Fabulous, Beautiful Debt

0:10Hello and welcome to Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Bloomberg with Elizabeth Spiers of the New York Times.

0:21Felix Salmon: Hello. With Emily Peck of Axios. Hello, hello. And with, for the umpteenth time it feels like on this show, our very favourite, fabulous, special, awesome guest, Mr. Robin Wigglesworth. Hallo, hallo. Robin, you are definitely, if not our absolute number one most favourite guest, because that's obviously Stacey Marie, you are our favourite Norwegian guest. Yes. As I was nodding to with my hallo, hallo gesture, I thought that would work better. Exactly. You are wonderful. You run the FT Alpha Phil blog. You are also a published author. And now I feel you've done the proper author thing of writing a second book.

1:04Like, if you only write one book like me, you're not really an author. If you write two books, now you're an author. I heard it was like, you need a hat trick. You need three to put it on your biography, as it were. I still feel like a dilettante, I'm afraid.

1:19Felix Salmon: No, I give it to you. So what is your book? The new one, the second one, is just coming out. Yes, it's a fabulous debt how bonds built the modern world, because bonds are my first love as a financial journalist. And mine too, I have to say. So we are going to nerd out on bonds, and this is a great time to nerd out about bonds, because the bond market is falling out of bed right now. And so we're going to talk about the history of bonds, the meaning of bonds, whether bonds are in trouble right now, what it means when bonds are in trouble, whether there's a case to be made for just having a jubilee and wiping them all out.

1:54It's going to range to some unexpected places, and then it's going to all culminate in a Slate Plus segment about sourdough rye, because of course it will. But it's all coming up on Slate Money.

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3:42Robin, welcome back. One of the first times you were here, we spent a lot of time singing Norwegian cod songs. And I feel like this time we're going to be more serious. I prefer if I didn't have to sing. Are there any good songs about Bonds? Not if you don't count the James Bond songs, unfortunately. I felt there should be one in Hamilton. And that isn't really. I know. Well, Joe Strummer once wrote a song about Maria Bartiromo and coverage of stocks. And I always felt that somebody, some punk rocker, should write a song about Bond reporters as well. But so far, nobody has done so. We should talk about Bonds.

4:23And we should talk about the big picture because you have a massive, wonderful book called, it's not called Trillions. What's this one called? A Fabulous Debt. A Fabulous Debt, which is a quote from some Englishman, right? Yes. So he was, everybody's freaking out about how much debt the UK had after the Napoleonic Wars. It sounds very contemporary. But he was saying, actually, no, look, this is fine. This is actually a strength for Britain. It's, in fact, a fabulous debt. When I came across it, the working title of my book on the history of the bond market was actually The Greatest Show on Earth.

4:57Felix, you and I, we know that the bond market is the greatest show. But a fabulous debt was too good to not take when it was just lying there, basically. I wrote my own piece about the aesthetics of debt, which we'll get to later in the show. But one of the things I say in that piece is that it's very sort of Janus face debt is always itself and the opposite. And one of the ways that it's that is it's both an asset and a liability at the same time. And when people get sort of exercised about the size of national debt, on one level, it makes perfect sense. On another level, it's like this is wealth.

5:28This is people's wealth that we're talking about here. And if the debt is going up, then just the amount of wealth that is held in government bonds is going up. And this idea that by borrowing money, governments could almost, you could say, create wealth, and certainly could do things like finance wars against France, which they could then win, because who was it who said that wars are won in the treasury? I don't know, but a lot of people, like Bismarck said that, Otto von Bismarck, the German chancellor, that said that, you know, the bond market's a real source of financial strength for a country.

6:01Variance of the quote by many people over the years.

6:04Felix Salmon: Why don't we step back and explain the things you've just said a little bit more? So, yeah, why don't we step back and try and understand? So the reason we're talking about this is because the first half of your book, pretty much, is a history of bonds and how this thing that just seems to be so integral to so much of what we live and breathe today. Once upon a time, it didn't exist. And you kind of trace back where it came from. And you tell this amazing story of how governments who embraced bonds in a kind of certain way tended to sort of, I don't Darwinianly survive better? Yeah, I mean, bonds, I mean, it's just a tradable loan.

6:51And debt is something that most people have like a negative connotation with. I mean, finance in general, really. But there's a pretty clear pattern that countries that were financially sophisticated, and especially the ones that developed bond markets, did better. And in fact, weirdly enough, also the bond market quite often encouraged a bit of transparency and accountability, maybe even, dare I say it, a little bit inclusivity. Because generally speaking, if you're going to lend to somebody, you want to trust them. And if you want to trust them, they have to open the books, they have to be run properly.

