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Joining us stay at the World Economic Forum, and please to cite Gary Khane, the IBM Vice chairman and former National Economic Council Director under Donald Trump. Gary, Oh, Gary, it's going to see you.
Great to be here. Thanks very.
We mentioned this the last time we caught up in New York, how different things might be this time around. What are you hearing here in Davos, Switzerland. How different are things this time around compared to years gone by?
You know, I started out with the pro polease in making.
I always take divis with the grain of salt because you know, you have lots of different opinions here, and I'm always the start of a new year.
Everyone likes to be excited. Everyone likes to be pulled up.
We obviously went through an inauguration and change of power in the United States yesterday.
We know that's fairly positive for business. On the fundamental level, it's positive for business.
It's a pro business, it's a smart regulatory environment.
So everyone's thinking that's very good for business.
But I think we're going to utimately have to see what the year brings, because there's still more unknowns than knowns in the equation at this point.
When you were last in the administration, the focus was on taxes first, and I spent the best part of the year trying to work out that tax bill. The following year things shifted towards trade. There's a sense this time around that maybe we can do everything all at once. How difficult is it to do everything all at once?
So I'm not in Washington right now, so I don't know.
I can't speak for them, but doing taxes by itself is going to be quite difficult. You know, there are a lot of different constituencies in Washington when it comes to doing taxes, and look, there are small margins of victory.
So especially in the House.
You know, you've got two or three today, it might even be one or two seat majority in the House. And within the House, you've got certain members that want certain things to be able.
To vote for a tax bill.
You've got certain people that are deficit hawks, so they do not want to see the deficit go out. You've got other members that want to bring back as much of the standard, the state and local tax deduction assault as we always call the assaulted DUTs. You've got other members that want to just extend everything in the Trump's tax cuts. Then you've got those that want to not only extend what's there and all of the additional things that were talked about on the campaign trail. All of
those things have a price tag associated with them. So it's four trillion, five trillion, six trillion, and you try and balance those with the people that don't want to have a deficit, and ultimately something has to be worked out.
And remember, the only thing that really has.
To change because it expires at the end of the year, is the personal side of the equation. That doesn't mean they won't touch the corporate side of the equation, because to make this all work, they're going to have to balance it. It's a balancing act, and there's numbers, so you're going to need revenue from certain places to be able to give it in other places.
It's a balancing act for Congress, and each congressional member has its own power just simply because of the thin margins. It is a one man show that when it comes to tariffs, and are you surprised that we didn't see more aggressive tariffs implemented or at least even announced from the get go, other than what we heard about from Mexico and Canada.
No, I'm not supplied prize. I think that even when I was there eight years ago, there was always a heavy debate on tariffs, on the positives and the negatives of tariffs, on the intended consequences and the unintended consequences. You know, it's day one of a four year administration.
You don't have to put tariffs on day one. I'm sure there's an enormous amount of debate going on in the White House today as there was in the transition, on what to do with tariffs, Where to put tariffs, Where can tariffs be helpful?
Where can tariffs be hurtful?
There are places, i'm sure where there's pretty universal agreement that we should tariff. There's other places where there's probably divided opinion, and there's places where people think there should.
Not be terriffts.
So we're here in Davos where everyone's incredibly excited about all the good and not really considering the potential inflationary component of this, the potentially the potential rate rise that could accompany this, or the potential slow down from an increase in the price of goods. Time when spending power has been coming down. Are you trying to tell corporate executives who you meet with or others maybe tep or your enthusiasm.
No, I'm not trying to tell corporate executives anything. I think every one of us is eyes wide open. Everyone has a fairly good view.
Of what's going on in Washington.
Look, the one thing about the Trumpet administration is they're very transparent, and the administration is very transparent. They've had enormous access. The corporate community has access, The corporate community has been involved. The Trump administration has wanted to hear from corporate community. So I don't need no one needs to tell the corporate community to slow down. I think what people are starting to understand is what are the
intended what are the unintended consequences? As you've talked about we've seen a higher rate environment. We're talking about an environment where we may not get cuts this year. We're talking about a steeper and steeper yield curve. I think the realization that the COVID financings that we're five year financings come do there's a big maturity wall coming up.
