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[00:00:10] Hello, I am Valentin Baryshnikov, and with me is Konstantin Sonin, Professor of Economics
[00:00:14] at the University of Chicago, and this is Popular America in the podcast reading
[00:00:17] News.
[00:00:24] Kostya, good day, hello. Attentive viewers here
[00:00:27] write that Professor Sonin constantly gives interviews against the background
[00:00:31] of a Harris poster, so explain now what kind of Harris
[00:00:35] you have behind you. The department where I
[00:00:39] the department where I
[00:00:41] work at the University of Chicago
[00:00:44] is called the Irving B.
[00:00:48] Harris School of Public Policy, so it says "Chicago Harris" on mine, below
[00:00:52] that is the web
[00:00:54] address of my, my school, it is not
[00:00:58] at all related to Kamala Harris. Kamala Harris
[00:01:01] is a namesake, she has nothing to do with the Chicago
[00:01:05] Harrises, a large banking family, in whose honor factories
[00:01:09] and steamships, theaters
[00:01:12] and the School of Public Policy are named. Well,
[00:01:15] now that everything has been clarified, let's talk about an equally complex
[00:01:18] topic. Lately, there has been a lot of talk about
[00:01:21] the sharp rise in interest rates on US government bonds.
[00:01:24] This sounds, I must admit, quite boring, but the discussions
[00:01:28] about it are the most dramatic. I decided to figure it out, especially since my
[00:01:31] interlocutor is a professor of economics at the Harris
[00:01:34] School, and let me ask questions like in a seminar, and
[00:01:38] you will explain it to me. First, for myself
[00:01:42] and for the viewers, how does
[00:01:44] it work? That is, if you buy a ten-year bond for $100
[00:01:48] at a conditional 5%, then every year it will bring in $5,
[00:01:52] and after 10 years, the invested $100 will return. It's much
[00:01:55] simpler to think about it differently, that it's just a piece of paper, on it
[00:01:59] it's written: in 10 years, you will be paid the amount
[00:02:03] written on it, $1,000. The fact
[00:02:06] that it is now sold, as they say,
[00:02:09] at a 5% discount, means
[00:02:12] that its current price is 95%,
[00:02:16] $950 out of
[00:02:18] $1,000, out of
[00:02:21] the nominal value. A bond is just, it's just
[00:02:24] a piece of paper on which the
[00:02:27] obligations of the US government are written.
[00:03:05] or sometimes even 500, that is, the discount can be very large.
[00:03:09] By tradition of financial markets, this price
[00:03:12] is called a percentage, as if the discount is
[00:03:15] how much the price is less than the nominal value, but in
[00:03:19] essence it's exactly that,
[00:03:22] it's the interest that is paid
[00:03:25] on the debt, it's how much the price is less than the nominal value. I
[00:03:28] wanted to look at it from the government's side, that is,
[00:03:32] I didn't say it by chance that
[00:03:36] $100 drops into your account every year, these percentages,
[00:03:39] 5%, and then these funds are returned. But
[00:03:43] if you look from the government's side, then to
[00:03:46] borrow these 100, for someone to give you these $100,
[00:03:49] you promise to constantly pay
[00:03:52] 105, $105, yes, but as I said,
[00:03:56] it doesn't look like you borrow 100 and they
[00:04:00] give you 105, but that you
[00:04:03] borrow a thousand, you borrow 100, and they pay you
[00:04:07] 95. Okay, so you take on an obligation for
[00:04:10] 100, and they pay you 95, okay, next, and
[00:04:14] this is essentially no different from any other debt. You can
[00:04:17] also write me an IOU, this
[00:04:20] will be an IOU, I don't know how much it
[00:04:24] will cost, it depends on your credit,
[00:04:27] but in principle, a person.
