Avoiding the A.I. Apocalypse

0:06Hello and welcome to Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Bloomberg. I'm here with Emily Peck of Axios.

0:16Felix Salmon: Hello, hello. I'm here with Elizabeth Spiers of The New York Times. Hello. We are going to talk about P-Doom. Well, we're going to talk about the risks of AI. Somehow it all exploded this week. Everyone is talking about how risky AI is or could be. We're going to unpack that. It's a good conversation. We are also going to talk about the rate how Kevin Walsh, the guy who was meant to cut rates, has raised rates. He voted for it. Let's talk about it. Yes, we will. We're going to talk about stock trading and whether it should all move on to the blockchain and be crypto. Spoiler alert, probably not.

0:50We have a Slate Plus segment on public toilets. It's a fun one this week. So stay tuned. It's all coming up on Sleep Money.

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1:39Felix Salmon: Slate Money is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Listen to Washington Wise, an original podcast for investors from Charles Schwab, to hear the stories making news in Washington right now. Host Mike Townsend, Charles Schwab's Managing Director for Legislative and Regulatory Affairs, takes a nonpartisan look at the stories that matter most to investors, including policy initiatives for retirement savings, taxes and trade, inflation concerns, the Federal Reserve, and how regulatory developments can affect companies, sectors, and even the entire market.

2:21Felix Salmon: Mike and his guests offer their perspective on how policy changes could affect what you do with your portfolio. Download the latest episode and follow at schwab.com slash Washington Wise or wherever you listen. Okay, so this week, I know we just had a whole big episode about AI a couple weeks ago with Noah Breyer. we kind of moved past the p doom and the ai safety and are we all going to die thing because noah said that it's hard to grapple with it in a sort of meaningful way and hard to know who to believe and also we just had a lot of other interesting things about the technology itself to talk about but for reasons this week the ai safety conversation and the p doom conversation and the possibility that AI is going to kill us all has bubbled up and become incredibly salient.

3:15There was a bunch of opinion polls saying that every, like a majority of both Republicans and Democrats think there's a meaningful chance that AI is going to kill us all. Open AI revealed that it wasn't just Hugging Face, so like half a dozen other incidents that were very worrying. People are broadly convinced that AI is quite literally out of control. And if it is out of control, then there is some non-negligible chance that it will damage either humanity, it's an existential risk, or like the economy or something. So let's just level set here.

3:57Elizabeth Spiers: Elizabeth, are these worries, do you kind of roll your eyes or are you nodding along? No, I'm nodding along because I think that the whole industry, when they talk about alignment, you know, they're referring to the idea that the aims of AI should be generally aligned with the aims of humanity. And I think that structurally, these companies are not set up to do that. And they're not good at self-policing. But also, when you look at the number of people that they have working on alignment, it's such a small percentage of their budgets. At OpenAI, it's 20 people out of every thousand employees. so I just don't trust them to police themselves and these incidences that are being reported and we don't we know that's only a fraction of what's actually happening are pretty disturbing oh we do how do we know that because it's sort of there was uh somebody used a good analogy and one of the things that I read he's like well if you see two ants in the kitchen they're not just two ants in the kitchen this is what they've chosen to release and make public it's interesting you say that they're not set up to do that because it strikes me that in the case of open ai which was originally set up as a non-profit in the interest of humanity and in the case of anthropic which was set up as a public benefit corporation a bunch of people worried about this from the beginning and tried their hardest precisely to set things up to do that that like neither of these are classical VC-funded companies which are controlled by shareholders.

5:25I'm not saying that they have succeeded in achieving alignment. And in fact, I think both of them will quite openly say that they have not succeeded in achieving alignment. But this is a worry that a lot of, that almost everyone in AI has had from the beginning. And I do think that they did make attempts to get to alignment. And I do think that they have have struggled to get there and they're surprised they have been surprised at how difficult it is

5:55Felix Salmon: but emily what's your general vibe here my general vibe is it has become increasingly clear over the past few weeks that ai specifically ai agents pose significant risks to businesses people services, the economy, financial sector, all of it more broadly. And the risk, I mean, to talk about existential risk is almost a distraction from the risks that AI seems to pose, which is basically cybersecurity risks. And the economy companies, we're all used to cybersecurity risks to an extent, but what AI does is just like put it on steroids. And I think there is lack of preparedness for that. And I think even from inside the companies, you're starting to hear like they're starting to say literally like we don't have good control over this.

6:49Felix Salmon: That's a big risk for themselves as businesses, even though they do have public interests at heart. To talk about the interests of humanity, it obscures just reality, which is these things are becoming very dangerous and they're evolving really fast. And I think Elizabeth is right that the companies have concerns about that. But because of their conflict of interest, which is like people have given them billions of dollars, some trillions for the whole system, like they're kind of like conflicted a little bit away from doing whatever it is that would work best to regulate them.

7:25Elizabeth Spiers: When you look at their incentives overall, even though we have four different AI companies who are publicly saying, you know, we should all consider a slowdown, the alternative is, first of all, they're all competing against each other. And they will only slow down if they all agree collectively to do it, which is not. That is what all of them have said that they want to do, but it is illegal for them to collude to do that. And so they really do need the government to tell them to do that. Yes and no. We do have working group frameworks where people are coordinating, especially around safety, which is not the same thing as the sort of collusion that's illegal.

