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MATT BURGESS: Welcome back to The Free Mind podcast, where we explore topics in western history, politics, philosophy, literature, and current events with a laser focus on seeking the truth and an adventurous disregard for ideological and academic fashions. I'm Matt Burgess, an assistant professor of Environmental Studies and faculty fellow of the Benson Center for the Study of Western Civilization at the 彩民宝典. My guest today is Sasha Breger Bush. Sasha Breger Bush is an associate professor of political science at the University of Colorado Denver, who studies International Political Economy and is the author of Derivatives and Development: A Political Economy of Global Finance, Farming, and Poverty.听
Professor Bush has recently sounded the alarm about what she calls the whole world debt crisis. We discuss her work as well as recent public debates about debt and deficits in the United States. Sasha Breger Bush, welcome to The Free Mind podcast.听
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SASHA BREGER BUSH: Thanks, Matt. Glad to be here.听
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MATT BURGESS: I wanted to have you on because you do some really interesting thinking and writing on an issue that I've thought a little bit about in the American context, but you've thought about it in the global context, and that's the issue of debt. You wrote an article recently called Whole World Debt Crisis, and in it you described rising public household and corporate debts over the past 50 years as a percentage of GDP. So, you showed that global government debt is now about the same size as global GDP, same thing for private non-financial debt, and you showed that household debt is about 60% of GDP. You also showed a chart that was pretty alarming, that suggested that the number of low-income countries that are considered to be in or at risk of debt distress has been rising, and nearly 60% of low-income countries are classified as being either in debt distress or having high risk of debt distress.听
So, let's unpack this a little bit. First of all, can you describe what's included in government debt, household debt, and non-financial corporate debt? What is that?听
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SASHA BREGER BUSH: Sure. Thank you very much for the question. So, government debt, otherwise known as sovereign debt, these are debts incurred by governments to cover their expenditures. Just like with an individual or I'm a household, when your revenues are less than your expenditures, you incur debts. And governments do this also. Every government in the world incurs debt. It's a regular feature of operating a government. But what's an issue for me in this context is just how large those debts have become and how quickly they're growing. So, government debts could be incurred for spending on pretty much anything from healthcare to education, to subsidies for power or agriculture or any of the many numbers of things that governments spend money on, defense spending and so on.听
In the case of household debt, the figures that are typically calculated nationally in the US and globally involve things like credit card debt, mortgage debt, home equity lines of credit, retail credit cards, like the card you might get from Nordstrom's, student loan debt, among other big categories of household debt. In the corporate context, the figures I quote in the article are non-financial corporate debts, and they are incurred either as loans or as bonds that corporation's issue on the open market to raise funding for their operations. And in a corporate context, depending on what business that corporation is in, they might be using those funds to pay for any number of things, from employee wages to materials and so on.听
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MATT BURGESS: Great, and just really quickly to clarify, what would be financial corporate debt?听
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SASHA BREGER BUSH: Financial corporate debt is debts incurred by banks or other financial institutions and most figures are those separately. And that's not something that I'm dealing with here in this article, though I think debts incurred by financial institutions are a pretty fascinating area of research also. Just wasn't part of this particular study of mine.听
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MATT BURGESS: Sure, sure. No, that's great. One of the things about debt maybe compared to some of the political cultural issues, is there's a lot of jargon, a lot of concepts, so it's trying to break it down as much as I can for our listeners.听
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SASHA BREGER BUSH: Matt, on that point, I'm really pleased you pointed this out about the jargon and technical language that surrounds issues like debt. This is a real chip on my shoulder as an academic and a researcher, because these issues fundamentally are not all that complicated, and we can talk about them in simple terms. But what dismayed me is the way in which technical language is often deployed by politicians, by the financial presses, by financial institutions themselves, almost as an exclusionary mechanism. It prohibits the general public from participating in these conversations about finance. And for me, it's one of the most undemocratic aspects of scholarship and public debate about finance, that it occurs in such jargon filled and complicated terms.听
The average person who understands quite well what debts are and how they come about and problems with debts are somehow excluded from a conversation that they should be part of.听
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MATT BURGESS: That's a great point. Now the flip side of that coin, I think, is that sometimes conversations about conceptually complex topics in public can be dumbed down and oversimplified too much, especially in the polarized discourse. So, for example, with debt, you often hear messages that basically sound like debt bad. So, before we get into why you see debt as a huge problem for today's economy, let's quickly note that debt isn't always bad conceptually generally, and in fact can be essential for development. So, for example-听
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SASHA BREGER BUSH: Absolutely.听
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MATT BURGESS: ... whether you're a person, you're a business or you're a country, access to credit unlocks important pathways to building wealth and capital. So, imagine how hard it would be for an average person to own a house if you didn't have mortgages. Imagine how inaccessible college would be to many Americans if you didn't have student loans. And companies and countries have the same dynamic. A lot of small businesses start out with small business loans, countries use debt to build infrastructure that provides benefits for decades. They use debt to soften the blow of a recession, et cetera, et cetera.听
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SASHA BREGER BUSH: And I think that's a critical point to make. Even looking at me, I've incurred student debts in order to obtain a PhD and an investment in my future. And a lot of what makes the difference between a good debt, quote unquote, and a bad debt, is what future advantages you're purchasing with that investment and if you're able to pay off those debts and still have more than you would have without incurring those debts. And so yes, it's been a critical development tool for poor and middle-income countries, for individuals. Mortgage debt is one of the most important categories of debt because it's an avenue for wealth accumulation for working in middle class people. I couldn't agree more.听
What concerns me currently is how quickly debts have grown relative to our collective ability to pay them off. And that's I think one of the pivotal points where you start thinking about debts not being so good and starting to be a burden rather than a benefit.听
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MATT BURGESS: So, let's talk a little bit more about that. So, some of the symptoms of having too much debt, whether you're a household, a business or a government, your interest payments can become crippling. It can become hard to secure financing for new investments. Governments have, unlike households and businesses, have the option in theory of printing money to pay off their debt, but that can cause inflation with Weimar Germany in the 20s and Venezuela in the past decade providing tragic examples. So, my question to you is, how do we know when a country, business or household has too much debt? What does that look like?听
