What's Up With the U.S. Bond Market?

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1:02Adam Tooze: Hi, and welcome to Ones and Twos, F.P.'s economics podcast. Every week we take a couple of data points, use them to try to explain the world. I'm Cameron Abadi, F.P.'s deputy editor with you in Berlin, Germany. Joining us, as always, is F.P.'s economics columnist and Columbia University professor Adam Tuos, this week also in Berlin. Hi, Adam. Hi, Cam. So in the second half of the show, we are going to be talking about the Venice Biennale, the biannual art event that happens there and is happening now, in fact. So, yeah, stick around to hear about that major art event and all the economics behind it.

1:43Adam Tooze: But first, another data point that is 5.33%. That is where the yield on the 30-year U.S. Treasury bond peaked about a week ago or so. That is the highest that the yield has been on U.S. Treasuries in 19 years. About a sharp sell-off in the bond market that's pushing long-term Treasury yields to their highest levels in nearly two decades. Those rising yields mean the federal government is paying more to borrow. And the ripple effects through the economy... Yesterday, Treasury Secretary Scott Besant announced new steps to try to help stabilize the bond market. Essentially, the government will increase the amount of bonds it buys back.

2:32Adam Tooze: That all comes as the national debt officially passed the$40 trillion mark this week. And we've talked a lot about treasuries on this show, if, you know, maybe not recently, But, you know, in some ways, this is a normal mechanism of the market at work. As the prices of bonds go down, the yields go up. And so, you know, the laws of supply and demand may be in effect as those yields go up. But of course, when we're talking about U.S. Treasuries, it's inevitably anything but normal, so to speak. This is a vast market that makes the plumbing of the international financial system work in the first place.

3:19Adam Tooze: And so, yeah, it wouldn't be fair to describe it as just a simple market mechanism. And the personalities at work here are also anything but normal, I guess it's fair to say. There's a good deal of irony that the person who has assumed responsibility for responding to that number I mentioned, those high yields of over 5%, is Scott Besant, the U.S. Treasury Secretary. I say ironic because he notably has a past in working with George Soros and specifically is known for having broken the Bank of England in circumstances, you know, broadly similar to the ones he's now being obliged to respond to on the other side.

4:05Adam Tooze: So, you know, he's someone with some experience acting on the bond markets, but now he's an official and assuming responsibility in ways that are, I think, fair to say unusual in the United States context. So, yeah, to kind of take a look at this unusual circumstance at this moment, we thought we'd dig in. And, yeah, Adam, to start off with, the basic question that came to mind is why exactly are yields rising? rising. I mean, we've talked about this in general terms before. Prices of bonds go down, their yields go up, there are broad kind of supply and demand mechanisms that affect the prices and yields of bonds.

4:45Adam Tooze: But is this right now a matter of too much bond supply that is reducing the prices of them? That is to say, too much U.S. debt that is being issued to fund the U.S. government? Or is this something happening on the other side? Is there a kind of softening of demand that is reducing prices? And yeah, how can we tell exactly what's at work?

5:07Cameron Abadi: Yeah, I mean, it's a truly important new story that's really developed with real urgency over the summer this year, which is this global move in yields. It's happening across the board with the vast majority of advanced economies, which a big issue is of government debt. And as you say, it's counterintuitive, so it's worth repeating the logic that you spelled out so clearly just a second ago. As the relative attractiveness of bonds falls, and so therefore their price falls, what you pay to get a$100 bond, as what you pay to get a$100 bond falls, the effective interest rate, the yield on that bond goes up because you end up paying$98,$97, $795 for$100 worth of bond, which then pays you a coupon of$4 a year in interest.

6:01Cameron Abadi: And then all of a sudden, you're looking at a much more attractive interest because you bought it for less than the $100 face value. And so what's happening in global markets, and we're talking about gigantic markets, tens of trillions of dollars. So people may have seen, you know, there's two figures out there for government debt in the US right now. One is$40 trillion. That's the total of debt that's been issued, of which about$8 trillion is held by other government agencies. So this is debt owed by the American government to itself. About$32 trillion is in the hands of the market. And that is almost exactly the same as US GDP.

6:39Cameron Abadi: So we've crossed two critical thresholds, $40 trillion for overall debt, and$32 trillion, 100 % of GDP in the hands of the market. And even those numbers by themselves, I mean, they are oceanic, that is huge. That's a trillion is a thousand, thousand, million. So it's a million, million. Those markets are being moved by just the awesome flow of new debt into the markets. And on the other hand, the growing anxiety around the persistence of inflation and the availability of other types of asset that are attractive by comparison with debt treasuries, equities and private debt. And all three of those forces are acting at the same time.

7:23Cameron Abadi: So there is a huge issuance of private sector debt, notably AI related debt by very, very highly rated, very high quality business names, which attracts a bid. There is persistent anxiety about inflation, unsurprisingly, because we've had a series of shocks starting with COVID, then Russia's invasion of Ukraine, then most recently Israel and America's war against Iran, which have triggered surges in price. The inflation rate is now 3.7%. And if you're holding a bond with a nominal face value, every inch, every percent of inflation eats away at the value of your bond. So that makes bonds less attractive, reducing the bid.