8:01Elizabeth Spiers: I think that's a red herring that some of the CEOs have put out where they can sort of say, OK, maybe we should collaborate on safety standards, but none of us wants to be held liable if they're not strong enough. And I think the other thing is just that you also have a lot of people who are sort of outside this AI development cycle who are worried about competition with China. And this includes our technically illiterate president who has said that AI safety concerns are a hoax and that we need to run as fast as possible so that we get ahead of China. So those are incentives that are just working against any kind of safety or caution.

8:37I totally agree on the second. the idea that there are two AIs in the world there's America and there's China and they are competing with each other to see which one can be better is deeply held in the White House among certain groups of tech types in America I don't think so much quite as much in within the AI world itself. But this idea that AI kind of has a nationality and that the country that develops the models that are on the frontier has the sort of strategic advantage is, I agree, driving a lot of the reluctance to regulate AI. I have my own skepticism that governments are even capable of regulating AI, but that's a separate issue.

9:26The financial idea that the companies have a financial incentive to move as fast as possible, I think is not quite as obvious. Yes, investors and people valuing these companies and stuff, they do love to see a lot of growth and improvement. But these models are each model costs more to build than the last. And then it only monetizes while it's on the frontier. As we were talking about with Noah, it only sits on the frontier for a few months before a new model comes out. And if you slow down, if the entire industry slows down and those models sit on the frontier for a year rather than six months.

10:14That doubles the amount of time that model can pay for itself, basically. I do think that a broad slowdown imposed by the US government on both open AI and antropics saying, can you, what's the term of art is pace the frontier, would be good for their profitability ahead of their IPOs. And I do believe that's part of the reason why they are pushing for that right now. But that would clearly be violate a bunch of antitrust laws if they did that. So but they do kind of need the government to tell them to do that.

10:45Elizabeth Spiers: When has that ever constrained them? Why would it constrain them in AI companies when it hasn't constrained them in any other type of large tech company? I think because, honestly, they're a little bit more, do I want to say ethical? I mean, I definitely want to say that these tech companies worry a hell of a lot more about ethics than any other tech companies in the history of humanity. I mean, that is true. I don't know that that's true. I think they're under more scrutiny than other tech companies, but I don't think that they are necessarily more ethical, especially. Oh, I didn't know. I didn't say they were more ethical.

11:18I did not say they were more ethical. I did say they worry more about ethics, which is a slightly different thing.

11:23Elizabeth Spiers: Ethics are a liability, though, because look at all the accusations that Altman's wildly dishonest and that he lies. And that's why he was kicked out in the first place. All of this is true, right? And that's the whole point. There was a board of directors at OpenAI who, even though Altman was creating this immensely valuable company, kicked him out over ethical reasons. Now, did that coup fail? Yes. But was there a board of directors who at least for like two days was empowered to do that and actually acted on that? And actually acted on that? Then, yes, there was. And I don't think that would have been conceivable in any other tech company.

11:56Felix Salmon: I think the question of whether slowing down development could still be profitable is really interesting. And I think actually makes some sense. Because especially if you look at from, I hate to say this word, from an enterprise perspective, because a lot of the money these AI companies are going to make is going to come from the corporate world, from companies adapting their models, using their models, paying for their models. and companies, enterprise, we move slow. Employees need and workers and management, everyone needs to figure out how to integrate the new technology into their business.

12:32Felix Salmon: And if it's literally changing all the time, that becomes quite hard to do. If you let the frontier model kind of like marinate a little longer, you could conceivably come up with better apps for it, better uses for it. You could just take your time with it and figure it out. Like I'm sure Apple could come up with a better folding phone on a more frequent product cycle, but it doesn't because it knows you got to pace your product rollout. And it's weird to me, actually, just thinking about it out loud a little bit, that the frontier model companies are, they're rolling out new models with new names and stuff like at a pace that I don't think humans can really grok anyway.

13:10No one is asking for this.

13:12Elizabeth Spiers: I don't buy this argument though. Partly because first of all, We're not talking about pacing just the public rollout of products. We're talking about pacing internal development, too. One of the points that's been made over the last week that I hadn't really thought about is the danger that AI presents is not just about the models that are on the market. It's been increasingly clear that just being developed in the lab is part of the risk. That could be a lab leak. Yeah, well, even if you think that, for instance, the hugging face incident was heavily a function of OpenAI failing to fully air gap their development, a lot of these other incidents are not really about that.

13:53Elizabeth Spiers: And so the danger is not just in what the company releases, but what they're working on in the labs. And so if they were just aiming for more profitability, they could slow the product rollout while still accelerating the R &D, and you'd still have the same problem. Yeah, that's a fair point. I think the idea is you slow down the R &D a little bit, but what you do is you give the alignment, which is behind the frontier models, a little bit more time to catch up. But I definitely want to come back to what Emily was saying about alignment, because I think there's two importantly different dangers here.