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SASHA BREGER BUSH: Well, it's a good question and it really varies on a case-by-case basis. I think one distinction first of all is that there's a difference between debt problems associated with temporary liquidity problems, temporary shortfalls in cash, which is called a liquidity problem, versus a insolvency problem, which means that no matter what you did, and no matter what your cashflow looked like, you just fundamentally structurally do not earn enough money to ever pay back these debts.听
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MATT BURGESS: Can you give a prototypical example of each of those just to give people a clearer picture of what you're talking about?听
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SASHA BREGER BUSH: Yes, absolutely. So, let's say that my credit card bill is due on the 15th, and I owe a payment to the bank that holds my credit card, but my paycheck doesn't come for a week after that payment is due to the credit card company. That's a liquidity problem. My paycheck is more than enough to pay for that, to service my credit card, to make that monthly payment or even pay off the whole statement balance. I just don't have it in my hands at the right time that I need to make that payment on time. And so that's really an issue of managing cash flows and ensuring that you can meet monthly deadlines with money that you have, right? But it's a way of managing cash flow. By contrast, if I've accumulated, let's call it $50,000 in debt, my income isn't sufficient to pay that off.听
And so, no matter how I managed my cashflow, no matter how I saved in February to be able to pay off my bill in March, I would never have any hope of having enough money to be able to pay it off in full. This happens to governments all the time. Sometimes governments experience liquidity shortfalls, they're just short on cash for a short amount of time, and they can borrow internationally or engage in other kinds of relationships with banks or with bilateral creditors, other governments to help them deal with that time mismatch and when their payments are due. A problem of insolvency indicates that the debts are just unsustainable, that they just will never be paid off.听
And in that context, we often see governments working with their creditors to restructure those debts, to either reduce them in size, to expand the period over which payment can be made, the term of the loan or the debt, among other workouts that can help reduce the absolute burden that debt on the debtor.听
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MATT BURGESS: That distinction is really interesting, and one of the things that strikes me as important to which side of that line you fall on or how much more broadly, how much a particular size of debt is burdensome, is the interest rate. So, for example, you said that if you had 50K of debt, that might make you insolvent. I assume you were talking about credit card debt, because of course, most people who have mortgages have much, much more than 50K of mortgage debt, or the difference being the interest rate, $50,000 in credit card debt with a 20% interest rate would be an enormous monthly payment in contrast to you could have 10 times that in mortgage debt with a three or 4% interest rate and with a much more manageable payment.听
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SASHA BREGER BUSH: Absolutely right. And also, the term of the loan, right? You might have 30 years to pay off a mortgage, 30 years to grow your income and your capability to repay as opposed to a revolving line of credit in which you might need to make larger payments more frequently.听
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MATT BURGESS: Okay, so let's talk about before the crisis happens. So once the crisis happens, you can restructure, you can go bankrupt or something like it. You can print money and hope that doesn't cause an inflation calamity.听
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SASHA BREGER BUSH: There is no international bankruptcy provision. So, while individuals or corporations can certainly declare bankruptcy, at the global level it looks a little more disjointed and a little less orderly in terms of how defaults are managed. Governments don't really, they don't get declared bankrupt. I know we say that in popular discussion, that the Federal Reserve is broke, the Federal Reserve is bankrupt, but as a legal concept, there's no such thing.听
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MATT BURGESS: Right. Of course, yeah, there's no international bankruptcy court. But let's talk about the path there. So, one of the differences, interest rates are a big difference potentially between rich and poor countries. And this is actually connected to how I got interested in this issue in the US. So, one of the things that I'm interested in that I study is slowing economic growth, which has been occurring in rich countries for several decades, and some people think it is inevitably going to continue. That obviously has implications for debt, because basically there are two ways to lower your debt to GDP ratio. You can pay down your debt or you can increase your GDP.听
And most countries rely on the growth mechanism to reduce their debt burdens, which means that long run stagnation tends to cause rising debt to GDP ratios. We've already seen this in places like Italy and Japan. This is arguably what we're seeing in the US, at least in part.听
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SASHA BREGER BUSH: So, I just want to say, so when the pandemic hit, this was a huge factor in increasing debt to GDP ratios. So, the pandemic hit, and yes, debts were increasing, but those figures really changed because GDP just shrunk all over the world, right? Economies stopped. And so part of what's going on is not just an increase in debt as you mentioned, but the stagnation, more recently associated with the pandemic, but in the longer term also for many developed countries.听
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MATT BURGESS: So, one of the things I've wanted to get your thoughts on is, there's been a really interesting conversation about the implications of this for debt in the US context and in the context of G7 countries, so basically rich countries. I'd love to get your thoughts on how this applies or doesn't apply to poorer countries. There was a paper in 2020 by Jason Furman and Lawrence Summers, two huge names in macroeconomics, and there was a paper in 2019 that made a similar argument by Olivier Blanchard, who's also a huge name in economics, and I think at one point was the chief economist of the IMF. And at the time he wrote the paper was the head of the American Economic Association. And they pointed out that as growth slows down, which causes debt to GDP to go up, interest rates including on government debt tend to also go down for a variety of reasons, reasons that are connected.听
So, the opportunity cost basically of lending cheaper goes down, is maybe a simple way to explain some of the reasons. Plus of course, central banks tend to lower their interest rates, which has an effect on the market, et cetera. And so, they said what really determines your burden of debt is not the ratio necessarily of your debt to GDP, which they call a stock. It's more the flow. So, it's your interest payments as a percentage of GDP for example. And there are some other more complicated measures that they argue for. One of the things that's really interesting that they pointed out is that in the G7 countries, even as debt to GDP has gone up for the most part for the last 20 years, interest payments is a percentage of GDP by governments has gone down in most G7 countries in the last 20 years, because interest rates have gone down.听
And so, in 2020 and in 2019, the conclusion that they reached was even though our debt to GDP is going up and we have a pretty sizable deficit, there's fiscal space as they said, or room for more deficit spending. Now of course that was 2020. Summers later warned that the American rescue plan was too big and would cause inflation and in turn he was right. Furman, I believe, has warned recently about structural deficits being too high. There's an ongoing debate about how much is too much. But I wanted to get your thoughts on, to what extent does this debate parallel or not parallel the issue in low-income countries, because I'm not an expert on that context, but as I understand it, the access to credit and the interest rate problems can be a lot bigger. I'd love to hear your thoughts on that.听
