I feel, Tracy, like this conversation is really about like the magical object that you don't you can't look at, right? Because it'll freeze you.

Or maybe it's the Shining gold in the briefcase in Pulp Fiction. You can't see it.

So all we've done historically, mostly, is we've attempted to figure out what it is by observing its reflection onto the world, which we observe that reflection, the unemployment.

And now this is an attempt to see the unseeable and to actually stare into the abyss at this crucial number and find out what it truly is.

Everyone's been wondering what's in the suitcase.

Pulp fiction it was our star. It was our star all along.

Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway and I'm Joe Weisenthal.

I'm Tracy Alloway and I'm Joe Weisenthal. Joe. Yeah.

Yes. Recently? Yes. Recently.

Stephen Myron, who is chair of the Council of Economic Advisers and also the newly confirmed fed board member. Yeah, he made his first public speech since joining the central bank.

And you know what it was about?

I do, but go on.

The neutral rate.

The natural rate of interest? Yes.

Our star. Yes.

Basically all about our star, which is pretty significant for his first speech.

I mean, to me, this has come up on a bunch of episodes lately.

To me, this is the multi-trillion dollar question, which is, why is it?

You know what? We're here. We're recording to September 24th, 2025.

Why are long term rates so much higher?

Well, also, I mean, our star has always been something of a controversial idea and people criticize it for being this unobserved label thing.

Yeah. You know, it's a hypothetical estimate that's extracted from all this different stuff, like savings and spending and productivity and demographics investment.

You can go on and on and on. Climate immigration. Yeah. Exactly. Yeah.

But I think, you know, our star is probably going to get even more controversial or perhaps more under the spotlight is a way of putting it.

Given that people like Myron in his speech where he was arguing that the natural rate of interest should be zero right now, which is very, very different than other sort of normal estimates out there, which has the natural rate of interest at like 3.3 or 3.9%, something like that.

And so if you think the neutral rate of interest is a lot lower, then then you would assume that the fed should be loosening more.

And conversely, if you think our star is high, which a lot of people have argued in recent years, then you would, argue that the fed you know, interest rates don't look that restrictive at the moment.

So I'll just say two things.

Probably something of an R star truther in the specific sense that I doubt, like, okay, everyone agrees it's like quote, unobservable, etc. but I doubt that there is actually some rate that will magically bring the economy into balance.

If we knew what it was.

That doesn't mean I don't find this to be a conceptually useful conversation.

And yet you don't believe in the term premium?

I don't really believe in any, any of this stuff.

No, that's not true.

I am very interested in setting aside whether something could theoretically be observed, whether one number could bring everything into balance, all of these things.

Setting aside that question, something is changed in the underlying economy.

If you want to call that a neutral rate of interest, I guess I'm totally fine with that.

But something's changed and I want to know what it is.

But more importantly, I want to know why. Okay.

All right, well, we have the perfect guess.

We're going to be speaking with Tom Orlik who is, of course, chief economist at Bloomberg Economics.

He's been on a number of times before.

And Jamie Rush, director of global economics at Bloomberg Economics,

and together with Stephanie Flanders, who is the head of Bloomberg Economics, of course, and also the host of the Trump Enomics podcast, have written a book all about the new and a whole book about it.

Yeah, called The Price of Money A guide to the past, present, and Future of the Natural Rate of Interest.

Amazing. I'm really excited.

All right, so let's get started.

Tom and Jamie, thank you so much for coming on. All thoughts.

Great to be here. Thanks, Tracy.

Thanks, Jay.

Thanks for having us.

Well, first of all, congratulations on the new book.

And I got to say, it's kind of ballsy to, to tackle this concept that a lot of people don't believe in excluding Joe.

And, you know, that tends to generate a lot of criticism.

And maybe it's even easier to publish your own model, so that everyone can see what the estimates actually are.

I mean, not as a genuine compliment, but why a book on the neutral rate? What prompted it?

So I actually recall a tweet from Joe a while ago.

He took aim at books as a concept.

Oh. Yeah.

So not only do I not believe in our star or anything, I don't even believe in the premise of a book.

No, I do believe in Joe.

It's all book. Should be a tweet. Sorry.

Keep going.

