Gridlock in the U.S. Housing Market

0:00Adam Tooze: I'm Jessica Krul, Editor-in-Chief of Allure, and I host the brand new podcast, Perspectives. At Allure, we cover beauty every day. But beauty is so much more than products and trends. It's connected to our health, our identity, our sexuality, and the way we understand our bodies. This season of Allure's Perspectives is all about breast health, a deeply personal topic that so many of us think about, but sometimes feel a little uncomfortable discussing out loud. And that's why Allure, we want to talk about it. Whether it's actor Olivia Munn opening up about her breast cancer and breastfeeding struggles, sex educator Erica Hart revealing how Going Topless started a movement, Raven-Symoné detailing the intimate relationship between breasts and body image, or experts breaking down the latest on GLP-1s and cosmetic surgery advancements.

0:51Adam Tooze: These conversations challenge the way we think about beauty, but they also challenge the way we think about our breasts and our bodies, and of course, the way we think about ourselves. Listen to Allure Perspectives and subscribe wherever you get your podcasts.

1:16Adam Tooze: Hi, and welcome to Ones and Twos' FB's Economics Podcast. Every week we take a couple of data points, use them to try to explain the world. I'm Cameron Abadi, FB's Deputy Editor with you in Berlin, Germany. Joining us as always is FB's economics columnist and Columbia University professor Adam Tooze this week in New York. Hi, Adam. Hi, Cam. So, two segments this week in the second half of the show. We're going to be talking about Brazil, specifically the Brazilian election that is coming up this weekend. At least the first round of it. Stick around to hear about that race. But first, another data point for you all, and that is 3.98 million.

1:59Adam Tooze: That is the seasonally adjusted annual rate of home sales in the United States as of August. That measure was taken. That is the lowest level since July 2025. It's only the second time, apparently, that sales have dropped below 4 million, according to that annualized rate since October 2024. And yeah, this is not necessarily a housing crash that's happening in the US, but clearly the housing market is seizing up somehow. Inventory has climbed. Buyers would seem to have more choice and leverage than they've had in years. But yeah, clearly they are not pulling the trigger. And that may be because of the elevated interest rates that are in effect in the United States by some measures.

2:53Adam Tooze: The average 30-year fixed mortgage rate is already past 7%. ...first time in 20 months. It's rough news for the housing market and for home buyers already struggling with rising prices elsewhere.

3:05Cameron Abadi: Yeah, well, new home construction, that's down, while the cost of those homes and most everything else these days is up. It's a very tough combination.

3:15Adam Tooze: And yeah, that interest rate is where this stops really just being a housing story because, yeah, obviously there are a lot of factors that go into determining that interest rate. And yeah, there is just generally a lot of competition in the United States for the pool of capital available for things like mortgages. And some of that money is clearly going into the AI build out that is running rampant in the United States, you know, with data centers and chip and power plants and etc, etc. All we've talked about. And yeah, this is obviously a big story. We've talked about the size of the U.S. housing market before.

3:56Adam Tooze: And so as the U.S. housing market goes, so goes much of life in the United States, seemingly and perhaps beyond. So, Adam, to start off with, yeah, maybe just a basic question. What exactly is going on in the housing market? How would you describe the dynamics in play right now?

4:14Cameron Abadi: Yeah, I mean, a term which seems to be commonly used by analysts is freezing up or it's frozen. I mean, I think you captured it very well. The mortgage rate, as you say, is over 7%, which is lower than the 7.7 rate that was hit in 2023 when inflation spiked. But the crucial point is that as recently as 2022, you could get a mortgage in the US, the very beginning of 2022, that is, you could get a mortgage for as little as 3%. And during COVID, it fell even lower than that. That's a 30-year fixed rate mortgage of less than 3%. So this is a huge financing shock, an increase in interest rates from 3 % to over 7 % is a huge financing shock to what is, as you already hinted, the largest single asset class bar none in the world.

5:04Cameron Abadi: You know, we talk a lot about US treasuries on this show, because that's a$40 trillion asset pool. American domestic real estate, so housing is$55 trillion, of which owner occupied is$48.7 trillion. So this is flat out the single largest element. If you add in commercial real estate, it's$26 trillion. So for the financing costs on a market that large to shift as much as this is a story that ought to rank alongside the Treasury's story in terms of its macroeconomic implications. Indeed, because it impacts households and therefore else impacts consumption, in some senses, is a more direct impact on people's lives.

5:48Cameron Abadi: Indeed, another way of describing this is that this is another aspect of the cost of living crisis and conversation that's been going on in American society, as it has in so many others in recent years, and particularly since COVID. And it's also a K-shaped story. So it's a story about the division within American society at its most elemental level, namely, you know, what do you pay and how do you finance your home? so american mortgages are very peculiar beasts by global standards in that they offer fixed rates for very long periods of time but with the one-sided advantage to the benefit of the borrower that they can refinance whenever they like essentially for relatively modest cost and it's a normal thing to do and so what happens is that when interest rates fall people who are well organized financially refinance their mortgages so currently about 50 percent of American mortgage holders are locked in on 30-year interest rates, which are less than 4%.