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SASHA BREGER BUSH: Thank you. And I think that the Summers argument is really interesting because it kind of avoids the conversation about, well, why were interest rates so low? So, after the 2008 recession, major governments and central banks across the world lowered rates to help revive the financial system in the economy. And rates were at historic lows for close to 15 years leading into COVID. And all else equal, lower rates encourage entities to take on more debt. And so, part of the story of these rising debts is a very long period of low interest rates that reduced the opportunity cost of borrowing, to use your language. These low interest rates were achieved by central banks through massive injections of liquidity into global financial markets.听
The US Federal Reserve, for example, purchased huge amounts of assets off of financial markets from stocks and mortgage-backed securities to its own bonds using printed money to purchase them, injecting that money into the global financial system such that the world was really just a wash in cheap money. And so why not borrow? Right? This isn't unlike the situation in the 1970s when high oil prices encouraged petrodollar recycling and huge numbers of developing countries took on massive debts because the world was just awash in liquidity and there was a lot of money to lend, and banks like to make a profit and traders like to make a profit, and so they did so. And I think what complicates the matter even further for many poorer countries is the issue of the currency in which their debts are denominated.听
For the US government or the European governments, they tend to be borrowing in their own domestic currency, right? The US borrows in dollars and EU countries borrow in euros. And so, what's eliminated in that equation is the exchange rate risk associated with the debt. Yes, there is interest rate risk. When interest rates rise, the burden of debt service also rises. And as you were saying, debt service as a percentage of GDP climbs as interest rate climbs, making the debt more burdensome. But there's an additional burden for countries that are borrowing in foreign currencies. Most global investors aren't interested in borrowing and lending in weak local currencies, the currencies issued by poorer countries. Some of those currencies are not only weak, but they're not convertible, meaning it's difficult to turn the local currency into a hard currency like a dollar or a Euro.听
But so concretely, when US interest rates rise, this has the effect of increasing the strength of the dollar, the value of the US dollar. Now, if you are a lower income country and you've borrowed in dollars to support your own economy, then the cost of your debt goes through the roof when the dollar appreciates relative to your local currency. You need more and more and more local currency units to make the same dollar debt payments, debt service payments that you used to. And so for many developing countries these days, rising interest rates are compounded and the issue is made even worse by the currency mismatch of their debts.听
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MATT BURGESS: Isn't there a flip side of that too or a second aspect of that, which is that, so one of the things that Olivier Blanchard points out is that the nominal growth rate in the US, so roughly speaking, growth plus inflation, has almost always been larger than the average interest rate on government debts basically. So, in a sense, inflation as a negative consequence of having fiscal or monetary policy that's too loose can also lower a burden of debt if you're the US. Doesn't it do the opposite for countries that are borrowing in foreign currency?听
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SASHA BREGER BUSH: Yeah, and this is the common complaint about US dollar dominance and the power of the Federal Reserve in the global economy, that the US is able to export its inflation problems abroad as a consequence of its central role globally. So, the US hikes interest rates to manage inflation at home, and what happens abroad? Currencies collapse relative to the dollar, which increases the price of imports into developing countries. So, they're paying more for food, which is denominated in dollars for energy, which tends to be denominated in dollars energy trade globally. And so, as the US Federal Reserve tries to manage inflation domestically, it has a negative impact and sends that inflation to other countries via the foreign exchange relationships between the dollar and their local currency.听
And so, there's a lot of discontent around the world these days, especially over the last couple of years as the US rose rates going into the Ukraine war in early 2022. And countries are frustrated at how US monetary policy impacts their own wellbeing on the other side of the world, their own capacity to buy food, buy energy, service their debts, pay for other things that governments that we expect them to pay for, like healthcare, infrastructure, education and so on.听
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MATT BURGESS: So, a really quick follow-up question, and then I want to go back to the 70s for a second. Really quick follow-up question. Is the foreign currency of choice fundamentally a zero-sum game? So, the United States benefits from having its currency being the dominant currency in global financial markets. If some other country supplanted that or if somehow it became more democratized, which to me seems unlikely just due to financial incentives for stability.听
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SASHA BREGER BUSH: We can talk about that if you'd like. I have a piece coming out about that.听
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MATT BURGESS: Let's talk about that. But is it a zero-sum game? You know what I mean? Are we going to end up borrowing and lending disproportionately in some country's currencies compared to others, and is that going to benefit those countries at the expense of others? Or is there a way to have a different system where everybody wins?听
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SASHA BREGER BUSH: It's a great question, and I think that's the debate that's playing out internationally right now. From the perspective of up and coming and new powers, rivals to the United States on the international stage, China, India, Brazil, Russia, South Africa, those are the BRICS countries, and there's others besides, there is an increasing sense that the US's financial dominance comes at the expense of the economic wellbeing of other countries that are forced to use the dollar. So, from the perspective of BRICS and other countries around the world, I see that language, that zero-sum game language, that your dominance comes at our expense, that you are reaping benefits from dollar hegemony and pushing the costs onto other countries around the world.听
And it's galvanized what I think of as an international movement to push back against dollar dominance and countries all over the world, and I can detail this for you, are innovating and trying to develop workarounds to reduce their dependence on the US dollar for precisely the reasons you're suggesting. However, most US economists don't necessarily agree with that, which is perhaps not surprising.听
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MATT BURGESS: Which part do they not agree with?听
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SASHA BREGER BUSH: The zero-sum game parts.听
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MATT BURGESS: What's the argument there?听
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SASHA BREGER BUSH: The argument there, I think the classic sort of liberal economic argument that a rising tide lifts all boats, that fundamentally stable international financial system, one that's anchored by a currency of overwhelming strength and value relative to other currencies, provides a mechanism for broader global stability and wider and deeper financial markets. So, the argument I often see coming from the west is that this is really good for everybody. The classic historical reference point is, well, look what happened during the Great Depression when we didn't have a single stable currency, and look at how the international financial system devolved into competition and degrowth and so on, and let's avoid that, right? That was the whole idea behind dollar supremacy, to avoid what happened during the Great Depression.听
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MATT BURGESS: Now, the dollar wasn't the only difference between those two-bank crises. But let me ask you a follow-up question. Are those arguments really mutually exclusive? Couldn't it be the case that having a common currency, or a dominant currency is beneficial on average to the size of the global economy and to the stability of the global economy? And also, it can be very harmful to individual countries, especially developing countries with currencies that are not widely traded or trusted. And then also that it's worse even if the overall economy is better, it's worse compared to a counterfactual scenario where we have an equally stable global economy, but the dominant currency is China's or India's from the perspective of China or India?听