[00:05:00] these papers, why would anyone lend to the American
[00:05:03] government? The debt of the American government is
[00:05:06] the most reliable asset, it is the most reliable asset of
[00:05:09] all that exist in the world. We think there is... gold,
[00:05:13] cryptocurrency, you can put something in
[00:05:16] a Swiss bank, but in principle, for a large
[00:05:19] investor, the most ultimately
[00:05:23] reliable asset is the obligation of the American Treasury, because
[00:05:26] everyone believes that in America there is Congress,
[00:05:29] democracy, and accordingly no one will declare
[00:05:32] default on the debt, no one will allow high
[00:05:35] inflation that will erode this debt.
[00:05:38] Accordingly, the fact that the American
[00:05:41] government gives... with a discount, this means that they still don't
[00:05:45] trust it completely, but on the other hand, they trust it very
[00:05:49] much, and this is a constant process, that is,
[00:05:52] there are always some papers that mature, the state
[00:05:55] needs to buy them back, return
[00:05:59] this debt, and if it is not profitable
[00:06:02] now, if its revenues do not
[00:06:06] exceed its expenses, then it needs to buy, as it were,
[00:06:09] issue new debts, now these debts...
[00:07:42] the situation, why has this whole scandal been happening for the last month, everyone is talking
[00:07:46] about it, because now interest rates on ten-year bonds
[00:07:49] have reached approximately 5.2%, and
[00:07:53] this is about one percent more than a year ago. Thirty-year
[00:07:56] bonds are around 5.6, a year ago they were
[00:08:00] around 4.7, so this is also almost one percent, and this
[00:08:03] increase means that it is more
[00:08:07] expensive for the government to refinance the debt, and the national debt recently exceeded
[00:08:11] a total of 43.
[00:09:12] 900 dollars, and then you get
[00:09:15] 1,000, then it starts to take money away from
[00:09:19] other activities, it raises other rates in
[00:09:22] the economy, this means now, to get money, for example, for
[00:09:25] buying a mortgage, and
[00:09:28] most Americans have homes bought with a mortgage, all people
[00:09:32] who buy homes this year, buy them one way or another with
[00:09:35] a mortgage, they have to pay a higher
[00:09:38] rate, that's what it means to pay a higher rate, that's...
[00:11:25] is actually the reason for this problem, which pushes up bond
[00:11:28] yields, that is, you were talking about the fact that
[00:11:32] government bonds are the most reliable, but I understand
[00:11:35] that this growing national debt still
[00:11:38] worries them, so they buy with greater reluctance,
[00:11:41] this means that the government needs to offer a little more,
[00:11:45] it worries them, yes, and this is exactly what shows, there is
[00:11:48] a special term, I don't even know what it's called
[00:11:52] in Russian, bond vigilantes.
[00:11:55] People, as if there is such
[00:11:58] a police, bond police, that
[00:12:01] when the government behaves irresponsibly, well, in the sense
[00:12:05] that it spends more money than it has,
[00:12:09] then these - I don't know,
[00:12:13] police, militia, of bonds, they start paying
[00:12:16] less for,
[00:12:20] for debt, and this sends a very strong signal to the government
[00:12:23] that there's no way out, you need
[00:12:26] to either cut spending or increase revenue, but
[00:12:30] what we've seen in recent years, the government in general
[00:12:34] in the US is quite right-wing, it
[00:12:37] doesn't want to increase revenue, it doesn't want to raise taxes, it wants
[00:12:41] to cut taxes, and it doesn't want
[00:12:44] to increase
[00:12:47] - tax collection efficiency, this was
[00:12:51] a priority for Democratic administrations, but it is absolutely not
[00:12:54] a priority for Republican administrations, and at
[00:12:58] the same time, cutting expenses does not work.
[00:13:01] The Trump administration made a lot of
[00:13:04] noise about the need to cut expenses, but
[00:13:08] it actually did not cut any expenses, it cut some
[00:13:11] peanuts on some trivial things, they closed USAID,
[00:13:15] fired someone, but in reality, as a result of the
[00:13:19] Trump administration's activities, expenses only grew, and accordingly
[00:13:23] the deficit grew, the difference between yes...