14:29One is that the agents wind up going rogue, spreading over the internet, and doing a whole bunch of extremely damaging unintended things. The other is that the agents wind up being controlled by North Korea and doing exactly what North Korea wants them to do. So I feel like nuclear weapons, to take a very salient analogy, are extremely aligned with the interests of the person who holds them. The point is, I am only going to drop a nuclear bomb on a city if I want to drop that nuclear bomb on a city. It is doing exactly what I want it to do. It might not be good for humanity, but it's the person in control of it is in control of it.

15:20Elizabeth Spiers: That's an interesting point, because one of the arguments is that one of the worst case scenarios here is that becomes not the case. But the one area around which I see all these politicians on both sides of the aisle actually coalescing around is the idea that there needs to be a kind of master kill switch. Yeah, a lot of people are talking about kill switches. I have yet to find an AI technologist who is convinced that a kill switch is something that they can just code up in a couple weeks and implement.

15:49Felix Salmon: Have you tried turning the AI off and on again to save humanity? Or just turning it off. Like, I don't think it can be turned off. I think we've already reached the point at which it can't be turned off. You know, there's enough open source models installed on enough computers in enough different countries that you can't turn it off. A lot of what we're talking about was informed by this really good piece from The Verge called Inside the Suddenly Explosive World of AI Safety. Everyone should just go and read it. that talks about Meter and what's the other lab? Redwood?

16:21Elizabeth Spiers: Redwood and then there's Apollo.

16:23Felix Salmon: And Apollo that basically are trying to sort of be quasi-safety agencies, I think. That's what they're sort of like trying to do in the absence of any like serious regulatory action so far from the federal government or really anyone else. And I thought that was sort of interesting and sort of hits at how are we going to do the regulation? Because these... And who even is we? This is one of the things that you see a lot in the American press is this idea that the obvious regulatory body would in one shape or another be the U.S. government. i'm and again like especially like obviously given the importance of china to ai development but just generally given the importance of ai to the world and given the way in which the u.s is not respected as the you know benign hegemon that it used to be i'm very uncomfortable with the idea that the u.s

17:21Elizabeth Spiers: government should step into that role i mean we already do that in so many industries we have aviation, medicine, banking, why not AI? Sure, sure. I'm just saying like, where should the regulation be? Like in banking, ultimately, you know, you have to bank for international settlements in Basel, right, which is a global body that basically tries to coordinate regulatory regimes globally. I feel like that kind of an institution that isn't in the US would be preferable to trying to do something domestically.

17:50Felix Salmon: I think you need both. You need a whole of system effect. I mean, regulation, people say like, we need regulation. Like it's quite complicated. And if you look back historically at any kind of invention that poses danger, but also innovation, literally any invention, railroads, cars, planes, drugs, like the list goes on, finance products, regulation takes years to develop. It happens inside countries and through coordination between companies like the Bank of International Settlements. I think it was around before even like the International Monetary Fund when countries still didn't even understand how like the global economy even kind of functioned.

18:29Felix Salmon: It like takes years to develop regulation and to figure out how to do it. And it requires a global effort a lot of times like you see with finance, but in coordination with structures inside different countries. And it often requires as like a catalyst. It requires real good regulation, some kind of disaster first, because until the disaster happens, you know you have a problem, but you don't know what the problem is. You might say like, our unemployment insurance system is like really bad and really weak. And a lot of like activists might be saying like, we need to fix it. It's a real problem.

19:11Felix Salmon: And we need more regulation. No one gives a shit. And then the unemployment rate hits 20%. And Congress is like, let's do extra unemployment insurance for Uber drivers. All of a sudden, like the regulatory response kicks into gear or like you look up at the sky in Los Angeles and you can't see the sun anymore because there's so much smog. And like people are like, what if we regulated the air? Do you know what I mean? Like you need before anything can happen and all that response kick in and we can have the debate about who regulates and you need the disaster. I think that's mostly true.

19:43Elizabeth Spiers: Most legislation is reactive. But not all of it. I mean, we do. Yeah. Let me just give a couple of really salient examples here. Right. And I keep on coming back to this incredible irony that one of the two, it's not even ironic, it's deliberate, that one of the two big AI companies is called Anthropic. And I'm going to come to that in a minute. Let's look at a few examples. One, nuclear weapons. Two, chemical weapons. Three, biological weapons. Four, here's an interesting one, human cloning. All of these technologies are technologies where there is a global norm, where humans around the world are in broad agreement that we should not be doing this thing.

20:24Or if we are in possession of it, we should not be using it. And for over 75 years, humans broadly have adhered to those norms. There have been a couple of incidents here and there where they haven't.

20:38Elizabeth Spiers: I mean, the Winklevoss twins exist. I'm not sure that we haven't killed humans. So, but it's kind of surprising the degree to which, given how broadly accessible these technologies are, especially to state actors, that they haven't been used more than they have. And we have not had some major existential disaster nearly to the degree to which most people would have predicted 70 or 80 years ago. and something has been working but i do believe that one of the reasons that something has been there are two reasons that something has been working one is that you have this broad agreement across humanity that these things are very bad and you don't have a broad agreement across humanity that ai is very bad that is just not a thing and then the second thing you have and i really want to just come to this is and i want i don't want to get too sort of up in head in the clouds late night dorm room philosophy session here.