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SASHA BREGER BUSH: It's a great question. Personally, I'm more inclined to think about it historically. So, there have been, over the course of the 20th century, if you look at international monetary history, there have been periods of time where the world has eagerly adopted a single hegemonic currency because it is beneficial to have the stable anchor for the international financial system. And then there are other periods that show up over the course of the 20th century where that was not the perception among governments of the world, where the so-called hegemonic currency was perceived as being weak or losing value or as somehow unstable and countries, much like any other investors started to diversify, right? Therefore currency holdings, the foreign exchange holdings the currencies in which they conducted trade as a way to hedge against the risks associated with relying on a hegemonic currency.听
So, for example, between the British pound sterling was the hegemonic currency leading into World War I, but the United States dollar didn't emerge as a hegemonic currency really into the late 1950s. The groundwork had been set previously. So, there's this huge chunk of time roughly with the two World Wars and the Great Depression between them and even the early Cold War where there was no single hegemonic currency and countries held a basket of different kinds of currencies in different proportions based on their perceived risks and benefits of holding those allocations. So, Barry Eichengreen is a really fascinating economic historian on this, and he has a lot of really interesting time series data tracking currency holdings over time.听
And what you see is really not, it's not like there's always one single dominant currency, you see periods in which that prevails, and then periods in which the monetary system appears, I wouldn't use the word democratic so much as multipolar, meaning that there are several dominant currencies that are being widely used at any given time. It's my own opinion that we're heading into one of those periods now, but that's just my opinion.听
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MATT BURGESS: Okay. I have two follow-up questions about that.听
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SASHA BREGER BUSH: Sure.听
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MATT BURGESS: The first is, and I know far less about this area of economics than you do, but my hypothesis would be that the BRICS effort to replace the US dollar or lessen the importance of the US dollar as a global currency. My hypothesis would be in the short term it's likely to fail for political reasons. Meaning that one of the things that makes the US dollar trustworthy in addition to the size and power of the US economy is the rule of law, the democracy, the financial freedoms that individuals and businesses have in the US, and related to all those things, freedom from expropriation, freedom or less risk of currency manipulation, less risk of state failure, et cetera, et cetera. Not that there's a huge risk of state failure necessarily in the BRICS countries either, at least some of them. So, am I wrong? What's your hypothesis?听
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SASHA BREGER BUSH: So, a couple things, just a few facts. So, first of all, I mean I think de-dollarization is ongoing. I don't think it's like some future battle that maybe won or lost.听
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MATT BURGESS: How do we measure that?听
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The peak of the dollar dominance was in 1968. That was the time at which the dollar was most widely held as a foreign exchange reserve, and it's only been declining since that time. So that's very interesting. We also see over that period from 1968 forward, the rise and fall of the Deutsche Mark, the rise and fall of the yen as a major global currency. We see the rise of the Euro, which still maintains a rather large chunk of international trade and lending, something like, I think, what is it? Maybe 20% of international lending is in the Euro, but don't quote me on that. I think we've already seen the dollar lose ground to competitors since the late 1960s. And so, what I keep thinking about is more of a continuation of an existing trend. So, the data is really interesting on this.听
Less than half of world trade now occurs in the dollar, although the dollar is used to trade some of the most critical commodities and most widely traded global commodities like oil, right? That's a really important one, and the dollar still dominates in that context. But for example, countries have been, non-Western governments have actually been reacting very strongly to what I see as a breakdown in the rule of law in the United States in regard to its financial system. I was really glad that you mentioned the risk of appropriation in the context of the rule of law in the United States. And I agree that historically that kind of law and order made investors all over the world comfortable holding dollars, comfortable investing in US assets, comfortable holding US government debt.听
But the picture changed really dramatically with the onset of the Ukraine war in February and March 2022. The United States and the EU worked together to sanction Russia. But one of the biggest early moves that the United States made to penalize Russia for its involvement in Ukraine was to kick Russia out of the SWIFT system. That's the system for worldwide, oh my gosh, interbank transfers. Gosh.听
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MATT BURGESS: Yeah, something like that.听
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SASHA BREGER BUSH: It's the organization that facilitates dollar payments. So, when entities all over the world are trading in dollars, this is the middleman, the middleman organization that sits between and facilitates those trades. And Russia was excluded from it. Russia's central bank assets held in western banks, US and European Canadian banks were frozen. And there's been increasing talk from the US and Europe since last fall about seizing Russian assets to redistribute to Ukraine for war reconstruction. And so, this rule of law and stability of the US system has lost ground, has lost legitimacy in the eyes of parts of the world. I like this, there was a quote from the Indonesian president who was like, yeah, look, we need to start working on trading in non-dollar currencies because of the geopolitical risk associated with using the dollar.听
China is the world's largest trading partner for most countries, most countries, their largest trading partner is China. And so the logic was, well, if the US can do this to Russia and Europe can do this to Russia in a geopolitical context, to a country perceived as an enemy, what happens when the US and Europe go to war with China and they try to sanction and freeze assets of countries trading with China, which is a much, much bigger threat given China's predominance in the international system. And so there has been concerted moves over the last 18 months to reduce dependence on the dollar as a way of avoiding future sanction and asset seizure by US and European governments should a war with China break out. So, for example, Saudi Arabia and China have just been dumping US government debt. Their holdings of the US treasury are at their lowest in 15 years.听
Governments in Asia, especially including China, India and Singapore, have been massively stockpiling gold and not just stockpiling gold, but repatriating gold holdings from vaults in the west. They don't want to own gold that's held in a vault in England or held in a vault in the US. They want it at home to avoid future risk of seizure and expropriation. I think we're at a time now where the historic stability and reliability of the United States government and US dollar is increasingly in question. I'm seeing, and my research shows really expedited movements by other countries to work together to reduce dependence on the dollar. For example, on the association of Southeast Asian nations, Indonesia and Singapore just unrolled a QR code-based local currency trading system, where they will be facilitating trade in local currencies, fast secure trade in Singapore's currency, in Indonesia's currency, not using the dollar at all anymore, eventually, using new technology like QR code.听
