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00:00:10Hello, I am Valentin Baryshnikov, and with me is Konstantin Sonin, Professor of Economics
00:00:14at the University of Chicago, and this is Popular America in the podcast reading
00:00:17News.
00:00:24Kostya, good day, hello. Attentive viewers here
00:00:27write that Professor Sonin constantly gives interviews against the background
00:00:31of a Harris poster, so explain now what kind of Harris
00:00:35you have behind you. The department where I
00:00:39the department where I
00:00:41work at the University of Chicago
00:00:44is called the Irving B.
00:00:48Harris School of Public Policy, so it says "Chicago Harris" on mine, below
00:00:52that is the web
00:00:54address of my, my school, it is not
00:00:58at all related to Kamala Harris. Kamala Harris
00:01:01is a namesake, she has nothing to do with the Chicago
00:01:05Harrises, a large banking family, in whose honor factories
00:01:09and steamships, theaters
00:01:12and the School of Public Policy are named. Well,
00:01:15now that everything has been clarified, let's talk about an equally complex
00:01:18topic. Lately, there has been a lot of talk about
00:01:21the sharp rise in interest rates on US government bonds.
00:01:24This sounds, I must admit, quite boring, but the discussions
00:01:28about it are the most dramatic. I decided to figure it out, especially since my
00:01:31interlocutor is a professor of economics at the Harris
00:01:34School, and let me ask questions like in a seminar, and
00:01:38you will explain it to me. First, for myself
00:01:42and for the viewers, how does
00:01:44it work? That is, if you buy a ten-year bond for $100
00:01:48at a conditional 5%, then every year it will bring in $5,
00:01:52and after 10 years, the invested $100 will return. It's much
00:01:55simpler to think about it differently, that it's just a piece of paper, on it
00:01:59it's written: in 10 years, you will be paid the amount
00:02:03written on it, $1,000. The fact
00:02:06that it is now sold, as they say,
00:02:09at a 5% discount, means
00:02:12that its current price is 95%,
00:02:16$950 out of
00:02:18$1,000, out of
00:02:21the nominal value. A bond is just, it's just
00:02:24a piece of paper on which the
00:02:27obligations of the US government are written.
00:03:05or sometimes even 500, that is, the discount can be very large.
00:03:09By tradition of financial markets, this price
00:03:12is called a percentage, as if the discount is
00:03:15how much the price is less than the nominal value, but in
00:03:19essence it's exactly that,
00:03:22it's the interest that is paid
00:03:25on the debt, it's how much the price is less than the nominal value. I
00:03:28wanted to look at it from the government's side, that is,
00:03:32I didn't say it by chance that
00:03:36$100 drops into your account every year, these percentages,
00:03:395%, and then these funds are returned. But
00:03:43if you look from the government's side, then to
00:03:46borrow these 100, for someone to give you these $100,
00:03:49you promise to constantly pay
00:03:52105, $105, yes, but as I said,
00:03:56it doesn't look like you borrow 100 and they
00:04:00give you 105, but that you
00:04:03borrow a thousand, you borrow 100, and they pay you
00:04:0795. Okay, so you take on an obligation for
00:04:10100, and they pay you 95, okay, next, and
00:04:14this is essentially no different from any other debt. You can
00:04:17also write me an IOU, this
00:04:20will be an IOU, I don't know how much it
00:04:24will cost, it depends on your credit,
00:04:27but in principle, a person.
00:05:00these papers, why would anyone lend to the American
00:05:03government? The debt of the American government is
00:05:06the most reliable asset, it is the most reliable asset of
00:05:09all that exist in the world. We think there is... gold,
00:05:13cryptocurrency, you can put something in
00:05:16a Swiss bank, but in principle, for a large
00:05:19investor, the most ultimately
00:05:23reliable asset is the obligation of the American Treasury, because
00:05:26everyone believes that in America there is Congress,
00:05:29democracy, and accordingly no one will declare
00:05:32default on the debt, no one will allow high
00:05:35inflation that will erode this debt.
00:05:38Accordingly, the fact that the American
00:05:41government gives... with a discount, this means that they still don't
00:05:45trust it completely, but on the other hand, they trust it very
00:05:49much, and this is a constant process, that is,
00:05:52there are always some papers that mature, the state
00:05:55needs to buy them back, return
00:05:59this debt, and if it is not profitable
00:06:02now, if its revenues do not
00:06:06exceed its expenses, then it needs to buy, as it were,
00:06:09issue new debts, now these debts...
00:07:42the situation, why has this whole scandal been happening for the last month, everyone is talking
00:07:46about it, because now interest rates on ten-year bonds
00:07:49have reached approximately 5.2%, and
00:07:53this is about one percent more than a year ago. Thirty-year
00:07:56bonds are around 5.6, a year ago they were
00:08:00around 4.7, so this is also almost one percent, and this
00:08:03increase means that it is more
00:08:07expensive for the government to refinance the debt, and the national debt recently exceeded
00:08:11a total of 43.