So we've written about a concept Joe doesn't believe in, in a format that Joe doesn't support.

So we shouldn't be on this on the podcast.

So why now?

Well, I think there's a couple of, ways to answer that question.

The first is, I mean, this is really important, right?

We talk about the neutral rate of interest.

But really a different way of saying it is it's the cost of borrowing in the economy. Right?

And the cost of borrowing is incredibly consequential. For ministers of finance, it's incredibly consequential for businesses, for households, for investors.

So it's always a good time to write about neutral rate, interest rates, the cost of borrowing.

Why specifically?

No. Well, it's because something really important has changed,

from the late 1980s to the mid 20 tens. The global economy was characterized by too much saving and not enough investment.

And in that state of affairs, the neutral rate of interest, the cost of borrowing was continually falling.

What's happened in the last decade?

Well, that dynamic has swung into reverse.

And now we have less saving, more investment.

And that means the neutral rate of interest, the cost of borrowing for the US Treasury and for everyone else is going up.

I like this framing.

So it's less about the idea that there is some rate that will bring everything into balance magically, etc. because I think a lot of people intuitively understand why you know that's not so true.

You know, I think that problem makes a lot of people uncomfortable, but it is seems objectively true or real that the cost of money or the cost of borrowing has gone up.

And so we can talk about that.

And how much more expensive is it to borrow money today by some measure, than it was, say, pre-COVID?

Wait, just before we do this, can we get like a, three sentence definition of how you view our star?

I feel like we should define our terms before we start.

Excellent idea.

So? So our star, the natural rate of interest is what balances demand for investment and saving in the economy.

And when those two things are imbalanced, the economy is on trend and inflation is roughly at target.

All right. That's a simple definition. Okay.

I like that.

All right. So why is it going up.

I mean this is the big this is the big question, right?

But actually, no.

Before we say why is it going up? How much has it gone up?

Or has it, in fact gone up versus the pre-COVID environment?

Let's start with that.

Well, if we cast our mind back to that, that Covid experience, there was a period where governments could basically be paid to borrow in real terms, interest rates were so low for so long, so far across the yield curve, that they could borrow without having to worry about whether they'd pay it back.

So you can see that the real world implications of that and the behavior that we saw during the pandemic, the borrowing that happened, is the interest rate was enormously consequential.

And a big part of that.

We're not in that world now.

Interest rates, Treasury yields in excess of 4% are much higher, much more burdensome.

And now we're seeing that the costs of those policies manifest in budgets today.

So I remember way back in 2016, Goldman Sachs put out this note arguing that the fed had a big new idea to justify keeping rates low, basically.

And the argument was that our star was was low.

And so, you know, monetary policy wasn't actually that that loose at the time.

Even though benchmark rates were already pretty low and the Goldman analysts had this chart in their note, where they basically looked at mentions of thematic ideas in fed speeches and press releases and things like that.

And indeed, you could see that starting in 2016, mentions of our star start going up.

And, you know, they basically came off of nothing for like the previous decade, no one was talking about the natural rate of interest.

I know our star itself is an old idea, because I read the book and there's a chunky chapter on the history, and development of the entire concept, but am I right in thinking that there has been a resurgence in interest in our star over the past decade or so?

Chunky seems like a neutral adjective.

Tracy, I like an informative chapter. I should say.

Okay.

So, I think I think that that clearly has. Right.

And I think one of the reasons for that, is because the state of the world has changed, right?

In the run up to the global financial crisis. I didn't feel like there were sort of fundamental issues with how monetary policy was operating. Right?

Interest rates moved up, interest rates moved down.

The economy responded in the way which, the textbooks would suggest.

But in the aftermath of the financial crisis, we were in this extended period of economic malaise. Right.

And from a monetary policy perspective, it was hard to explain.

Interest rates were on the floor.

There'd been a huge amount of quantitative easing.

And yet unemployment rates remain stubbornly high growth remained stubbornly low.

Why was that?

And that's one of the reasons why this neutral rate of interest rose in profile as an explanatory factor.

Because if the neutral rate of interest has come down, if it's come down very far, well, that means the central banks have to do a lot to stimulate the economy.

And if the neutral rate of interest is close to zero, well, that effectively means that central banks are out of firepower.

