September 10, 2025 • 22 mins
Why is the price of money rising and what does US President Donald Trump have to do with it? Stephanie Flanders is joined by Bloomberg Economics' Jamie Rush and Tom Orlik to explore the global forces driving up interest rates, from defense spending to deglobalization, and what higher borrowing costs mean for governments, businesses and households.
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Speaker 1 (00:00):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:17):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is trump Anomics, the podcast that looks at
the economic world of Donald Trump, how he's already shaped
the global economy, what on earth is going to happen next?
And this week we're talking about the price of money,
why it's going up, and why that matters to all
of us, and especially to governments with big debts like France,
(00:39):
where it's part of why the government just collapsed. Who
also want to explain why this big shift in the
most important price in the global economy is not entirely
caused by Donald Trump, though he might be speeding the
process up. Now, when I say the price of money,
I mean the interest rate. So just like anything you
buy phones, fruit, money also has a price, but instead
(01:01):
of paying for money with other goods, we pay for
it with interest. And that price of money, that interest
rate matters because it touches everything. What you pay for
a home, how much companies invest, where the prices rise
too fast, even how strong a country's currency is, Who
or what sets the price of money? Well, short term, yes,
central banks play their part. We all write a lot
(01:23):
about that piece, but long term, that price is set
by a wide range of structural factors that we're going
to get into in this show, and I thought we
should talk about it this week. Well, for a few reasons. First,
it's a reminder that this would have been a challenging
time for governments anyway, even without Donald Trump turning the
world upside down. The second reason is we're seeing the
(01:44):
consequences of a higher cost of borrowing play out in
real time this month, as bond yields the government interest
rates go up in many countries. France I've already mentioned,
now pays more than Italy to borrow from the market.
It's also arguably rising bond year that is the one
factor more than any other, putting serious financial pressure on
(02:05):
the labor government in the UK. But yes, I'll admit
the final reason is because we at Bloomberg Economics have
written a book that explains it all, The Price of Money,
A Guide to the past, present and Future of the
natural Rate of Interest. It's published a few weeks ago
by Oxford University Press, and it is available I'm told
(02:25):
at all fine bookstores, and my two lead co authors
who face it did most of the work pulling that
book together. Are here with me now. Jamie Rush, the
director of Global Economics at Bloomberg, who's here in London
and joining again from the Washington studio, Tom Orlick, who's
chief economist for Bloomberg Economics. Jamie, Tom, thanks very much
(02:45):
for being here to hawk card book. We don't usually
get to say that.
Speaker 1 (02:49):
Thank you for having me.
Speaker 3 (02:50):
Great to be here, Stephanie.
Speaker 2 (03:01):
Tom, let me start with you. You know, I've said a
little bit about it, but why is it important now
to think about the long term cost of money? Because
for many people that will seem pretty abstract.
Speaker 3 (03:09):
So I think there's a few factors at work, Stephanie.
So the first is, this is a moment for the
global markets. This is a moment where across Europe, across Japan,
in the United States, long term interest rates are high,
and in many of those places they're rising, with far
reaching consequences for governments, for businesses, for households, for investors.
(03:35):
I think the second reason is, well, there are some
really long term factors that drive the rate of interest,
things like demographics, for example, but there's also some important
factors that are playing out right now. So think about
Donald Trump and the end of the Pax Americana, the
(03:55):
US security guarantee. That's forcing everyone from European NATO allies
to Japan and Korea and Taiwan to significantly increase their
defense spending. And when they do that, when governments borrow
to increase defense spending, that puts upward pressure on interest rates.
(04:17):
So it's a market moment, but it's also a kind
of paradigm shift moment for the global economy, and I
think that's one reason that makes this new book timely.
Speaker 2 (04:28):
You can see how many book references the book we
can get in now, Jamie, looking at quite a lot
of examples now where this is playing out. Tell us,
just as example of France, how some of these forces
are pushing up the cost of borrow and indeed helping
to cause you know, yet another government to collapse this week.
Speaker 1 (04:44):
Well, there are certainly a handful of economies globally which
are sort of in the cross hairs of markets, and
they've seen interest rates go up by the most. So
you mentioned France. Largely that's because the parliament is very
fractured and it's going to be very very difficult for
them to pass any legislation which gets the budget under control.
We saw in Japan the interest rates at the long
(05:06):
end of the curve moved up. Why because the central
bankers ditched your curve control. And if you ditch your
co control, you no longer have control of your curve.
And in the UK, where there's a significant amount of
gloom and pessimism about the government's ability to rain in debt,
all of these things are serving to push up interest rates.
But actually these idiosyncratic things are not the main source
(05:27):
of the movement up in interest rates. If you look
at which part is local and which part is global,
you see that there's a huge global element to rising
borrowing costs around the world, and it's that part that
we were trying to think about when we did our analysis.
