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Freeberg, we have uh this idea that
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there would be a couple of rate cuts and
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maybe we get monetary velocity going
00:00:07
again. People will be able to take more
00:00:08
loans out, invest more in business. But
00:00:10
with the stock market tearing it up,
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there's a lot of wealth being put into
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the system with the big beautiful bill.
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There's a lot of spending in there as
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we've talked about here. Putting that
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aside, it feels like the economy is in
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really great shape. Chances of a rate
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cut has now flipped. No change is now
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the favorite option for September.
00:00:28
whereas a week ago the favorite option
00:00:30
was 25 bips. So this idea that we're
00:00:32
going to cut or the Fed's going to cut
00:00:34
that seems to be changing as well. So
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your thoughts on the um the macro
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picture here? So I'm not sure like the
00:00:43
firing of Jerome Pal necessarily solves
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the US fiscal challenge which is rising
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interest rates on the long end of the
00:00:53
Treasury curve. So, if you look at the
00:00:56
the 30-year Treasury yield over time,
00:00:59
and Nick, maybe you could pull this up
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while I'm talking, but as of today,
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we're at exactly 5% on the 30-year. And
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you can see that this 5% yield, which is
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what the market is demanding the United
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States government pay in order to be
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loaned the money to make the bill
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payments that the US government has to
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make every year is the highest it's
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been. The borrowing cost is the highest
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it's been since going all the way back
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to 2007 as of today. And I think this is
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the real story for the United States. We
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have 36 trillion of debt. The average
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interest rate we're paying on that debt
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today is 3.3%. That's the average of all
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the treasuries that the federal
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government has issued, the Treasury
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Department has issued to borrow the
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money that it is using and has used to
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pay all its bills. And if you look at
00:01:50
the 5% number, that's a 1.7% hike.
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At 3.3%, which is the current average
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rate we're paying across 36 trillion,
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we're we have a run rate interest
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expense. So just the money we're paying
00:02:03
each year and the interest of the
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outstanding debt is $1.2 trillion a
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year. And if this spikes up to 5% from
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3.3, we're talking about nearly $2
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trillion a year in interest expense. And
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that number is only going to get bigger
00:02:17
as we borrow more money each year and
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the loan balance goes up, the
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outstanding debt goes up because we are
00:02:24
still running a deficit. The government
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is spending more than it's making every
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year. So the crisis that America faces
00:02:30
is a more profound fiscal crisis where
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the rates that we're having to pay are a
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function of what the market is telling
00:02:37
us. The market does not want to loan the
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United States money over a 30-year
00:02:41
period for less than 5% as of today. And
00:02:44
so making adjustments to the short end
00:02:47
of the Treasury curve, making overnight
00:02:49
loans cheaper, which is what the Fed can
00:02:51
do, will stimulate the economy and make
00:02:54
more money flow easily because now
00:02:55
you'll be able to borrow money overnight
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to do stuff like build a building and
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then sell the building next week or next
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month or take out a car loan and pay it
00:03:03
down and use your car to go drive for
00:03:04
Uber and grow the economy and other
00:03:06
things. So the theory is that if we can,
00:03:09
you know, drive rates down on the short
00:03:10
end of the curve, we'll grow the economy
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such that we'll be able to make those
00:03:13
payments on the long end of the curve.
00:03:16
Um, but there comes a point where again,
00:03:18
you're only going to be able to move the
00:03:20
market so much until the more important
00:03:23
fiscal situations are going to be
00:03:24
addressed, which is
00:03:26
spending, taxation, and some of the
00:03:29
other key policy issues. So I think what
00:03:31
the market is saying is it's not as much
00:03:32
about Jerome Pal and frankly getting rid
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of a prudent individual may be more
00:03:37
challenging than it is beneficial when
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the real challenges facing the United
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States need to be more hardily
00:03:42
addressed. So I think that's my kind of
00:03:44
take on this whole
00:03:45
can I yeah go ahead Gavin build on it.
00:03:47
So point number one the 30-year has gone
00:03:49
up since PAL started cutting rates. So
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that is just empirical proof that what
00:03:55
David is saying I think is right. And
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second,
00:04:01
the deficit has been a feature of
00:04:04
American politics dating back to Ross
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Perau's,
00:04:08
you know, 1992
00:04:10
presidential run,
00:04:11
his independent third party run,
00:04:13
his independent third party run.
00:04:14
Here we go. But yes, but it the deficit
00:04:17
never really mattered because interest
00:04:20
rates kept going down such that even as
00:04:23
our debt grew, interest expense has kind
00:04:27
of a percentage of the government's
00:04:28
budget stayed relatively low. Now that
00:04:31
rates have gone up and don't seem like
00:04:35
they're,
00:04:36
you know, going down anytime soon, the
00:04:39
deficit does matter and it really
00:04:41
matters. And you can kind of run a a
00:04:45
couple of scenarios, but like pick your
00:04:47
pick your metric.
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If the deficit kind of continues at
00:04:51
current levels and we were to refinance
00:04:54
the debt at the prices that uh you know
00:04:58
David was talking about,
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you know, it's it's only a few years
00:05:02
before spending on interest is
00:05:04
significantly larger than spending on
00:05:06
Medicare and Medicaid or Social Security
00:05:08
or the military. So, pick something you
00:05:10
care about. But you know our current
00:05:13
course in speed it's it's in the not
00:05:16
tooistant future where interest expense
00:05:18
is the biggest line item for the
00:05:19
government and that is not healthy and
00:05:22
that's why the deficit finally matters.
00:05:25
It's just that rates are higher. But the
00:05:27
great thing is is there is a virtuous
00:05:29
cycle here. Has you close the deficit
00:05:32
rates should theoretically
00:05:34
come down
00:05:37
and then those both feed on each other
00:05:39
to kind of help the problem. And it is
00:05:42
possible. There's no silver bullet here,
00:05:44
but some combination of slowing
00:05:46
government spending, extra revenue, and
00:05:50
you know, tariffs are effectively, we've
00:05:52
never had a consumption tax here in
00:05:54
America, which I think is a good thing
00:05:56
because consumption taxes are very
00:05:58
regressive.
00:06:01
But the reality is like even when Obama
00:06:03
controlled the House, the Senate, and
00:06:05
was the most popular Democratic
00:06:06
president of our lifetime, I don't think
00:06:08
federal government tax receipts has a
00:06:11
percentage of GDP got above 18 19%. So
00:06:14
that's kind of the ceiling.
00:06:17
And it for income taxes alone, and
00:06:20
tariffs are really just a consumption
00:06:21
tax that kind of insense domestic
00:06:24
manufacturing. I mean, there's all sorts
00:06:26
of reasons they're bad ideas. You know,
00:06:28
David Ricardo, the theory of comparative
00:06:30
advantage,
00:06:32
100% correct. Free trade is a good
00:06:34
thing.
00:06:36
But introducing some sort of a
00:06:38
consumption tax, growing the economy a
00:06:40
little bit faster through deregulation
00:06:43
and slowing government spending.
00:06:45
I think there is a way out of this for
00:06:47
America.
00:06:48
Yeah. But it's important to find the way
00:06:50
because the deficit finally does matter
00:06:52
after really never mattering in my
00:06:54
political lifetime.
