Bloomberg Audio Studios, podcasts, radio news.
He wants to abolish the penny. He doesn't want to abolish it as much as he wants to give his boss a reason why we can't.
Well it's stupid.
Yeah, The thing is.
It isn't really really.
Turns out, the majority of pennies not circulating, thin going jars, sock drawers. Two thirds of the pennies produced in the last thirty years have dropped out of circulation.
Well, it's taken more than twenty years. But in his efforts to save federal dollars, President Donald Trump has boldly gone where no other president, fictional or otherwise you just heard from a West Wing clip, has ever dared to go. He's told the Treasury to stop printing pennies. Now, that will definitely save money, maybe as much as one hundred
and seventy nine million dollars. After all, it each penny costs more than three cents to make, apparently, but pennies aren't going to fill the hole in the federal budget for that. According to Treasury Secretary Scott Bessant, you need the Department of Government Efficiency DOGE to cut spending radically,
and you need deregulation to raise US growth. I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and welcome to trump Anomics, the Bloomberg podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. Our question this week is could the besant Trump musk plan for keeping control of America's debt possibly work? We have
the perfect Trump economists to help me do it. Bloomberg columnist and senior advisor to Bloomberg Economics, Bill Dudley, who spent quite a large part of his career thinking about the US treasury market as chief economist to Goldman Sachs and then president of the New York Federal Reserve. Bill, welcome and thank you.
Great to be here.
And back again. Anna Wong, chief US economist here at Bloomberg and formerly also an economist at the Federal Reserve and Donald Trump's Council of Economic Advisors in his first term.
Thanks Stephanie, good to be here.
Now. People listening are probably fed up with people saying Donald Trump as president is acting like the real estate developer he used to be. Well for one thing, it's just too easy to say, especially when he starts talking about all that beachfront property he's going to build in Gaza. But there is another way that President Trump has been reminding me more and more of his former self. He keeps talking as if the US government has a lot
more money than it really does. We're going to buy greenland, invest hundreds of billions in Ai, do what oil rich nations like Katara and Norway do, and set up a sovereign wealth fund. Now, these are all things that require big bucks, and well, the US doesn't have a lot of free money to spend. What it has, in fact, is a whole lot of debt. Bill let me start with you. You wrote a column in November after Scott Bessont was nominated, saying he would face two big challenges
if confirmed by the Senate. Ensuring that the world's largest government debt market functions properly was the first, and pursuing a fiscal policy that doesn't send the country's debt service costs soaring was the second. Now, we are obviously going to focus on that one, the fiscal challenge in a little bit, But given all the developments recently at the
Department of Treasury. I guess I have to ask you, are you more or less confident today of this administration's handle on the treasury market and its ability to make sure it's functions smoothly than you were when you wrote that column in November.
I actually am, Because Scott Besset is a market guy. He understands markets, He understands the importance of good communication from the Treasury to markets about what the Treasury is trying to accomplish in terms of debt issuance. And I think he's very sensitive to the level of long term meals.
One of his desires is to get long term meals down, and so that's also going to make him very careful about doing anything you know, radical in terms of changing treasury debt management practices, are changing the schedule of issues. So I think the big issue on you know, the treasury market function is really about fiscal policy. Sustainable physical policy, probably pretty manageable treasury debt market. Non sustainable physical policy, then the treasure market.
Is going to bark with the doge guys or the doge bags as some of them have been called. But these sort of young coders getting access to the treasuries, various systems which have had a lot more attention than they've probably ever had in their lives, or the various
systems sitting in the Treasury. I've heard even from some on Wall Street, some concern about accidentally, you know, a bit of code going awry somehow, that damaging payment's going out to the global market on treasury bills or other things. We've had President Trump say they found irregularities in the some of the debt. When you were sitting in the New York Fed you were very closely involved, but certainly very close to the day to day functioning of that market.
Should we take any of those sort of technical worries seriously, Well.