Speaker 2 (05:41):
I guess this is partly just the supply of money
and the demand for money. We think of the demand
for money being things that you need to invest in
or governments might be wanting to borrow. And the supply
of money is the savings and other sources of cash
that are sitting around the economy. Over the previous decade,
(06:02):
people whused to talk about the savings glut. There was
a lot of money sloshing around and potentially fewer places
for it to go. So governments were able to borrow
very cheaply because there was a lot of money. But
now that shift is churning. Talk us through that sort
of demand and supply forces, because obviously it relates to
what you just said.
Speaker 3 (06:19):
Yes, exactly it.
Speaker 1 (06:20):
So it's the balance of saving an investment in the
global economy that matters for global interest rates, and they're
all determined with that global factory in mind. And for
many years, the global cost of borrowing was falling, and
the reason for that was because investment was getting cheaper.
We had all this these cheap goods coming from China.
(06:42):
Much cheaper to upgrade your technology, for example, you don't
have to spend so much on investment. That was one
of the by products of globalization. On the saving side,
you have the baby boomers socking away their paychecks into
their savings accounts, preparing for retirement. That also helped push
down the cost money and defense spending. For example, well
(07:03):
after the Cold War, we thought the world seemed relatively safe,
and so governments saved. They didn't They reduce their military
budgets and they save the money all of these things
are now starting to spin into reverse. So globalization, which
helped keep investment goods cheap and actually inflation down, well
that's not going to be proceeding at the same pace
as it was. Defense spending where we don't live in
(07:25):
a safe world. It's becoming much more dangerous. We need
to ramp up defense spending like Tom was describing. And
the demographics side of things, well, yes, the baby boomers
are now retiring, and so they're going to be drawing
down their savings rather than pushing money into them, and
so all of these factors are shifting that fundamental balance
between saving and investment in the global economy, and that
is going to help push interest rates up.
Speaker 2 (07:46):
Tom, we've said it's not all down to Donald Trump,
and you could just hear from that list it's clearly
not all down to Donald Trump, much though he might
like to make the political and economic weather while he's
in office. But you can also hear in that list
number of things which are at least are being given
the kind of extra impetus by his policies. And I
guess we also have the possibility for sort of supply
(08:08):
chain issues or reversing globalization, which you would think, given
that it was contributing to falling prices in previous decades,
if that's contributing to rising prices and potentially come of
more variability in prices, more kind of shocks for central
banks to manage, well, that too might be a way
in which he's contributing to higher rates overall. Is that right? Yeah?
Speaker 3 (08:32):
I think there's a multiple dimensions on which the Trump
administration is driving interest rates higher, Stephanie. Perhaps the first
of them, as you mentioned, is the shock to the
global system. It was the integration of a billion low
cost Chinese workers into the global trade system, which helped
keep a lid on inflation in the US through the
(08:54):
Great Moderation. I think many people expected the addition of
a billion Indian local cost workers to extend that trend
in the decades ahead. Donald Trump, with his tariffs is
signaling well, that's just not going to happen. Borrowing in
the United States is really high. Trump's Big Beautiful Bill
adds very significantly to the fiscal deficit over the next decade.
(09:18):
Some three trillion added to US debt according to the
Congressional Budget Office, And when the US Treasury is issuing
more debt well, they're going to have to pay more
to borrow, and that means interest rates go up as well. Lastly,
of course, there are the attacks on FED independence. Now,
the impact on interest rates there is a little bit complicated.
(09:40):
If Trump gets his way and gets a more pliant
FED chair and a more pliant FED board, well he
could get short term interest rates down, and the impact
of that ripples through the yield curve, so it also
has an impact on long term rates as well. The
bigger impact, though, would likely be a blow to the
Fed's credibility as an inflation fighter, and that would mean
(10:02):
that investors would demand a premium to lend to the
US government, to the US Treasury, and that too is
a force pushing up longer term borrowing costs.
Speaker 2 (10:20):
We've mentioned the UK, We've mentioned France, and we know
from previous episodes that the borrowing in the US has
been continued to be very high. And then the government
deficit is very high for a country that is actually
not in the middle of a recession. It's been running
this kind of four or five six percent of GDP
budget deficits. And we've just had that big beautiful bill,
(10:41):
as he called it, pasted in Congress, which added enormously
to future debt. And yet I was amazed to see
the other day that of one of the few developed
countries that has seen its sort of ten year borrowing
rate go down slightly since the beginning of the year
is actually the US. So, Tom, how is the US
getting away with that? I mean, yields are obviously higher,
(11:04):
and they're higher than when Donald Trump took office or
when he was elected, but not as much high. We
haven't seen the kind of impact that you might have expected.