7:22So generally, countries that had bond markets were run better. And they had stronger bond markets because they were run better. So it kind of became a bit of a feedback loop. So this weird invention in Renaissance Italy, it was completely accidental, kind of became, played a small part in sort of even the Reformation in Europe. And that's why, you know, even though people still think, like you say, the U.S., oh, wow, it's got$40 trillion worth of debt. That sounds really bad. It's also kind of, if you look at it from a different perspective, a sign, a signal of America's financial health, of the size of its financial markets, of power and influence.

8:00Felix Salmon: And it's the way you describe it in the book. It's a democratic thing, right? A government could go to one rich guy, like a guy who owns a space company, say, and lend us a trillion dollars. And then they could have a relationship with just those two together. But when a government borrows in the bond market, it says, lend me$40 trillion. And the whole world steps up to do it. And then everyone, like you said, demands accountability, some kind of transparency, rule of law. Like those are the countries that have those sort of strong institutions get to borrow more money at a lower interest rate than the ones that don't.

8:40Felix Salmon: And I love the feedback there between democracy and facts and rule of law and trust and the bond market and that ability to then have like a bigger economy. I don't think people appreciate it enough. Well, I think one thing also that's counterintuitive to people is what Felix just said in passing. A bond is not just a liability, it's also an asset. And I think that's sort of the overriding theme of your book, Robin. Do you want to explain kind of what that means? Yeah, I mean, it's very much obviously if you borrow, if you lend money to somebody, they owe you money. And that's an asset for the lender and it's a liability for the borrower.

9:16And the flip side of$40 trillion worth of U.S. debt is that somebody else owns$40 trillion worth of U.S. debt. And that's you and me. It's through our pension plans, our insurance companies, the banks, the deposits we have in our banks, mutual funds. Companies have cash on hand that is usually invested in treasuries. And we're not borrowing this money from Mars. We're not borrowing it from Venus. We are borrowing, I mean, the U.S. is borrowing a lot from foreigners, which can get a little bit dicey when given the current political environment. But, you know, it's a sign of strength. And actually, in a weird way, the reason why the treasury market sits at the apex of the entire global financial system is that it's so big and deep.

9:58And the metaphor I always use, and it's a silly one, so I'm sure Felix will appreciate it. But if you want to dive into a swimming pool, you want it to be deep. You don't want to dive into a shallow swimming pool. And if you're a big central bank, a sovereign wealth fund, a mutual fund in South Africa, a pension plan in Brazil, whatever, you want to buy something that you know you can sell very easily as well. And the fact that the treasury market is so humongously big is actually what kind of makes it so strong. There's over a trillion dollars worth of bonds that treasury bonds that trade every day, every single day.

10:28And that, weirdly enough, actually matters way more than America's credit metrics, like what FICO score the U.S. government has. That doesn't actually matter as much as the fact that you can sell a ton of treasuries whenever you want or buy a ton of treasuries whenever you want.

10:43Felix Salmon: I love the part of your book, the history of the credit rating agencies and how it was just like one dude who was like, I'm just going to grade this stuff. And, you know, that's going to help everyone. And it was like immensely helpful until it wasn't, I guess, in 2008 or whatever. I feel like there's a parallel there to Jim Grant just starting Grant's Interest Rate Observer is like a Xerox thing. Yeah. It gave me so much hope and belief as a journalist. Like, oh, one day I could come up with some rating system, and the next thing I know I'm like a multimillionaire. And the global financial system is low-key depends on my random grades.

11:20It helps if you can get the government to say that everybody has to follow your ratings. That definitely helps. That kind of regulatory moat around your business. assembly, that would be really helpful.

11:30Felix Salmon: See, they say regulations hurt business. No, nay, nay, it's more complicated. I want to get back to this idea of what is, again, often considered to be a bad thing, which is the fact that the US has so many foreign creditors. And Robin, you and I have spent a lot of time covering various sovereign borrowers, often in emerging markets who are struggling to borrow money. And the pride you hear in the voice of the finance minister of ruritania when he finally manages to issue his first euro bond and you know he's managed to issue a bunch of debt in london or new york to a bunch of foreign investors nominated in dollars or euros or pounds like this idea of being able to borrow from abroad this is a sign that a country has made it this is something that many countries in the world desperately want and when they get there they're incredibly happy should they not be happy about this?