It's fascinating. We see Russia, for example, adopting cryptocurrency-based systems for international payment as a way of circumventing US and European sanctions. And so, I think the position of the US government and the US dollar is more tenuous than it was in the past, and not just because of the Ukraine war, I can bring us back to debt, US government debts have the world concerned. Just a couple of months ago, is that in June, Fitch downgraded US government debt from AAA to AA.听
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MATT BURGESS: That was related, I thought, both to the debt ceiling brinkmanship in addition to, or possibly even more so than the quantity of debt, or was it both?听
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SASHA BREGER BUSH: If I may, I think the statement is pretty outstanding. It's very interesting, right? So, this is from Fitch. In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit. The repeated debt limit, political standoffs, and last-minute resolutions have eroded confidence in fiscal management, and they go on. So, the Fitch downgrade wasn't just reflecting the dispute, this recent dispute over the debt ceiling, but what they see to be as long decades, long patterns of fiscal mismanagement and standoffs that have eroded the reputation of government as a debtor.听
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MATT BURGESS: Okay. Let me ask you one follow-up question about what you were saying earlier. So, we could have a whole podcast on the Ukraine war and-听
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SASHA BREGER BUSH: Oh my gosh, it's such a big issue.听
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MATT BURGESS: ... the financial decisions that were made, which I'm sure were made not for financial reasons, right? But let me just ask you a clarifying question about what you were saying about the countries dumping US debt or US assets. To what extent, I always think in terms of trust when you're talking about countries trust compared to whom? So, do you see the pattern being that countries are saying or thinking some other large country like Russia or China is more trusted than the US because of what happened with Russian assets? Or is it more, well, we thought that just the US and the EU could be trusted, now we don't trust anybody, and so we want to bring it all back low locally or in crypto or things like that? Which of those is a second?听
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SASHA BREGER BUSH: Is more of the latter. It's not that there's some new more trustworthy replacement, because there's two major theories for looking at currencies, right? One is this kind of cage match between superpower currencies, vying for total world domination, and it's the dollar versus the Chinese yuan, and they're going head-to-head. That's not the theoretical perspective that I use in my own work. I see opportunities for, like I said, non-hegemonic currency systems, from multipolar currency systems based in historical readings drawn from the interwar period and also in the post 1970s period. So, what I see at least, and I see this in the crypto context, I see this in the gold context, that countries are diversifying their currency holding and currency usage as a response to uncertainty and fundamental uncertainty at that.听
I don't know that there's a much more trustworthy substitute unless you want to look at gold as the classic safe haven asset in that context. But gold doesn't need a government to make it trustworthy, which is interesting.听
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MATT BURGESS: So, getting back to the sustainability of debt, which is where we started, let's take your hypothesis, which you've laid out convincingly as a premise that the global debt market is going to diversify in terms of its currencies. What are the implications of that for a low-income country that's in debt distress? Does that help them at all?听
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SASHA BREGER BUSH: I'm so glad you asked this question, because I need to just do a little bit of history. Starting in roughly the 1970s, developing countries took on huge amounts of debt during that decade, associated with rising oil prices, which put money into the hands of Gulf region oil producers who then invested that money into the United States. And then you had all of these US banks looking to lend that money that had gotten cycled through across the developing world. And so, debts just skyrocketed. And there was this 1980s debt crisis that we talk about. In 1981 the US started raising interest rates, not a dissimilar story to what we've seen recently. And these giant debt burdens suddenly became very unsustainable for the reasons you've eloquently pointed out. Rising interest rates matter in terms of your ability to repay.听
And so, after this debt crisis in the 1980s was worked out largely vis-a-vis the International Monetary Fund and the World Bank, there were almost no other investors, no other governments, no other private investors were willing to keep lending to the 40 plus poorer countries who had just defaulted on their debts. And that's just reasonable. If you're going to default on them, they're not going to lend more. Who is going to help keep these countries afloat while the World Bank and the International Monetary Fund step in? And for several decades, they were really the only show in town in terms of creditors. And whatever the IMF in the World Bank did, other bilateral creditors, other governments and other private investors would follow. So if the IMF made a loan to, let's call it Argentina, then the private sector would come in and follow and say, well, if the IMF thinks it's safe and the IMF is working with this country, then it's probably safer for us too.听
And so the World Bank and the IMF really monopolized the credit market to a lot of middle income and lower income countries between the 1980s and let's call it the mid 2000s. But what's really interesting is that over the last 15 years, the kinds of creditors available for poor country debtors have diversified. So China rose and started lending a lot more to developing countries. Some of those loans in yuan, some in dollars. Private investors started lending a lot more. The percentage of developing country debt held by private bond holders has skyrocketed over the last 15 years. Even further regional development banks and other kinds of competitors to the IMF and the World Bank started rising up, regional development banks in Asia, in Central America, the rise of what used to be called the BRICS Bank, that's now called the New Development Bank, which is being operated by the BRICS country specifically to compete with the bank and the fund.听
The Asian Infrastructure Investment Bank, which is spearheaded by China. In addition, there's the rise of new kinds of currencies like crypto. And so, what I find fascinating is that debtor countries today seem to me to have more leverage in working out their debts, precisely because they have more options, there are more creditors willing to lend to them. I think the case of El Salvador is really instructive in this regard. El Salvador was hugely in debt, was facing emergency debt situation, and the IMF was stepping in to offer them a loan. And instead of taking an IMF loan, El Salvador borrowed some money from China. They borrowed some money from Regional Central American bank, and then they also introduced crypto, Bitcoin as legal tender alongside the dollar to help try to stabilize the domestic economy. And what's fascinating is that it was successful.听
The IMF was predicting massive failure. Private investors were predicting massive failure, and yet El Salvador managed to avoid a new IMF loan that would've had strict conditions and required them to make all sorts of difficult decisions, and instead pursued a series of other substitute options that ended up being successful. I'm seeing similar stuff in the case of Argentina, where Argentina has a huge amount of dollar denominated debt, and they've been working with China to swap currencies. They do currency swaps with China, so that Argentina has a whole bunch of yuan to work with that they can use for trade and to service their debts. And so frankly, I'm a little more optimistic about developing countries and the poorest countries' debt situations now than I would have been 15 years ago, 20 years ago when I started studying this issue.听
Just that the existence of more options and options for creditors competing against one another to court these developing country governments, this means that better deals can be made for poorer countries.听
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MATT BURGESS: That's really interesting. And as you said, it's quite optimistic, more optimistic than you said you would've been 15 years ago. And yet only a few months ago you wrote this article called The Whole World Debt Crisis. So now let's get pessimistic. What does it look like when those chickens come home to roost in your thinking?听