They can't take interest rates low enough to stimulate growth.

This is a very important point actually, because and again just let's stay in the 20 tens here.

When interest rates were at zero or near zero for a long time, you probably heard a lot of people in the financial press say, oh, you know, the fed is super loose monetary policy, etc..

How long will the fed continue to print money or whatever?

And yet, looking at the actual results in the real economy, as you've described, unemployment remaining stubbornly high, inflation consistently undershooting, which in retrospect, very nice problem to have.

I think we should have appreciated it more at the time.

Really not a problem at all in my opinion.

The implication, though, and we could have understood this from Milton Friedman and some of his talk about Japan, was that actually, implicitly, we were still running tight monetary policy, even with nominal rates basically at their physical floor.

Yeah.

So I so I guess during that period, interest rates were low, the economy was failing to gain traction.

And policymakers were puzzling over it.

And so, so one of the thing and actually the the puzzle continues, right.

Policymakers still don't know how restrictive policy is.

They have they have they infer what they think the natural rate should be for by looking around them, seeing what's happening to unemployment, see what's happening to inflation.

But they don't know.

And so, well, one of the things that we did and we tried to achieve in our book is to rather than inferring the natural rate of interest, we looked over a broader sweep of history and trying to pin down the explanatory drivers of the rates of interest to try and get shed some light on why these things are as they are, why interest rates fell so much, why there was an inflection point around the pandemic, and why we think interest rates may therefore go forward, go upwards in the future.

So it was for its thrust, the exercise the book was really about trying to pin down the drivers and then tell a story about those drivers so we can think about it in the future.

I feel, Tracy, like this conversation is really about like the magical object that you don't you can't look at, right? Because it'll freeze you.

Or maybe it's the shining gold in the briefcase in Pulp Fiction. You can't see it.

So all we've done historically, mostly, is we've attempted to figure out what it is by observing its reflection onto the world, which we observe that reflection, the unemployment.

And now this is an attempt to see the unseeable and to actually stare into the abyss at this crucial number and find out what it truly is.

Everyone's been wondering what's in the suitcase.

Pulp fiction it was our star. It was our star all along.

Okay.

Well, on that note, I mean, I take the point that most of the book is about the specific drivers of our star.

But you do come up with a model.

And you do come up with an estimate, for the sort of long run trajectory of our star.

Can you walk us through how your model actually differs from some of the other models out there?

Because I think that might help us to understand, you know, when people say this is unobservable or we're sort of staring at the reflection of the economy and trying to come up with this hypothetical, number, what we're actually doing or what economists are actually doing.

Yeah.

Of because so the, the conventional way or least the way that's been gained a lot of popularity over the past couple of decades has been at the Lao back. And William's model of the natural rate of interest on neutral rate of interest.

And what they do is they they look at what's going on with inflation, what's going on with unemployment.

And they and they judge, they try to judge from that how far current interest rates must be away from the neutral rate.

So if interest rates are very restrictive, very far away from the neutral rate, inflation's going to be very low and unemployment's going to be very high and vice versa.

And this this has the benefit of giving you a feel for what's going on right now based on observable data.

But it doesn't tell you anything about why the interest rate is what it is. Or therefore where it may where it may go.

And so what we tried to do, was, was pin the, the natural rate down by using some, some actual data and some theory.

So if we think about what the natural rate is, what it is that determines it, well, it's the price of money, it's the price and that's determined by in the same way as anything else, it's determined, by the supply and the demand.

So on the one hand, you've got investment demand and then you've got the supply of savings.

And when these two things move, it shifts the rate of interest.

And because of that fundamental theoretical understanding, you're able to think about, well, what is it that determines investment?

Why do people want to invest?

Why do people want to save?

What is it about them that or different types of people or different age people, that affects their saving behavior.

And so you can you go from that theory to these drivers of the, these theoretical drivers of behavior, and then you can try and try and pin it down empirically and that's exactly what we did.

So we fed into this model, what economists generally think are the main drivers of, of these investment and saving decisions.

So there were quite a few of them.

And, and then we estimate their relationship with the interest rates over the sweep of, say, 50 years.

And that really is the that that really was what supported our results.

And it allows us, of course, then to think about how those drivers may change.