8:05Cameron Abadi: And then there is absolutely gigantic issuance. So$40 trillion is the amount outstanding. But America actually has to roll that is reissue to replace outstanding debt about somewhere between$8 and$10 trillion a year, because a lot of the debt is rather short term. It's running a deficit of 6 % of GDP, which amounts to$2 trillion in new issuance. And so there is a huge volume of new paper coming onto the market all the time. The daily churn in this market is over a trillion dollars. All of these numbers are important to put, say, Besant's interventions in perspective. And so not only is this oceanic in size, but it is currently rather turbulent and being disturbed by these profound forces.

8:52Cameron Abadi: Huge flow in, alternative things you can buy, and overall pressure on the market. And the whole thing adds up to this shift, which is affecting not just the US, but everyone really, French government debt, British government debt. We've spoken about that a couple of times on the show, even German, even Japanese. The only country whose bonds have not seen a substantial increase in yield is basically China, I think, where they operate in a relatively closed financial system, and there's no inflationary pressure. So that gives you an idea really of how capacious this is.

9:24Adam Tooze: That's a useful sketch of what's going on, the scale. But to narrow down this a bit, I mean, you're describing these actors in this market for U.S. government debt, and they, through their judgments about these bonds, are affecting these prices. And that obviously has all sorts of ripple effects for the U.S. and the global economy. But, you know, whose judgment exactly is being expressed here? You know, when we talk about bond markets, it always strikes me that there used to be this reference to bond vigilantes. And basically, yeah, actors kind of willfully trying to manipulate bond markets in order to turn a profit, kind of seeking out vulnerabilities for the sake of profiting directly from movements in the bond markets.

10:19Adam Tooze: But are these actors participating in this mechanism right now, vigilantes at all in that sense? Or, you know, what exactly are they expressing? Are they expressing a real rational judgment about U.S. fiscal policy and its sustainability? Or are these actors being like driven by something else entirely? Are they being driven by other needs that they have and being forced into these actions in the marketplace? place.

10:44Cameron Abadi: Yeah, I mean, we should just focus in on what's so political about this right now. Why are we talking about this? We're talking about this in part because one of the great fears of the Trump administration was the interest rates would go up. Trump hates high interest rate. He's a man who's lived with debt all his life. It will slow down economic growth if interest rates go up. And they don't, you know, this is an election year, no one wants to see that. On the other hand, Trump appointed as Fed chair, new Fed chair, Kevin Walsh, who, as we've discussed on the show, is actually a conservative who has rather clearly committed himself to pulling the Fed out of large scale buying in the bond market, which of course reduces the bid and therefore tends to drive the price down, especially if the central bank is actually selling.

11:24Cameron Abadi: And the central bank, the US central bank, holds about 10 % of all the US treasuries that are outstanding and even larger share if we look at the 32 billion, which are out there in the market. And so there's a downward pressure on prices and an upward pressure on yields coming from the Federal Reserve, which was appointed by Trump. And he's obviously involved in legal struggles with the Fed and so on. And at the same time, his Treasury Secretary has taken it upon himself to intervene in this market using a rather technical fund normally devoted to liquidity stabilization, that is providing liquidity to the market, a bid at any given time, to seemingly try and manipulate downwards the price of the 30-year, the long-term bonds, by buying them, driving their price up and driving the yield down.

12:12Cameron Abadi: And he has justified this. The position of the Fed is we should let the market do its thing. As you started by saying, Cam, this is an entirely natural process. There's a bunch of issuance out of there. There's a bunch of other things you can invest in, which is a sign that there's growth in the economy and there's inflationary pressure in the economy, another sign of growth. So therefore, it's entirely appropriate for interest rates to go up. The Treasury is actually taking the opposite position. So it's not just actively intervening, it's justifying its interventions by saying there is a misperception in the market, people don't understand the long run trajectory of fiscal policy.

12:47Cameron Abadi: So they are underestimating the determination of the Trump administration at some point to deliver tough physical medicine. And so the Treasury needs to get ahead of this and push the market in the right direction by driving the prices up. Because as bonds get scarcer, as the deficits go down, this is what, you know, Besson has drunk the Kool-Aid and believes this is going to happen. So if that's the case, then the market really should be scurrying towards buying the debt, which will be scarcer in future and therefore more valuable, and therefore yields should go down. And he just sees himself, or, you know, I'm making the case here, as shepherding the market towards its own best interest.

13:24Cameron Abadi: But this has unleashed the biggest debate about the bond market that we've seen for a long time anyway, because this is a really unusual situation for the Treasury to be intervening. And it does indeed beg the question of how are these prices formed? What is the basis on which demand is shaped? And the place you started from, Cam, is to say this is exactly what you would expect. And this is also the Fed's position, broadly speaking. There's a lot of bonds out there. There's other things you can invest in. And there's inflationary pressure. So obviously, the yield should go up. Besson's view is that people are not really reading the tea leaves correctly and they need to be hurried another view would be that this is the bond market trying to boss the government the bond vigilante image is a is a further image really because if you think about vigilantes the role of vigilantes is not to kidnap people and extort people for ransom the role of vigilantes is to impose the law in a space in which the government is no longer active this is at least how Yardini who introduced the term in the 1980s explained it right so this is a moment of anarchy where the government isn't doing its job of stabilizing and it will be the role of the bond vigilantes to step in.

14:29Cameron Abadi: And this is the sort of classic story of bond markets versus irresponsible governments. But for that to be really a compelling narrative of the current moment, you'd actually have to see some wild action in the bond market. You'd have to see debt issuance failing. You'd have to see serious pullbacks by buyers. And for all of Besson's huffing and puffing and insisting that he needs to intervene, no one really buys it because we're not seeing any of that. What we're actually seeing is a fairly predictable, very broad-based adjustment across all advanced economies from Japan to the United States.