6:47Cameron Abadi: So incredibly good financing, given that the inflation rate in the US is currently ticking along at 3%. So half of that population is locked in. And for them to consider moving, they would then have to refinance, presumably if they're moving up the chain, more money at a rate which was not 4%, but 7%. So it's incredibly off-putting. But even over the period of the last 12 months, if you had taken out a mortgage 12 months ago, over the lifetime of a 30-year mortgage, your interest costs would be tens, if not hundreds of thousands of dollars lower than they are right now. So you can see why from that side, there is a real freezing pressure going on.

7:28Cameron Abadi: So what's happening is precisely what you described, namely a contraction of the overall market. A market economist would say, well, the way this works is if demand falls, the price should fall. But the problem with the US housing market right now is that structurally, if you look at household formation, as compared to new construction of buildings, there's a deficit, a fairly substantial deficit. And so prices are remaining stuck high. But even at those prices, not many people are actually willing to sell because of the refinancing costs when they move into a new property and the entire market is in this sort of frozen state.

8:08Cameron Abadi: There were periods in the early 2000s during the real estate frenzy before the 2008 crash where house sales were running at the rate equivalent to 7 % of households. So real considerable churn. Not all of those of course were properties that people lived in but nevertheless it suggested a very large mobility. That rate is half or less than half that currently. So we really are talking about a kind of a kind of deadlock.

8:33Adam Tooze: Yeah, it really is an extraordinary market, the housing market in the United States, just how deeply anchored it is in US culture in the ways I guess you're also hinting at. Like the idea of owning your own home is kind of inseparable from the American dream that is kind of part and parcel of life in America. So, you know, and then an entire economy grows up around that. I mean, like the kind of economic structures, all the mortgages that you're describing and the the the legal then backing for that and uh the the kind of back to

9:07Cameron Abadi: the they go back to the new deal so this really is the a key element of the american welfare state essentially because fannie mae and freddie mack backstop this mortgage structure which is not really viable from a purely private economic point of view so it's a huge unacknowledged element of the debt subsidy regime or the debt management regime that is the key element of the american welfare state. The other one would be student loans, right? So there is these regimes that manage debt and structure them and classify American society, right? Because to qualify for one of these loans, you have to have decent credit.

9:38Cameron Abadi: So then you have the whole category of people who are in subprime or jumbo. It is, as you say, like a social model inscribed in credit relationships.

9:49Adam Tooze: Yeah, it's actually almost important to emphasize that, I guess, for people who are not in the United States. I mean, I remember growing up in the US, I was told it was important to get a credit card in order to build a credit score so that you could buy a home later. I mean, that chain of financial steps that is just kind of taken for granted in the United States is not something that necessarily is even legible elsewhere. But to get back to the specific scenario in the United States right now with the interest rates increasing, I'm curious why that's the case, because there's a lot of talk about the Iran war leading to inflation leading to the need for higher interest rates.

10:30Adam Tooze: But this doesn't seem to be an oil story. I mean, the price of oil is steady right now, and yet interest rates are continuing to go up. So is this about a broader growth story in the United States that is sort of producing increased interest rates, a sort of overall economic growth, a labor market seems to be picking up? Is that what's going on here?

10:52Cameron Abadi: Yeah, there are a variety of contending stories about these interest rates. This is one of the things that folks maybe outside the financial markets don't appreciate. Something we come back to over and over again on the pod, the fixed income. So bond issuance, because the mortgages are ultimately refinanced through bonds, which are issued by banks, mortgage banks, or Fannie Mae and Freddie Mac overwhelmingly. And so this then becomes part of the pool, which sits directly alongside US Treasury debt. And what determines those interest rates, those yields, in other words, the relationship between the price that you pay for the bond and the underlying flow of income you derive from it is determined by this complex array of factors which provide the stuff of endless conversation about the economy much more than say chat about how apple's doing or nvidia which is really the stock market story the macro story is dominated by the questions you've just raised and so there is you know the possibility that this is to do with particular supply chocks and therefore pressure on prices, which one could generalize to a more general story about a tendency in the modern economy to supply shortage, which tends to drive prices up.

12:02Cameron Abadi: It could be, on the other hand, a growth story, an excess of demand story, which would be AI in the American case, with huge volumes of new debt being issued and rapid growth. Then, of course, there's the fiscal conversation. Is the problem Ultimately, the American government is issuing too much debt. And then there's the drama of the Fed and, you know, who's in charge of the Fed and what we think Fed policy is going to be. And because the Fed has a huge say in the long run development of long run interest rates in particular. And all of those kind of drama narratives are out there right now. I think the smart money currently is to say, yes, the structural pressure from price shocks.