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SASHA BREGER BUSH: This is a really good question, and one of the big open-ended questions for me with this research, and one of the reasons that I'm interested in what's going on with debt now, is that I can't think of a historical period where so many countries as in addition to world corporations and world households have been in so much debt simultaneously. So, there's this synchronicity to it, right? Everyone is in debt and huge amounts of debt at the same time. And what's further interesting, and the World Bank and the IMF have commented on this, that these recent interest rate increases that the United States took, other countries have followed suit. And this is the most synchronous period of interest rate increases that we've seen in 50 years.听
So, the world is saturated in debt, and at the same time, central banks are all more or less raising interest rates, which raises the prospect of cascading and simultaneous defaults that a lot of different governments and a lot of different entities might simultaneously be finding themselves in debt trouble. And I find this interesting and concerning, because one of the questions it raises for me is who is going to be the lender of last resort if the whole world is experiencing debt trouble at a similar time? So, for example, right now the US is experiencing mounting debt troubles, the UK, Germany, Japan, these are huge economies who central banks have historically stepped in during times of global financial volatility to stabilize the situation. China's experiencing massive debt problems.听
Corporations who you think might be able to provide some kind of private sector stability in the global debt context, dealing with debt restructuring, perhaps purchasing bonds, they're also in trouble. So, one of the questions for me is who's going to bail everybody out? Where is that underlying support going to come from? Or are we going to see a cascade of defaults in a series of potential failures to stabilize? I'm not sure what this is going to look like. At other periods, financial crises moved around over time and geographically. And so, it wasn't the case that every part of the world was experiencing debt problems all at the same time. And this is I think a new wrinkle in debt crises. The United States has been in debt trouble before. Argentina has been in debt trouble before. Zambia has been in debt trouble before. Thailand's been in debt trouble before.听
But the fact that it's happening all together in a context of rising debts and rising interest rates is what's giving me pause about this particular episode that we're in now.听
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MATT BURGESS: So, if President Biden called you to the White House and said, I've read your article, really concerned about this, and Janet Yellen, what should I do about it? What would you say?听
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SASHA BREGER BUSH: That's a great question. I don't think there's one special solution. The United States has a number of problems that are trickling into its debt problems. So not only is growth slowing, tax receipts are slowing, but spending is rising. I think this is going to have to be a combination of cuts in expenditure and attempts to boost tax revenues. I don't see how we get out of this situation without both cutting spending and raising taxes. And the question is, what do we cut and whose taxes do we raise and how much? And that's what a lot of the debate in this country is about. I have my own personal opinions about what could be usefully cut starting with our defense budget and grotesque amount of defense spending in this country. It's half the budget.听
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MATT BURGESS: Let's talk about that a little bit, because I think how do you reduce the deficit in the US-听
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SASHA BREGER BUSH: That's the one issue that neither Republicans nor Democrats ever bring into this, right? It's always the huge chunk of our spending that nobody's willing to touch.听
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MATT BURGESS: I think it's bigger than that. Sometimes it seems like the conservative solutions are, we're going to cut spending, we're not going to touch social security, Medicare, the military, but we're going to balance the budget. And don't worry, the math will work out. And it's like, wait, are you going to cut more than half of everything else? Which obviously they're not. And sometimes they also want to cut taxes on top of that. And then on the left, they often want to raise spending, and then their tax solutions are, we're going to tax millionaires and billionaires, and there just aren't enough of them to generate that much revenue. You can do a wealth tax, even the wealth tax, if you buy analysis like Elizabeth Warren's about how much money it would raise, it still doesn't make a big dent in the problem. And also, it would be an accounting nightmare, right?听
Imagine a 2% wealth tax where somebody like Elon Musk says, if I have to make 2% of my wealth liquid, that sale would reduce my wealth and therefore reduce the tax that I owe. Just imagine how much fun the lawyers would have with that. So, my personal, I guess, pet solution for this problem is number one, return on investment. So, reducing waste. And I think that that's where I would focus on the military, in the sense that I do worry, even though we do spend a ton on our military compared to as a percentage GDP and overall compared to most other countries.听
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SASHA BREGER BUSH: All other countries.听
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MATT BURGESS: All other countries. And yet I worry that that's more important to global stability than we think. And yet on the flip side, I think it's the case that the military hasn't passed an audit in a really long time. They had some like 600 billion or something in the most recent one that they couldn't account for. And then also you read stories about how China is building their navy way faster than we are, even though they're spending way less. Right? Now some of that has to do with labor costs, but some of it must have to do with waste, and it's not just the military. There was a paper that came out recently that showed that the US construction total factor productivity has declined since 1950. So, there's lots of waste. And it seems like cutting waste is something that we could do on the spending side.听
On the revenue side, it seems obvious to me that, or at least I haven't heard a better argument for anything else than for having a sale or a value added tax. One of the criticisms that conservatives have sometimes raised in the US in response to the call for raising high income taxes, as they say, look at Hauser's law, the revenue, US government, federal government revenue as a percentage of GDP has been pretty flat for a hundred years, even though we've had a huge change in the top tax rate. But there's no Hauser's law across countries. So if you look across the OECD, there's huge differences in government revenue as a percentage of GDP, and they pretty closely track the value added tax, which strikes me as the most free market efficient way to raise government revenue because the distortion is a function of the tax rate and the revenue is the tax rate times the tax base.听
And so, you want to have as large a tax base as possible. And also, you want to have a tax base that's hard to offshore, which is consumption, certainly at least many aspects of consumption or like that, I'm not going to go get my groceries in Mexico if you charge me a sales tax. Now, liberals don't like sales taxes sometimes because they're regressive. Poor people spend a larger fraction of their income on consumption. But if you're using the money to fund government services that are progressive, then that addresses that. And then of course, auditing, right? There's a study that just came out that found that for every dollar the IRS spends on tax audits, especially the super-rich, they make $6 in revenue. It's tax the rich to become audit the rich. What am I missing?听
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SASHA BREGER BUSH: I appreciate this conversation and I think that there's a lot of good ideas for how to balance it, but I keep coming back to the practical reality, the US political system right now. I don't know if any kind of orderly workout of our debt problems is in our future. Have you been tracking the government shutdown back and forth at all? We are-听