12:25I mean, to make it, take it out of Ruritania, that's a wonderfully fictional, amazing place of sovereign debt restructuring and put in the real world. I remember covering Rwanda's first European bond issue, issued in dollars. But Rwanda obviously went through just a cataclysmic civil war and has had many problems, but has actually recovered incredibly well since then. And for them, selling a big bond to European and Asian and US investors was a real sign of how far they've come. And it was incredibly emotional for them. And they were very proud that they were able to show open, transparent government books, show a surplus, show everything they were going to do with the money, be entirely transparent and what they were going to do.

13:11And this was how we're going to spend this money that you were giving us to improve our country further. Build a tourist center, hotel, convention center. And it sounded kind of wild, the convention center in Kigali, but it's done incredibly well. And it is good. The crucial thing is that you need to spend the money well. And quite often these countries, when they do it as a one-off or do it a few times, it's just so easy. It's so much easier to borrow money than to tax or grow your economy more slowly, like inch by inch. And we have seen so many times, Felix, over the years, you know, that countries often mess this up.

13:45All we need to say is the famous word tuna bond. Yeah. Like Mozambique. That was crazy. Borrows a bunch of money to invest in a tuna fishing fleet and basically none of it. There is no tuna fishing fleet. No, I mean, that was just pure fraud, basically. But there are more gray areas where countries borrow money. Some of it might end up in the pockets of certain government ministers, but most of it kind of goes where it's supposed to. but it just doesn't work. They just don't implement or spend well, and it comes back to bite them. And it's always tragic and painful, right? Because quite often it's these countries' taxpayers often have to bear the burden and occasionally Western bondholders.

14:26I weep less for them, though, I have to admit. You also talk in the book a little bit about how sometimes these things fail because the bonds are badly structured. Can you give us some examples of that? Yeah, I mean, the tuna bonds is a classic one where because the classic bond is like a tradable loan issued by the government or city. And it's very transparent. That's kind of the best like bonds out there. Best of transparent. You can see them traded. It's reported everywhere. There's documentation. Other times they are quite complex. They are not publicly disclosed. They are maybe there's a state-owned company that is issued a bond that is guaranteed by the government but doesn't actually appear on the government's finances.

15:09So there are all sorts of ways where this can be done in one person might say creative ways. Another person might say heinously, horrifically opaque ways. And Felix's example of the tuna bonds in Mozambique is a great example of something that was for all purposes just essentially massive government-enabled theft. And that was very bad for the country.

15:30Felix Salmon: Is the ideal bond like a war bond, like where the government borrows money to do war and it spends the money building weapons and all kinds of things that kind of like juice up the economy, setting aside the death and destruction? That's kind of like how economies grow by like doing a successful war, borrowing money to do the war. Well, it was fun. It sounds terrible saying this, but it was really fun researching a thousand years of bond market history. And yes, it is very much tied to war. It was born out of war and it tended to make these big leaps in war. And I think wars are bad and we don't want them.

16:08And bonds have financed terrible things like slavery as well. There have been like plantation back bonds back in the 1700s and 1800s. I mean, slavers financed themselves with bonds as well. But broadly speaking, you see bonds is just like a neutral tool that you can use for good things and bad things. And sometimes those wars were, for example, the Netherlands sold a lot of war, not really war bonds, but bonds to finance their fight against Spain for independence. The US colonies issued lots of bonds to finance their war for independence as well. Generally, whenever we have these big titanic projects, they just require so much money.

16:43And that is historically quite often wars of some kind. Data centers. Data centers, railways, canals, cable, like literally the wiring of the internet world. That kind of requires bonds because that's what you need to do that kind of heavy lifting. It's a bit like the extra belt. You know when you're going to lift a heavy lift, you need that kind of extra girding. That's what the bond market is. And then when bonds default, because honestly, Robin, you and I get on a podcast, we're not going to talk about defaults. Yeah. Is that, now that you've looked at a thousand years of bond market history, would you say that overwhelmingly you can sort of point the finger at the borrower and say there was a fuck up there somewhere?

17:25Or is there also just like circumstances overcome the borrower and like sometimes shit happens? Yeah, I mean, it's very easy to have hindsight. My hindsight is, it's not even 2020, it's still a little bit off. Because even after the fact, it's hard to know really what happens sometimes. But yeah, I mean, there are some times where you're just like, what the heck happened there? My favorite example, probably also from my book is a massive emerging market bond boom in 1820s.

17:52Felix Salmon: Yeah, that was crazy. Wild stuff, right? So I mean, there were like real reasons. So basically, like the UK, England had issued lots of bonds to pay for its war against Napoleon, and they won. And then all those bonds that were kind of sold at like 80 pence on the pound or 70 pence on the pound, they all traded up to 100 pence. People made out like bandits. So all these British people were suddenly flush. England was buying back these bonds all the time, paying them back. So suddenly British investors had made a bundle out of consoles, they were called. They got really kind of, oh my God, this is great.