12:44Cameron Abadi: Yes, there is also structural pressure from very large government issuance, but the more likely force driving this right now is some sort of story about the relative robustness of the US economy. And that actually is sustaining a lot of economies in an up drive currently. We're not in a deflationary moment by any means. And then furthermore, there has been a substantial shift in the markets assessment of the likely reaction function of the Fed. Last year still, the markets were betting that we would see multiple rate cuts by the Fed to address a slowdown in most of the American economy. Now, after the display of bravery by Walsh and the Fed leadership, markets are pricing into increases in interest rates from the Fed side for the rest of this year.

13:35Cameron Abadi: So that's a huge shift. And when you put all of those factors together, you know, some people will say, well, this is really alarming and this may produce instability as hedge fund strategies unwind and we're back to the treasury market story. But a calmer assessment would simply be, well, this is exactly what you would expect to see interest rates doing in an economy with 3 % inflation currently that seems to be running hot and where all of the taps are on. So this is exactly what fixed income markets ought to be doing. And mortgages are part of that giant pool. It is the logic of this lock-in effect that generates particular issues and the fact that has been under construction of housing.

14:16Cameron Abadi: But it's not in and of itself a sign of anything disastrous happening here.

14:23Adam Tooze: I'd be curious to take a closer look at one of the factors you mentioned, namely the role of the AI economy and how that is relating to the soft housing market. I mean, obviously, there is a boom underway in terms of the investment in the AI economy. We've talked about that at length before. But are these AI data centers, say, pushing up the cost of capital that could go towards financing mortgages? I mean, is that part of the reason that the housing market is freezing, as you mentioned it? Or are the costs of energy going up because of these data centers that obviously require so much energy?

15:10Adam Tooze: I mean, is all of that playing a direct role on the housing market?

15:14Cameron Abadi: The way I would think about this is not through a kind of, you know, piggy bank of money that has to go either to houses or to AI. And then say, well, AI is somehow crowding out housing. You know, the volume of debt issuance by AI is now large enough to be up there with, say, treasury issuance in certain categories. So it's certainly a big factor. But an awful lot of that is being generated essentially by credit creation within the financial system itself. And so that's the connection, which is that this boom in finance leveraged investment in AI is creating a hot economy to which the Fed then responds by raising interest rates.

15:54Cameron Abadi: And so then within the general kind of undulating, quite kind of baggy economy, which isn't tightly constrained by a pot of money, which has to go one way rather than the other, but is this kind of, you know, expanding kind of liquid balloon kind of structure of credit. As the hot bit drags the entire economy forward and the Fed responds to that, the more slumber moving bits are squeezed. And that is what we are seeing. So the interest rate for the housing market would probably, the equilibrium interest rate would probably be lower than it would be for the AI driven economy. And so the Fed has caught between one and the other.

16:32Cameron Abadi: And we're seeing this very severely in the supply side. So in the construction of everything other than data centers. So data center construction since the end of 2023 has increased at an annualized rate. So if you add up what they do per month and you multiply it by 12, we've seen a$50 billion increase in spending on data center construction. And we've seen$120 billion collapse in the construction of absolutely everything else. And that's exactly what you would expect in this kind of, you know, kind of ooze model of the economy where the bit that's growing fastest is dragging policy into a higher interest rate level, which the AI sector can absorb, has to absorb because they're so obsessed with speed.

17:19Cameron Abadi: They have to move forward on this, whereas everyone else in every other bit of the construction economy is just going, well, you know, in due course, we'll do that project. But now at 7 % plus interest rates is not the moment to do it. So that all gets deferred. So I would put it in that kind of way. It's more a macro crowding out, if you like. And it's not even, I don't think, direct competition for workers because the people who build data centers are not the people necessarily that are building housing. but it's an effect by way of the interest rate which is being set to suit the ai economy or slow it down but is squeezing the more fragile bits of the economy that's interesting and yeah

17:59Adam Tooze: i take your point that this is happening on the kind of macroeconomic level and yet it also seems to me like the united states government is obliged to run a kind of de facto industrial policy with respect to housing in the United States, just given the scale of this economy and like the importance of it. And then, yeah, it almost sounds like in order for the housing economy to be healthy in the United States, it almost seems like you need to kind of slow down other parts of the economy if they're running hot intentionally. But yeah, I guess it's not an intentional industrial policy with respect to housing, just a kind of accidental one.

18:37Adam Tooze: So maybe that's the wrong term for it. But I mean, I guess maybe a final question here would be, given all this, I mean, how much housing weakness can the United States even really have when it has a strong underlying economy in the ways we're describing? Yes, I mean, interest rates are high. But if GDP growth is strong and the labor market is strong, is it a kind of misnomer to say that the housing market is struggling? I mean, how bad can things ever really get under these circumstances?