15:06Cameron Abadi: Everyone is seeing this move. There's no real reason to believe that there's any malfunction of any type whatsoever. And so in the end, this just looks like a remarkably cat-handed and ill-designed intervention, which above all, just doesn't have the heft that it would need. So during the COVID episode in March 2020, when the bond market really did look like it was going to fail, the Federal Reserve bought, on some days,$100 billion in bonds a day. So over the course of two weeks, you could clock up over a trillion dollars in purchases. That's a significant amount of money in relation to the overall deficit, in relation to the total bond market.

15:50Cameron Abadi: Besant is talking about maybe buying$10 billion over a period of months. It's peanuts. So it's a typically Trumpian kind of mismatch between the scale of the problem, which is quite real and has quite fundamental causes, probably a slightly conspiratorial, highly voluntarist reading that the markets have got it wrong and we need to correct them. And then you get out your magic wand and it turns out to be $5 billion in a market which is 40 trillion large. And there's these amazing graphics going around the financial media just going, does he understand the size of the market, the scale of the intervention.

16:33Cameron Abadi: Like, this can't work. It's a very, very strange moment that we're living through. And to me, it's reminiscent of many other areas of Trumpian policy where you just have a kind of profound disconnect between diagnosis and reality.

16:48Adam Tooze: Yeah, and I did use the word irony before, you know, advisedly, because in Besson's case, I do think that word applies. I mean, And in Trump's case, there's a kind of consistent, you know, kind of blowhard aspect to Trump's worldview where, you know, this kind of willingness just to kind of brash things out a bit and hope that you can kind of just take things step by step and brazen things through. But Besant, as I mentioned, was someone who in the 1990s was seemingly on the other side of these kinds of mechanisms. I mean, he identified situations where a government didn't have the ability to hold a bond market at a certain price, and he kind of bet that they couldn't and profited from that.

17:44Adam Tooze: And one would think that that would inform how he's approaching this situation now that he's, you know, a responsible government official. But in your view, how is this approach that Besant is taking? How is it reflective or is it not reflective at all of his earlier experience as a traitor with George Soros?

18:04Cameron Abadi: I mean, I think a lot of the Trump people are kind of caught in a cleft stick. On the one hand, they have some degree of technical competence, otherwise they wouldn't be in the jobs they're in. And on the other hand, you can't be a Trump underling without being basically a sycophant. So you've got to sort of follow the boss's story. And then they, in various contorted ways, try and twist narratives around that. And the foreign policy people do that in various ways. And what we're seeing with Besant is a guy who, he was not a terribly successful hedge fund guy. He's no macroeconomic super brain, but he's somebody who does have a deep understanding of how treasury markets work, at least at the kind of superficial technical level.

18:47Cameron Abadi: And so he oscillates. It's really bizarre watching between technical justifications for his various interventions, which have included swap lines for Argentina and, you know, supporting the Japanese currency by selling euro without telling the Europeans first. And now this intervention, you know, when he's pushed, he havers between a position which says, oh, this is just a technical intervention. There's some mispricing in the long end of the bond market. We should pop in there and make some little tweaks. And I'm just doing a technical thing. Nothing to see here. Let's move on. and on the other hand this bombast which then when it's exposed that really they don't you know they're talking very loud they've got a teeny tiny stick they've got nothing really to do here they then start briefing the media as they've done this week to say well actually you know there's this thing called the general account which the treasury has with the fed which is basically the current account of the u.s government you know there's a trillion dollars in there and we could use those where everyone just kind of goes in the markets you've got to be kidding because that is the American government's current account.

19:52Cameron Abadi: That is not a bond trading account. And B, it's a trillion dollars. And that's what this market turnover every single day. And the only thing that's really going to impress this market, if you do actually want to move it, is a limitless, bottomless, literally unchecked account. And the only actor which, given our current institutional arrangements, has that kind of firepower is the central bank, not the treasury. Now, MMT people will say, modern monetary theory people, who we haven't talked about in a while, will say, well, this is all terribly artificial. The Treasury could print dollars too.

20:27Cameron Abadi: It could just create its own purchasing power, which is true, but it would overtone all existing institutional structures, and it would massively destabilize the financial status quo in the US. So that's not on the cards. So then you ask yourself, what is Besson's endgame here? When people call his bluff, where's this going to go? And the answer seems to be just kind of goldfish, goldfish don't worry people have forgotten no one really cares the boss said we should do something i did something that's all that really matters here no one will remember no one will remember and then bond market isn't like that i mean it doesn't have a deep distant it's not a historically wise thing but it this is going to come at a price this intervention i think especially because it also puts the federal reserve in a really really tight spot yeah you've put your finger on something

21:09Adam Tooze: that I think is interesting here because yeah that into some extent that's a uh theme of our show that you know when you sort of dig into these financial and economic questions to some extent you have inevitably hit some basic fundamental political questions as well and the question of who ultimately is at the foundation of this international, you know, financial lubricant of that is that is U.S. Treasury's market. You know, again, that is responsible for the conditions in the U.S. economy and the global economy more broadly. the question of what political actor is ultimately at the foundation of that, I think is, it seems to be, is also an issue here, because as you suggested, it seems like normally if there's going to be an intervention to correct something in this vast global market, it would be the Fed, and Kevin Warsh in this case, the new Fed chair that would have responsibility for intervening.