Speaker 3 (11:12):
Yeah, So a few thoughts on that. The first one
is if we sort of extend the span of history
a little bit longer, the big picture is very much,
very low ten year borrowing costs before the COVID shock,
very low ten yure borrowing costs at the end of
the twenty tens, and significantly higher borrowing costs today. So yes, absolutely,
(11:34):
the US has been one of the countries that has
had that ten year rate nudge down since the start
of the year. But if we pull the historical frame
back a bit, the US is still very much in
the group of countries which had very low borrowing costs
a few years ago, a much higher borrowing costs today. Now,
why haven't US borrowing costs gone up so far this year?
(11:56):
Maybe it's useful to think about kind of three different
groups of countries. You've got your fragile emerging markets that
are very dependent on portfolio capital flows, and there's big
questions about the quality of their institutions, places like Turkey
or Argentina. If they make a policy error, all the
money flows out straight away, interest rates spike higher, currencies
(12:20):
plunge lower, and the impact are very real and very rapid.
Then you've got advanced economies where the quality of institutions
is stronger and investors have a higher degree of confidence.
But they're still small relative to the size of the
global economy, and so when they make policy missteps they
face some pretty rapid and severe consequences as well. Think
about the UK under the Trust administration. The US perhaps
(12:43):
is in a category of its own right, the world's
biggest economy, the world's deepest financial markets, the world's most
powerful military, a history of good governance, even if there
are growing concerns about erosion of institutions right now, and
for a country like the United States, the issue of
the world's reserve currency. I think what you have is
(13:06):
just much more capacity to play fast and loose with
the rules before facing the real consequences. Perhaps this is
an opportunity for me to surface my favorite quote from
The Great Gatsby, how did you go bankrupt? First slowly,
then all at once?
Speaker 2 (13:24):
Well, we've been pointing to some ways in which that
might happen on this show, Jamie, I want to take
off a couple of things, because we've gone through a
lot of factors. But there'll be some people listening who
will think of other ways in which the world's changing
and will be interested to know how this affects the
cost of money. One thing we do talk about in
the book is inequality, and one thing that seems destined
to continue, although individual countries have had different experiences, but
(13:47):
the sort of emergence of the sort of super wealthy
and apparently much more unequal division of wealth. You wealth
obviously plays a big part in savings and investment. How
is that going to affect to the cost of money.
Speaker 1 (14:01):
The mechanism at play here is that people at the
top end of the income distribution saved more, their earnings
have gone up faster than their capacity to buy cpots,
and then so they're putting that in their bank accounts,
and so over the past few decades or so, as
income inequality has moved upwards, perhaps contributed more to savings
and it helped to contain borrowing costs or push them down.
(14:23):
Looking ahead, our view is that income inequality is not
likely to rise by as much as it has over
the previous few decades, largely because it has risen so
much already and it would require significant policy change. But
clearly with the direction of travel in US, policy is
likely to climb a little further, and again that will
continue to exert some downward pressure on interest rates going ahead.
Speaker 2 (14:44):
And if we move more slowly or faster towards a
net zero goal when it comes to the carbon transition,
how does that affect things, Because that's obviously one of
those areas where we've had in the book, we've had
to have a pretty big range of uncertainty.
Speaker 1 (15:00):
Yeah, So I think that the impacts of climate change
on rates, or at least the research into it, still
in its infancy, So you have so many unknown It's
not just about economics, but the impact of global heating
on the economy, and so I think you need to
think about it through two lenses. One is what are
the physical damages that climate change does the global economy,
Because the more damage it does, the slower growth will be,
(15:23):
the lower the inherent rate of return in the economy
will be, and that will push down on interest rates.
But going in the opposite direction, if the world gets
serious about tackling climate change, it's going to take huge
investments in energy infrastructure to green the economy. And if
you look at what new economy finance being there for
saying at Bloomberg, we're talking about trillion dollar investments here,
(15:44):
and so that extra spending that's required, that extra investment
would push interest rates up, and we think that if
there is a significant push, then the net effect is
more likely to be upwards on borrowing costs than downwards.
Speaker 2 (15:59):
That rais is interesting point, and that actually it was
one of the things I think a bit about in
the final chapter of the book, when you sort of
think about what are the implications of this change for governments,
for businesses and others. I mean, we've tended to describe
the cost of money going up as like a negative thing,
a challenge, a headwind, and it certainly is for governments.
If you have a lot of debt. It could also happen,
(16:21):
as we describe, for reasons that we could be quite
happy about. It could be a world of higher interest rates,
could be a world in which we all might prefer
to live in. I mean, we obviously savers it's better
for them if they have higher interest rates. We've already
seen in a kind of small way, companies find it
all be easier to cover their pension obligations because that
higher interest rate means that future money that their promise
(16:44):
to pensioners is worth a bit less in today's money
than it was in the period where rates were extremely
low and we had all those big holes in pension funds.
But what else could be better about a higher rate world?