19:15Cameron Abadi: No, this is why I think frozen implies low pressure, whereas this is a sort of high pressure impasse, like gridlock, if you like, would be a better description. Just to be clear, we are not talking here about a late 2000 and a overheating bubble type scenario. That's not on the cards here. we're talking about a kind of gridlock created by the lock-in effects of the very low mortgage rates in the past and the supply side issues and it's very striking JP Morgan has done research looking at housing markets regionally right rather because America's huge 330 million people lots of different separate housing markets people are relatively mobile but not as mobile as they once were and so each one of these has a separate logic and to go back to your point I thought there's very interesting and provocative like how can one think about housing as industrial policy maybe not as industrial policy but definitely as policy and there is huge variation between blue states notoriously and red states this is the whole abundance debate and jp morgan which no doubt you know sides with a vision of abundance which is driven by deregulation and so on has produced a lot of rather interesting data showing that if you want to see american housing markets which are not in gridlock, where there is in fact rapid movement, where market mechanisms are working, where prices are coming down and the market is reviving.

20:38Cameron Abadi: Look to the red states, where there is very rapid economic growth, supporting everything, and very, very rapid construction of housing, notably Florida and Texas. And if you look at those two growth drivers of the New South in America, the new New South, there the housing market is not frozen in the same way as it is in the hotspots, say, of California and the United States, where you've got these massive lock-in, so California, New York, where you have these massive lock-in effects on the coasts. So this then comes back to this other theme. So, you know, this housing market is fascinating because it's a story about society.

21:14Cameron Abadi: It's a story about fixed income. It's a story about macro policy. It's a story about the cost of living. And it's a story about this abundance agenda, ultimately, right? Everything is bundled up there. And the red states demonstrate what a minimally regulatory regime, which is a, let's not call it industrial policy, but like a growth regime or a construction regime looks like. And it does indeed produce the kind of market mechanism of adjustment that you would like to see. But it involves the building out of strip suburbs, identikit buildings, which are clearly not suitable for urban spaces like New York and run up against local political opposition in California.

21:54So that's part of the answer.

21:57Cameron Abadi: And emphatically, no, we are not on the cusp of a 07, 08 type subprime meltdown. And it really is. It's kind of like a gridlock, I think, in the end is the best image that's come out of this conversation. Better than frozen, even, because gridlock implies everyone wants to actually go somewhere, but they can't move. And that's a little bit where the American housing market is at, actually.

22:18Adam Tooze: I mean, I suppose there is a question if the AI economy is a bubble that pops, how the spillover would be for the overall U.S. economy, including housing. But that's that is a separate question.

22:31Cameron Abadi: That's down the line.

22:32Adam Tooze: Yeah.

22:32Cameron Abadi: And it clearly does impact. I mean, there's no doubt that some of the overheating in economies like California's is to do with the enormous wealth that's been generated by the AI bubble. But that's a dot-com type story, not an OA type story, right? That's a story that's running by wealth creation outside the housing sector, spilling over to the housing sector. Yeah.

22:52Adam Tooze: As we've repeatedly discovered on this podcast, a lot of things are connected in the economy when you start scratching the surface. And clearly the housing economy is no exception, but we should take a break. And as I mentioned, we will be back in a second to talk about the Brazilian election.

23:24Adam Tooze: I know that my son is somewhere alive. This is Deborah Tice. Her son Austin is one of the biggest missing person cases in the world.

23:34Cameron Abadi: And for years, I've been searching for him.

23:37Adam Tooze: It's a case like I never imagined.

23:39Cameron Abadi: And there are people who don't want the truth to come out.

23:43Adam Tooze: From the BBC, this is I'm Not a Monster Presents. Where is Austin Tice? Listen on BBC.com or wherever you get your podcasts.

23:55Cameron Abadi: Michael Lewis here to tell you about my new book, Blockers, which gives you an inside look at the Trump administration and the public servants who stood in its way. These were people who were securing our most sensitive data, keeping the public safe from all sorts of threats, and engaged in life-saving scientific research until they were told they no longer belonged. And the question to me is, if they can't survive in our government, then what does it say about us? Get Blockers only at blockers.fm.

24:25Adam Tooze: Hi, welcome back. Our next data point is two, as in two points. That is the gap in the latest poll from the Datafolha Institute between Brazil's current president and the challenger who wants to take his job, and they will be facing off in the election happening this Sunday, October 4th. The current president, Lula, currently leads Flavio Bolsonaro 47 to 45. Other polls have shown the lead as close as one point. So we will know after Sunday whether one of them has emerged victorious with a majority or in the absence of a majority, whether there will be a runoff towards the end of this month. But clearly the stakes are high.

25:17Adam Tooze: Lula is 80 years old now. Now he's seeking a fourth non-consecutive term. Bolsonaro is challenging him from the right. His father previously served as president, but is now serving time in prison. And yet his son is running to continue his father's conservative legacy. And yeah, the campaign has put a lot of issues that Brazil is facing into stark relief. we will see what the ultimate outcome is, but we thought we could at least unpack some of the issues involved in the campaign. And Adam, to start off with, it's been a while since we've talked about Brazil. We, I think, talked about Lula perhaps last when he actually won his current term in office.

26:05Adam Tooze: So now looking back, what could we say he's accomplished in this most recent term in office as president.