18:24I love bonds. So I'm going to start buying some Prussian bonds or some Italian bonds or Spanish bonds that paid an even higher interest rate. And they made tons of money from that as well. So eventually, you know, this was the 19th century, early 19th century, there were all these independence wars happening in Latin America as people were freeing themselves from the Spanish Empire. There were new countries being born all the time. So Argentina, Venezuela, Brazil, Bolivia, and so on. And English investors just went gaga for these. But like these were kind of, these were ideas of countries in most cases, more than actual real countries with proper finance ministries and ability to tax and pay debt.

19:00But you know, if you're the finance minister of Brazil, and London investors are desperate to lend you millions of pounds, you're like, yeah, sure, I'll take that money. Yeah, no problem. And they all went bankrupt. Hilariously, one guy, a Scottish merchant adventurer mercenary called Gregor McGregor, which is an amazing name. He's descended of Rob Roy McGregor as well. So he was real like scoundrel. He fought with Simon Bolivar in Venezuela. He married his cousin. And he was allegedly granted the princeship of a country called Poirier in Central America. and he went to London and said, I'm the prince of this country.

19:39Allegedly, according to himself. According to himself. Well, this is it. He had songs sung about this country of milk and honey and gold and mahogany. It was amazing. He got people to move there. He sold bonds on the London Stock Exchange. I mean, we don't actually know whether it seems he could have just been an insane fantasist, like an Elizabeth Holmes on steroids, fake it till you make it. He tried to will a country into being because it seems like he genuinely somehow thought he might be able to pull this off. But yes, it was a swampy hellhole. Everybody went there. Almost everybody died.

20:13And the few people came back and told everybody about this. And then he went to France to do the scheme there as well. But crazy, like the bond, the EM bond boom at the time was so mental that people didn't care. It's like, yeah, but that was different. These other countries are completely, they're very safe. But yes, it all went bad. Every country defaulted. And it caused probably one of the first big, truly global financial crisis that was caused by finance itself rather than a war or famine or something like that.

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24:17I want to sort of bring us into the present day because you are coming on this show to plug a book that you have been writing for many years. And as your book is published, there are front page headlines, not just in the financial press, but in like the mainstream New York Times, talking about like bonds falling out of bed, massive problems in the bond market. So did you engineer this, Robin? I have prayed pretty hard to the bond gods in recent months for something bad to happen when my book was coming out. And they seem to have listened. Bonds are only interesting when it's bad news. When there's good news, bonds do nothing.

24:55When it's bad, like the opposite of stocks. Stocks get exciting when there's good news and they go up and they skyrocket. And obviously there can be crashes as well. But bonds can never return amazing returns once they're trading at par. All they can do is go down. Most of the time, when you have a terrible period in the bond market, like you're talking about in the 1820s, or maybe if you're talking about 2008, the reason is defaults, that people lent the money, they're not getting the money back, a bunch of railroads in America have gone bust, and now we've all lost bazillions of dollars. So that's my first question, because I don't see anyone worried about defaults right now.

25:34So how can you have a bond market crash or crash lit like we have right now without people being worried about default? I mean, we like bonds and think they're interesting all the time, I hope. But broadly speaking, yeah, whenever like bonds hit the front page of USA Today, that's never a good thing. But bond yields can go up and down annoyingly for both good and bad reasons. Bond yields can go up when there's an economic boom going on and everyone wants to put their money into stocks. they can go up because people are worried about the credibility of the central bank about inflation going amok and about for example oh my god this country is so indebted it might go bankrupt in the u.s and this is what the difference is between the u.s and frankly most kind of big countries and those kind of emerging market developing economies that we used to cover the u.s doesn't issue bonds in a currency other than its own like push comes to shove there could to be like political accidents and stupid things happening.

26:33But the US can print dollars. It's very hard. Like if I could print Norwegian krona, I'm never going to default on my Norwegian krona mortgage, right? And the US government, yes, it owes$40 trillion. But you know, it can print dollars if the alternative is default. So there's no credit risk in that. But there's all sorts of other risk. Risk comes in as many flavors as like Baskin Robbins, right? It's a 31. Wow. Okay, Well, I hope you're not going to make me name 31 different bonds market risks. No, I think we will.