Just in, keeping in mind Tracy's mentioned the beginning of defining terms investment.

Just sort clear.

This is like real investment. Right.

So this is hiring impulse capital expense.

Like what is investment mean in your terms?

Yeah.

So we're thinking specifically actually the the the capital expenditure.

Okay. So

I mean let's give you let's take an example, I so I, I it's great.

I can't do it on a Casio calculator.

I have to buy something to make it work.

I have to spend money. I have to invest, in chips in, in fabs, to reap the benefits of those frontier technologies.

So as I lift the growth rate of the of the economy, it also raises the investment needs.

And so this is the this is one of the linkages that we kind of explore is like what is the relationship between overall growth in the economy and productivity growth, the investment need that creates.

And then therefore the the knock on consequence for interest rates.

So I mean, whether it's ICT revolution in the 90s, railroads or anything else, these things all have impacts on investment and therefore the natural rates of interest.

And just to define the other term, when you talk about savings, is this because it's, you know, in the sense a savings loan to a bank, etc..

But this is the impulse to have sort of liquidity, right?

Or at any given moment, the various actors, the desire to hold essentially dollar or euro or whatever liquidity.

Yeah.

That's right. I mean, okay, I guess you can think about it on the, the, the individual level.

So I want to save right now as I get older, I want to spend those savings in my retirement.

So that's one of the key drivers of saving behavior.

China. China used to save a lot.

Now it saves a little, but state actors also matter to the global supply of saving, an investment.

So, yes, it's everybody, and it touches on everything.

Yeah.

One of the light bulb moments for me reading this book was kind of, touching the idea of generational warfare and the idea that from the 1980s onwards, baby boomers started saving a lot.

And so the supply of savings went up and the neutral rate went down.

And that's the reason why I never earned interest on my bank account until two years ago.

Okay.

Serious question in your model, what's the biggest driver of the neutral rate actually going up in the future?

Well, then I'm not the main driver.

Really?

Is is this saving by governments or spending by governments?

So there were a number.

I mean, if you look at the recent past experience of the pandemic, if you look at the the path of the deficit in the US and other countries since then, what we've learned, is that governments like to spend and they have continued to do so even though, it's become more costly.

And a lot of that reflects, politics.

Politics are fragmented.

It's hard to get support around closing budget deficits.

And so governments continue to spend, which is tilting the balance between investment and saving in the global economy.

And of course, they have big outlays coming up.

Defense spending, is going up in much of the in much the, the advanced world and the need to green the energy infrastructure again in some parts of the world is also, crimping, saving.

And then just that fundamental point that you've got aging populations, increasing outlays for, for dealing with that on health, for dealing with that on, on, on benefits and pensions.

All of this is just making it very difficult to keep spending down.

I think this it also intersects, with the argument which you, kicked off with Joe and Tracy, from Steven. Myron.

So, Steven, Myron. The new fed governor, has made the case that, the policies from the Trump administration, are going to have a big negative impact on the neutral rate of interest.

And that's why he's advocating for very aggressive, rate cuts, to keep policy accommodative.

Now, the argument we make in our book, actually, points in the opposite direction, right.

If you think about the policies of the Trump administration, well, firstly, we've got the one big beautiful bill, which adds trillions and trillions of dollars to government borrowing over the next decade.

That significantly pushes up the neutral rate of interest.

And if you think more broadly about Trump policies, well, it's kind of the end of the grand bargain which America has struck with the world. Right?

One way of thinking about the last few decades is America said to the world, we will buy your stuff and we will defend you, but you have to finance us.

You have to send your savings to the United States, buy US treasuries.

But what the Trump administration now is saying is, well, we're not going to buy your stuff and we're not going to defend you. Right.

So it wouldn't be that surprising if the rest of the world said, well, if you're not going to buy our stuff, then you're not going to defend us. We're not going to finance you any more. Right.

So Stephen, Myron, who's a super smart, super articulate guy, and if you've not had him on Odd Lots already, we have, we have. And we'll have them again sometime.

Fan favorite episode makes the case. Makes the case that the Trump administration has significantly lowered the neutral rate of interest.

And that's why the fed needs to aggressively, the model which Jamie developed the argument, weaken our book actually points in the opposite direction.