It's hard to know exactly what's transpiring, so it's hard to evaluate how big a concern you must you might have. I mean, you know, I can focus more on sort of the treasury issuance, and I'm not very worried about that because the Federal Reserve handles the auctions of the new TI Treasury debt on behalf of the Treasury, So I don't worry that that's going to be upset to any significant degree. But obviously, you know, if the payments
are you interfered with? And that reduces the confidence and the timeliness of the US government making good on its obligations. That could be obviously, you know, disturbing, But I just think it's hard for us, you know, sitting where we sit to value. Wait, I know how big of riskless is?
No?
I think that's right. Well, I think we can evaluate at least the plausibility of the bigger fiscal challenge that Scott Besson is facing has set himself but is also just facing in his current job. He's talked about three three three as his goal. Three percent economic growth a year for the US, a three percent budget deficit, federal borrowing, and an additional three million more barrels of oil produced today. That sounds like it would all be quite good for
keeping a handle on debt service costs. But I guess the real question is can he get there? And I asked you that sort of in a very flippant version of that question on Monday night in an email, and then you, being you, spent a long time that night calculating a very non flippant response, and I felt rather guilty in the morning for having kept you up. But you did work out a way that the bestent plan could be achieved. So just tell me what needs to go right for that to happen.
Okay, So to evaluate whether the mass works out, we utilize the Bloomberg Economics fiscal sustainability model, where I could input paths of nominal GDP growth and primary balances, assumptions and primary balances, and also assumptions of interest rate, the term structure.
So just to go back, just to give people a sense, it's sort of a tool that we have for playing around with different scenarios for US fiscal policy. And the things that you're changing, among other things, is the cost of borrowing, the bond yield, but also the primary budget balance, which is kind of how much you're borrowing before you get to the money you need to pay off your debt to be doing servicing the debt.
Correct and also GDP growth. The three pillars of besons ideal scenario or his goals in the next few years is this three three three right. The first three refers to three percent fiscal deficit currently Untracked hit about six percent this year of GDP, and our baseline forecast has it going out to nine percent of GDP in ten years. Time, and Scott Besson's goal is to reduce it to three
percent of GDP. The second pillar of his three refers to three million additional barrels per day of oil production. He thinks that by doing so it will generate non inflationary growth. And the third final pillar is three percent real GDP growth. So real GDP growth in the past year was two point three percent, and it was already quite a phenomenal year. The long term potential GDP growth rate for US economy is about one point seven percent.
So basically, in Besson's ideal scenario, every year we're seeing one point three percent additional percentage of growth. So I know Bill is going to talk about the plausibility of these assumptions, but you know what, I was just going to put all these three assumptions into the model and see what it spits out. So what it did spit out is that, Oh, by the way, another additional assumption I put in is DOGE. So I am assuming that DOGE is able to successfully reduce spending by four hundred
billion per year. And just to give some context of what that means, So in the current fiscal year, about twenty five percent of US government spending is indiscretionary purchases versus seventy five percent in mandatory for as things such as medicare, social Security, and also paying off the interest on your fiscal debt.
So what DOESE is working with is only twenty five percent of the overall spending.
Correct if they want to keep Trump's promise, which is not to touch anything related to the mandatory social security payments. So even within the discretionary that twenty five percent discretionary, twelve percent is defense. And surely we cannot really reduce defense spending in the midst of elevated geopolitical tensions.
What he wants to increase it in fact.
Right, So really we are talking about about one trillion non defense discretionary spending. So in fact Elon Musk's original pledge of cutting by one trillion is unattainable by this, you know, if he they are really touch the right change right, right, right, But anyway, I digress. So the point is, let's assume that DOGE is able to cut spending by four hundred billion for a year, which is half of the almost half of the non defense discretionary spending.