Speaker 1 (16:56):
Think about AI as an example here specifically, So what
will AI due to the natural rate? Well, to realize
that the promise of this technology, you have to pile
a huge amount of money into it, and that will
tend to push interest rates up. But at the same time,
the benefits could be huge and growth could be faster.
Income growth could be faster, people could be better off.
So it's in spite of the higher interest rate environment,
(17:18):
people will be on the whole quite significantly better off.
So I think that's kind of a good example of
how interest rates can move for good reasons, they can
move for bad reasons, and it's not always clear which
is which.
Speaker 2 (17:28):
I guess. If there's lots of demand for money, that
could be, as you say, people desperately wanting to use
it to build green energy and to have a much faster,
more dramatic approach to prevent climate change. It could be
that they want to use it for all these exciting investments,
and this is what we seem to be seeing. If
it's for governments to desperately cover their rising bills from
(17:49):
aging populations and creaking health services, then that's less of
a positive.
Speaker 1 (17:54):
Yeah, And I think that's the big risk, isn't it.
So if you look at aging populations, you should expect
probably that the tax to GDP ratio and move in
line with the dependency ratio. Such the older population more
outlays higher taxes. But if you look at how divided
parliaments are across advanced economies, the actual ability of governance
to raise taxes in line with those liabilities is extremely low.
(18:17):
So if they can't. If they can't do that, then
you're just going to borrow more interest rates will therefore
rise and you end up in this bad equilibrium.
Speaker 2 (18:26):
And that's what sounds a little bit similar to what
the finances of the Chancellor in the UK is grappling
with as we head towards this budget, which as always
is being billed as sort of a make or break budget.
But the fundamental thing she's trying to avoid really is
people noticing that the tax rate, tax share of GDP's
gone up, but it seems almost inevitable that it will.
(18:47):
Tom Jamie's already said individual countries can't change the global
supply and demand for money, and maybe even the US
is going to to some extent be a taker of
these forces, not a maker, although Donald Trump's doing his
best to change that. What do you think about, just
as a final thought about how to prepare, you know,
(19:07):
or do better or worse in this world where money
becomes more expensive, I guess I'm thinking a little bit
as household but also as a government.
Speaker 3 (19:16):
So, first of all, Stephanie, for any of the rich
people out there who heard Jamie's comments about inadequate demand
as a kind of blight on the broader economy and
wants to do their bits to address the problem, they
could buy copy of our book. It won't fundamentally solve
the problem, but every little bit helps. So coming back
to your question, one of the things which I find
(19:38):
really fun about working on this book with the Bloomberg
Economics team is that it just touches such a rich
variety of subjects. Right, So, what drives the natural rate
of interest? Well, it's about climate change, it's about artificial intelligence,
it's about demographics, it's about deglobalization. And one of the
interesting things about writing the book was the we had
(20:00):
to get to grips with all of these subjects, but
we had to get to grips with them in a
very specific way, right, with a very specific angle. It's
not what does climate change mean for everybody's life in
the future of the planet, It's what does climate change
mean for the balance between saving an investment? Right. So,
in a sense, if some of the predictions which we
(20:22):
have in the book play out, people are going to
have other stuff to worry about. Right. They're going to
be living in a much hotter planet, or they're going
to be living in a world where robots are thinking
for themselves, or they're going to be thinking of living
in a world where there's much more, much more conflict,
and much more defense spending. But in terms of the
focus of the book on interest rates, from the early
nineteen eighties to the mid twenty tens, we were living
(20:44):
in a world a US, a Europe where interest rates
were on a structural declining trend. Right, it was getting
cheaper and cheaper to borrow, and that had far reaching
consequences for everybody. If you're an investor in equity markets
or property, you made a lot of money because were
coming down and money was piling into those markets. If
you were a minister of finance, you could borrow more
(21:07):
cheaply and not really face a bill for piling on debt. Now,
with rates rising, all of those trends swinging into reverse, right,
and so we don't have low interest rates as a
upward driver of equity and property markets. We have rising
interest rates as a drag on equity and property markets.
We don't have low interest rates giving ministers of finance
(21:30):
a free lunch. We've got higher interest rates, which means
the bill is about to arrive.
Speaker 2 (21:36):
But typically upbeat economists answer, well, I guess money doesn't
make the world go around, but maybe it does make
economics more interesting for all of us. And I guess
the moral of what you just said, Thomas. If the
price is money is going up, it's going to be
even more important to spend it and borrow it wisely.
Tom Warlick, Jamie Rush, thank you so much.
Speaker 3 (21:56):
Thank you. Thanks definitely great to be here.
Speaker 2 (22:01):
Thanks for listening to Trumponomics from Bloomberg. It was hosted
by me Stephanie Flanders. I was joined by Bloomberg's Tom
Orlick and Jamie Rush. Trumponomics was produced by Samasadi and
Moses Dam with help from a Keen and special thanks
this week to Rachel Lewis Kriskey. Sound design is by
Blake Maples and Kelly Gary and Sage Bowman is Bloomberg's
(22:23):
head of podcast And please help others find this show
and enjoy it by rating and reviewing it highly wherever
you listen
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:17):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is trump Anomics, the podcast that looks at
the economic world of Donald Trump, how he's already shaped
the global economy, what on earth is going to happen next?
