No Mercy / No Malice: United States of Debt

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Speaker 3 I'm Scott Galloway, and this is No Mercy, No Malice.

Speaker 1 Last week, we saw the tariff ward jump the lab and become a capital war.

Speaker 1 United States of debt, as read by George Hahn.

Speaker 3 Quote,

Speaker 3 I would like to come back as the bond market. You can intimidate everybody, unquote.

Speaker 3 James Carville

Speaker 3 America is blinking.

Speaker 3 The day after April Fool's Day, President Trump liberated the United States from an eight-decade run as the world's economic superpower, raising the cost of capital for the federal government, American companies, and consumers.

Speaker 3 If this sounds like stupidity, i.e. hurting others while also hurting yourself, trust your instincts.
But don't trust America. A blackout drunk is behind the wheel of the U.S.
economy.

Speaker 3 All around us, horns, bear markets, consumer confidence plummeting to historic lows, are blaring.

Speaker 3 In the back seat is a cultist, the GOP, who thinks the red lights Trump has blown through and the accidents in his wake are baller moves.

Speaker 3 Also in the back seat, a sulking teen, the Democrats, who's visibly upset but can't articulate what they want or suggest a better route. Riding shotgun, though, is an adult the driver can't ignore.

Speaker 3 The bond market.

Speaker 3 First-year economics students are taught that money evolved to make early barter systems practical.

Speaker 3 In his book, Debt, The First 5,000 Years, anthropologist David Graeber argues that the barter story was likely a fiction created by Adam Smith.

Speaker 3 Graeber believes the earliest coins were actually tokens used to keep track of debt. Quote,

Speaker 3 the moment one starts framing things in terms of debt, People will inevitably start asking who really owes what to whom, unquote.

Speaker 3 Debt is both a financial instrument and a social construct that binds people, firms, and nations to one another and links together the past, present, and future.

Speaker 3 As many anthropologists have pointed out, debt has moral implications around fairness, responsibility, and obligation, as it's a tool through which we impose order.

Speaker 3 Historically, Judaism, Christianity, and Islam outlawed interest under most circumstances, counseled their followers against taking on debt, and advised debtors to repay loans promptly.

Speaker 3 When someone saves another person's life, the person they rescued is said to be in their debt. When a criminal has served their sentence, they're said to have repaid their debt to society.

Speaker 3 In a debt crisis, the real risk is not default, but a breakdown of the economic, social, and political orders.

Speaker 3 How bad is this debt crisis? It's too early to tell.

Speaker 3 But as former Treasury Secretary Lawrence Summers explained, what has people most scared is the real-time erosion of the American-led economic order.

Speaker 3 Our reputation as a bastion of strength and stability with our dollar and treasuries representing safety is in jeopardy.

Speaker 3 Increasingly, we resemble an emerging economy where a crisis in confidence sends stocks, bonds, and currencies down and spikes interest rates.

Speaker 3 Quote, if the United States isn't credible, that makes the whole financial system less stable,

Speaker 3 Summers said, adding, we are more vulnerable to bad surprises from here than to good surprises,

Speaker 3 One potential bad outcome? A stagflation cocktail of high interest rates, low growth, and high unemployment.

Speaker 3 This week, Fed Chair Jerome Powell warned that Trump's trade policy and the resulting uncertainty may put us in a challenging scenario in which the Fed's dual mandate goals of maximum employment and stable prices are in tension.

Speaker 3 That's FedSpeak for

Speaker 3 this could be a cluster fuck.

Speaker 3 Since World War II, the U.S. dollar and U.S.
treasuries have been the backbone of the global economy.

Speaker 3 Charles de Gaulle called this exorbitant privilege, as it creates an asymmetrical financial system where foreign governments effectively subsidize American living standards and firms.

Speaker 3 Just how exorbitant is difficult to quantify, but as economist Barry Eichengreen argued, the privilege isn't what it was in the 1960s when de Gaulle complained that America was far too powerful.

Speaker 3 Still, our exorbitant privilege is a benefit, not a liability, as reliance on U.S. currency and debt lowers our cost of capital and increases the punching power of our economic sanctions.

Speaker 3 But in the wake of Liberation Day, analysts at Société Générale, Deutsche Bank, and Goldman Sachs expressed concern that America's privilege is eroding.