How do I come up with four hundred billion per year. Scott Besson mentioned the Grace Commission Report, which is a report commissioned by Ronald Reagan in nineteen eighty two to come up with recommendations on how to increase government efficiency and reduce fiscal spending. And that Grace Report basically came up with in today's dollar, one point three trillion dollar of cost saving across three years, which average to be about four hundred billion per year.
And I think if he managed that, he would declare a great success because he said a trillion. He never said a trillion a year, I guess, so yeah, he would count four hundred billion as a massive win.
Yes, four hundred billion would be a massive, massive win because that is forty percent of non defense discretionary spending. So in putting all of that into our model, what we were able to find is that whoe that indeed could lower the federal debt to GDP ratio from our current baseline of one point thirty do about one hundred percent of GDP growth, So thirty percentage point decline in debt to GDP ratio.
So just to be clear, it's we're nearly at one hundred now, So the stock of debt is almost the whole value of our annual output. In our sort of what we would consider to be more plausible scenario without all of this happening, groat's not picking up massively, without having an enormous reduction in non discretionary spending. We thought that debt was going to go to about one hundred and third thirty. Yes, and you could basically stop all of that by doing by following this scenario.
Yes, exactly, it's not going to go down. No, it's no, No, it's unfortunately it's not going to go down. But when you further look into what component of these I deal scenariow generate this thirty percentage point decline in debt to GDP ratio rather relative to baseline, the most important part really is the nominal GDP growth part, the growth pillar
of Scott Besson's three three three. Because without the growth pillars, just DOSH alone, which possibly four hundred billion per year in savings, would reduce primary balance by about point nine percent of GDP per year. That will get you their debt to GDP racial down by ten percentage point over ten years. But to get the other twenty percentage point, it's really interest payments getting the interest long term interest rightdown and GDP growth up. And one of the most
challenging part of this debt dynamics. It is indeed the interest payment, the debt servicing part of US debt because of the stock of debt and the increasing flow of that. Even with doche assuming four hundred billion reduction and fiscal spending, and in fact, by twenty seven, our net interest payment will exceed how much we're spending in non defense discretionary payments. So our net interest payments on our debt would be one point one trillion as of twenty twenty eight.
That's if they didn't go up significantly. I mean that's of interest rates stay broadly on the path we're expecting.
Correct, Okay, I think Bill might get into this why it is that the debt service payment is blowing up. So I think that the bottom line of this exercise that I did is that it reveals what an uphill battle the new administration has to contain the fiscal situation. Just because even if they do everything right they are, interest costs paid is set to rise and will become about a fifth of US GDP every year. US would be spending about twenty percent of the GDP in paying interest.
And on top of that, even in Scott Besson's ideal scenario, the fiscal deficit would still be at six percent by twenty thirty five, where four percent of those six percent of the deficit would be interest payments.
Okay, so this is pretty salutary for those who think that even the slash and burn will at least have this sort of positive side that you'll get control of America's debt bill. You've been around the block a few times when you hear that kind of arithmetic, and we still end up with a pretty large debt service cost. How plausible do you think any of this conversation is not.
Very plausible, probably for the numbers that to an outline, But it's also not plausible because think about the three percent GDP growth target. We're starting to deport workers from the United States, so we're actually lowering the growth rate of the labor force. The layor force isn't going to grow at all, probably over the next couple of years, both because of deportations and because of the retirement of
the Baby Boom generation. So to get to three percent GDP growth, it's got to all be come through productivity. You need enormous productivity games to get to three percent GDP growth. I don't see how that happens, especially when you're disrupting the global trading system by putting teris on across a lot of different products and it against a lot of different countries. So you're introducing a lot of
friction into the global economy, into the US economy. So I think the three percent GDP goal is not feasible. We're at full employment today, so GDP growth is going to be basically labor force growth and productivity. No labor force growth, so you're talking about productivity growth. Productivity growth is good, maybe you can get one and a half two percent. So I think three percent GDP growth is
not doable under the current regime. So the deficit, you're going to have slower GDP growth, you can have less tax revenue from a faster GDP. You can have the retirement of the baby boom generations that drives up entitlement spending sor automatically on Medicare and Social Security, which the Trump administration has ruled is off off out of bounds.