22:19Adam Tooze: But Should we be seeing Besson's intervention as also a kind of an intervention in governance here as well? Is Besson encroaching on Warsh's territory here in terms of the financial actor of the U.S. Treasury encroaching on the kind of territory that Warsh oversees at the Fed?

22:42Cameron Abadi: Yeah, this is really one of the dramatic aspects of what's been going on. And it'll be interesting to know in retrospect whether the Fed was actually informed of what the Treasury was going to do. because we now know that the Americans, the Treasury, did not inform the ECB and the Europeans of the sale of euros to support the yen. So who knows whether they communicated with the Fed over this. Both Walsh and Besant come out of the stable of Druckenmiller, the famous investor. So they actually have a kind of genealogical link. They're both protégés of that figure, who's disowned Besant in the pages of the Wall Street Journal in an AI-assisted column that he wrote there.

23:20Cameron Abadi: So this is getting pretty incestuous. And it is indeed a, I mean, this is a moment of quite high drama. And we may end up having to do a show about this again next week, because this week is the occasion of the Jackson Hole meeting, which is the great rallying moment of the central banking clique. We've done shows about Jackson Hole several times in the past. And so in this moment where Kevin Walsh is having to establish himself as Fed chair, And it's not been going terribly well so far. His second press conference in particular was widely rated to have been a disaster because Walsh is trying to move the Fed to a regime of much more tight-lipped, much less garrulous, much less explicit navigation of the relationship with the bond market.

24:04Cameron Abadi: And here comes Besant making these cack-handed interventions, which are widely being interpreted as a sign of panic and mounting insecurity on the part of the Treasury, which is the last thing the Fed needs. And so the question now is, what is Walsh going to say? His speech will be on the day this show is released, on Friday this week. And in some ways, you know, he could, if he was ultimately going to play the political cards, he could align or he could avoid making any comments on Besant's intervention. Or on the other hand, if he actually wants to establish his bona fides with the market, he's now in a position where he almost needs to say something about Besant's intervention, which will put him explicitly at odds with the executive branch, which is not where the Fed is going to want to be.

24:53Cameron Abadi: So whether or not Besant and that crew intended to raise the pressure on Walsh, they absolutely have, because fundamentally, this is not Treasury business. This is Fed business. The relationship between the Fed and the Treasury on these issues was really fundamentally worked out after World War II, where America had similarly high levels of debt, and there was huge pressure on the Fed to manipulate interest rates so as to enable the budgetary balanced to be easier to strike because the lower the interest rate, the less interest payments you have to make. And in the end, in the aftermath of World War II, this led to a continuous tug of war between the Fed and the Treasury that was resolved by an agreement in 1951, which effectively separated these two issues and established what we might now think of as the modern regime of Fed independence.

25:40Cameron Abadi: And we are challenging the limits of that in this current moment. And people have long forecast that it would come like this. I think most people imagined it would be in the manner of Trump bullying that we've seen plenty of after all, and the legal war on the Fed is still continuing. But I don't think we anticipated the Treasury stepping in as an activist player in its own right, and so egregiously and openly seeking to manipulate the price of the US Treasury, and doing so with such patently inadequate tools. So it's either doomed to fail or begging for somebody else to come and sort it out. And the Fed right now is not minded to make that move.

26:24Cameron Abadi: A considerable body of opinion on the FOMC that makes the monetary policy decisions actually wants to raise interest rates because they, like the markets, see that the American economy, in their view, think the American economy could do with a dace of tighter monetary and tighter credit.

26:39Adam Tooze: I mean, just to clarify this issue a bit, I mean, what is at stake in terms of which government body has this authority? I mean, is the fact that the Fed was responsible for this seen as the appropriate answer because they're kind of one step removed from our normal democratic politics and the Treasury, by contrast, is kind of, yeah, much more directly accountable to the president and to other, you know, elected officials? Is that why, you know, beyond this kind of personal question of who is responsible, and theoretically, I guess it could be either government agency or body that has this authority.

27:22Adam Tooze: Yeah, what is ultimately sort of at stake in which body enjoys that ability?

27:27Cameron Abadi: Yeah, and this is a really fundamental question that goes to the heart, I think, of the democratic legitimacy of these procedures. And it's at first sort of rub a puzzling question, Nick. isn't this so technical? Does this really belong within the purview of democratic oversight? Would we want Congress to be having a voice in this? Would we want the executive branch to be doing this? I think the general feeling was exactly as you were suggesting, Cam, that this is so technical. It's such a fast moving operation when you want to do it effectively. and you need really unlimited financial power, that the only actor that really sensibly could exercise that role is the Fed.

28:13Cameron Abadi: Because that's its designated place in the modern constitution. It may not have been spelled out as such, but the Supreme Court with its recent judgments has come pretty close to arrogating to conferring on the Fed, though this has no standing in American constitutional jurisprudence, a special position. In other words, the key figures in the Fed are protected from presidential intervention in a way that other federal agencies are not, according to the Supreme Court, which reflects, I think, the Supreme Court's understanding that the Fed sits in a fundamentally different relationship to major social forces, notably the financial markets and any other body of the American government.