[00:13:55] did not affect the cuts that were made,
[00:13:59] large-scale cuts during the tax reform that
[00:14:02] was carried out in the first year of the Trump administration, they did not affect
[00:14:06] current expenditures, these current expenditures are USD, these are
[00:14:09] pennies, and since they carried out this
[00:14:13] process of cutting expenditures inefficiently, they essentially
[00:14:17] increased current expenditures. So what
[00:14:20] happened that was serious in that reform
[00:14:23] is that it reduced very sharply, but it reduced
[00:14:27] the growth of future obligations for
[00:14:30] social and medical programs, for programs
[00:14:33] that
[00:14:36] help the poor, the poor part of America in terms of medicine, in
[00:14:40] terms of social insurance,
[00:14:43] it has been believed for many years that these programs, these expenses,
[00:14:46] are themselves unshrinkable, if
[00:14:50] something is already
[00:14:51] decided, decided...
[00:15:25] these obligations will grow at the projected rates.
[00:15:28] What the Trump administration did in its first year, in
[00:15:31] 2025,
[00:15:33] it reduced this growth, the growth of obligations.
[00:15:37] In what sense is there an important symbolic
[00:15:40] element, that it clearly showed that this
[00:15:44] is not a sacred cow, it can be reduced, what
[00:15:48] seemed to be, what seemed
[00:15:50] unshakable, once we decided to pay it, we will never
[00:15:54] reduce it, so far it has not been reduced, but
[00:15:57] the rate of payment growth
[00:16:00] has been decreased, and this, of course, reduced the long-term
[00:16:04] deficit, but since the administration
[00:16:07] does not reduce current expenses, the debt is still growing
[00:16:11] at a high rate. I will return again to the factors
[00:16:14] of yield growth on securities, although
[00:16:18] this phrase sounds very difficult. I don't know if I understand
[00:16:21] this correctly, but if there is now an AI boom, that is,
[00:16:25] everyone wants to invest in companies
[00:16:29] dealing with artificial intelligence,
[00:16:33] then these
[00:16:37] companies and government
[00:16:40] bonds, government bonds compete for investors'
[00:16:43] money, you have to offer something more profitable
[00:16:46] to attract investors' attention, and
[00:16:49] also, if I understand correctly, inflation, war,
[00:16:53] increased oil prices
[00:16:55] and the war with Iran, also somehow
[00:16:59] affect the fact that just a second, the war in Iran so far
[00:17:02] has cost, has cost pennies, less than 50
[00:17:05] billion dollars has been spent.
[00:17:37] decreases, but look, you are in a situation
[00:17:41] where I buy for 950 dollars, that
[00:17:45] thousand dollars promised by the state, but
[00:17:48] if during these 10 years inflation is
[00:17:52] high, it will eat a significant part of it, and I will
[00:17:55] ask for an additional increase in interest, that
[00:17:59] is, inflation leads
[00:18:02] to me as an investor asking for more
[00:18:05] to be given to me, because otherwise... it's not profitable to invest at all, is it?
