Jeremy Hutton: Milford Asset Management expert on Government debt levels rising globally

Government debt levels are rising globally - with many at risk of permanent structural deficits if they can't bring down interest bills each year.

Cutting spending and increasing taxes is an unpopular concept among voters, so experts are wondering what the next steps could be.

Milford Asset Management's Jeremy Hutton explains further.

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Episode Transcript

Speaker 1 (00:00):
Father due to see us. Jeremy Hasson Milford asset management
with me right now, how.

Speaker 2 (00:04):
Jeremy, Good evening, Heather.

Speaker 1 (00:06):
Now, government debt levels arising. We've got and this is globally,
We've got the interest bills for government's huge and growing issue.
A concept of fiscal dominance is emerging. What is this
all about.

Speaker 2 (00:17):
Yeah, many governments globally are at risk of permanent structural
deficits in their finances, particularly if they can't cover their
interest bills each year or even try and reduce their
heavy debt loads. As we know, cutting spending and increasing
taxes is obviously very unpopular with the voters. So politicians
are looking at some rather unusual ways at trying to

(00:39):
reduce the annual interest bill, and one of those is
trying to order central banks to lower interest rates or
this concept called fiscal dominance, and this is the primary
driver of the ongoing stash between President Trump and Jerome Powell.
We know the US government deficit is pretty much out
of control and there's no real trajectory of it ever reducing.

(01:00):
So Trump and other governments around the world have been
pretty active in calling for lower interest rates to try
and keep the government solvent and keep government finances in checks.
So a blurring of the lines between central banks and governments.

Speaker 1 (01:14):
And undermining, isn't it of the independence of central banks?

Speaker 2 (01:20):
Yeah, of course, so central banks they primarily use interest
rates as a tool to control inflation and economies and
achieve price stability. But if they're forced to address government
debts or government solvency, as is their primary issue, then
they do risk losing control of this inflation and independence
as well. And most developed economies they operate and pride

(01:44):
themselves on the central bank independence and it is an
important way to keep the confidence in the economy and
the country. So it would be a big divergence for
financial markets to potentially digest if this fiscal dominance scenario
played out.

Speaker 1 (01:59):
Yeah, is this why we've seen Trump constantly calling for
the Fed to cut rates? And are there any risks
in New Zealand of this?

Speaker 2 (02:05):
Yeah, the US is likely creeping closer to this fiscal
dominance concept and replacing a traditional independent monetary policy. And
you know, Trump has been very vocal calling for these
lower rates, but it does come with those risks of
inflation in the future. Now in New Zealand, you know,
we're even more proud of this monetary policy independence, and

(02:26):
it is more important for a small, open economy like
New Zealand that relies heavily on global debt markets. But
you have seen a little bit of gentle prodding by
the government, but ultimately that's likely all it will come
to here in New Zealand. Nothing more aggressive aggressive than that.

Speaker 1 (02:42):
Where does the market react to this fiscal dominance.

Speaker 2 (02:46):
Yeah, the base case for markets is they are assuming
that central banks retain this independence. But you know, if
there is more evidence of a crossover, particularly in the US,
then this does pose risks to the global economy, particularly
in interest rates and bombs. And this concept can explain
some of the recent very strong moves in gold and
maybe even bitcoin two to a lesser extent. So you know,

(03:08):
fiscal dominance scenario, it's going to lead to further inflationary pressures,
potentially a loss in confidence and currency, so a lower
UIs dollar and those real assets like gold will continue
to do very well.

Speaker 1 (03:21):
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