21:39But the anthropic principle is this idea that we have to be aware of the fact that we are asking these questions and that we are around to ask these questions. If you take the world in like 1945, with all of these technologies, basically, you know, in existence, and then run it forwards 1000 times. And in 999 of those times, you know, most civilization gets wiped out because some of you know these technologies get out of control then in 999 out of a thousand worlds we're not here to ask like why is it that these technologies haven't been used it kind of we are in the one almost by definition because we're asking the question we are in that one world that we've managed to somehow luck out and survive yeah

22:26Elizabeth Spiers: one thing that concerns me and this is why i'm not my pdm isn't high and i think gary marcus kind of said this my p-dom isn't high but my p-dystopia is meaning like i don't necessarily believe that ai is going to wipe us all out but i think some pretty bad shit's going to happen if they're not interventions what's your p-dystopia i think i think my p-dystopia is 90 oh wow so you are basically convinced we are entering a dystopia yeah well i just don't see people doing the things that absolutely need to be done to stop it and i think part of the problem to to your point about you know, everybody being on the generally in agreement that, you know, we shouldn't have biological weapons, we shouldn't clone people.

23:04Elizabeth Spiers: I think part of the reason why that's not the case with AI is that it's the kind of thing that is too abstract and in some cases technically complicated for the average person to feel that they understand it enough to honestly be that anxious about it. It's such an invisible layer of our technical architecture. That's why you need

23:24Felix Salmon: a disaster to happen before any regulation happens yeah but i i think you know i i don't

23:29Elizabeth Spiers: disagree with that i think that may be what maybe precipitates it and hopefully the disaster isn't world ending which it won't be emily let's let's run this forward just a little bit let's assume there is a large but survivable disaster and everyone goes oh shit this is really bad obviously we need to regulate this in your opinion do you think that the u.s government or anyone else has the ability to regulate this or will have the ability to regulate this at that

24:03Felix Salmon: point i mean maybe i know we feel like the u.s is in a in the bad place now vis-a-vis government vis-a-vis doing things vis-a-vis etc but like the the political picture can change quickly in two years, you know, I mean, who knows? Let's assume that this disaster happens with some, you know, very intelligent Obama style technocrat in charge. Okay. And he's put the best scientists in charge of finding a workable way to regulate this thing so that this disaster never happens again. Do you think that is possible? Yeah, of course. And it's not just about government action. When we talk about regulation, it's about the big, rich companies that are putting all this technology into play, taking it even more seriously and doing stuff to prevent it.

24:51Felix Salmon: You see that happen all the time in finance, right? Something weird blows up one time and then everyone in the markets kind of adjusts and like hedges and figures out how to deal with that risk. So that exact thing maybe doesn't happen. Just to lay my cards on the table here, I take the other side of that one. I think - Wow, you're so optimistic usually. That's almost surprising.

25:12Elizabeth Spiers: He's very anti the idea that government can be effective. But I'm not saying only government.

25:16Felix Salmon: I'm saying everyone in the system. Once you realize something is a risk the way it is, a lot of the times, especially companies with financial interests, will change the way they work. Yeah, and I think Dan Tresner just had a piece out saying this is all about analogies and which analogies you're using and what you're analogizing AI to. And you're saying, like, if you analogize it to securitization of mortgages or something, then, yeah, we can pretty easily work out how to stop that from happening again. And we have stopped that from happening again. And we're not going to have another mortgage securitization crisis.

25:52You said it here, folks. I said it, yeah. But my opinion, and this is not a strongly held opinion, because I think everyone is in a kind of epistemic fog here right now. I don't think anyone has a lot of hard facts that they can deal with. My opinion is that if we reach a point where the agents escape containment and hack into JPMorgan Chase and vaporize everyone's bank account and there's a major disaster along those lines, then at that point, it's too late. All the best will in the world is not going to be able to put that lid back on Pandora's box. We're not going to be able to get those agents back under control.

26:33Elizabeth Spiers: Another factor here is just the political will. What's cutting against that is, you know, again, people not really understanding AI. When you look at the backlash to data centers, that seems to present a potential playbook for regulation because right now every person who's up for re-election has some kind of data center bill up for consideration because they have to convey to their voters that they are concerned about it. And if you slowed down data center development, that would, by default, slow down some of the AI development because without data center build outs, you can only do so much.

27:08Maybe.

27:10Felix Salmon: Also, just having these conversations, talking about the possibility of catastrophe, often that actually does head off catastrophe. And then you have in five years people saying, like, remember, we said there was going to be a Y2K disaster, but then there wasn't. And everyone was like, so it was a hoax. It's like, no, because when you talk about danger and risk, people adjust and try and head it off.

27:34Elizabeth Spiers: Gen X stopped using Aquanet and now we don't have a hole in the ozone layer. So it's possible. Yeah. Go back and listen to the Slate Money Goes to the Movies episode on Office Space, which is still one of the great classic movies of corporate life and all time. And you know what our hero was doing in Office Space? He was working on the Y2K boat.