They can't they're not going to touch that. And then we have the repricing of all the debt that was issued over the last few years at much lower interest rates. Death service costs are going to go significantly. So it's a cleverest slogan, the three three three, But I think the chances of it actually being accomplished is very remote.
If this was an emerging market economy, you might say, well, hang on a minute, with numbers like this, surely they're just going to inflate away the debt. What would a bit of higher inflation. I mean, it certainly helps with that. That Anna was talking through the arithmetic of the nominal GDP, the cash GDP that gets bigger relative to the debt if you have inflation.
Bill Well, absolutely, we saw the debt to GDP ratio go down during the pandemic, not because the counting was doing well, but because nonmal GDP was growing very quickly because of very high inflation. So yeah, higher inflation, faster nomal GDP growth, that you can actually reduce debt. But as we've seen, that's not really a politically feasible solution
because we've seen that people hate inflation. So if the Trump administration goes down the path of sort of saying let's have more inflation, and that will inflate away the debt that's not going to be politically feasible. Also, you know, the Fed Reserve is going to continue to do their job.
I mean, there is a lot of questions about, you know, the Trump administration raining in the independence of the FED, But first of all, I don't think that's easily easy to accomplish, and before it's accomplished, the FED is going to continue to be on the case of trying to
push inflation back sustainably down to two percent. I think the Fed's credibility is still quite high, and you can see that by the fact that despite inflation running above the FED subjective for four years now, long term inflation expert dictations are still pretty well anchored around two percent. So markets believe that the Federal Reserve is going to do their job. I believe that the Federal Reserve is
going to do their job. Doing their job, though will probably make the Trump administration unhappy with the FED.
I suspect if I was Elon Musk, I would think that all of us, and certainly you and Anna were sort of trapped in a very kind of narrow mindset that you weren't realizing the potential of this exciting world, you know, deregulation, AI, all of those things could transform productivity in growth.
Now they could, but it takes these things take a long time to sort of play out. I mean, you look at you know, the in the development of electricity generation in the US in the late nineteenth century. It took about twenty years for that actually to change how
we actually did man in factoring. So you have the invention and then and then and you have to figure out how do you actually use it in your business processes, And to really get the benefits of things like artificial intelligence, you actually have to change how you're organized, how you
conduct business, and that takes quite a bit of time. So, you know, we can, you know, we can debate about how big AI is going to turn out to be, but even if it does turn out to be transformational, I think it's going to take quite a long time to play on. And I think that same it's true for deregulation. I don't think you you know, can deregulate, you know, very quickly. And even if you deregulate, how
much benefit are you going to get it? People think about, well, what's going to happen four years from now, when maybe the Trump administration is not empowered and all those regulations come back. Are you really going to change your investment behavior because things are better now? Or are you going to be concerned that this deregulation effort is going to fade away once we get to the to the next administration.
Anna, I will say, looking at your numbers, it did make sense to me why Scott Besendon his interview that he did with US with Salaiah Mosen last week, he was focused so much on bond yields, on long term borrowing costs for the government. That's the key factor in even making your numbers add up right exactly.
I mean, after I conducted that exercise, it's clear why It's not just Scott Bessons. We also have heard from Trump a week agode that all of a sudden he approved the way that Federal Reserve is conducting monetary policy. He said he thinks the Fed is correct to keep rates constant, which was a very surprising thing because.
Just so earlier this week he seems to have gone back on that. He's tweeted or truthed that he wanted he thought interestrates should go down as he's putting tariffs in.
Well, don't expect consistency here.
Is he saying that Fed should lower rates or is he referring to the tenure yields?
Yeah, it's a good question. I don't know that he's.