Yeah.

On this note, do you get the sense that central bankers, policymakers, economists sometimes use our star as a crutch to justify whatever they're doing?

Like if you think rates should be lower, then you can just argue that our star is in fact, low.

And our star is this unobservable thing that's based on your own estimates.

So you can argue about it. But no one's ever going to prove what our star actually is.

And if you think that rate should be higher, then you just argue that, well, actually something has structurally changed, and the natural rate of interest is in fact quite high.

Do people use it in that way?

It feels like it.

Well, one thing I suppose is that with our star, you're never beholden to a prediction. Really?

So if you say I think interest rates should be lower because the economy is going to tank and then the economy doesn't tank you just like a bit of an idiot.

But if you say, I think rate should be lower because our star is actually lower than no one's ever going to say, oh, actually, you are completely wrong, because I've got irrefutable proof that our star was actually, in fact, higher.

So I think it's probably a safe way to to express your views if you just have a belief, an inner belief that rates need to be lower.

But it is perhaps one that's less easy to hold to account when we talk about Trump policies and their effect on our star.

Another thing that I think about a lot is, you do talk about this grand bargain falling apart.

The trade and every country wanting to be increasingly more self-sufficient in various goods, which strikes me as something that once again adds to the investment impulse.

The US is worried that maybe one day we won't be able to rely on Taiwan for chips.

Europe might be worried that if the EU, that the US may not be a great supplier for whatever the US supplies to Europe, etc.,

does this sort of fracturing of global trade, which may or may not be happening, contribute to a positive investment impulse in a sense, and therefore, raise our star?

Yeah, I think there's a couple of dynamics at work there, Joe.

So the first one is the one you mentioned.

If everyone wants to make their own stuff at home, then clearly there has to be a massive amount of capital spending so everyone can build their own everything, right?

We can't just have semiconductor fabs in Taiwan.

We need semiconductor fabs in Germany and Japan. And the United States.

And that means there needs to be much more investment spending.

The second dynamic, and this is something which one of our coauthors, Dan Hanson, gets into, in the book, is around, globalization and the cost of investment goods.

Right.

Think about how much more computing power you get for your money today than you did in 1980.

Right?

There's just been a massive increase in productivity.

A massive increase in the amount of computing power you get for a certain amount of money.

And that means you don't have to spend as much, in order to buy investment goods.

Well, if globalization now breaks down and we come to the end of that kind of productivity miracle in technology, well, that means that the cost of investment goods is going to stop falling.

You're going to need to pay more to buy a certain amount of technology, a certain amount of investment goods.

And that is also going to be a factor pushing up the natural rate.

So on a related note, I mean, we we have had a number of supply shocks in recent years.

You know, during the pandemic, during the Russian invasion of Ukraine, all that stuff which has led a lot of governments to start thinking about how to solve these sort of choke points or shortages in the system.

What does that actually mean for central bank policy? If, you know, perhaps the neutral rate of interest is going up because of these supply shocks, because you need more investment.

But at the same time, the central bank raising rates doesn't necessarily produce more wheat or more shipping capacity and things like that.

How should central banks respond?

Well, there are obviously going to be periods, where inflation just moves higher.

Because because of the supply shocks you mentioned, I think, and we should expect those to happen with increasing frequency.

Right.

So climate change is going to make it harder to, to produce stuff.

It's going to make feed price shocks more, more common.

It's going to create other distortions which will hit production.

So central banks of the future will perhaps have to keep interest rates higher anyway, just to kind of prevent those shocks from feeding through to inflation expectations.

And therefore, keeping inflation away from targets is because supply shocks really are very different from demand shocks, as you guys know I'm sure.

And but, you know, history was was dominated, at least in the last couple of decades by demand shocks.

And actually it's just a different playbook for central banks.

I agree with all of that.

I think there's other there's another dynamic for central banks, which is also going to be, a force for higher interest rates, going forwards.

And that's the challenge to central bank independence. Right.

We've talked about, Steven, Myron coming on to the board of governors at the fed.

Well, guess what?

He's still holding onto his position. As the chair of the Council of Economic Advisers, senior member of Donald Trump's, economic policy team,

having someone from the president's team serve on the fed concurrently.