26:11Cameron Abadi: It's a complicated story, or rather it's a story which has some simple and rather direct elements. And then when you look at the election, you realize the picture is more complex. I mean, the big simple story is that Lula administrations in Brazil are very good for ordinary Brazilians and especially Brazilians at the bottom end of the extremely skewed income and wealth distribution. And the facts on this are just completely undeniable. It is an element here of COVID recovery. Brazil had a very bad COVID under Bolsonaro senior and it's bounced back but it goes way beyond that. So the current unemployment rate in Brazil is a historic record.

26:48Cameron Abadi: Youth unemployment which is an affliction of Brazilian society is down to around 10 % which is unprecedentedly low. The incomes of working people are up by really dramatic numbers about 20 % since 2022. Poverty has fallen, food insecurity has reduced, 5 million families have left the Bolsa Familiar Basic Welfare System as a result of increasing prosperity. That system itself has been reformed and improved. There has been substantial adjustment to poor people debt relief, mass public housing projects, the whole works, right? So, Lula administrations are bona fide reformist administrations in a society afflicted by very large inequality and quite rank class differentiation that's also then quite heavily racialized.

27:41Cameron Abadi: And this is not the first time this is true of all of his administrations. So they carry through and they make a real difference. They also make a very, very significant difference with regard to the global environmental issue, which of course is also a Brazilian issue, which is the Amazon and Amazonian deforestation. Bolsonaro was deeply in cahoots with the rancher interest in the Amazon, which is the interest most directly responsible for the most egregious destruction of rainforest. And Lula administrations repeatedly since the early 2000s have, when they come into office, reversed this. So this is a story that's really dramatically significant for not just Brazil, but the whole world.

28:22Cameron Abadi: If you follow the financial press, however, if you follow commentary from Western media on Brazil, you'll hear a different story. And this is to do with the fact that though unemployment is down, and growth is not bad, the big anxiety is that this is essentially being driven by undisciplined fiscal policy. And because Brazil has a history now decades back, but nevertheless, a history of really rapid inflation, not to say hyperinflation, there was deep anxiety about fiscal imbalance. And Brazil being a class society, there is a huge conservative interest in control of fiscal policy, of tax policy and of central bank policy.

29:03Cameron Abadi: And so this is a hotly debated issue. And under Lula, the debt to GDP ratio has risen from 70 % of GDP when he took office to over 80 % of GDP, which by European and American standards, given what's been achieved in the interim, would be a reasonable trade off. but from the point of view of the comfort zone of Brazilian financial elites is anything but and the efforts by the Lula administration to struggle within the fiscal framework that had been set in place since the 2010s to constrain any adventurous progressive policy is well intentioned and smart and yet has run into really major major obstacles and the in terms of politics and Congress where Lula never had a solid majority, to say the least.

29:51Cameron Abadi: And so the odd thing is the current election is actually about a bunch of issues which are not natural Lula territory at all, including security and crime, which is a huge issue of state violence and of race and of class in Brazil, with Rio, of course, and its favelas being like the crosshairs of this, and national security of all things. I mean, Lula is a leftist organiser who risked his life in struggles against the military dictatorship in Brazil. Bolsonaro, on the other hand, celebrated the military dictatorship, which went hand in hand with torture and disappearances. and yet nevertheless under the sign of Trump Lula has found himself courting military interests in part also because it's seen as a way of pursuing industrial policy which is at the heart of the way in which the Lula administration has tried to think about economic policy because when they think about the problems of mass unemployment one of the questions they have is how do we rebuild a nation-centered industrial structure like the one that grew up in Brazil in the 60s and 70s and 80s and military industrial construction in Brazil as elsewhere has appeared as a kind of weird deus ex machina for that problem so it's a it's a checkered record not when you look at the socio-economic data where it's just quite clear that if you actually have the interests of average Brazilians in mind you vote for Lula administrations but when you when you get into the when you get into the weeds of how this problem is constructed whether it's quote-unquote sustainable, how the financial markets will react, you can see how things are getting sticky.

31:28Cameron Abadi: And then there's questions of governance. And right now it's issues of corruption around the Supreme Court, which ultimately indicated the judgment against Bolsonaro's father, and now itself is embroiled in different types of corruption allegations. All of this is eating away at the nimbus, the charisma of the Lula government.

31:45Adam Tooze: Yeah. And it's all happening against the background of a very highly polarized political system and society, seemingly. And yeah, also foreign policy questions are also clearly at issue in the election, and that's been coming out in the campaign. One of those issues is Brazil's relationship with the United States. And I'm curious about what exactly is at stake in the respective candidates' platforms here. It seems Bolsonaro is promising a closer partnership with the Trump administration specifically, and I guess with the United States in general. Is that right?