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MATT BURGESS: A little bit听being in an institute that's largely funded by the federal government.听
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SASHA BREGER BUSH: A hyper partisan and polarized government right now, and I don't foresee an orderly policy discussion in which we each give ground and come up with some really efficient and wonderful compromise. That just does not seem to be in the cards for the US right now. My fear is of a more disorderly workout of a potential default, a failure to make a debt service payment, some kind of banking system failure that results in capital flight out of the United States. So, when debt crises happen across the world, they're typically, there's a crisis first, and then there's a workout. Often things get really, really bad before politicians are willing to come to the table and negotiate with their creditors and with one another about a workout. I am really pessimistic about our opportunities in the current Congress given our current presidential and congressional makeup for them to come to any kind of reasonable and sensible agreement in the time we have to work on this.听
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MATT BURGESS: I'm also concerned by our dysfunction but let me steel man the optimistic case there.听
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SASHA BREGER BUSH: Yeah, please.听
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MATT BURGESS: And the optimistic case would be more a case for a trend than a state, right? There's certainly lots of division, lots of polarization, lots of dysfunction. If you look at the most recent debt ceiling deal, it was a lot. You could argue it was a lot less disorderly than previous ones have been.听
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SASHA BREGER BUSH: But it didn't actually work anything out. They just raised the ceiling. There's no ceiling until 2025. So sure-听
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MATT BURGESS: That's fair in terms of the structural debt issues. But just in terms of the political brinkmanship, right? There was much, it seemed like the risk that the US was actually going to default on its debt because of the debt ceiling law seemed to be lower this time than even in some previous times. There have been some not related to debt, but there have been some bipartisan legislative successes in other areas. So, the CHIPS and Science Act, Bipartisan Infrastructure Law, being two examples. And my sense is that the engine driving some of those successes behind the scenes is that there's a growing and almost critical and sometimes critical maybe mass of moderates on both sides of the aisle that are willing, at least in theory, at least credibly to buck their side to avoid a disaster.听
So, Kevin McCarthy has a narrow majority in the house, and so to pass anything on party lines, he needs to have his far-right flank in line. But it seems more likely than maybe, at least to me than maybe it was 10 years ago, that if it was required to avert a near-term disaster. And you can argue that the debt crisis is a slow-moving disaster that won't get averted, but it's something like we're going to default because we can't raise the debt ceiling. It seems more likely than a few years ago, to me at least, that the adults on both sides of the aisle will be able to figure it out. Do you see a similar trend or am I being a naive Pollyanna?听
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SASHA BREGER BUSH: No, I would never call you that, but I don't really see adults within a million miles of the situation. I agree that it's great that they got together to avoid a short-term default, but they did it by making the problem much worse.听
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MATT BURGESS: How so? Because some would argue that they did so without eliminating some of the big legislative successes on things like infrastructure and climate change.听
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SASHA BREGER BUSH: They made no hard decisions about taxes and expenditures. They made no hard decisions. They kicked the can to 2025. They said, oh, let's just spend crazy until 2025 and we'll revisit it then. Right? So, what the debt ceiling deal did was say there's effectively no debt ceiling until 2025, spend away, borrow away. Yes, we averted near term default, but with a solution that exactly spells out Fitch's concerns, decades of fiscal mismanagement. I don't think the solution to debt problems is more debt. And that's how I see us filing onto this.听
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MATT BURGESS: Let's go back 15 years, another steal man to your argument. In, I think it was 2006, you can correct me if I have the year wrong, but somewhere around there, there was this thing called the Simpson-Bowles Commission, which was I think a bipartisan commission to try to come with solutions to precisely this slow-moving problem. And one of the solutions, not surprisingly, was, or maybe the main solution was we need to cut the deficit. Then the financial crisis happened. There was also around the same time, there's a famous paper by Kenneth Rogoff and Carmen Reinhart that argued that you shouldn't exceed 90% debt to GDP. And so there were lots of calls for austerity that came out of that. There was austerity that was required as, and sometimes deep austerity as a requirement for some of restructuring and loans in places like Greece.听
And the short-term economic evidence seems convincing to me against that advice being the right advice in the aftermath of the Great Recession. So, countries that, there's this famous paper by Olivier Blanchard and Leigh that shows that countries that projected a fiscal expansion, I think in 2009, grew faster in the next two or three years than they had expected. And countries that projected a fiscal contraction grew slower than they expected. And of course, that, as you talked about earlier, can exacerbate debt problems. In the long-term, I think your argument is very clear that our debt to GDP is going up, our growth is slowing down. So maybe that means that our debt is more important to get under control, but how do we think about it in the short term when there may be, and probably will be times in the near to medium term where we want to increase our deficit?听
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So, for me, a lot of the way I think about this is the redistributive consequences of different kinds of debt workouts. One of my biggest concerns. I strongly feel that in the United States we've been living beyond our means as a nation for a long time, and that this post Great Recession expansion that you were just alluding to, the post 2009 was almost entirely debt financed. That it's almost a false expansion in that way. It was funded by governments. It was a government funded expansion. And so, one of my biggest concerns with a more disorderly debt workout, which is what I see going on, is the distributional consequences, that we will start cutting services and government programs upon which poor and working people rely and not doing what we need to do to address wealth and equality on the other end.听
So, for example, I can't believe that we're still bailing out banks as one way to talk about the interaction between debt and solutions. We've spent half a trillion dollars-听
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MATT BURGESS: Hang on, let's stop there a second. So, what would you say to the architects of that bailout, as I understand it did so very reluctantly and did so because they thought that it was necessary, as ugly as it was, to avoid a repeat of the Great Depression. Is that wrong in your view?听
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SASHA BREGER BUSH: What I would've preferred to see is to let the financial institutions fail and to use the money spent bailing out big banks to cushion the impact of that crisis on households. I don't think Bank of America and AIG, and JPMorgan Chase should have received a penny of taxpayer money as a bailout in the wake of the Great Recession. [inaudible 00:56:11] caused the collapse, and I'd like to see it funnel towards households to support current consumption, to support mortgage payments and so on.听
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MATT BURGESS: Because again, just to push on this point a little more, I think the argument, I've read a lot and seen lots of documentaries on this, and so I feel like I understand at least what the public version of the folks thinking was. It was that if you allow, the banking system is so interconnected that if you allow the whole thing to collapse like a bunch of dominoes, then the crisis of access to capital and confidence and credit that that would create would have such a big effect on the economy that you'd have to spend way, way, way, way, way, way, way more government money to dig out of it. And it would take longer, again, compared to 2008 as occurred in the Great Depression. Do you disagree with that?听