28:50Cameron Abadi: So I think that's where this conventional sense comes from, that Besant has overstepped a line that it is the Fed that properly deals with this stuff. But the problem, of course, is that that judgment itself is highly conventional, not to say contentious, because ultimately what we're talking about here are nothing more nor less than huge distributional questions. The whole debt issue is fundamentally a distributional question. The vast majority of American debt is held domestically. So it's owed by Americans to Americans in the name of the American government to be paid by American taxpayers.

29:28Cameron Abadi: So this is an internal American on American issue. And the only real limit to, there isn't a real limit to how much debt you can pile up, other than the fact that as you raise the volume of debt, as interest rates go up, you have to churn larger and larger amounts of money through the tax system, through the fiscal apparatus, and pay that out again as interest payments. And almost by definition, the people who hold large quantities of financial assets, including treasuries, tend to be wealthier. So what you're doing is taking from a relatively broad tax base and distributing to people who receive interest on government debt.

30:04Cameron Abadi: And this is obviously politically delicate. And right now, we're already churning more through on interest payments than we are on the Pentagon's budget, which is already hugely inflated. So this is a very delicate balancing act. So if you view it that way, manipulating the interest rate at which those bondholders are compensated is a huge political intervention. It's a form of tax. So in the most contentious interventions we've seen in the last week, Citadel securities, Druckenmiller, people like that have essentially openly accused Besant of what they call financial repression, which is really a technical term for a way of managing the financial system, managing the relationship between interest rates and inflation, but not improbably in this context is actually taking on a highly political connotation.

30:52Cameron Abadi: In other words, what you're doing is shifting the balance of interest here through artificial interventions to the benefit of taxpayers and to the detriment of those who are investing in financial assets. right that's the that's what you're doing you're artificially squeezing the price up and squeezing the yield down so existing holders benefit future borrowers will future lenders will get lower yields it's a huge operation on the american distribution of income and wealth that you're engaged in and what they're saying is you shouldn't be doing this it should just be the market that does this which of course is its own kind of value judgment right so i am you know personally think financial repression we've spoken about on the show is probably the best way out of America's fiscal dilemmas.

31:41Cameron Abadi: But if you're going to do it, you're going to have to do it with more purpose and more coherence and with bigger instruments than the ones that Besant is mobilizing.

31:48Adam Tooze: This is fascinating because even just hearing your answer, it strikes me that this kind of intervention in the economy, management of the economy on this level is fundamentally political, obviously, in ways that we've been talking about, but in ways that almost resemble war almost like the management of a war in the sense that yeah there's obviously fundamentally political the goals and the distributional questions at stake but then i wonder whether like on the technical operational side whether it can be democratic at all because of yeah as you're discussing like there are judgments being made by these political actors that um that are going to have to be made in in uh on the battlefield so to speak and that like Like, you know, whether people can really have a say in this day-to-day or week-to-week seems to me unlikely.

32:41Adam Tooze: And yet we're all subject to these decisions, whether on a battlefield economically or more literally, I guess. But it is pretty stark to be faced with these kind of fundamental political questions that emerge in these kinds of, you know, really stark situations. But we should take a break. As I mentioned, we do also want to talk about the Venice Biennale. So stick around. We'll be back in a second to talk about that.

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34:47Adam Tooze: Hi, welcome back. Our next data point is 700 ,000. That is the number of people who went to the Venice Biennale in 2024. So that was the addition two years ago. This exhibit happens every two years. We don't know how many ultimately will go this year, but it seems safe to say somewhere around that 700 ,000 number. Of those, about 59 % came from outside Italy. Among those people are collectors, curators, dealers, critics, diplomats, people interested in art of all kinds, and also billionaires who collect art, for example. They all descend on Venice for the opening and for the months of exhibits that follow it.

35:40Adam Tooze: And I guess it's fair to ask what exactly they're going to see, not in the sense of all the works of art, but what kind of exhibition is the Biennale? It's, you know, obviously well known around the world. It is an exhibit of art, but it's also a kind of machine for deciding what art and what artists matter at the moment. So, Adam, you were at this year's edition already. Is that right?

36:07Cameron Abadi: Yeah, relatively late in the day because it opens in the spring, early summer. And I went last week.

36:15Adam Tooze: Yeah, anyone interested, I think, still has a little bit of time to go before it closes. I think it's sometime in the fall. But yeah, Adam, maybe to start off this conversation, it is known as the biggest art show in the world. I don't know if that's just a cliche or a kind of factual assessment. but how did the Biennale get started in the first place? And why is this, you know, in Venice to begin with?

36:42Cameron Abadi: Yeah, I mean, I have to say I love it. I go to a lot of art shows and this is by far my favorite. I mean, Venice itself is just the most extraordinary place. And it's such a gift that it should be there. And for those who have preconceptions that Venice is a, you know, tiny town overrun by tourists and making it impossible, it's really not like that at all. you discover that the city is actually quite sprawling and there's plenty of space so yeah it's really a blessing that it it was started in Venice essentially it was started as a municipal as a city initiative I mean Venice is of course one of the great city-states of the medieval and renaissance period a proud republic so it's not surprising that Venice should be taking independent cultural initiatives of its own but it's very much of that second half of the 19th century internationalism kind of moment and also a proud display of Venice's city pride and of Italy's pride in its creation in the late 19th century as a nation state.