And this week we're talking about the price of money,
why it's going up, and why that matters to all
of us, and especially to governments with big debts like France,
(00:39):
where it's part of why the government just collapsed. Who
also want to explain why this big shift in the
most important price in the global economy is not entirely
caused by Donald Trump, though he might be speeding the
process up. Now, when I say the price of money,
I mean the interest rate. So just like anything you
buy phones, fruit, money also has a price, but instead
(01:01):
of paying for money with other goods, we pay for
it with interest. And that price of money, that interest
rate matters because it touches everything. What you pay for
a home, how much companies invest, where the prices rise
too fast, even how strong a country's currency is, Who
or what sets the price of money? Well, short term, yes,
central banks play their part. We all write a lot
(01:23):
about that piece, but long term, that price is set
by a wide range of structural factors that we're going
to get into in this show, and I thought we
should talk about it this week. Well, for a few reasons. First,
it's a reminder that this would have been a challenging
time for governments anyway, even without Donald Trump turning the
world upside down. The second reason is we're seeing the
(01:44):
consequences of a higher cost of borrowing play out in
real time this month, as bond yields the government interest
rates go up in many countries. France I've already mentioned,
now pays more than Italy to borrow from the market.
It's also arguably rising bond year that is the one
factor more than any other, putting serious financial pressure on
(02:05):
the labor government in the UK. But yes, I'll admit
the final reason is because we at Bloomberg Economics have
written a book that explains it all, The Price of Money,
A Guide to the past, present and Future of the
natural Rate of Interest. It's published a few weeks ago
by Oxford University Press, and it is available I'm told
(02:25):
at all fine bookstores, and my two lead co authors
who face it did most of the work pulling that
book together. Are here with me now. Jamie Rush, the
director of Global Economics at Bloomberg, who's here in London
and joining again from the Washington studio, Tom Orlick, who's
chief economist for Bloomberg Economics. Jamie, Tom, thanks very much
(02:45):
for being here to hawk card book. We don't usually
get to say that.
Speaker 1 (02:49):
Thank you for having me.
Speaker 3 (02:50):
Great to be here, Stephanie.
Speaker 2 (03:01):
Tom, let me start with you. You know, I've said a
little bit about it, but why is it important now
to think about the long term cost of money? Because
for many people that will seem pretty abstract.
Speaker 3 (03:09):
So I think there's a few factors at work, Stephanie.
So the first is, this is a moment for the
global markets. This is a moment where across Europe, across Japan,
in the United States, long term interest rates are high,
and in many of those places they're rising, with far
reaching consequences for governments, for businesses, for households, for investors.
(03:35):
I think the second reason is, well, there are some
really long term factors that drive the rate of interest,
things like demographics, for example, but there's also some important
factors that are playing out right now. So think about
Donald Trump and the end of the Pax Americana, the
(03:55):
US security guarantee. That's forcing everyone from European NATO allies
to Japan and Korea and Taiwan to significantly increase their
defense spending. And when they do that, when governments borrow
to increase defense spending, that puts upward pressure on interest rates.
(04:17):
So it's a market moment, but it's also a kind
of paradigm shift moment for the global economy, and I
think that's one reason that makes this new book timely.
Speaker 2 (04:28):
You can see how many book references the book we
can get in now, Jamie, looking at quite a lot
of examples now where this is playing out. Tell us,
just as example of France, how some of these forces
are pushing up the cost of borrow and indeed helping
to cause you know, yet another government to collapse this week.
Speaker 1 (04:44):
Well, there are certainly a handful of economies globally which
are sort of in the cross hairs of markets, and
they've seen interest rates go up by the most. So
you mentioned France. Largely that's because the parliament is very
fractured and it's going to be very very difficult for
them to pass any legislation which gets the budget under control.
We saw in Japan the interest rates at the long
(05:06):
end of the curve moved up. Why because the central
bankers ditched your curve control. And if you ditch your
co control, you no longer have control of your curve.
And in the UK, where there's a significant amount of
gloom and pessimism about the government's ability to rain in debt,
all of these things are serving to push up interest rates.
But actually these idiosyncratic things are not the main source
(05:27):
of the movement up in interest rates. If you look
at which part is local and which part is global,
you see that there's a huge global element to rising
borrowing costs around the world, and it's that part that
we were trying to think about when we did our analysis.