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31:49we need to move on and talk about rate hikes guys this kind of came as a surprise i think most people were surprised the fed unanimously voted to hike rates we had god knows how many fed meetings with jay powell in charge where there wasn't a rate hike and then in comes kevin walsh handpicked by Donald Trump to cut rates. And what does Kevin Walsh do within like his first two meetings? Not only does he preside over an FOMC meeting that votes to raise rates, which I think people were expecting, but he voted to raise rates too. And everyone's like, oh, maybe you're not such a Trump puppet after all.

32:31Felix Salmon: Also, Trump didn't yell at him. Yeah. Yeah. He framed it as kind of like everyone on the committee who hates Trump wanted to have a rate hike. So Kevin just went along with it. And he said that was OK.

32:44Elizabeth Spiers: That was reassuring when people refer to themselves in the third person. You know, so it has now been, I think, since the 60s. It's been a really long time since the Fed chairman ever voted against what the board decided to do, what the committee decided to do. I think there was just a massive amount of pressure on Walsh not to look like this sort of powerless chairman who voted against the rate hike even where the rest of the committee wanted to do it because like yeah i remember reading a biography of paul volcker where it was just assumed that if the fed chair is ever outvoted then he has to resign now i don't think that would happen in this case i think wash would stay on even if he was outvoted but it certainly makes future meetings a lot less uncomfortable and it's and i think that somehow trump understands this he understands that dynamic.

33:38And he's like, if I want Kevin Walsh to be able to have any influence at all, he needs to have gone along with the rate hike at least once.

33:45Felix Salmon: Well, if he hadn't, then I think it would have been chaos in the markets. The credibility of the Fed would have been kind of wrecked because Kevin Walsh at the Jackson Hole meeting last month gave what they call a hawkish speech where he said, we definitely want to have inflation under control. And everyone was like, markets were reassured. They're like, OK, he cares. He sees that inflation is going the wrong way. Prices are going the wrong way. And if he needs to, he is going to do something like that was kind of the consensus. And then when we had the high inflation reports this past month, markets again were like, OK, he's probably going to raise rates.

34:19Felix Salmon: And coming into the meeting, it was like 90 percent he was going to raise rates. No, it was 90 percent they were going to raise rates. They were going to raise. Yes, they were going to raise rates. And even I was like, I don't see how he's going to do it and cross Trump. Everyone was like, Emily, it's 90%. And I was like, yeah, but he's not going to cross Trump. And then he did. So it was still kind of surprised me.

34:37Elizabeth Spiers: I wonder if maybe what happened was somebody who does have Trump's ear convinced him that the stock market would drop if we're sure. Yeah.

34:45Felix Salmon: I mean, we have seen time and again, the stock and bond markets are the only thing that seems like the only thing that really constrains the president. The polls don't seem to do it, right? He keeps plowing ahead with that tariff strategy, no matter what anyone will say about it. But if the stock market kind of falls. I mean, that's his his ultimate master. So if he's able to understand that or if someone explained to him, like if Kevin goes for the rate cut this time, it's going to be bad for bonds and stocks. Maybe he he I don't know, especially just ahead of midterms.

35:16Elizabeth Spiers: He doesn't

35:17Felix Salmon: want to he's got a lot of money in the market. The one thing that everyone is pretty, pretty clear about is that this was a great hike. This wasn't the beginning of a hiking cycle. Kevin Walsh gave no indication that from here on in, the default is going to be more rate hikes. There's a very good chance that the next meeting he'll hold rate steady. Walsh has made it abundantly clear. The one thing we know about Walsh, more than anything else, is that he wants to keep his options open and he does not want to signal what his future actions are going to be. So I think he has been relatively successful in that.

35:57There are still dot plots. He hates the dot plot. But the fact remains that there will probably be another couple of rate hikes to come. But there's no indication that we're going to start seeing 150, 200, 250 points of hiking over time.

36:11Elizabeth Spiers: Well, he refused to participate in the dot plot this time, which is one way to keep Trump from yelling at him.

36:18Felix Salmon: I was thinking because having lived through the rate hiking cycle of 20, 2022, 2023, you know, when Jerome Powell was kind of late to the party and he kicked it off with like a 0.75 percentage point hike and everyone kind of like freaked out. And like things broke pretty quick in the financial world. Stock market ultimately went down 20%. We had a mini banking crisis. Silicon Valley Bank imploded. Like this was a big thing. Yeah, it was a big thing. So like one thing I was wondering about when this happened this week was like, are things going to break this time and people are well everyone's always optimistic right wall street's optimistic but this time it was a smaller cut wasn't as drastic wasn't as shocking and people are now they've already lived through like we were saying about ai they've already lived through not a crisis or disaster but they've lived through the disruption the time before so i think people are better sort of positioned now to deal with this so there's a huge difference between that time and this time even assuming that this is a rate hiking cycle rather than just a single rate hike, which is that in 2022, the rate hikes that Jay Powell did fed directly into the long end of the curve.

37:29So when you saw the overnight interest rate that Jay Powell controlled go up by 150 basis points, mortgage rates went up by 158 basis points too. All rates, the entire curve went up and everyone was like oh shit suddenly my treasury bonds that i was holding if i'm silicon valley bank are worth much less than they used to be because price goes down when yields go up and all of the yields went up and what powell did was not just raise short-term rates but he raised yields across the entire curve what happened when wash raised interest rates by a mere 25 basis points we don't know like exactly how it's going to play out over months and years but the immediate effect was that long rates went down rather than that.