32:22Cameron Abadi: Sorry, I laugh because that's such an understatement, right? I mean, in some ways, you would expect this to be the central issue of the election. And I think in some ways, it is the most emotive election. It's just in general, not a rather underheated election. but um yes i mean what's at stake here at least on the face of it is is absolutely dramatic because brazil is huge right brazil is not a central meraque and quote unquote banana republic and yet we are seeing an agru level of massively aggressive and intrusive intervention quite flat out intervention by the trump administration in brazil's democratic processes questioning the legitimacy of the electoral system, threatening and in fact implementing sanctions against the Brazilian judiciary for carrying through on the judgment against Bolsonaro Sr., engaging in very overt support for his son as a rival to Lula, clandestine conversations which apparently involve also side deals by which if Bolsonaro Jr.

33:24Cameron Abadi: is elected then there will be deals done that allow the United States to gain access to Brazilian raw materials, geopolitical power plays at that level, but also, and this is the kind of the novel element, because after all, America has always taken an interest in, if you like, the Cold War era and Brazilian politics back the military dictatorship. And under Biden, it's widely understood, actually intervened proactively in the moment of the coup against the Lula government to keep the Brazilian military firmly in the barracks in the end. Now, all of a sudden, we have a policy which, on the one hand, when you read Marco Rubio, is, you know, astonishingly aggressive assertion of the Monroe Doctrine against players the size of Brazil, which literally asserts that American dominance in the Western Hemisphere, in so many words, will not be challenged.

34:17Cameron Abadi: Whereas, of course, Brazil's own aspirations to sovereignty imply that it has sovereignty and autonomy and will not accept the dominance of the United States in the Western Hemisphere. And then from the Trump camp, something much more personalistic, which is literally Trump's view that electoral campaigns in South America are extinctions of the war which MAGA is waging against liberal North America, Canada, Mexico. And he literally tops up the victories of right-wing candidates and chalks them up to his own personal account. He'll say things like, we're doing really well in Latin America right now, by which he doesn't mean United States national policy, that more conventional Marco Rubio kind of vision, but a much more partisan and much more personalistic vision of his camp, his ideology, his vision.

35:05Cameron Abadi: So as much, of course, as America has a century old tradition of intervention in the Southern Cone and in Latin America and in Central America, This has a new edge because it really is a matter of personalities and personal commitments and personal loyalty, which runs against, of course, the standard logics of American statecraft and were Bolsonaro to prevail. Therefore, I think it will be a shock, not just in Brazil, though it will be massive in Brazil, it will be a shock in the wider region. And it should be a shock in the United States as well, because there should be there already are protests from Congress saying in the last couple of days, there have been protests, letters from Congress to the White House saying, you know, we have no business interfering in Brazilian electoral democracy in this way.

35:54Cameron Abadi: And if Trump were to pull it off, thanks to the Brazilian electorate and his threats, it would at this point constitute a flouting, at least of the will of a significant minority of members of Congress. Because this isn't the way that American foreign policy has been conventionally handled, as intrusive and aggressive as it has often been towards South America.

36:14Adam Tooze: Yeah, I would certainly also be curious from Brazil's perspective, because Trump himself won't be in office forever either. And so to sort of embrace one party and one person in particular seems like a high risk policy, given that the United States will have its own election in a couple of years. But, you know, geopolitics being what they are, it's not just the United States featuring in the Brazilian election. China is also a big topic in the campaign. And I'm curious what's at stake there in terms of the candidates' positions on China. I mean, I see in contrast to Bolsonaro's promises of partnership with Trump, Lula has been proposing deeper cooperation with China as far as I can tell.

37:01Adam Tooze: I mean, does he have a sustainable strategy that he's developed for Brazil with respect to China?

37:06Cameron Abadi: Yes, the China-US-Brazil triangle is fascinating. It's new. This was never previously an issue. And the rise of China since the 2000s accompanied the first pink tide in Latin America and continues as a major factor in enabling a greater degree of sovereignty and autonomy. And it's quite clear that that's reflected within the Brazilian political system itself. So Bolsonaro Sr. was racially xenophobic in his relation towards China. He would make truly obnoxious, racist comments about China's influence. And amongst the Brazilian right wing, though overall public opinion appears to be balanced on preferring China or the United States, it's actually highly partisan.

37:47Cameron Abadi: So right-wing Brazilians strongly favor closer relations with the United States and left-wing Brazilians even more strongly oppose those because Brazilian nationalist leftism is based on opposition to the Yankees, obviously. And then conversely, conservative Brazilians are much more sceptical towards China and more left wing Brazilians are more interested in balancing. The problem, Lula has articulated that and has refused on several occasions to align himself with sort of Western coalitions against other fellow members of the BRICS, for instance. The problem for both the right and the left in Brazil on this issue are the realities of the economic connection to China, which is that 79 % of Brazil's soybean exports, one of the great agro-industrial miracles of the 21st century, go to China.