Speaker 2 (05:41):
I guess this is partly just the supply of money
and the demand for money. We think of the demand
for money being things that you need to invest in
or governments might be wanting to borrow. And the supply
of money is the savings and other sources of cash
that are sitting around the economy. Over the previous decade,
(06:02):
people whused to talk about the savings glut. There was
a lot of money sloshing around and potentially fewer places
for it to go. So governments were able to borrow
very cheaply because there was a lot of money. But
now that shift is churning. Talk us through that sort
of demand and supply forces, because obviously it relates to
what you just said.
Speaker 3 (06:19):
Yes, exactly it.
Speaker 1 (06:20):
So it's the balance of saving an investment in the
global economy that matters for global interest rates, and they're
all determined with that global factory in mind. And for
many years, the global cost of borrowing was falling, and
the reason for that was because investment was getting cheaper.
We had all this these cheap goods coming from China.
(06:42):
Much cheaper to upgrade your technology, for example, you don't
have to spend so much on investment. That was one
of the by products of globalization. On the saving side,
you have the baby boomers socking away their paychecks into
their savings accounts, preparing for retirement. That also helped push
down the cost money and defense spending. For example, well
(07:03):
after the Cold War, we thought the world seemed relatively safe,
and so governments saved. They didn't They reduce their military
budgets and they save the money all of these things
are now starting to spin into reverse. So globalization, which
helped keep investment goods cheap and actually inflation down, well
that's not going to be proceeding at the same pace
as it was. Defense spending where we don't live in
(07:25):
a safe world. It's becoming much more dangerous. We need
to ramp up defense spending like Tom was describing. And
the demographics side of things, well, yes, the baby boomers
are now retiring, and so they're going to be drawing
down their savings rather than pushing money into them, and
so all of these factors are shifting that fundamental balance
between saving and investment in the global economy, and that
is going to help push interest rates up.
Speaker 2 (07:46):
Tom, we've said it's not all down to Donald Trump,
and you could just hear from that list it's clearly
not all down to Donald Trump, much though he might
like to make the political and economic weather while he's
in office. But you can also hear in that list
number of things which are at least are being given
the kind of extra impetus by his policies. And I
guess we also have the possibility for sort of supply
(08:08):
chain issues or reversing globalization, which you would think, given
that it was contributing to falling prices in previous decades,
if that's contributing to rising prices and potentially come of
more variability in prices, more kind of shocks for central
banks to manage, well, that too might be a way
in which he's contributing to higher rates overall. Is that right? Yeah?
Speaker 3 (08:32):
I think there's a multiple dimensions on which the Trump
administration is driving interest rates higher, Stephanie. Perhaps the first
of them, as you mentioned, is the shock to the
global system. It was the integration of a billion low
cost Chinese workers into the global trade system, which helped
keep a lid on inflation in the US through the
(08:54):
Great Moderation. I think many people expected the addition of
a billion Indian local cost workers to extend that trend
in the decades ahead. Donald Trump, with his tariffs is
signaling well, that's just not going to happen. Borrowing in
the United States is really high. Trump's Big Beautiful Bill
adds very significantly to the fiscal deficit over the next decade.
(09:18):
Some three trillion added to US debt according to the
Congressional Budget Office, And when the US Treasury is issuing
more debt well, they're going to have to pay more
to borrow, and that means interest rates go up as well. Lastly,
of course, there are the attacks on FED independence. Now,
the impact on interest rates there is a little bit complicated.
(09:40):
If Trump gets his way and gets a more pliant
FED chair and a more pliant FED board, well he
could get short term interest rates down, and the impact
of that ripples through the yield curve, so it also
has an impact on long term rates as well. The
bigger impact, though, would likely be a blow to the
Fed's credibility as an inflation fighter, and that would mean
(10:02):
that investors would demand a premium to lend to the
US government, to the US Treasury, and that too is
a force pushing up longer term borrowing costs.
Speaker 2 (10:20):
We've mentioned the UK, We've mentioned France, and we know
from previous episodes that the borrowing in the US has
been continued to be very high. And then the government
deficit is very high for a country that is actually
not in the middle of a recession. It's been running
this kind of four or five six percent of GDP
budget deficits. And we've just had that big beautiful bill,
(10:41):
as he called it, pasted in Congress, which added enormously
to future debt. And yet I was amazed to see
the other day that of one of the few developed
countries that has seen its sort of ten year borrowing
rate go down slightly since the beginning of the year
is actually the US. So, Tom, how is the US
getting away with that? I mean, yields are obviously higher,
(11:04):
and they're higher than when Donald Trump took office or
when he was elected, but not as much high. We
haven't seen the kind of impact that you might have expected.
Speaker 3 (11:12):
Yeah, So a few thoughts on that. The first one
is if we sort of extend the span of history
a little bit longer, the big picture is very much,
very low ten year borrowing costs before the COVID shock,
very low ten yure borrowing costs at the end of
the twenty tens, and significantly higher borrowing costs today. So yes, absolutely,
(11:34):
the US has been one of the countries that has
had that ten year rate nudge down since the start
of the year. But if we pull the historical frame
back a bit, the US is still very much in
the group of countries which had very low borrowing costs
a few years ago, a much higher borrowing costs today. Now,
why haven't US borrowing costs gone up so far this year?