38:15And the important interest rate in the U.S. economy is not the overnight rate. The important interest rate in the U.S. economy is the 10-year rate. That's what mortgages are priced off. That's what it costs businesses to invest for the long term. If long-term borrowing costs remain unchanged or in fact even go down, then raising rates at the short end does much, much less harm.

38:37Felix Salmon: Yeah, because what he did was sort of restore some of the reason that 10-year was going up was like people were sort of losing, see if this is right, losing confidence in the Fed, worrying about inflation, worrying about all manner of credibility issues. But the Fed raising rates unanimously restored some of that credibility and made the yields come down a bit. Is that what you're saying? Exactly. The yields were high at the long end because people were pricing in higher and higher embedded inflation. Inflation would be, you know, quite far north of that 2 % target that the Fed has. And then unanimous Fed hiking rates kind of made people think, well, maybe the Fed actually does have the cojones to bring inflation down to 2%.

39:22And if that's the case, then long-term rates don't need to be where they are.

39:25Felix Salmon: So here's my question for those of us, or those of you listeners who maybe tuned out when Felix said the long end of the curve or whatever, when we talk, I feel like people, not because you're just, it's wonky, But to take it back to like real world stuff, inflation is high and like prices, guys, prices keep going up. I live in the Northeast. We all do. And I have a heating oil bill. And that shit is crazy right now. Like things, things are really expensive. And it's because of this war that things are really expensive. So my question is, do we think interest rate hikes are going to like slow the roll here when it's a war, like a supply driven shock that is making prices higher?

40:09Felix Salmon: Can the Fed even actually do very much to help us?

40:13Elizabeth Spiers: Well, it's smarter than Treasury doing buybacks, right? Yeah, that's a king can you trying to roll back the tide kind of thing. But it's a good question. And I think the answer is narrowly no. If what you are talking about is diesel prices, heating oil prices, basically the cost of hydrocarbons in general, no, the Fed can't do anything about that. Now, the fact is that the US economy has 70 % services and even the good spot of the economy is much less hydrocarbon intensive than it used to be. so when hydrocarbon prices go up that is something which is very salient when you get your heating oil bill or you fill up your car with gasoline but it is not it doesn't necessarily show up in broad cpi and it certainly doesn't show up in the core measure of inflation that the fed worries

41:08Felix Salmon: about it does well core i think is just a way it's like prices aren't going up we've stripped away all the places where prices are going up to show you that prices aren't going up but i don't want to have a discussion about corp i do want to have that conversation at some point but the higher diesel prices they do filter out into other things they filter out into the into food prices that filters into restaurant prices which gets i mean it just it sort of starts to infect the system and supply chain kinks no the harbour bosch process food it's not just supply chain food is hydrocarbons right the harbour bosch fertilizer is made from hydrocarbons hydrocarbons are very deeply embedded in the economy.

41:47I'm not denying that. There is definitely a way in which hydrocarbon prices do feed into CPI in a bunch of different ways. Not denying that at all. I'm just saying that it's not quite as big as maybe you're implying and that it is entirely possible to have high oil prices and low inflation. How do I know it's possible? Because we have had that just a few years ago.

42:14Felix Salmon: You mean 2008 when oil hit 100 or whatever? Exactly. That's true. But then we had massive demand destruction because we had a financial crisis. But whatever. But yeah, in the 70s, an oil spike would cause massive inflation. Right. Now in the 2020s, that pass-through is a lot weaker. That's true. I agree. I agree with you, Felix.

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45:05all right let's move on to tokenization of equities because why the fuck not this was my idea and i'm sorry this is your idea emily you've sown this so you're gonna have to reap it what is

45:16Felix Salmon: tokenization of equities and why should i care so tokenization of equities means converting stocks to crypto and trading them on the blockchain and that's a thing that happens outside of the u.s in other markets. Hyperliquid, I think, is one. We've talked about it before. People trade stocks 24-7 using tokens, basically. Crypto companies really like this because it creates a reason to have cryptocurrency. It creates a reason for the blockchain. Traders like it because they can trade whenever they want to 24-7. In the U.S., we haven't really been able to do it. And this week, the SEC said, no, we'll do it.

45:56Felix Salmon: We can do it. Yeah, we're going to do it. We had a crypto bill called the Clarity Act fail to pass the Senate. And the SEC was like, well, if they're not going to do something about crypto, we're going to do this thing about crypto. Basically, they're like creating a five-year trial period to allow for trading of stocks like crypto. But the catch is you need permission from the company. Like you can't just create a fake crypto stock and trade it without the permission of it. You can't create like an Apple stock in crypto form without Apple saying that's fine. And that that will go on for five years.

46:32Felix Salmon: Companies like Robinhood, very excited about this. Other parts of the crypto economy are super psyched about this. So Robinhood, to be clear, makes orders of magnitude more money trading crypto than it does from trading stocks. And they're like, well, if we turn stocks into crypto, then guess what? We'll make more money. And that's true. There was a massive fight on Twitter between the CEOs of robin hood and amc the movie chain which is this meme stock where robin hood was basically trying to get people to trade a crypto token that tracks amc stock and the amc co was like what the fuck are you playing at you motherfucker um it got yeah and um so so just to be clear about this my base case scenario is the to a first approximation zero companies are going to give their permission to allow this to happen.