Speaker 3 A financial adage frequently attributed to John Maynard Keynes, John Paul Getty, and others, quote, if you owe the bank $100,

Speaker 3 that's your problem. If you owe the bank $100 million,

Speaker 3 that's the bank's problem, unquote.

Speaker 3 This is the paradox of debt. The bigger the outstanding balance, the more the risk shifts from debtor to creditor.
For a time, anyway.

Speaker 3 Trump, who bragged that he was the king of debt during his 2016 campaign, has leveraged this paradox his entire career, filing for bankruptcy six times.

Speaker 3 But compared to the federal government, Trump is a lightweight.

Speaker 3 Despite decades of warnings from economists and business leaders, increasing the debt is one of the longest-running bipartisan traditions in Congress.

Speaker 3 Conservatives, teetotalers, campaign as deficit hawks, then vote to increase the debt for unfunded tax cuts.

Speaker 3 Liberals, social drinkers, deprioritize debt by pairing big spending initiatives with modest proposals to increase revenue, i.e. taxes.

Speaker 3 And progressives, full-blown alcoholics, champion modern monetary theory, which holds that governments with control over their own currency can finance spending without worrying about deficits or debt as long as they manage inflation.

Speaker 3 How's that working out?

Speaker 3 America is drunk on debt. We continue to drink at the bar long after last call.
Spiking bond yields and the declining dollar are interventions. It's not too late to get sober, however.

Speaker 3 I believe we should do it for our kids as debt is a tax on future generations.

Speaker 3 But as I argued in my TED talk, despite saying we love our children, we're waging war on them.

Speaker 3 There's another reason to sober up. Self-preservation.

Speaker 3 Sovereign debt crises have been the green mile of empires, from ancient Rome to the French monarchy, to the Ottoman and British empires, to the Soviet Union.

Speaker 3 America is exceptional in many ways, but we are not exempt from history. Countries typically are not conquered, but go broke.

Speaker 3 In budgetary terms, some people call the U.S. an insurance company with an army.

Speaker 3 This is correct insofar as our largest deliverables are the greatest military in history and a social safety net that lags behind those of other industrialized nations.

Speaker 3 But our fastest-growing spending priority is the interest on our debt.

Speaker 3 If current laws remain the same, net interest payments will total $13.8 trillion over the next decade, rising from an annual cost of $1.0 trillion in 2026 to $1.8 trillion in 2035, according to CBO projections.

Speaker 3 Rising interest rates increase the VIG, crowding out mandatory and discretionary spending as well as our capacity to respond to future crises.

Speaker 3 General Omar Bradley once said, Amateurs talk strategy, professionals talk logistics.

Speaker 3 His point was that war plans, even when the Defense Secretary doesn't drunkenly share them with the Atlantic's editor-in-chief on Signal, don't count for much.

Speaker 3 It's the unsexy stuff, supply lines, resources, and infrastructure, that wins wars. The world's least sexy financial instruments are U.S.
treasuries.

Speaker 3 They have historically been viewed as the safest bet in uncertain times.

Speaker 3 U.S.

Speaker 3 debt is both a shield that protects us from higher borrowing costs and a sword that, when used in conjunction with the dollar as the global reserve currency, guarantees American economic hegemony.

Speaker 3 But as with any weapon, if we lose control of it, our debt can be used against us.

Speaker 3 The U.S. debt is roughly $36 trillion.

Speaker 3 Nearly three-quarters of that debt is held by U.S. investors, the Fed, and various federal agencies, including the Social Security Administration.
The rest is held by foreign investors.

Speaker 3 China is currently the second largest foreign holder of treasuries, behind Japan.

Speaker 3 After last week's shit show, some analysts asked, without hard evidence, whether China was to blame for bond market volatility.

Speaker 3 That question misses the point. It's not what what China did or didn't do, but rather what it's capable of doing, now that the blinker-in-chief has put a spotlight on our Achilles' heel.

Speaker 3 Dumping treasuries raises U.S. borrowing costs and, more important, undermines global trust in American leadership.

Speaker 3 It also hurts China as a fire sale means they'll take losses too, and a possible recession hurts everyone.

Speaker 3 Beijing's fear of of that economic pain has been a strong deterrent until now.

Speaker 3 A trade war makes the pain real, meaning China has a lot less to lose and potentially something to gain by using our debt against us. And China has a pain multiplier here.