37:37Cameron Abadi: And so in 1893, the city fathers, they were then fathers, decided to launch this project of a great art exhibition quite explicitly to celebrate contemporary art. The first event was held in 1895. And this format of having a biennial Biennale show has established itself as a kind of international model. There's about 200 worldwide now. Many, many cities have them. And from 1895 onwards, it was organized in the Giardini, which if you know the geography of Venice at all, is the St. Mark's Square, which is a very incredibly famous view with the extraordinary tower and this amazing church. And if you just keep walking along the waterfront, you come to this beautiful 19th century garden, which for the duration of the art show becomes like an outdoor mall for an American audience, like an outdoor space with pavilions.

38:31Cameron Abadi: And then bits of Venice's architecture more generally, of which there's a huge amount of fantastic architecture, have been repurposed as the displays. And from 1895 onwards, it rapidly established a kind of an international reach, explicitly welcomed international art from the very beginning. nations began building pavilions I believe the Belgian first but if you see pictures of some of the very controversial pavilions like the Russian pavilion which has caused a huge scandal at this year's biennale because not unreasonably the Europeans in particular who helped to co-fund the biennale took exception to the fact that Russia was allowed to have an official pavilion but these pavilions are themselves you know beautiful instances of contemporary architecture starting in the 1890s and continuing down to the present day.

39:19Cameron Abadi: And through the vicissitudes of Italian politics, the Biennale has kept going. So it was taken, as you might expect, out of Venetian control into national government. Essentially, it was sort of gleichgeschaltet, as the Germans would say, coordinated by the fascist regime in the 1930s, which was also the moment at which Venice launched the film festival, which is also the most prestigious film festival, I think, in the world. Also on a biennial, initially on a biennial ticket to coincide with the art show and then relaunched after World War II and have maintained the rhythm ever since with the major interruption being for COVID.

39:53Cameron Abadi: And it's gone through, I mean, it always reflects the politics of the day. So the great controversies of the current moment were about, on the one hand, the Russian pavilion, and on the other hand, the presence of Israel and the Israeli pavilion, to which many exhibitors and artists, of course, took obsession because of the violence in Gaza. So it becomes a kind of reflection of global politics through the medium of art. And if you're into art, into art history, if you just want to see a kind of melding of a European, one of the great cities in world history with contemporary art, it's completely unique.

40:31Cameron Abadi: And I think there should be even more visitors, though. It's probably not in my interest to say that. But I'm surprised more people don't go because it's an incredible experience.

40:41Adam Tooze: Yeah, I'm curious how the Biennale negotiates what seems to be a kind of potential tension in its basic approach to exhibiting art. I mean, you're describing an exhibition that is organized around national pavilions and at the same time dedicated to the current state of contemporary art. And, you know, to the extent that I'm familiar with contemporary art discourse, and there's obviously all kinds, but much of it is exploring aesthetics beyond national boundaries or seeking to break down conventional boundaries of our political and aesthetic discourse. so what exactly does it mean to be representing a country artistically when yeah contemporary artists are you know often rejecting national identity well that's part of the fun i mean you're

41:43Cameron Abadi: absolutely right it doesn't make much sense but it's um you know it makes us it makes it as fun as say the eurovision song contest where european countries have to pick a terrible pop band to represent them it's uh it's at one level it's just hugely contentious it's like a rorschach lot like okay onto americanness what art are you going to project so you go around wondering sometimes fascinated sometimes charmed sometimes genuinely impressed often bemused and scratching your head at what selection process can possibly have led to this to this choice and that's part of the it's an ongoing soap opera type of story that's part of the charm of going and the choices are fascinating i mean i've often been with my daughter who's fantastically fun to talk to about.

42:30Cameron Abadi: I mean, our impression is that small countries often make the better picks because they have fewer options to pick from. And politics plays a somewhat smaller role in the selection of the candidates than in the big countries, where representation is everything. There was a remarkable crop of sex and reproduction themed sessions this time. The Austrians show up with body art, as you kind of might expect the Austrians to do. the British and American pavilions are intensely political. The American pavilion this year is a kind of Trump era set of choices. And then there are some cases where you're absolutely right about contemporary art in general, but there are large parts of the world because everyone's there, like where there is a much more straightforwardly kind of celebratory national agenda for art, which in itself is fascinating to see.

43:19Cameron Abadi: I mean, if one's open-minded about what makes interesting and attractive art, then there's a buffet of options here. And then the important thing to say is that's only part of the show. So the pavilions are, from my mind, not the most. They're interesting for all of these kind of reasons. And sometimes rarely a great artist will meld with the politics of a national choice, and then you get to see something really great. Like I thought the German show this year was really fascinating. When Michael Neumann was doing an amazing set of stuff about East Germany. But that's quite rare. The other thing that there are three levels that happen at the Biennale, there's the national pavilions, and then there's the curated display of art, which in some ways is just, it's as though a designated curator assembles their view of contemporary global art.

44:07Cameron Abadi: and they have a huge canvas to do this on. So there's a museum gallery space, a big one, inside the Giardini where the national pavilions are and this is now sprawled out into the thing called the Arsenale which is the former military dockyard of Venice and it goes on forever. Seeing this show is a three-day project. And then the third level are the what are called collateral events which is just the global art world clusters in Venice for several months because this is just the greatest stage on earth. So we saw an absolutely jaw-dropping show by Michael Armitage, the Kenyan British artist, which was hosted by Pinot, the big French billionaire foundation, which has also opened an amazing gallery in Paris.