27:02Felix Salmon: Yes. For the plus segment. In the plus segment. Just for the plus segment. Well, OK. So there is duration risk, which I always feel is a little bit hand wavy. But basically, it's the idea that, oh, there's a bit more uncertainty in the world. And this is, I think, what's going on in the US. So there's essentially, I want to get a bit more money for the difference for buying a 10-year bond versus a one-year bond. You should expect a bit more money if you're going to lock up your money for 10 years. And that's kind of what we can see a little bit going up in the US as well. And that's kind of, well, we don't know really the path of interest rates and inflation.

27:33I'm going to want more money to hold those 10-year treasury bonds. Then there's inflation. And that's a big one. But let's stick with duration for a minute, because this is one of the big questions I wanted to ask you. This crash in the bond market kind of sort of coincides with what may or may not be the start of a hiking cycle from the central bank. we've had one rate hike so far. We'll almost suddenly have at least one, maybe two in the rest of the year, and who knows how many after that. And last time there was a hiking cycle, which was, what, four years ago, when J-PAL started raising interest rates, the 10-year bond yield and the mortgage rate, which is basically the same as the 10-year bond yield plus a little spread, went straight up with it.

28:20And people sort of oversimplified just a little bit and said, well, Jay Powell has raised mortgage rates. And it kind of felt that way that he raised the rates and then the mortgage rates went up and they and every time he raised the interest rate at the short end, the long end went up by pretty much the same amount. And so my question for you is, if this is a hiking cycle, if Kevin Walsh does end up raising rates by 150 basis points, Should we expect mortgages to go up another 150 basis points from where they are now, which is 7 %? Yeah. So, I mean, it's like the Facebook status relationship between short-term interest rates and long-term bond yields is it's complicated.

29:02And this drives me a little bit crazy. I actually thought that if Kevin Walsh kind of put on his proper Walsh face and decided to raise interest rates and signal that the Fed was now determined to really tackle inflation, get inflation down to the central bank's 2 % target for the first time in quite a few years, I actually thought that would bring bond yields down. So, I mean, I'm wrong. I was wrong. But I do think there is a point where that happens, where a lot of what's going on in the long end was worries about inflation staying high for longer than the markets had previously assumed. And that the Fed was not really willing under Kevin Walsh, who was put there by Trump, who famously loves low interest rates, that they would be unwilling to do what it takes.

29:46And I think, Walsh, that's one of the reasons why we started to see the bond sell off earlier this year. We're kind of simmering, not, oh, my God, the Fed has lost all its credibility, but the Fed has lost maybe a little bit of credibility. Now, I think the Fed is now in a bit of a reverse operation. I think Walsh probably doesn't want to hike interest rates because his boss might say mean things about him on Truth Social. But he's kind of painted into a corner. And I think they are going to raise interest rates. And at some point, that is going to be credibly strong enough to bring down inflation and actually lower bond yields, I think.

30:18So let me follow up with another very basic but impossible to answer question. But this is an argument that Kevin Walsh particularly loves. Is the market kind of doing his job for him? Because is it not the case that the rates that matter in the economy are the long-term rates at which people invest? The amount I need to pay to build a data center, that has gone up enormously. Not that many people are borrowing overnight. And so if longer rates have gone up by 100, 200 basis points, whatever it is, then that is a tightening of financial conditions. That is a tightening of monetary conditions. That is effectively a rate hike on the country.

30:58So given that we've already had the rate hike, maybe Walsh doesn't need to. Yeah, I mean, it's both true and hilarious that Kevin Walsh says that because he's always argued that the Fed shouldn't care that much about markets and markets shouldn't care that much about the Fed. So it's fun that he's making that argument now. But it is true and it's something that other Federal Reserve chairs have said in the past that the market quite often will do some of the Fed's job for it. And that's why you do things like forward guidance and messaging and transparency and give speeches. So you kind of explain what you think and maybe the market kind of does your job a little bit for you.

31:32And I think it is true. I mean, one of the reasons why I wrote A Fabulous Debt is because I think the bond market matters way more these days than like banks and overnight interest rates. Over half of all global debt is in the form of bonds. So that actually now matters more than loans. And if treasuries keep selling off, then the Fed might have to hike less. But I do think it is now painted into a corner. I said I think they do need to kind of do a little bit more. But at some point it will reverse and things will slow. So let me just ask the really basic way. Is it bad when treasuries sell off?

32:07Like I said, it can be good and bad. I mean, I think one of the reasons treasuries are selling off is, and I hate to say this, but something like people like Stephen Moran have come out and said, it's because people think this is a Trump boom. And it's not really a boom. But the fact that the global economy as a whole, the US included, well, US especially, but the whole global economy has been way stronger this year than we actually thought it would be. And that's actually a great thing. And like the bond yields that were super low back in 2010s, that was a sign of economic malaise. That was a bad symptom.