That's unprecedented going back to 1936.

And raises significant questions about fed independence.

And so the Fed's credibility as an inflation is as an inflation fighter. Right.

Now, we've not really seen this in markets so far.

Markets have been paying surprisingly little attention, to this dynamic.

But if the fed does lose its independence, if the fed does lose its credibility as an inflation fighter, then markets are going to start demanding an additional premium, to hold long term U.S. Treasury debt. Right.

So you're going to have all of these structural forces, less saving, more investment.

You're going to have the greater preponderance of supply shocks, which Jamie spoke about is an additional driver of higher inflation.

And you're going to have risks to fed independence.

And all of these are forces which are going to be pushing up. Yeah. Long term borrowing costs for the U.S. Treasury.

And because the Treasury rate is the anchor for global markets, also pushing up borrowing costs for everybody else.

I'm glad you brought this up, because even setting aside the sort of formal risks to fed independence, there are others who question the degree to which the fed still takes its own 2% inflation targeting, target seriously,

including our own colleague here, and one who says implicitly, if you look at what's going on, it looks like they're no longer targeting 2%.

They're targeting 2.8%.

Tim. Julie, an economist we've had says, you know what?

As long as inflation is below 3%, we think the fed is mostly concerned about the labor side of the mandate.

So setting aside Myron's role or Trump's truth social posts, when you look at market, is there the sort of growing belief that the fed just does not take 2% as seriously as once it did?

Yeah.

So it's a powerful argument, which Ana, our chief U.S. economist, makes, and, part of that argument is that, this divergence between what the fed should be doing if they take 2% inflation seriously and what they're actually doing, didn't start under Trump.

It started under Biden.

And actually, it was those rate cuts in the run up to the 2024 election, which were the beginning of the fed, diverging from a kind of pure, apolitical Taylor rule path. Right.

So, as I'm sure you've seen, Joe and Tracy, there's not much, which Republicans and Democrats agree on. In America right now.

One point of bipartisan consensus, unfortunately, is that there's too much politics in the fed.

Tracy.

So one once told me that the two things that everyone agrees on, by the way, in America, are that, Dolly Parton is good and that Epstein didn't kill himself.

We can add a third, that there is too much politics in monetary policy making.

So the three points of, bipartisan agreement, that's going to be my new conversation starter at dinner is for everyone.

Just ask them if they think there's too much politics. In fed policy. Okay.

Joe mentioned markets just then.

So I think when people think of the era of low interest rates, and low natural rates, people think about high asset prices, right?

There tends to be a correlation there.

If the price of money is going up, what does that actually mean for asset prices.

Well, I it kind of depends on the reason.

And as we sort of talked about earlier about the kind of role of I well, I, I can raise equity values because it's a frontier technology that's going to potentially transform the way the economy operates and create lots of profits along the way.

It can it's also going to suck in a load of capital, and make it less available for others, which is going to drive up interest rates.

So if that's the source, you can see this world continuing.

You can see that interest rates will continue to rise as investments are sucked into the AI nexus.

But the if sounds the the actual promise is realized. You see equity values going up as well, which is kind of a slightly unusual arrangement.

But then we don't have technological revolutions every day.

I'm glad you brought up a because I wanted to go there.

You know, I've seen, Jason Furman.

He is characterized AI spending as being almost quasi fiscal in nature because it has this there's not that we haven't got the productivity pay off yet, but there is this incredible flood of money coming in.

So it sort of has this perhaps crowding out effect.

Neel Kashkari gave a interesting, posted and I guess it was a blog post called three Questions.

I think you posted it last week, but he talks about our star and he about how this higher neutral rate of interest may be appropriate given the given the intense pace of, AI investment that's going on.

But also it may not be appropriate, you know, for the housing sector, the, that's not what bring into balance.

And we see this decline.

Could there be to our stars,

could there be this, our star, that sort of the high tech economy booming?

But it's not a it's not the our star that brings the rest of the economy into balance.

It's a it's a good question, Jay.

And I think people do think about this concept, quite a lot in the sense that there's a maybe there's an all star which keeps the economy balanced,

and maybe there's an all star which keeps the financial sector and financial markets balanced and not getting carried away with themselves.