44:52Cameron Abadi: And it was by far the strongest single show at the Biennale this year. And it brought together private ownership, gallery ownership, galleries that are selling Armitage's work right now to just display this extraordinary painter's talent. And the curation every year, every time, is a real crapshoot. So it's very interesting what perspective you get. And this year it was the tragic figure of Koyo Kuo, who was a South African curator who tragically died of liver cancer, I think, before she could see the realisation of the project. But she produced a vision of global art from an African perspective.

45:34Cameron Abadi: I think it's fair to say that. That was really quite unlike anything I've ever seen before anywhere in any space. And so those are really the three dimensions. You have the Eurovision lottery of the national pavilions. You have the distinctive curator's vision, which when it's a brilliant vision is expanded on a scale you can't see anywhere else quite like this. and then this scattershot of very high status exhibitions. And then you just randomly walk around Venice and you open a church door and there's like 10 paintings or 10 pieces of art. For me, it could be literally anywhere in the world.

46:11Cameron Abadi: Like Timo Estes, like a national pavilion was fantastic. I've seen Mongolian, lots of Central Asian art in a way that you wouldn't ever see anywhere else. So it's a real extraordinary grab back. And all of this against the backdrop of Venice. So if you're not looking at the art, you're kind of wandering out into the streets of this just jaw-dropping town. Yeah, so it's a completely unique, very unlike the experience of Basel or somewhere like that, where you're in a giant industrial hangar looking at art.

46:44Adam Tooze: Yeah, the National Pavilions do seem like a very unique aspect of this exhibition. And even hearing you talk about them made me think that to some extent, it's a reminder that even like the political officials responsible for like appointing who is displayed in those national pavilions are ultimately subject to the same market for cultural capital that we all are. They don't determine what acquires cultural capital, so they need to follow the same rules or try to, you know, it's almost like kind of putting political officials in their place, ultimately. You know, they have to kind of follow the same rules of cultural capital that anyone else does.

47:26Adam Tooze: But I guess that raises the question of where ultimately, you know, when you translate cultural capital into financial terms, where exactly it's located. I mean, we've talked about the art market before on this show, and it is, you know, not a secret that it's a very rarefied marketplace ultimately when you get to the financial side of things. And, you know, so the Venice exhibition is, you know, translating cultural capital into value of the artworks on display that ultimately benefit people who might be able to afford to buy and own that art. So let's say it's very wealthy people around the world who are the ultimate financial beneficiaries of the value created at exhibitions like this.

48:15Adam Tooze: And as you said from the outset, this is an enormous public event where there's public money being spent, not only by Italy, but all the national pavilions as well. So is there a kind of public subsidy here for the production of private cultural capital?

48:31Cameron Abadi: Yeah, it's really fascinating. I have to say that this is such a great question, but I will admit that I bristled when I read it. It's like, oh, God, come. And then we spent all that time talking about the US Treasury market and the Fed and the Treasury's intervention. And after all, what is that? But with a public curation of trillions of dollars of value on a much, much larger scale, right? So this interaction between the public and the private is in no way peculiar to the art market. And in general, of course, public subsidy for the arts is trivial by comparison with public subsidy for the fossil fuel industry or for home ownership or any of these sorts of things.

49:05Cameron Abadi: But it's a reality. You're absolutely right that this is a publicly curated and publicly funded place in which the display of the art that's displayed there hugely enhances its value. And the big, big years are when the people move from the Biennale in Venice to the Basel market a few months later in the summer. And there's a one-to-one relationship and the value of art being sold at Basel goes up after Venice. It's not sold in Venice. Originally, the Biennale was a market. Venice is a commercial city, and Venice is a city which has always combined public and private wealth, culture. I imagine the Italians quite reasonably thought that art was a business and it would be good for Italian prosperity if it was the center of this business, and there was no harm in that.

49:54Cameron Abadi: And yes, this involved the accumulation of wealth but what is Venice but the accumulation of wealth those those churches those amazing palazzos were built through wealth so this is not a city that's squeamish when it comes to the mingling of culture and wealth and it's a grandiose monument to that to that merger when you get into the integrity of it though it's a kind of deflationary story because it's not easy to get numbers for the actual cost the budget of the festival but the best one I've been able to find is it's 20 million euros. So that's like, you know, Besson sneezes and he moves more money in the US treasury market than that.

50:30Cameron Abadi: There's 20 million euros, I believe. That's for the overall festival. And the pavilions seem to piece together their money from a weird ad hoc combination, even the national pavilion, say the US pavilion, of a tiny little bit of public money. And then philanthropy. Christie's The Auction House will get involved. It's a real hodgepodge. And once you get out to the commercial shows, the Pinot people will have used their own money to boost Michael Armitage's work, of which they've no doubt got a handsome stash. So this no doubt benefits the value of the assets they already hold. But it's also a unique chance at practically no cost to see a truly amazing body of work.

51:16So I'm

51:17Cameron Abadi: I would say it's a glorious demonstration of the continuing relevance of a certain sort of public-facing wealth in its cultural manifestation. This is not in any way to deny that there's an accumulation logic here. And at Basel, this is completely manifest. And as we've discussed, people buy art off the rack and stick it in tax-free warehouses in Switzerland and no one ever sees it again. but the the logic in venice is really to create something much closer to a public space now it's what is it it's 15 euros to go if you just buy a regular ticket or 20 or something like that so maybe you could say it's another middle class audience that will do this but it's nevertheless the most dramatic integration of art some of it is truly brilliant into a public space that you're going to see anywhere right now.