32:38That was something that was wrong with the global economy. So this is kind of more a return to normalcy. And almost whatever the Fed does isn't really going to change. I mean, back in the 1990s, bond yields were at this level and the world was fine then. So, yeah.

32:52Felix Salmon: And I have seen, I mean, it does seem like no one actually knows why the yields are going up exactly. Like it's like inflation. It's the war. It's this. It's that. But one of the arguments we haven't touched on, and maybe we'll get to in a bit, is it's the AI boom. There are a lot of price-insensitive borrowers out there, like the big tech companies, who are borrowing an absolute fuckton of money to build these data centers and all this compute infrastructure. And they're not as price-sensitive. They're willing to pay higher interest rates. They have strong credit ratings. People are willing to give them money.

33:25Felix Salmon: And I think it was Warsh or one of these one of these bros saying competition from the private bond market is part of the reason we're seeing higher interest rates on the U.S. government debt because there's like other options. And, you know, Microsoft has a better credit rating than the U.S. government does. Right. So whatever. Let's give Microsoft money. I don't know if that's part of it, too. But that's a good sign to follow what Robin's saying. It's a good sign that there's all this economic activity going on and building, I think. Yeah, there's definitely a correlation between yields and expected growth.

34:02And in fact, when people say they're worried about inflation, there's a correlation between inflation and expected growth. And growth causes inflation. Although one of the things I should say, we should say about the bond market is that there are these wonderful things now called TIPS, inflation-protected securities, which are treasury bonds that pay out the rate of inflation. And so you can look at the yield on TIPS, and the yield on TIPS has come up a lot. It used to be negative. It used to be like you would get back less than inflation if you're investing in TIPS. Now it used to be like minus 100.

34:35Now it's plus, what, 250, something like that. So there's been a big sell-off in TIPS. And a big sell-off in TIPS is the one thing you know can't be ascribed to inflation. Especially TIPS is fun. And we use these to derive something called the break-even rate, that kind of what inflation rate is the market pricing in. There are all sorts of frankly like really weird, funky technical factors that can play in there. It's a very liquid market, at least in the US and other countries, slightly less so. But it's also very slavishly tied to the price of oil. Isabel Weber, an economist, talked about it, how it's like a super inflation or it's like there's certain inflation components that are super influential because they flow into all other inflation components.

35:15So one of the reasons why inflation was so high back in 2022 was because energy shock just flows into almost everything else very quickly. And it also works on the other side now. But right now, obviously, energy prices are a lot higher, and that is largely due to the war on Iran. It's kind of what I love and both hate about the bond market. It's a bit like an inkblot test. You can see what you want. So like a Kevin Walsh will talk about, oh, this is AI hyperscalers issuing lots of bonds, and that's competing for the US Treasury on the long end. And that's true-ish, but I don't see it being as big a factor.

35:49So this year, it has, right, I think tech companies have issued around$500 billion worth of bonds, which is a ton because these companies never issued debt before at all. They are transforming the corporate bond market. But still, like the US issue is issuing like$2 trillion. And they kind of have slightly different investor bases sometimes as well. So I think it's maybe having an impact, but very marginally on the side. I actually have more sympathy for their view, as Felix said, that actually this is people pricing a high growth and maybe inflation being stubborn. Let me ask you about the other big theory about what's going on is that the treasury bond market used to be dominated by the most boring investors in the world, which is central banks, Chinese central bank, Japanese central bank.

36:34And they would just buy up a shit ton of treasuries and sit on them and do nothing and china in particular has been selling or allowing his its treasuries to just roll off and not reinvesting and that 40 trillion dollar investor base in treasury bonds is now by historical standards much more dominated by traders and by hedge funds and the traders and the hedge funds are just flightier they move in and out more quickly they react more quickly to information they overreact more quickly to like you know there's some purchasing managers index comes out and they go and they freak out a bit like when you have an IPO you want to place your stock in the hands of strong stable long-term investors now it seems that the stock of treasury bonds is in the hands of complete noise traders it is i think one of the most i mean people like us we discuss this stuff but i think it's probably like on a broader level one of the least discussed subjects I think should get more attention.

37:33You know, it's partially just the fact that every government in the world has been borrowing a ton over the past few years. And that big global savings glut that people like Ben Bernanke used to talk about, that's looking slightly less glutty these days. Well, it's actually disappeared, right? It's like gone. You can measure it in different ways. And for example, like the China one, for example, like China looks like it's selling or moving out of treasuries. I'm pretty certain that what China's actually doing is that they're getting state-owned banks to buy treasuries instead. And they're buying US agency debts, or bonds issued by Fannie and Freddie that are guaranteed or implicitly guaranteed by the US government.