47:24Only a couple of very weird and kind of meaningless companies will even allow this. And so this SEC regulation is going to kind of be moot in practice.

47:35Elizabeth Spiers: So can you explain to me, because I still don't understand this, how exactly the token tracks a stock? Does it function more like a stable coin where it's a one-to-one thing? Because there was another piece in the prep that we read that said something about in cases of low liquidity, the token value can sort of decouple from the underlying asset? Yeah. So there's two different things. One is, yes, you're absolutely right. It's a stable coin and it's one to one. So like a stable coin is always worth the same as$1. This is like a stable coin and it's always worth the same as Apple stock. And there's an arbitrage mechanism that allows market participants to trade one back and forth with the other.

48:15And so that enforces that identity, that the price of the token should, if everything's going according to plan, always be the same as the stock. Now, it can't be the same as the price of the stock when the stock isn't trading. The whole point that we were talking about, this is 24-hour trading. And so when the markets are closed at night, at weekends, at holidays or whatever, then people will trade the token and it's going to trade at whatever it's going to trade at. But then once the market reopens, that arbitrage mechanism will kick in and those two prices will align again. That's when everything is going according to plan.

48:50Are there ways in which things can stop going according to plan? The arbitrage mechanism breaks down. The crypto world goes kablooey, as crypto is prone to doing. FTX implodes or whatever. And people are worried about, are the stocks backing the crypto tokens really there? Who's holding them? Are we going to be able to get them back? All of this kind of stuff. In principle, it is definitely possible that those crypto tokens could turn out to be worth much less than an actual share of stock. So that is one reason why a normal sensible person who just wants to invest their money in the stock market should probably just invest their money in the stock market and not in a bunch of hyperliquid tokens.

49:26Felix Salmon: It's interesting to wonder because I think there's also an effort or a movement or some people want to have stock trading become 24-7 and become more tokenized in the future and have actual authorized tokenized stocks. That's not what this is. Like you're saying, these are stocks backed by a share. They're not actual shares. But I think there is sort of like movement in that direction. And can I just say as someone who co-writes Axios Markets, please subscribe, I don't want this. No, it is not good for investors. When you were listing the people who want this, it is intermediaries like Robin Hood.

50:08It is intermediaries. Like the first person I heard really lay out a plan for tokenizing every stock in the stock market and creating a platform for trading all of those tokens 24-7 was Sam Bankman Free. And he went into quite a lot of detail about how he wanted to do that. Those people. And then he persuaded a bunch of VCs that he wanted to do that. And a bunch of VCs gave him billions of dollars in order to build that platform. Why would that platform be worth billions of dollars? Because the intermediaries make money and the platforms make money, right? But that's, it's not us. It's not the long-term buy and hold investors who make money.

50:43Felix Salmon: It's so interesting because if you think about how the stock trading has become, it's free. Remember, it used to not be free. Right. And now it's ostensibly free. So what's actually happened is that the financial industry has just been scrambling ever since to figure out the other ways to make money and make it less free in hidden ways. You know what I mean? Like it's just taking that cost and like putting in other parts of the system so you can't even see it. Well, each trade is much less profitable than it used to be. So the way you make money, if you're the financial industry, is by getting people to do more trades.

51:16And the way it turns out that you get people to do more trades is you make it more fun for them to do trades. And it just turns out that trading crypto is more fun than trading stocks. And so everyone's like, let's make it crypto-ish. Fuck that.

51:30Felix Salmon: Yeah. And crypto is 24-7 market. So why shouldn't this be? Why shouldn't all the markets be 24-7? Like, the year is 2026. We are worried about superintelligence killing us all. Why can't we wake up at midnight and buy a share of Apple stock using a cryptocurrency?

51:45Elizabeth Spiers: There will be no banking 24-7, you understand, but we should have 24-hour trading. Well, no, there is. In a world where your bank account is your tether wallet, where you're using stable coins rather than dollars, then yeah, banking is 24-7. You know, and in fact, actually, if you look at a lot of countries with instant payments, there is a bunch of 24-7 infrastructure that it is becoming more common. But this is all a move in the wrong direction, right? I genuinely believe that the world would be perfectly well served by a stock market that traded for one auction per day. We could get a long way there.

52:25We could solve all of the problems of high-frequency traders and all of that kind of stuff just by going to a discrete auction mechanism of the stock market, where instead of it trading continuously from 9.30 to 4, it just trades once a second from 9.30 to 4. Surely once a second is fast enough. Already we have reached the point where the majority of stock trading takes place in the combination of the first five minutes and the last five minutes of the stock trading session. The stock market is open between 9.30 and 4.00, but really it's two moments, one at 9.30 and one at 4.00. And if you're trading at 2 o 'clock in the afternoon, there's not that much liquidity there.