(11:56):
Maybe it's useful to think about kind of three different
groups of countries. You've got your fragile emerging markets that
are very dependent on portfolio capital flows, and there's big
questions about the quality of their institutions, places like Turkey
or Argentina. If they make a policy error, all the
money flows out straight away, interest rates spike higher, currencies
(12:20):
plunge lower, and the impact are very real and very rapid.
Then you've got advanced economies where the quality of institutions
is stronger and investors have a higher degree of confidence.
But they're still small relative to the size of the
global economy, and so when they make policy missteps they
face some pretty rapid and severe consequences as well. Think
about the UK under the Trust administration. The US perhaps
(12:43):
is in a category of its own right, the world's
biggest economy, the world's deepest financial markets, the world's most
powerful military, a history of good governance, even if there
are growing concerns about erosion of institutions right now, and
for a country like the United States, the issue of
the world's reserve currency. I think what you have is
(13:06):
just much more capacity to play fast and loose with
the rules before facing the real consequences. Perhaps this is
an opportunity for me to surface my favorite quote from
The Great Gatsby, how did you go bankrupt? First slowly,
then all at once?
Speaker 2 (13:24):
Well, we've been pointing to some ways in which that
might happen on this show, Jamie, I want to take
off a couple of things, because we've gone through a
lot of factors. But there'll be some people listening who
will think of other ways in which the world's changing
and will be interested to know how this affects the
cost of money. One thing we do talk about in
the book is inequality, and one thing that seems destined
to continue, although individual countries have had different experiences, but
(13:47):
the sort of emergence of the sort of super wealthy
and apparently much more unequal division of wealth. You wealth
obviously plays a big part in savings and investment. How
is that going to affect to the cost of money.
Speaker 1 (14:01):
The mechanism at play here is that people at the
top end of the income distribution saved more, their earnings
have gone up faster than their capacity to buy cpots,
and then so they're putting that in their bank accounts,
and so over the past few decades or so, as
income inequality has moved upwards, perhaps contributed more to savings
and it helped to contain borrowing costs or push them down.
(14:23):
Looking ahead, our view is that income inequality is not
likely to rise by as much as it has over
the previous few decades, largely because it has risen so
much already and it would require significant policy change. But
clearly with the direction of travel in US, policy is
likely to climb a little further, and again that will
continue to exert some downward pressure on interest rates going ahead.
Speaker 2 (14:44):
And if we move more slowly or faster towards a
net zero goal when it comes to the carbon transition,
how does that affect things, Because that's obviously one of
those areas where we've had in the book, we've had
to have a pretty big range of uncertainty.
Speaker 1 (15:00):
Yeah, So I think that the impacts of climate change
on rates, or at least the research into it, still
in its infancy, So you have so many unknown It's
not just about economics, but the impact of global heating
on the economy, and so I think you need to
think about it through two lenses. One is what are
the physical damages that climate change does the global economy,
Because the more damage it does, the slower growth will be,
(15:23):
the lower the inherent rate of return in the economy
will be, and that will push down on interest rates.
But going in the opposite direction, if the world gets
serious about tackling climate change, it's going to take huge
investments in energy infrastructure to green the economy. And if
you look at what new economy finance being there for
saying at Bloomberg, we're talking about trillion dollar investments here,
(15:44):
and so that extra spending that's required, that extra investment
would push interest rates up, and we think that if
there is a significant push, then the net effect is
more likely to be upwards on borrowing costs than downwards.
Speaker 2 (15:59):
That rais is interesting point, and that actually it was
one of the things I think a bit about in
the final chapter of the book, when you sort of
think about what are the implications of this change for governments,
for businesses and others. I mean, we've tended to describe
the cost of money going up as like a negative thing,
a challenge, a headwind, and it certainly is for governments.
If you have a lot of debt. It could also happen,
(16:21):
as we describe, for reasons that we could be quite
happy about. It could be a world of higher interest rates,
could be a world in which we all might prefer
to live in. I mean, we obviously savers it's better
for them if they have higher interest rates. We've already
seen in a kind of small way, companies find it
all be easier to cover their pension obligations because that
higher interest rate means that future money that their promise
(16:44):
to pensioners is worth a bit less in today's money
than it was in the period where rates were extremely
low and we had all those big holes in pension funds.
But what else could be better about a higher rate world?
Speaker 1 (16:56):
Think about AI as an example here specifically, So what
will AI due to the natural rate? Well, to realize
that the promise of this technology, you have to pile
a huge amount of money into it, and that will
tend to push interest rates up. But at the same time,
the benefits could be huge and growth could be faster.