And there's no guarantee or any particular reason to think that they should be the same, which implies then, that you've got this policy trade off, you've got you.

What's good for the economy may not be good for, for financial stability.

And so that's, that's another thing for central banks to be grappling with in the, in the years to come.

When it comes to the composition of investment, one topic that, gets a lot of attention nowadays is the idea of dollarization.

And perhaps people buying fewer U.S assets per perhaps people, you know, had choosing to hedge those U.S assets.

And we have seen some very big buyers, of securities like foreign central banks actually slow down their purchases of U.S. treasuries or U.S mortgage bonds and things like that.

How would that affect the neutral rate of interest if you know there's less money flowing into dollars specifically, or dollar assets?

So I think there's a number of reasons why we would expect less money flowing into dollars. Right.

So one really big reason, is that China has changed its FX policy.

For, more than a decade, China was pegging the yuan to the dollar, and that meant the PBoC needed to hoover up the whole trade surplus and park that in treasuries to stop the yuan appreciating.

The second big important reason, is that shift in the grand bargain between the US and the rest of the world.

Think about how, the US and Europe acted to freeze Russia's FX reserves following, Putin's, full scale invasion of Ukraine.

That's a kind of shift in the grand bargain.

And it tells Russia, but also everybody else. Guess what?

There's geopolitics in the dollar, right?

And if you put your assets in the United States, there's a risk you might lose them.

And of course, the tariffs themselves are a factor.

That huge hike in tariffs that we saw on Liberation Day.

Well that's the US saying we're going to play a smaller part in the global trade system in the future.

And if the US is going to play a smaller part in the global trade system.

Well, the utility of holding dollars as a way of settling import and export transactions goes down.

So there's a lot of reasons to be concerned about this dollarization trend.

And, Jamie may have a more sophisticated way of thinking about this, this than me.

But basically, I think about buying dollars and buying treasuries is pretty strongly correlated in this context.

So if the rest of the world is the dollar rising, that also means they're buying less U.S. treasuries.

That means less demand for U.S. treasuries.

And so it's another force pushing us borrowing costs higher.

I think all that is and that was all entirely true.

I and I guess one thing when you're trying to think next to the the linkage with global borrowing costs is, is what happens to those, those savings instead.

Now if you can't find anywhere else any other assets to buy in place of U.S. treasuries, what are you going to do?

Well, quite possibly you end up spending them.

And particularly you think about the geopolitical context.

You think about the impact of tariffs on China, for example, when I was actually an extra incentive to spend more.

And if you think about in those terms, then actually that that policy itself is going to shift the international balance of investment. And saving, again, away from saving is partly because it's just too, too hard to save me anywhere safe.

My computer, just for the Air Force reboot.

I had a great chart on my screen, but now I can't look at it.

But, December 27th or whatever the last day of trading was in 2019, the US ten year was about 1.8, and today it's probably like 1.12%.

Maybe both of you get list your five reasons in order.

I know this the ten year is not the our star, but you know for our purposes for for podcast talk we could just sort of our star is everywhere.

Yeah like and maybe ranked the five for both of you in order rank the five major things or however many you on to that have contributed most significantly to this, regime change or price change.

Maybe I'll take the easy ones, of course.

So here's my here's my three.

So firstly, it's demographics.

For decades we had the baby boomers in prime working age saving money for retirement.

That pushed the neutral rate down.

Now they're retiring, spending down their savings.

That's a powerful force pushing the neutral rate up.

Second is that, for decades, from the 1980s to the global financial crisis, borrowing from the US and from other major advanced economies, leaving aside, Japan, was low and stable,

since the global financial crisis and again, since the Covid pandemic, there's been a massive increase in government borrowing.

And when there's more government borrowing, that pushes the natural rate of interest higher.

And then the third, the globalization.

So one of the factors driving neutral rates lower was that Ben Bernanke savings glut hypothesis.

Yeah.

Chinese saving Petra saving from Saudi and others heading into the United States.

The forces of globalization have now brought that to an end.

So conveniently, 3DS demographics, d globalization all pushing neutral rates higher.

Very good.

Jamie, you have to beat that now.

I'm. I think I only had one extra, to be honest and that's I so when we, when we were putting pen to paper for the book, ChatGPT wasn't really a thing.

