sort of very very poor consumption
plus capital tax that with all sorts of international repercussions
as well. But there's a part of me that admires
that that difficult and painful a thing was actually done.
(17:41):
I just wish it was something else difficult of that.
And then the last thing I should say, though, is
different countries are in a different place. I mean, I'm
sort of flabbergasted that there's any I mean, I shouldn't
be because it's France, but you know, there's any attention
to raising as part of the fiscal solution in France.
Speaker 2 (17:58):
I mean, the United States to move a tiny.
Speaker 3 (18:01):
Fraction of the way towards France and friends should be
thinking about moving a tiny fraction or maybe more.
Speaker 1 (18:07):
Just to spell that, you mean, maybe having more constraints
on spending, Yes.
Speaker 3 (18:11):
More constraints on I mean, was an important part of
the debate in France.
Speaker 2 (18:15):
Just seems to me you should be sitting.
Speaker 3 (18:17):
There worried about productivity growth, worried that revenue is too high,
worried about the reasons your country is unattractive to be in.
And you know, I realize that, you know, the Prime Minister,
the President basically rejected the idea, but it's sort of
amazing that anyone would be thinking that's that's part of
the solution in France. But conversely, in the United States,
(18:39):
we need to figure out how to tacks, including at
least some of the bottom ninety nine percent of Americans.
Speaker 1 (18:46):
And just to draw a link with our previous discussion
we had at this conference, the US has been able
to unilaterally raise tariffs and buy in large major trading partners.
Certainly Europe have not retaliated, and they've sort of accepted
these as deals. And mean, I guess the flip side
of that is if you want the US to lower
those tariffs, they're going to have to do it unilaterally,
(19:06):
and that's even less likely given the revenues that they're raising.
Speaker 4 (19:09):
Is that right?
Speaker 2 (19:10):
Yeah, I mean there's two things.
Speaker 3 (19:11):
One is the Supreme Court is going to be hearing
the case and they may decide that a bunch of
these tariffs are illegal. Now, there's other legal courses that
the Trump administration can and has said it will do,
but it's hard to get up to quite as much
as the current tariff right through those, so there's a
legal avenue. They do remain quite unpopular with people, and
(19:33):
the next president if they're especially they're from a different
party might find it quite attractive that on their first
day in office they could sign an executive order that
would basically lower prices for American families. So that's a
little bit of an open question. I do think the
more dominant thing will be if they're in effect for
three straight years, people will really believe them. The last
(19:55):
thing though, in terms of the geopolitical dynamic, cause I
think Donald Trump credibly had a threat, for example, with
the European Union, that the United States is going to
set tariffs at whatever the European Union does plus fifteen,
and so if the European Union had retaliated with fifteen
percent tariffs, we would have gone to thirty. They'd gone
to thirty, we would have gone to forty five. I
(20:16):
don't know that any other president could carry that threat
out in a credible way. And so the United States
has established that it could have unilateral tariffs for three years.
While Donald Trump isn't president, I don't think it's established
it can have unilateral tariffs without retaliation forever. The dynamic
to me, feels quite different with almost anyone else in
(20:37):
the way house.
Speaker 1 (20:38):
So to your point, they will still need the money.
I mean they have managed to actually increase revenues, and
that would be another hole.
Speaker 4 (20:43):
In the budget.
Speaker 1 (20:45):
I think we've actually run out of time, but I
think we've had a pretty wide discussion. Jason, thank you
very much for joining us from the US. Rupert, thanks again,
(21:11):
thanks for listening to Trumponomics from Bloomberg. It was hosted
by me, Stephanie Flanders, and I was in conversation with
Harvard professor Jason Furman and Pimco advisor Rupert Harrison. Trumponomics
was produced by Summer Sadi and Moses and Dam with
help from Amy Keen special thanks to the Society for
Professional Economists. Sound design is by Blake Maples and Kelly Gary,
(21:33):
and Sage Bowman is Bloomberg's head of podcasts. To help
others find it, please rate it and review it highly
wherever you listen to podcasts.
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