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I think that some of that bailout money was spent indiscriminately. I think banks that made bad decisions and that put their money into risky investments that they shouldn't, shouldn't have received a dime of taxpayer funds.听
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MATT BURGESS: I'm glad you raised that, because that's a nuance that again, I've seen addressed in at least one documentary in order to get your take on-听
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SASHA BREGER BUSH: Banks such a calculated risks.听
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MATT BURGESS: The indiscriminate part. Right? So the argument, as far as I understand it, the theory that Hank Paulson and Tim Geithner and other members of the administration had in terms of giving TARP money to both banks that needed it immediately, and banks like JPMorgan that probably didn't, was that if they didn't do it indiscriminately, then any bank that was seen to be taking a bailout, would then have a catastrophic loss of confidence in a bank run because it would be a single to the market that they needed the bailout. It would undermine the bailout itself. Do you buy that argument? And if not, what would you have done differently?听
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SASHA BREGER BUSH: I'm sensitive to that issue, and I know that that issue happens in a lot of places. We've been seeing it over the last couple of years also, banks reluctant to take advantage of federal borrowing facilities like the discount window during the current banking crisis because of fear of the stigma that they're insolvent. But I think that the way we did it indiscriminately has fostered concentration, right? Has fostered banking sector concentration. So, we indiscriminately lend, companies that don't need the money, get it, in addition to companies that do. The companies that were more stable to start with, have additional funds, buy out the failing banks. Every time we have a crisis, and we bail out indiscriminately, we end up with fewer institutions on the other side-听
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MATT BURGESS: Consolidation.听
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SASHA BREGER BUSH: ... than we started with. It gets increasingly concentrated. I joke with some of my students that pretty soon we'll have one bank to rule them all and one bank to find them, one bank to bring them all and in the darkness bind them. That we're going towards this kind of mega monopolistic banking system. I would've preferred to see, for example, support for community banks and regional banks and other kinds of smaller lenders and not providing larger lenders. If we're going to blanket and talk about indiscriminate lending, let's do it in a way that's smart and that supports decentralization, supports community growth. Let's not pile money into JPMorgan, into Goldman Sachs. Let's talk about community level banking and decentralizing our banking system. I think it would be a good idea for us to start thinking about longer term goals and not just in the short-term saving, let's save the banking system and prevent contagion.听
The contagion happened anyway. Life was miserable for families anyway. I don't know what these bailouts did for normal families who were underwater on their mortgages. We saw massive increases in poverty, massive increases in hunger, increases in homelessness, increases in housing insecurity of all kinds associated with the Great Recession. So yeah, we bailed out those banks, but I don't see much evidence in the data I've looked at that it was super helpful for the average American struggling to put food on the table for their families. So, part of this question is who gets the monies first? Whose pocket does it go into to start with? And not just about the size of the bailout.听
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MATT BURGESS: And also, what are the multipliers I think is a huge issue in a liquidity crisis. But we could have a whole podcast on the bailout.听
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SASHA BREGER BUSH: Totally.听
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MATT BURGESS: We're almost out of time. So as a parting thought, what would be a piece of advice you would give consumers that are worried about this problem? Because of course, the debt problem as we talked at the beginning is not just a government debt problem. And what is one policy that you would prioritize if you were a policymaker?听
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SASHA BREGER BUSH: Those are really good questions. Gosh, I'm reluctant to give financial advice to debtors of any kind, but in terms of poor country debtors, borrowing in other countries, currencies is a horrible idea, right? It would be a really good idea to develop ways of borrowing and lending that expose poor governments to less foreign exchange risk. And even diversifying the currencies within which you borrow and lend would be useful. Too many countries have way too high a burden of dollar denominated debt and euro denominated debt. So, for my own part, I think that that currency mismatch is a real linchpin in the poor country's debt problem. And I think that there are possible solutions to that, including developing debt instruments that allow for borrowing in other kinds of currencies.听
The New Development Bank just did its first bond issue in South African Rand and is going to start lending in multiple currencies as a way to mitigate the exchange rate risk associated with exposure to the dollar specifically. So, I think that's really interesting and exciting from the perspective of poor country debtors. And I think, I don't know if there's an analog to that at the household level. You have to forgive me, I think about this in global terms, and that's where I don't think about it as much in household terms. The opportunity to diversify your creditors is not quite the same. It doesn't look the same at the household level as it does internationally.听
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MATT BURGESS: Yeah, currency [inaudible 01:01:57] an issue.听
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SASHA BREGER BUSH: Correct. And also, a lot of households in the United States right now that debts are increasing, they're borrowing to finance current consumption. They're borrowing to finance medical costs, to finance food, to finance the rising cost of energy. I'm not in a hurry to encourage people not to do that where they're not going to eat, not going to get necessary medical care. So, I think some of the issues facing households are structural associated with the price of necessities in the United States, associated with depressed real wages over time, among other issues, inequalities between labor and capital. And so, I'm reluctant to say that.听
But in terms of policy, yeah, we need to stop spending so much on guns and ammo and military bases, and we need to start feeding people and taking better care of one another. I would love to see us manage our debt problems in this country by thinking seriously about foreign policy and what we spend our money on in terms of war and weapons of death and destruction. That's where my heart is.听
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MATT BURGESS: Efficiency is the one thing that I would add to that, right? So, the healthcare system is hugely economically inefficient. The military's inefficient. Construction's inefficient. It seems like there's so many ways that we could save money and still build the things that we're trying to build. But it has been super fascinating. I really appreciate your perspective and your coming on Sasha Breger Bush, thanks for coming on The Free Mind podcast, and we'll see you soon.听
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SASHA BREGER BUSH: Matt, thanks for having me. I appreciate your time.听
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MATT BURGESS: The Free Mind podcast is produced by the Benson Center for the Study of Western Civilization at the 彩民宝典. You can email us feedback at freemind@colorado.edu or visit us online at colorado.edu/center/benson. You can also find us on social media. Our Twitter, LinkedIn, and YouTube accounts are all @bensoncenter. Our Instagram is @thebensoncenter, and the Facebook is at Bruce D. Benson Center.听
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