38:36Cameron Abadi: 67 % of its iron ore exports and 45 % of Brazil's booming petroleum exports go to China. And this creates a conflict. You might say, well, this is all in favor of, you know, the left Brazilian strategy of balancing, except the interests inside Brazil that favor trade with China are all die in the wall, conservative, business class, anti-Lula Brazilians. right so they're your actual anchor to china and conversely bolsonaro as much as he was a xenophobic racist in the end couldn't really break with china or any substantial degree because his core constituency in the business community is totally bought in on the relationship so it's a it's a truly conflicted position that brazil is in and part of the reason why folks in the lulu administration that I actually had the chance to talk to on a visit there a couple of years ago, were so deeply committed to industrialism and local industrial projects, is precisely so as to try and break this impasse where the future of the Brazilian economy essentially depends on agro-industrial interests that are deeply tied to China.

39:45Cameron Abadi: And that has then meant that Brazil has become one of the real forerunners of proactively negotiating industrial deals with China. So moving away from agro to industry to build industrial capacity within Brazil to leverage Chinese investment and technology to do that, but to insist on technology sharing terms on investment agreements, market access and so on, which are favorable to Brazil in various ways. And that's one of the most constructive dimensions of Lula's China policy, less the posturing in the UN than this kind of nitty gritty work on industrial policy. But it's born out of an impasse, which is that you want to use the leverage, but you end up by in doing so supporting domestic interests, which are really hostile to your domestic agenda.

40:33Adam Tooze: Yeah, and I'm sure that's hard to summarize in a campaign slogan, say, that kind of strategy. But clearly, I guess Lula would hope to continue that if he gets another term. But yeah, beyond the United States and Brazil, obviously, there's a lot of other foreign policies that are at stake in this election. And I'm thinking specifically about Brazil's relationship with the rest of the region. And obviously that bears on, you know, indirectly on the United States, given that it's such a major presence in the Western hemisphere. But if we were to specifically take a closer look at Brazil's relationship with Argentina under Malay right now, a obvious right wing figure himself, how would the candidates current platforms fare on on on that Brazilian Argentinian relationship?

41:26Adam Tooze: I'm wondering if one were to take Cuba as another regional issue right now that's under blockade by the United States. And clearly there are aggressive intentions behind that in terms of a potential regime change in Cuba. Where would Brazil stand under the respective candidates being in office with respect to Cuba? And then, yeah, Mexico comes to mind as a country also that is, I guess, getting independence, pursuing maybe a more independent policy of its own in Latin America. So, yeah, how might Brazil's election bear out with respect to those relations as well?

42:02Cameron Abadi: Yeah, I mean, the really striking thing about these questions of cross-cutting relationships in South America is that by comparison with the deep economic integration of North America, in defiance of MAGA ideology, Mexico, the United States and Canada are actually deeply economically integrated, let alone by comparison with the deep economic, political and cultural integration of Western Europe, for instance. the relations between the major South American societies and states, even though many of them share Spanish as a common language, Brazil obviously being the exception, are much, much more tenuous.

42:42Cameron Abadi: I mean, trade relationships are trivial, given proximity and everything else. You'd expect this to be a single kind of massively complex unified block, and it truly, truly isn't. And that means that relations between the states are much more tenuous. So the answer to your questions is much less substantial than one would imagine it to be, right? You'd think these things would all be very tightly nutted together, but they're really, really not. One way of trying to think of this integration would be by way of a big political currents, however. And it's quite clear that one of the key things about this election is that it's another test of the increasingly dominant trend towards right-wing politics across much of South America and Central America.

43:28Cameron Abadi: The big standout exceptions are Scheinbaum in Mexico and Lula in Brazil, but overall across Bolivia, Chile, Colombia, Peru, the intervention in Venezuela and Milay, of course, in Argentina setting the trend, there has been a really decisive right-wing shift. It's something we maybe should do an episode about, a segment about on the show. This has produced some pretty serious ruptures. The first Bolsonaro government, to come to your Cuba question, actually broke relations with Cuba. There was a long-standing medical assistance program from Cuba to Brazil. So poorer parts of Brazil were provided with medical services for a fee by Cuba.

44:06Cameron Abadi: And Bolsonaro used accusations of exploitation of the Cuba medical staff as an excuse to break those relations off. The relations between Argentina and the Lula administration have been rock bottom because of essentially abusive Trump-style comments made about Lula by Millet, which resulted in the Brazilians reducing their representation in Argentina to charge a fair level. So essentially, we joined their ambassador. The Argentinians left theirs in Brasilia. But nevertheless, this is a remarkable development. I think the upshot of this answer is that this isn't the sort of earthquake that, I don't know, a Le Pen presidency in France would be for the rest of the EU because of the interconnections are not as tight.

44:53Cameron Abadi: But it really matters in terms of the broader political currents of the region. And a Lula defeat would be a further consolidation of this North American, you know, make North America great again, kind of that's not something we're going to be able to say because that's manga but anyway it it uh it would be a badge it would be a it would be a decided shift to the right interesting yeah again

45:20Adam Tooze: we'll know by the end of the month uh if there's going to be a runoff or not but i think uh and maybe this is where the conversation should end i wanted to return to something you mentioned i maybe in passing earlier, which is that the election campaign itself seems somewhat muted compared to elections in the past in Brazil, in the recent past, that is to say. I mean, clearly this is a polarized political system. There have been attempted coups in the very recent past. You have a previous president sitting in prison, his son running for office. A lot of a vehement rhetoric has been used in this system in the past.