53:01The real liquidity is at 9.30 and at 4.00. So why not just stop people trading at 2 o 'clock in the afternoon? It's not really helping anyone. Let's just have an auction at 9.30, an auction at 4.00, Bob's your uncle. That kind of simplification makes sense. trading continuously 24-7 takes all of that liquidity that is moving towards those two auctions at 9.30 and 4 and spreads it super, super thinly across 24 hours of the day, seven days of the week. Where you have less liquidity, you have higher bid-offer spreads, you have more inefficiency, you have more middlemen making more money. That's great for the middlemen and the platforms.

53:35It's really bad for the investors.

53:37Felix Salmon: You're here. And let's also work less. Yeah, I want to work for two seconds a day One second at 9.30 and one second at 4 o 'clock And in between my agents will do all my work for me Yeah, I mean, that's what we've all been gunning for And now that socialism's back That's what Marx wanted Let's do it Amazing The capitalists, the rentier classes Will achieve Nirvana much earlier than the workers Something like that

54:17We should have a numbers round. Elizabeth, do you have a number?

54:20Elizabeth Spiers: I do. 12. That's the number of advanced degrees. A guy named James Beaton, who's 31 house. He has an MBA from Stanford, a Yale Law degree, an MA in applied math from Harvard. This guy has just gone to school perpetually while also running an education company with a bunch of employees. and this is my rich person dream if i had a bajillion dollars i would endlessly go back to school for useless degrees just for the sake of it but i'm sort of fascinated by a where he finds the time and b what the total value of 12 advanced degrees would be like that's got to be like a million dollars worth of education the cost of it oh the cost is high the value is probably negative to be honest i don't know like i feel like writing endless phd thesis is not my idea of fun, but maybe it's yours.

55:08Felix Salmon: I would like to go back to school. I would like to go back to school. I feel like there's a lot I need to understand. I really don't understand science as well as I should, I think. Like, I just didn't pay attention, Elizabeth, to science at all.

55:18Elizabeth Spiers: I think I would have taken different classes if I could do undergrad over.

55:22Felix Salmon: Me too. Man, send us back to school. My number is 200, which is the amount that the Starbucks Snoopy cup is trading for on StockX. $200? Yeah. Cup? Yes. Paper? Well, it's... No, it's glass. Oh, okay. You can get a glass coffee cup from Starbucks in the shape of a Snoopy. It is quite cute. The shape of a Snoopy? I'm going to show you.

55:56Elizabeth Spiers: Oh, that's cute. I think there's like a Peanuts renaissance happening. I've seen so much Peanuts branded stuff lately. You can go into a Starbucks and buy it for$39.95, which is already quite a lot of money. But apparently it's hard to go into a Starbucks and buy it for$39.95. So now people are trading it on StockX for$200. I'm just super interested in how corporations make themselves cute and lovable by using mascots. There's this massive thing going on in Japan right now with the penguin that's the mascot of the card that you use to tap into the subway in Tokyo. How cute. And the penguin is graduating, and it's not going to be a penguin anymore, but the penguin's going to do other things, and everyone's got the penguin plushies.

56:41And I'm fascinated, by the way, you can be the biggest, most faceless insurance company in the world, but you create a mascot that's some cute gecko, when everyone's like, oh my God, so cute.

56:52Elizabeth Spiers: Now I'm imagining all these AI safety people in a very serious meeting about whether the AI should have access to nuclear systems. And one guy just slowly pulls out a Snoopy shaped coffee cup and takes a sip. Emily, what's your number?

57:07Felix Salmon: My number is 618. That's billions of dollars. That is China's holdings of US treasury securities. I'm so embarrassed. Is this going down? It's going down. It's at an 18 year low. It hit an 18-year low in July because China has moved away from its hoarding of treasury bonds and notes and things like this. And I remember a time when people really worried about China, like, dumping treasuries, and that was going to be really bad for the U.S. But if you look at the chart, it's just been sort of like a slow decline. And other countries now are buying less of our bonds, which stresses people out because a bigger share of the bond buyers are now hedge funds.

57:47Felix Salmon: and private investors who are more likely to sort of dump and run at the latest sign of trouble or whatever. So something to keep aware of, I guess. But I mean, people worry that if China sold off its treasury holdings, then bond yields could go above 5%. And guess what? China did. And they did. Yeah, they did. The fears came true. The fears came true. But once again, it's not as bad as people said it would be. It's just a slow burn. And yet the sun rose the following morning. We're still here. We survived the sell-off. Congratulations, folks, on surviving the great multi-hundred billion dollar sell-off of Chinese treasury holdings.

58:29Congratulations on making it to the end of this podcast. Congratulations on opening up your email app and sending us emails to slatemoney.slate.com. We do appreciate them. Thanks to Jessamyn Molly of Seaplane Armada for producing. We are going to have a Slate Plus segment on...

58:49Elizabeth Spiers: Robo toilets. Free toilets. Toilets, yes. Whether cities should have free toilets. Listen to the Slate Plus. We have a sale on right now. I completely screwed up the promo last week because I didn't give you the proper promo code. The promo code is MONEY50. So type in MONEY50 if you go to Slate Plus. Use the promo code Money50 and you'll get 50 % off Slate Plus, which is a great deal. You'll support us. You'll support Slate. You'll support independent journalism. We love you. You're great. Other than that, thanks for listening. We'll be back next week with more Slate money.

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