00:09:12900 dollars, and then you get
00:09:151,000, then it starts to take money away from
00:09:19other activities, it raises other rates in
00:09:22the economy, this means now, to get money, for example, for
00:09:25buying a mortgage, and
00:09:28most Americans have homes bought with a mortgage, all people
00:09:32who buy homes this year, buy them one way or another with
00:09:35a mortgage, they have to pay a higher
00:09:38rate, that's what it means to pay a higher rate, that's...
00:11:25is actually the reason for this problem, which pushes up bond
00:11:28yields, that is, you were talking about the fact that
00:11:32government bonds are the most reliable, but I understand
00:11:35that this growing national debt still
00:11:38worries them, so they buy with greater reluctance,
00:11:41this means that the government needs to offer a little more,
00:11:45it worries them, yes, and this is exactly what shows, there is
00:11:48a special term, I don't even know what it's called
00:11:52in Russian, bond vigilantes.
00:11:55People, as if there is such
00:11:58a police, bond police, that
00:12:01when the government behaves irresponsibly, well, in the sense
00:12:05that it spends more money than it has,
00:12:09then these - I don't know,
00:12:13police, militia, of bonds, they start paying
00:12:16less for,
00:12:20for debt, and this sends a very strong signal to the government
00:12:23that there's no way out, you need
00:12:26to either cut spending or increase revenue, but
00:12:30what we've seen in recent years, the government in general
00:12:34in the US is quite right-wing, it
00:12:37doesn't want to increase revenue, it doesn't want to raise taxes, it wants
00:12:41to cut taxes, and it doesn't want
00:12:44to increase
00:12:47- tax collection efficiency, this was
00:12:51a priority for Democratic administrations, but it is absolutely not
00:12:54a priority for Republican administrations, and at
00:12:58the same time, cutting expenses does not work.
00:13:01The Trump administration made a lot of
00:13:04noise about the need to cut expenses, but
00:13:08it actually did not cut any expenses, it cut some
00:13:11peanuts on some trivial things, they closed USAID,
00:13:15fired someone, but in reality, as a result of the
00:13:19Trump administration's activities, expenses only grew, and accordingly
00:13:23the deficit grew, the difference between yes...
00:13:55did not affect the cuts that were made,
00:13:59large-scale cuts during the tax reform that
00:14:02was carried out in the first year of the Trump administration, they did not affect
00:14:06current expenditures, these current expenditures are USD, these are
00:14:09pennies, and since they carried out this
00:14:13process of cutting expenditures inefficiently, they essentially
00:14:17increased current expenditures. So what
00:14:20happened that was serious in that reform
00:14:23is that it reduced very sharply, but it reduced
00:14:27the growth of future obligations for
00:14:30social and medical programs, for programs
00:14:33that
00:14:36help the poor, the poor part of America in terms of medicine, in
00:14:40terms of social insurance,
00:14:43it has been believed for many years that these programs, these expenses,
00:14:46are themselves unshrinkable, if
00:14:50something is already
00:14:51decided, decided...
00:15:25these obligations will grow at the projected rates.
00:15:28What the Trump administration did in its first year, in
00:15:312025,
00:15:33it reduced this growth, the growth of obligations.
00:15:37In what sense is there an important symbolic
00:15:40element, that it clearly showed that this
00:15:44is not a sacred cow, it can be reduced, what
00:15:48seemed to be, what seemed
00:15:50unshakable, once we decided to pay it, we will never
00:15:54reduce it, so far it has not been reduced, but
00:15:57the rate of payment growth
00:16:00has been decreased, and this, of course, reduced the long-term
00:16:04deficit, but since the administration
00:16:07does not reduce current expenses, the debt is still growing
00:16:11at a high rate. I will return again to the factors
00:16:14of yield growth on securities, although
00:16:18this phrase sounds very difficult. I don't know if I understand
00:16:21this correctly, but if there is now an AI boom, that is,
00:16:25everyone wants to invest in companies
00:16:29dealing with artificial intelligence,
00:16:33then these
00:16:37companies and government
00:16:40bonds, government bonds compete for investors'
00:16:43money, you have to offer something more profitable
00:16:46to attract investors' attention, and
00:16:49also, if I understand correctly, inflation, war,
00:16:53increased oil prices
00:16:55and the war with Iran, also somehow
00:16:59affect the fact that just a second, the war in Iran so far
00:17:02has cost, has cost pennies, less than 50
00:17:05billion dollars has been spent.