52:10Cameron Abadi: So take your point about the capital accumulation logic and the public-private partnership that's involved here. That's real. It's intended. That was always part of the plan. And people didn't used to see that as problematic. And now it's taken on grotesque proportions, which maybe makes that a little bit more open to debate. But what's really surprising, actually, I think, is how little public money goes into it overall. This is not an expensive event the and um there's it's a hodgepodge of funding you know the european union to great brouhaha withdrew all its funding from the bnr which turned out to be two million euros like it's peanuts you know individual works of art that are on display there are worth more than their than the amount of funding that was withdrawn by the eu collectively for the the the event so it's you're right about this leverage but it's um yeah it's worth putting it in perspective

53:03Adam Tooze: fair enough yeah and i i don't mean to suggest it's some kind of vast uh laundering of money but precisely because it's a you know a relatively small and and and also opaque market you know that's when we've talked about the art market in the past that's always been a kind of theme I do wonder whether the kind of financial incentives end up undermining or infiltrating the kind of curatorial judgments being made.

53:29Cameron Abadi: Oh, for sure. No question. Yeah, absolutely. And also just what can be insured, what can be gotten there, who can afford to have their work, who can afford to have the work made for the big pieces because artists have to be paid.

53:41Adam Tooze: And I'm sure there are gallerists kind of who are demanding, you know, various curators, ears, etc. And all that happens behind the scenes in ways that we don't necessarily know about. And none of it suggests it's not worth visiting or that it's not genuinely public ultimately, but it does get sort of muddied, I'm sure, in practice when it comes to these judgments about what exactly is being shown or not. But I guess to end this conversation, I do want to ask about the exhibition's relationship to Venice, the city, ultimately. You know, it's not a secret that Venice attracts a lot of visitors.

54:19Adam Tooze: I think some statistics I read suggest it gets more visitors every year than it has people living in the city in terms of its population. And so does this event, does it help to preserve Venice as a city, you know, as a place where people live? Or is it accelerating its kind of transformation ultimately into an overall museum?

54:45Cameron Abadi: I mean, the funny thing is your two questions, again, I'm sounding defensive, but like your two questions point opposite directions. that you can't have it both ways. Either the Biennale is, as it were, the dark heart of the global art, you know, public-private nexus. In other words, it's business. Or it's a museum. You know, but, you know, I think the simple answer to your point is, no, this is a moment at which Venice centers itself in what is a, or what was at least, the current moment, is not a good one for the global art market. But from the 90s through to the current moment was a rapidly expanding, highly dynamic space of culture industry.

55:26Cameron Abadi: And that was always the plan, and that was why they launched it in 1895. And looking at Venice's history, that's kind of always been the idea, right? Venice is a city that lives like other port cities of its type, off commerce, off trade, off cultural exchange. This is the city of Marco Polo, for heaven's sake. We're not shy about cultural appropriation. We're not shy about staging glamorous culture as a business, making profit. This is what Venice is and always has been. And to that extent, it's an extension of that logic. It once upon a time was also a major maritime power. And that's where the Arsenale comes in, which is the big display space now.

56:08Cameron Abadi: And the Arsenale, it's still got Italian naval vessels floating around in the basin, not big ones, but modern naval vessels. But if you look into the history of the Arsenale, where the great Venetian navy was built that dominated parts of the Eastern Mediterranean in the late medieval and modern period, those buildings were empty when they were taken over by the art. And then you ask, when did they become empty? They first became empty at the end of the 1700s. They were then reoccupied by the Italian navy at the end of the 19th century for a few decades. And then the Italian Navy stopped using them around 1900.

56:47Cameron Abadi: And the art came in the 1980s to re-dynamize this space and turn this early modern naval space. Literally, the biggest display gallery is a cordoria. So a hall long enough to turn maritime rope in it. So it's a giant linear space that you used to make mass-produced maritime rope. that obviously wasn't something you were doing in the 1900s because people were using chains. They weren't ever relying on sailing ships anymore. So if this is a repurposing, it's a repurposing of a legacy that goes all the way back to the early modern period. And for it to have found such a kind of high value modern culture industrial use borders on a miracle, to be honest.

57:35Cameron Abadi: And when you're in those spaces, it's eerie because you're looking at this contemporary, some of it very zany contemporary art in a space that used to twist maritime rope for one of the Mediterranean's great navies.

57:49Adam Tooze: So yeah, I guess you're making an interesting case for Venice as the ideal place for this event to be happening, but partly in the sense that it is the perfect place for the art industry to be centered in a way because there's almost no other resistance to it i mean there's no reason to to it's it's always been a kind of almost a free port for exchange and for maybe art in in general um you know that that that um you know makes it fitting somehow that this event uh has been happening in venice and will continue to be happening there maybe i should book my ticket to go check it out still a little little while left but uh otherwise yeah we should uh end this conversation.

58:37Adam Tooze: Of course, we'll be back in a week with new data points for everyone.

58:44Adam 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 Two's homepage on foreign policy.com or email us that's podcasts at foreign policy.com. Or you can tweet us that's at ones and twos pod. I'm Cameron Abadi. Thank you very much for listening. And we'll be back in your feed next week.

59:30Adam Tooze: The world at this moment is more fractured than it's been in decades. More wars.

59:35Cameron Abadi: Iran will not have a nuclear weapon.

59:38Adam 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.