Actually talking to the market now because he realized after the one hundred bases point spike in ten year yields since the Fed started reducing rates, Trump realized that the Fed doesn't hold the key to long term interest rates.
H that's interesting. So the final thought, I think we all agree that making growth, getting growth up, increasing productivity is really hard. Seriously slowing the path of spending and cutting the budget deficit, it's hard. Actually, the last time we did both of those things we saw a significant increase in productivity and a significant reduction in the budget deficit was in the Clinton years, as Anna pointed out
on doing Boy Television the other day. And you know, times were very different then, especially in Washington, and people tend to say, oh, he could do that, he could cut the deficit because politics was much less polarized. But I was reminding myself that actually there wasn't much bipartisanship in that area. Even then, there was not a single
Republican who voted for the Clinton Deficit Reduction Act. So I guess i'd ask both of you, whatever we think about the way that DOGE is going about well constitutionality of some of what's happened, is there an advantage to having a strong executive and a rather supine Congress if you're going to actually make progress on any of these things. I guess I'll start with you Anna.
Well, Stephanie. You know, it's funny because the other day I met with somebody who actually tried to deregulate but failed, and I asked him what's the lessons? Were the lessons?
So he is actually Lord Dominic Johnson from UK, who is the co chair of the UK Conservative Party, and he was just speaking about DOGE at Harvard Kennedy School also and he said the reason why it's very difficult to get the support for degregulation, which is a key pillar of the Trump administration's vision to generate non inflationary growth, Lord Johnson, it's because the beneficiaries of deregulation is very diffuse, Whereas there are a lot of wetted constituents who are
benefiting from the regulations and who would really complain very loudly. So at the end of the day, it's very hard to get the kind of support you need to push through these policies. So as a result, he would advocate that the way to conduct to really cut government spending and deregulate is to go bold and break things and then start from scratch again. He at least from a person who has done this and failed. He said, that's the way. So I think that's pretty interesting. Bill.
Well, you can certainly do more if you act in this kind of aggressive fashion. But you know, I worry about the indiscriminate nature of this approach because there is some regulation that actually does good. For sure. I certainly like the fact that we have an FDA that make sure that drugs are safe. I'm glad we have a Transportation Environment Transfer Tation that makes sure that the planes
sight flies safely and uh, real traffic moves safely. So this idea that you know, all the all the regulation we have is sort of for non productive uses, you know, has not productive benefits. I think that's that's something that I think is just not true. And then the question is how do you determine the good stuff from the bad stuff? And I think that's really really difficult to do. I think the approach that's being taken right now is
pretty indiscriminate. So I would imagine that, you know, some regulation that should go away is probably going to be eliminated. But I also worry that some regulation is actually very supportive to the well functioning economy and protects the households and businesses is also going to be you know, so it's going to be throwing it and the baby out with the bathwater. That's what I'd be worried about.
Well, this is the way to find out. I guess that you get rid of everything and then see whether anyone notices, or you get rid of quite a lot to see if anyone notices. I mean, I say that flippantly, but actually the fiscal the austerity quote unquotes that was in the UK after the global financial crisis, the really significant cut was in local government spending, and it took quite a long time for people to realize that those cuts had come in places that we were really going
to notice down the road. So it might take longer than you thing. Thank you very much, Bill, and Anna occurred to me. I've been saying over the last few weeks that Wall Streets seemed to be betting on the best of all possible trumps. But I realized, because we're going through as numbers, it's the bestn't of all possible trumps. Ho ho. Thank you for listening to Trumpnomics from Bloomberg. It was hosted by Me, Stephanie Flanders, and I was
joined by Bill Dudley and Anna Wong. Trumpnomics is produced by Sammer Sadi and Moses and Am with help from Chris Martlou. Sound designed by Blake Maples. Brendan Francis Newnham is our executive producer and please do help other people to find this show by rating and reviewing it high me wherever you listen to your podcast
Mm hmm