38:09So it's kind of treasuries in drag, and they're just hiding it. I think foreign investors are not really selling much, but they can't absorb the sheer amount of new bonds coming to hitting the market all the time. And hedge funds have really stepped into the breach. That is true actually in the UK as well and in Europe too, but the US is where it's super clear, where the Federal Reserve has published data that shows the hedge funds now own more treasuries than China, at least officially, Japan and Saudi Arabia combined. They are the single biggest holders of treasuries now.

38:41Felix Salmon: That just seems so... Hedge funds are... They're not the transparent democratic institutions we celebrated earlier in the conversation. Establish that. No, but I'd say some of like a big chunk of this is actually them almost rendering a service. I mean, I hate to carry water for hedge funds here, but really, it's basically there's all sorts of technical arbitrage opportunities where they're not really like they're not YOLOing into treasuries. They're kind of buying treasuries so they can provide something called treasury futures to ordinary US mutual funds that want to buy for all sorts of annoying regulatory and technical reasons.

39:17The basis trade. So it's hedged, the basis trade, exactly. But as Felix talked about, it's mega levered. And then the basis trade is just one of these hedge fund strategies in the treasury market. And given that the treasury market is kind of like the global financial systems, like Bunker is our safe house, the fact that that safe house is now basically dominated by extremely leveraged hedge funds with huge, very complex, very sophisticated trades makes that market more brittle. And that is, I think, genuinely alarming and worrisome. I mean, that on top of the fact that global debt is at an all time high, you know, you have an entire chapter in your book titled How Much Debt is Too Much Debt.

40:00Do you feel like there is an answer to that, given that all of this is really leaning on the US bond market and we can print money, as you pointed out earlier? Is there such a thing? Yes, having studied a thousand years of bond market history and read, oh, so many papers on this, I can very confidently say that everybody's talking out of their ass if they confidently have some sort of rule or metric that supposedly works. Wait, wait, the 90 % of GDP rule is maybe oversimplified? Possibly, yes, Felix, yes. Or the Ferguson rule? Yeah, the Ferguson rule, I mentioned that. I think that's actually, I mean, I think that has some improvements, but I don't really care.

40:38So the Ferguson rule is that coined by Neil Ferguson that if a country spends more on interest payments than it does on defense, that typically signals a decline. I care less about specifically the defense, but I think there is an interesting point there about almost like fiscal capacity, like how much like countries' fiscal resources are consumed by just servicing a debt burden. I think that is interesting.

41:01Felix Salmon: Can we just – Raise taxes. No, wait, wait. But no, let me just be – No, let me just do the politically kind of easier one. Can't we just MMT this shit and monetize the debt? Can't we just print the money we're spending rather than having to borrow the money that we're spending? Doesn't that solve the problem? Inflash. Ask Germany. Oh, God. Are we going to start an MMT debate? No, let's not. Let's not start an MMT thing because that way goes. That's the biggest of all rabbit holes. Well, have you seen the guy in France who wants to burn the bonds? Yes. Could we do that? Could we burn the bonds?

41:38Is that a jubilee? I don't think so. We could mint the coin and burn the bonds. There we go. Let's do all of the above. Do it.

41:45Felix Salmon: Do it all. See what happens. We could go wrong.

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44:34But let me segue to myself because there's nothing more interesting than me. I wrote this piece, which you said a couple of nice things about the aesthetics of debt. And one of the things I touch on in this essay is the way that society needs debt in order to function, but it also needs debt default and debt forgiveness in order to function. And this goes back all the way to like the deuteronomic code where there was a jubilee every 49 years. And we haven't had a jubilee in many, many, in a very, basically since, you know, in modern history, since your sort of Renaissance bond market explosion happened, there has not really been a jubilee.

45:18And are we kind of overjubile?

45:20Felix Salmon: I swear I read your piece, but could you remind us what a jubilee is? A jubilee is just a sort of universal debt forgiveness where all of our debts are forgiven. Like you have a mortgage, poosh, now you just own your house. You own slaves, then those slaves have to get freed. If there's any kind of obligation that someone has to someone else, that obligation just gets evaporated. There are sort of like mini jubilees every seven years that are just to do with sort of loans. And then there are big jubilees every 49 years that almost everything gets touched. And this kind of wiping out of debts seems to have been a, let's just say, more ignored than implemented feature of the ancient world.