There's also a lot of deals in the pipe. If you look back at the vintage years of sort of twenty ten on in the venture world, the private equi world, there's been very little to no liquidity out.
Of twenty ten vintages on.
There's a lot of investors, especially pensions and endowments, started looking for a return of capital from those vintage years.
There's a lot of pressure in the.
System to do transactions and get deals done. We all feel that, we all know that that would be great if we can get it all done. But I think there's a realism that not all this can get done at the same time, and we'll have to see what the market can bear it. And we have all of this at the exact same time when we have very tight credit spreads and very high multiples in the market.
You've said it, repeat to b coming into this year, there's a lot of paper that needs to be moved. There was a moment in the hearing with Scott Besson, the incoming Treasury Secretary, where he was asked about scrapping the debt ceiling, the debt limit, and he said something instead of the warrant didn't really let him speak, But what I ultimately was going gut was that he wanted to survey market participants, And what I sensed about where he was going was he wanted to find out how
market participants would respond to that headline. Now, you've been in both office and the administration, and you've known the business financial markets and your time at Goldman Sachs. What would you be telling Scott Besson about that, about how that headline would be absorbed in financial markets? I mean, you're concerned that we could get some pushback to some of these plans.
Well, I think you will get some pushback some of these plans. You know, the market.
Is getting to a point now where they're telling you we are more concerned about the debt and the deficit today than we have been in a while. And I think there's a few factors there. The debt and deficit continues to get bigger, but we're also getting closer and closer to that Social security sort of tipping point, you know, and they work together. We all know that the Social Security Trust Fund will be unable to fund itself in a matter of years. So it's five six seven four,
you know, somewhere in there. And I think we're all confident that no one's going to cut Social Security payment. There's no member of Congress that is going to vote to cut soci security papers, nor should they. So not only do you take the pre existing debt that we have, the debt that we're going to continue to build by running this government, you're going to have a new source of additional debt called Social Security.
That you're going to have to have to fund.
So you start putting all those things together, and you look at what the government's need going to need to borrow in the near future, and it's a fairly large number. And the rollovers, the quarterly rollovers, are going to start getting quite staggering. Add to that that the prior administration did not really elongate the maturities on the debt. They were using a very short dated maturity system, which I didn't understand when we had low rates. When you have
low rates, you want to elongate your debt. We're going to have to deal with the problem that we never really put duration into the pre existing debt. So we've got to roll the duration of the pre existing debta out. We got to add to it the exist the new debt we're going to create, and we got to be prepared for Social Security.
And do you think we can term out of debt, just to unpack one piece of that. If we turned out the debt right now and you're fantaska this. We talked about it for front end of the curve. At the moment it is priced around FED funds on twos. The curve is what forty to fifty basis points steep, maybe forty something like that. The last time I check, historically, that's.
Not that much.
I mean, I don't think there's any real sign that we're freaking out about the fiscal definity. Yeah, that's before you even do all of these things you've talked about.
We're not.
Look, I think is a good opportunity to term our debt. We've got a, as you said, a forty point inverted yield curve.
Historically, we've got to positively shape yield curve.
You know, we still need to continue to elongate our maturities in the United States.
You think we have the space to do that right now? Because I think it's about forty basis points steep a twos versus ten. Do you think we have the space to do it still steep?
Yeah? Yeah, it's Steve, You're right, we do. We do need to do it in forty basis points. I still think it's the right place to go.
Your message to the people that didn't live a steep yield curve and things that right now at the moment like this might be it. What's your message to them?
My message is go back and look at history.
You know, if you go back and look at history the one hundred years, your ten year rate average in the United States is over four percent. If you look at the steepness of the yield curve over the one hundred years, we've always had one hundred and fifty basis points of steepening in of steepness in the curve if you look at FED funds out so we are still in a relatively flat curve.
Gary, appreciate your time. Always shop. It's going to catch up. Thank you, Sir, Gary Khanna the former National Economic Council Director and of course formerly of Goverment Sachs as well