00:17:37decreases, but look, you are in a situation
00:17:41where I buy for 950 dollars, that
00:17:45thousand dollars promised by the state, but
00:17:48if during these 10 years inflation is
00:17:52high, it will eat a significant part of it, and I will
00:17:55ask for an additional increase in interest, that
00:17:59is, inflation leads
00:18:02to me as an investor asking for more
00:18:05to be given to me, because otherwise... it's not profitable to invest at all, is it?
00:18:09we are getting into a course on macroeconomics, because in your explanation,
00:18:12вот,
00:18:15in your question, you clearly
00:18:17явно,
00:18:20blurred the difference between current inflation
00:18:23and expected inflation, it's true that expecting
00:18:27inflation, an investor will demand a greater
00:18:30discount, he will want to pay less for that
00:18:33very paper, yes increasing inflation
00:18:37complicates current borrowing and
00:18:40at the same time facilitates the overall repayment of debt,
00:18:44what happened recently, or rather, the Federal Reserve system
00:18:48for the first time in September for a long time raised
00:18:52the credit rate, although Kevin Warsh,
00:18:55the current head of the Fed, was nominated by President
00:18:57Trump with a clear, as it were,
00:19:00mandate to lower this rate, but this
00:19:04means that we should expect inflation to... uh
00:19:07decrease, President Trump sends
00:19:11mixed signals, if we talk, for example, about monetary
00:19:14policy, then this is true, he
00:19:17says in words that he demands a reduction in the key rate,
00:19:21he wants the key rate to be lower, for American
00:19:25businesses to have cheaper credit, that's what
00:19:28he explicitly states, he criticized the previous,
00:19:32the previous chairman of the Federal Reserve System, he didn't
00:19:35criticize the current one, but he really said that he expects him to lower
00:19:39rates. At the same time, President Trump constantly
00:19:43talks about prices going down
00:19:46or decreasing, or already decreasing, which is not true,
00:19:50but he says it, which is simply a completely
00:19:53opposite signal, because to lower
00:19:57prices, you need to raise the key rate, that is, he essentially
00:20:01tells the chairman of the Federal Reserve System, you need
00:20:05to lower the rate and you need to raise the rate.
00:20:37there also the interest rates on bonds that the state borrows are growing,
00:20:41for some reason this is also connected, this is some kind of global problem
00:20:44with government borrowing and the USA
00:20:47is also involved in this, this affects the USA.
00:25:20they show, they analyze the speeches
00:25:22of candidates, they
00:25:25analyze specifically for the last
00:25:2880 years the speeches of candidates regarding
00:25:31the national debt, and Republicans, when Republicans
00:25:35are not in power, when they are in opposition, then this
00:25:39is almost always almost the main topic of the campaign, then
00:25:42coming to power, they
00:25:45change and don't talk about it, Democrats
00:25:48are much more consistent with them...
00:26:11we cannot live beyond our means, we need to cut, cut, cut expenses, then they come to power, here the talk about cutting expenses
00:26:15stops, because here they
00:26:17begin
00:26:20to reduce revenues, because they cut taxes,
00:26:23but now Republicans are in power, so
00:26:27this year we don't hear much
00:26:30rhetoric about the national debt.
00:26:33if now Democrats take
00:26:35Congress, then all Republican candidates in
00:26:392028 will only talk about, "look
00:26:43at these high interest rates," they will repeat what you, what you
00:26:46said, drawing different catastrophic scenarios,
00:26:49asking: do you want to turn into
00:26:52France? but at the same time Republicans believe
00:26:55that the best way to fight national debt is rapid
00:26:59economic growth, yes, that is, taxes need to be cut.
00:27:03and growth will solve everything, you
00:27:06will raise revenues so much that you don't need to for anything, here's their cycle, when they
00:27:09are not in power, the most important thing
00:27:12is to
00:27:15cut government spending, as soon as
00:27:19they are in power, the most important thing is growth, and that means taxes
00:27:22need to be cut, that is, they really have this amazing thing, as
00:27:26shown in the data that is calculated with the help of
00:27:29artificial intelligence for all speeches.
00:28:32the votes of this senator, this is a typical topic that is brought up
00:28:36in debates, well, we will follow the debates, now, let's finish for
00:28:40today, I remind you that I am Valentin Baryshnikov, with me is Konstantin
00:28:44Sonin, Professor of Economics at the University of Chicago, this is Popular
00:28:47America in the podcast, reading the news.
00:29:03In the national maral breeding nursery, for 30 years
00:29:07they have been preserving and breeding these red-listed
00:29:09cloven-hoofed animals.
00:29:12If a snow leopard eats a maral, what will you do? I say, I will be glad. A snow leopard
00:29:16exists, and if a snow leopard exists, it is the peak of this, let's say, biotope,
00:29:19biological chain, right? This means there is some balance, some
00:29:23equilibrium.