46:00Adam Tooze: But I'm curious why this election is as relatively sedate as it seems to be. Has Brazil itself become depoliticized somehow? Is the society more apathetic than it once was? I mean, what is your assessment of that?

46:17Cameron Abadi: So, yeah, Cam, you sent me this fascinating tweet by Brian Winter, who's a great North American, Latin American, South American expert. And he coined this phrase apathetic polarization for the situation in Brazil, which I think might have broader relevance. But there is a meta conversation to be had here about to the extent to which MAGO is sweeping South America or the extent to which the logics of South American polarization are sweeping the North. Or is there a kind of convergence of Western hemisphere politics in this mode of apathetic polarization where the divides are really profound, and yet they are beginning to feel old.

46:59Cameron Abadi: How many times can we rerun the indignant script about Trump? Likewise, how many times can we run the indignant script about Bolsonaro? Reading this tweet, I was quite reminded of conversations in Europe after Trump's re-election of, like, why are there no protests and trying to explain, well, yeah, we're totally polarised and the stakes are huge, but somehow there is this feeling of kind of doom, gloom, inevitability. There's another sense in which also overshadowing the Brazilian election is just this cloud of corruption allegations on both sides. So there is a delegitimization of the whole process, which again can be held at bay through polarization.

47:41Cameron Abadi: So the accusations from the right against Lula are baseless because he's actually the great crusader of Brazilian democracy. And conversely, the accusations from the left against Bolsonaro are baseless because the Bolsonaro family are the martyrs of right-wing politics in Brazil. And so you can kind of hold those corruption allegations at bay, but they are pervasive and they affect every institution, including now the Supreme Court. And I think there's a sense Winter was saying that he thought that there are rumors that some giant, massively scandalous video is going to break at some point, which will indict either one or discredit one or the other candidates a little bit like the, you know, I don't know, Trump sex tapes or something like that, that everyone expected to emerge.

48:26Cameron Abadi: And then I think there's another factor, which is that in focusing on the very top of Brazilian politics, we ignore the fact that in Congress, where the power to actually pass legislation resides, there is a profound sense of impasse, and the politics there is much less tumultuous. And it's overwhelmingly dominated by very opportunistic, centrist, largely conservative forces with whom either the more radical conservatives around the Bolsonaro clique or the more progressive politics around Lula have to make their peace and govern with them. And furthermore, when it comes to policy making, there is a deep sense that yes, a Lula administration can make things better and no, a Bolsonaro administration can make things an awful lot worse.

49:15Cameron Abadi: But there is also a sense of a kind of block, an impasse around key issues of what in the US discourse will be called entitlement, which we have spoken about on the show before with regard to Brazil, which is that there is a very large chunk of public spending, which essentially circulates as a middle class welfare state within the Brazilian educated civil service white collar elite, which provides incredibly generous pensions. And a lot of the major issues, say, of fiscal imbalance could be addressed if anyone could actually address that. But given the solid glock of the status quo and establishment interest in Congress, there's no chance of actually making any progress there.

49:56Cameron Abadi: So part of this sort of apathetic polarization story is that you can run these big dramas of electoral politics over and over again, and they clearly do make a difference, which is why people in the end are very clear about which side they line up on. And yet, the prospect of really dramatic change for many people increasingly just seems unrealistic.

50:18Adam Tooze: interesting yeah i don't know this this uh reminds me in some ways of i guess the hyper politics thesis of anton yeager's book in which people are very politicized but nothing ultimately can get done and we all kind of know that but uh yeah perhaps that's just the mode that brazil is stuck in a kind of self-conscious polarization and uh being stuck nevertheless. But yes, we will know the outcome soon enough and we'll follow that in the years ahead, I'm sure. But for now, we should say goodbye until next week when we'll have two new data points.

51:00Adam Tooze: Ones and Twos is written and edited by Adam and me and produced by Claudia Tatey. The show is made possible through the support of foreign policy readers and Ones and Twos listeners. As always, we love getting listener feedback. You can leave voice messages on the Ones and Twos homepage on foreignpolicy.com or email us. That's podcasts at foreignpolicy.com. Or you can tweet us. That's at OnesandTwosPod. I'm Cameron Abadi. Thank you very much for listening, and we'll be back in your feed next week.

51:45Adam Tooze: The world at this moment is more fractured than it's been in decades. More wars.

51:51Cameron Abadi: Iran will not have a nuclear weapon.

51:53Adam Tooze: More extremism. Germany could soon have a far-right political party running one of its regional... And deeper disagreements on a range of issues. On season three of Counterpoint, we get to the heart of those disagreements with a series of debates. On each episode, two of the smartest people in their field face off over one question. CounterPoint is a production of Forum Policy Magazine in partnership with the Doha Forum.