That's when we started out.

By the time we published the book, it's very much a thing.

And we can already see that the, the transformational impact that's having on the investment landscape, whether it has a transformational impact on the economic landscape, remains to be seen.

But I think we're actually in a world now with that scenario is basically coming to pass.

We had a scenario in our book, about what that could do to the natural rate.

No surprise, it pushes it up.

And I think we're actually in a world now with that scenario is basically coming to pass.

I'm going to help everyone out here with a little bit of marketing.

So, Tom, you mentioned the 3DS, debt demographics. D globalization,

I we can rebrand as data centers.

So that's the fourth D

and then the fifth one, which you guys talked about, but you didn't hit your list. And that is defense spending. Yeah.

So really we can talk about the five five.

Is that demographics D globalization data centers and defense as having contributed this we've come to something we could really market this

I think the four of us together, the five DS that have caused the price of money to get so much higher in the last six years, well,

that can be the next book.

Yeah.

Although the current one talks a lot about all of these, obviously,

I think there could be the, the title to this episode, the five DS, the five DS, the pushing up the price of money.

Yeah, yeah, that would work.

Okay.

Well, on that note, Tom and Jamie, thank you so much for joining our thoughts.

Really appreciate it.

Thank you so much for having us do, Tracy.

Always a blast.

Thank you so much.

That was great pleasure. Thanks, guys.

Thank you Joe.

That was very fun.

Always a fun time having our Bloomberg Economics colleagues on the podcast.

I think, our star filled

I believe in it now.

I believe that there are some number that if only we could stare at it directly, we could kind of bring things into balance.

I think it's a useful concept.

Yeah, for sure.

And it's something to aim for, and it's kind of a framework under which, like an umbrella under which you can put all your thoughts about the economy, basically.

That said, and I mean, Tom and Jamie and Stephanie lay out a very convincing argument for why they think our star is going to be higher in the future.

Meanwhile, you have people like Myron. Yeah, arguing the exact opposite.

We can debate whether it's convincing or not, but it does feel like our star is not a method of achieving consensus.

Let's just put it that way.

No, it's not, but, and to your point, anyone, if you can't make an argument for either our star going higher or lower in the future, it's like an intelligence test.

Any intelligent person should be able to argue both sides.

Yeah, exactly.

Exactly right.

You can always come up with an eloquent, nice sounding argument for any direction.

This is true.

The one thing I'll say is that while our star may not truly be observable, etc., and maybe there isn't one number that satisfies the whole economy, what's that line?

It's like all models are fake, but some are at least useful.

It strikes me that it may be a fake concept, but a useful concept, and that plugging some of these factors in, what can we anticipate about where defense spending is going to go?

What can we anticipate about the nature of savings or savings or spending decisions among an aging population?

These are useful things to try to wrap our head around it.

And maybe these could be this could be a useful exercise, even if the underlying concept is still like a little, yeah.

Except that a lot of people argue that the models are garbage to know.

Of course, except for this one, obviously.

Of course, that was argued for everything, but I'm just saying, like, I mean, you just go total nihilist and think that the profession of economics is nonsense, but, but it does strike me as useful to say there is going to be a lot more spending here because real reasons that are happening.

What is that going to do to the availability of money or capital?

Yeah, whatever.

I think that makes sense.

Although one thing I would like to see more study of is like, maybe not, not necessarily our star and whether it's too high or too low, but like the actual impact of interest rates on economic growth, like the sensitivity, you know, of growth to rates is a great question.

And that's, I think, one of the other big sort of mysteries of the last several years. Yeah.

Which is how do you get the biggest interest rate hike in decades. And the growth trajectory barely budged, and the unemployment or the employment trajectory, barely. Budges.

These are like things, you know, I think a lot of people would have thought in retrospect, oh, we're definitely going to go to recession with this rapid pace of rate hikes, the degree to which policy actually affects the real economy in predictable ways.

Highly, highly contested.

Yeah.

Well, maybe that can be Tom and Jamie's next book. Yeah.

Shall we leave it there?

Let's leave it there.

All right.

This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway.

You can follow me at Tracy Alloway

and I'm Joe Weisenthal.

You can follow me at The stalwart.

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