Income growth could be faster, people could be better off.
So it's in spite of the higher interest rate environment,
(17:18):
people will be on the whole quite significantly better off.
So I think that's kind of a good example of
how interest rates can move for good reasons, they can
move for bad reasons, and it's not always clear which
is which.
Speaker 2 (17:28):
I guess. If there's lots of demand for money, that
could be, as you say, people desperately wanting to use
it to build green energy and to have a much faster,
more dramatic approach to prevent climate change. It could be
that they want to use it for all these exciting investments,
and this is what we seem to be seeing. If
it's for governments to desperately cover their rising bills from
(17:49):
aging populations and creaking health services, then that's less of
a positive.
Speaker 1 (17:54):
Yeah, And I think that's the big risk, isn't it.
So if you look at aging populations, you should expect
probably that the tax to GDP ratio and move in
line with the dependency ratio. Such the older population more
outlays higher taxes. But if you look at how divided
parliaments are across advanced economies, the actual ability of governance
to raise taxes in line with those liabilities is extremely low.
(18:17):
So if they can't. If they can't do that, then
you're just going to borrow more interest rates will therefore
rise and you end up in this bad equilibrium.
Speaker 2 (18:26):
And that's what sounds a little bit similar to what
the finances of the Chancellor in the UK is grappling
with as we head towards this budget, which as always
is being billed as sort of a make or break budget.
But the fundamental thing she's trying to avoid really is
people noticing that the tax rate, tax share of GDP's
gone up, but it seems almost inevitable that it will.
(18:47):
Tom Jamie's already said individual countries can't change the global
supply and demand for money, and maybe even the US
is going to to some extent be a taker of
these forces, not a maker, although Donald Trump's doing his
best to change that. What do you think about, just
as a final thought about how to prepare, you know,
(19:07):
or do better or worse in this world where money
becomes more expensive, I guess I'm thinking a little bit
as household but also as a government.
Speaker 3 (19:16):
So, first of all, Stephanie, for any of the rich
people out there who heard Jamie's comments about inadequate demand
as a kind of blight on the broader economy and
wants to do their bits to address the problem, they
could buy copy of our book. It won't fundamentally solve
the problem, but every little bit helps. So coming back
to your question, one of the things which I find
(19:38):
really fun about working on this book with the Bloomberg
Economics team is that it just touches such a rich
variety of subjects. Right, So, what drives the natural rate
of interest? Well, it's about climate change, it's about artificial intelligence,
it's about demographics, it's about deglobalization. And one of the
interesting things about writing the book was the we had
(20:00):
to get to grips with all of these subjects, but
we had to get to grips with them in a
very specific way, right, with a very specific angle. It's
not what does climate change mean for everybody's life in
the future of the planet, It's what does climate change
mean for the balance between saving an investment? Right. So,
in a sense, if some of the predictions which we
(20:22):
have in the book play out, people are going to
have other stuff to worry about. Right. They're going to
be living in a much hotter planet, or they're going
to be living in a world where robots are thinking
for themselves, or they're going to be thinking of living
in a world where there's much more, much more conflict,
and much more defense spending. But in terms of the
focus of the book on interest rates, from the early
nineteen eighties to the mid twenty tens, we were living
(20:44):
in a world a US, a Europe where interest rates
were on a structural declining trend. Right, it was getting
cheaper and cheaper to borrow, and that had far reaching
consequences for everybody. If you're an investor in equity markets
or property, you made a lot of money because were
coming down and money was piling into those markets. If
you were a minister of finance, you could borrow more
(21:07):
cheaply and not really face a bill for piling on debt. Now,
with rates rising, all of those trends swinging into reverse, right,
and so we don't have low interest rates as a
upward driver of equity and property markets. We have rising
interest rates as a drag on equity and property markets.
We don't have low interest rates giving ministers of finance
(21:30):
a free lunch. We've got higher interest rates, which means
the bill is about to arrive.
Speaker 2 (21:36):
But typically upbeat economists answer, well, I guess money doesn't
make the world go around, but maybe it does make
economics more interesting for all of us. And I guess
the moral of what you just said, Thomas. If the
price is money is going up, it's going to be
even more important to spend it and borrow it wisely.
Tom Warlick, Jamie Rush, thank you so much.
Speaker 3 (21:56):
Thank you. Thanks definitely great to be here.
Speaker 2 (22:01):
Thanks for listening to Trumponomics from Bloomberg. It was hosted
by me Stephanie Flanders. I was joined by Bloomberg's Tom
Orlick and Jamie Rush. Trumponomics was produced by Samasadi and
Moses Dam with help from a Keen and special thanks
this week to Rachel Lewis Kriskey. Sound design is by
Blake Maples and Kelly Gary and Sage Bowman is Bloomberg's
(22:23):
head of podcast And please help others find this show
and enjoy it by rating and reviewing it highly wherever
you listen
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