Speaker 3 An increase of 50 basis points on a $36 trillion debt adds about $180 billion

Speaker 3 per year in additional interest,

Speaker 3 an equivalent of 13 aircraft carriers, we currently have 11, or $30 billion

Speaker 3 more than Doge claims it'll save taxpayers this year.

Speaker 3 Our debt isn't our only vulnerability. China holds 3.2 trillion US dollars, more than any other foreign nation.

Speaker 3 Devaluing the US dollar in the face of rising inflation would hurt Americans as they'd pay even more for less.

Speaker 3 China's mortgage-backed securities position is less clear, but as one of the top three foreign MBS holders, it has the power to spook an already troubled housing market.

Speaker 3 China's leading export partners are ASEAN, a 10-nation trading bloc in Southeast Asia, and the EU, followed by the U.S.

Speaker 3 Decoupling hurts both countries, but it hurts us more, as our exposure is greater and our pain tolerance lower.

Speaker 3 Remember, Americans freaked out about toilet paper and masks during COVID. China did actual lockdowns.
We lost 36,000 service members fighting in Korea.

Speaker 3 Before tapping out, China suffered 10 times the casualties. We don't have the tolerance for pain to exchange fire in an economic war with China.

Speaker 3 Ask Bo and Yang, who's more willing to endure hardship for the glory of their nation.

Speaker 3 In the same week that U.S. Treasuries surged 50 basis points, yields on German bonds were largely unchanged.

Speaker 3 According to Bloomberg, that's the biggest underperformance since 1989.

Speaker 3 In non-financial terms, as investors lost trust in the U.S., they they found safety in Germany.

Speaker 3 One fixed income portfolio manager put it this way, quote, BUNS have been one of the only rate markets that has acted as a risk-off asset during recent volatility, unquote.

Speaker 3 Are BUNS the new T-bill?

Speaker 3 Too soon to tell.

Speaker 3 But if last week kicked off a debt crisis that unravels the world order, Germany, even allowing for a recent increase in defense spending, looks like a paragon of fiscal responsibility compared to other industrialized nations.

Speaker 3 Ostensibly, HBO's Game of Thrones was a show about knights, dragons, Arctic zombies, and hot people.

Speaker 3 But underneath the veneer of sex and violence, the show was an epic story about the relationship between debt and power.

Speaker 3 As three economists who analyzed the political economy of Westeros wrote, quote, those who control the purse strings of the realm thereby acquire political power.

Speaker 3 And although it is a foreign institution, the Iron Bank becomes a key political player in Westeros, unquote.

Speaker 3 Full faith and credit is American for a Lannister always pays his debts.

Speaker 3 Instead of a mad king sitting on the iron throne, we have a very unstable genius, minus the genius, sitting behind the resolute desk.

Speaker 3 His small council of sycophants know better, but drunk on a cocktail of fear and greed, they cheer him on, claiming, he's playing 4D chess.

Speaker 3 This is the bullshit we hear from the sparrows who can't offer a counter-argument to what is depressingly clear. The president's actions are nuclear-grade stupidity.

Speaker 3 Chess?

Speaker 3 At this point, the Western world is expecting him to eat the pieces.

Speaker 3 Trump's game isn't chess or checkers, but Russian roulette with bullets in five of the six chambers.

Speaker 3 The interpretive dancing and intellectual pretzeling of the remaining cultists doesn't fool the Iron Bank, aka America's creditors.

Speaker 3 In season one of True Detective, hashtag awesome, Matthew McConaughey needs something from his former partner, Woody Harrelson. McConaughey convinces him with a simple statement.

Speaker 3 You have a debt,

Speaker 3 calling on his sense of equity and a bond they share to reciprocate. Europe, China, the Middle East, and America all, at one time, imprisoned people who couldn't pay their debts.

Speaker 3 With 4% of the world's population and 25% of global GDP,

Speaker 3 we have have a debt to our allies who've engaged in relationships that provide roughly 6x the prosperity relative to the rest of the world.

Speaker 3 However, that hasn't been enough, and we've accrued unsustainable debt.

Speaker 3 From George Washington through George W. Bush, we borrowed $10 trillion.

Speaker 3 During the first Trump administration, we borrowed $8 trillion.

Speaker 3 Biden was $4 trillion.

Speaker 3 We find ourselves ignorant of our debts and in a prison of our own making. A giant with feet of clay, ignorant to our vulnerabilities.
In sum, we, America, are acting like assholes.

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