[00:18:09] we are getting into a course on macroeconomics, because in your explanation,
[00:18:12] вот,
[00:18:15] in your question, you clearly
[00:18:17] явно,
[00:18:20] blurred the difference between current inflation
[00:18:23] and expected inflation, it's true that expecting
[00:18:27] inflation, an investor will demand a greater
[00:18:30] discount, he will want to pay less for that
[00:18:33] very paper, yes increasing inflation
[00:18:37] complicates current borrowing and
[00:18:40] at the same time facilitates the overall repayment of debt,
[00:18:44] what happened recently, or rather, the Federal Reserve system
[00:18:48] for the first time in September for a long time raised
[00:18:52] the credit rate, although Kevin Warsh,
[00:18:55] the current head of the Fed, was nominated by President
[00:18:57] Trump with a clear, as it were,
[00:19:00] mandate to lower this rate, but this
[00:19:04] means that we should expect inflation to... uh
[00:19:07] decrease, President Trump sends
[00:19:11] mixed signals, if we talk, for example, about monetary
[00:19:14] policy, then this is true, he
[00:19:17] says in words that he demands a reduction in the key rate,
[00:19:21] he wants the key rate to be lower, for American
[00:19:25] businesses to have cheaper credit, that's what
[00:19:28] he explicitly states, he criticized the previous,
[00:19:32] the previous chairman of the Federal Reserve System, he didn't
[00:19:35] criticize the current one, but he really said that he expects him to lower
[00:19:39] rates. At the same time, President Trump constantly
[00:19:43] talks about prices going down
[00:19:46] or decreasing, or already decreasing, which is not true,
[00:19:50] but he says it, which is simply a completely
[00:19:53] opposite signal, because to lower
[00:19:57] prices, you need to raise the key rate, that is, he essentially
[00:20:01] tells the chairman of the Federal Reserve System, you need
[00:20:05] to lower the rate and you need to raise the rate.
[00:20:37] there also the interest rates on bonds that the state borrows are growing,
[00:20:41] for some reason this is also connected, this is some kind of global problem
[00:20:44] with government borrowing and the USA
[00:20:47] is also involved in this, this affects the USA.
[00:25:20] they show, they analyze the speeches
[00:25:22] of candidates, they
[00:25:25] analyze specifically for the last
[00:25:28] 80 years the speeches of candidates regarding
[00:25:31] the national debt, and Republicans, when Republicans
[00:25:35] are not in power, when they are in opposition, then this
[00:25:39] is almost always almost the main topic of the campaign, then
[00:25:42] coming to power, they
[00:25:45] change and don't talk about it, Democrats
[00:25:48] are much more consistent with them...
[00:26:11] we cannot live beyond our means, we need to cut, cut, cut expenses, then they come to power, here the talk about cutting expenses
[00:26:15] stops, because here they
[00:26:17] begin
[00:26:20] to reduce revenues, because they cut taxes,
[00:26:23] but now Republicans are in power, so
[00:26:27] this year we don't hear much
[00:26:30] rhetoric about the national debt.
[00:26:33] if now Democrats take
[00:26:35] Congress, then all Republican candidates in
[00:26:39] 2028 will only talk about, "look
[00:26:43] at these high interest rates," they will repeat what you, what you
[00:26:46] said, drawing different catastrophic scenarios,
[00:26:49] asking: do you want to turn into
[00:26:52] France? but at the same time Republicans believe
[00:26:55] that the best way to fight national debt is rapid
[00:26:59] economic growth, yes, that is, taxes need to be cut.
[00:27:03] and growth will solve everything, you
[00:27:06] will raise revenues so much that you don't need to for anything, here's their cycle, when they
[00:27:09] are not in power, the most important thing
[00:27:12] is to
[00:27:15] cut government spending, as soon as
[00:27:19] they are in power, the most important thing is growth, and that means taxes
[00:27:22] need to be cut, that is, they really have this amazing thing, as
[00:27:26] shown in the data that is calculated with the help of
[00:27:29] artificial intelligence for all speeches.
[00:28:32] the votes of this senator, this is a typical topic that is brought up
[00:28:36] in debates, well, we will follow the debates, now, let's finish for
[00:28:40] today, I remind you that I am Valentin Baryshnikov, with me is Konstantin
[00:28:44] Sonin, Professor of Economics at the University of Chicago, this is Popular
[00:28:47] America in the podcast, reading the news.
[00:29:03] In the national maral breeding nursery, for 30 years
[00:29:07] they have been preserving and breeding these red-listed
[00:29:09] cloven-hoofed animals.
[00:29:12] If a snow leopard eats a maral, what will you do? I say, I will be glad. A snow leopard
[00:29:16] exists, and if a snow leopard exists, it is the peak of this, let's say, biotope,
[00:29:19] biological chain, right? This means there is some balance, some
[00:29:23] equilibrium.