46:02But it did happen from time to time in certain countries. And, you know, I remember in 2008, there was a lot of talk of jubilees for a lot of the time that Robin and I have been covering emerging markets, that one of the main sort of pressure groups in this space, in the world of what's known as HIPOCs, heavily indebted poor countries, has been a group called Jubilee 2000, which is basically this idea that all of the rich countries should forgive a bunch of countries' debts. And they actually did. And so it has happened in small ways from time to time. And the HIPOC thing worked. Robin, should we not have more Jubilees?

46:42Are Jubilees good? It worked with several big fat asterisks next to it. Debt Jubilee, I've actually studied a little bit for my book. I mean, it was interesting in Mesopotamia where kind of like the OG debt Jubilees happened. Periodically, whenever like a new king came to power, they would forgive the debts. And it was consumer debts. So credit cards, I guess, today. Student loans, not corporate debts. The big merchants were exempted.

47:07Felix Salmon: We just tried to have a Jubilee. The Biden administration took a run at it. interest rates in Mesopotamia were like 33%. If you are a lender and you can at any given time when the king suddenly dies or just feels like announcing a debt jubilee to please people, then you're going to charge a lot of money to make sure that you're covered, your ass is covered. So people paid through the nose to borrow money back then. And it's one of the reasons why, again, you had lots of problems with indentured servitude and slavery, essentially. If you pay your debts because the interest rates were so high, you'd end up as a slave until there was a jubilee.

47:43So I struggle. This is a super fun topic and historically fascinating. Whenever I hear it now, it's like it reminds me of somebody saying, oh, my house has a slightly leaky faucet. Let's burn it down. I don't think it's going to help. Forgiving debts is basically nuking the financial system. And for some people, that might sound attractive. But I guarantee you that is no fun whatsoever. That is the mass death of banking, insurance, pension plans, the whole works.

48:11Felix Salmon: But what about sovereign debt specifically? Like if after World War I, we saw what happened. I mean, the reason in part for World War II was basically like no one would tell Germany, forget it. We don't want your money anymore. It was just like the spiraling nightmare, you know? Well, I mean, actually, whether German debts after World War I, they were punitive, deliberately so. Whether they were unserviceable, that actually isn't quite always this clear. But I mean, HIPC is a great project, this highly indebted poor country. So there was mass debt relief for some of the poorest countries on earth that borrowed primarily from other countries.

48:46So Western countries, often for sort of Cold War political reasons. And they were long defaulted. And yeah, France, the UK, the US, Germany, nobody really expected those debts to ever get repaid. So they formally just wash the slates as what used to happen back in the day. I had lots of friends that worked in that kind of jubilee movement, and I was super in favor of it. And I still think for all sorts of reasons, I think it was the right thing to do. I struggle to say that it has worked because almost every single hippie beneficiary has just turned around and borrowed more money and ended right back up in debt distress.

49:21And this time they borrowed money from mutual funds and hedge funds and China. Countries and investors are far less willing to just wipe the slate clean. So these countries have not really benefited from that. And I think that's actually one of the big tragic under discussed economic stories of the past 20 years that the HIPAAC program, although noble and benign and the right thing to do, has not really led to any improvement in these countries with a very few exceptions, really. I want to mention here that the second most important financial blog in the world the first of course is ft alpha yes obviously the second is this peculiar animal that got launched during the financial crisis called zero hedge and is written by a group of people who collectively under a pseudonym the pseudonym they use is tyler durden who is the brad pitt character in fight club and for those of us who remember the Pilate of Fight Club, basically, the whole point is that the dream is to effectively create a jubilee, even if the government doesn't want to do one, just do it by force by blowing up all the banks.

50:34And this is this kind of nihilistic utopia that then gets created where we just blow everything up and start again. And there is a significant number, well, there was a significant number of people around the time of the financial crisis. And I think there still is quite a large number of people who look on that kind of chaos and maybe just see a crypto utopia on the other side and they're like maybe we should just blow it all up and start again and then and then just to close the loop then we had the closest thing that we've had to a real blowing up of the plumbing of the financial system happened in the pandemic happened around in 2020 Adam Tooze wrote the mother of all books about it, talking about how the money market seized up and short-term debt instruments seized up.

51:23And that was the point at which you could almost like see the whites of their eyes. And you're like, this could all go very, very catastrophically wrong. And Adam Tooze, for one, seems to think that we came astonishingly close to complete catastrophe. Since that was the last time that we had a big sort of bond market dislocation, without credit fears, without default fears, like is, I hate to say it, but is something, that's not happening now, right? I mean, the blowing it all up or burning it all down is incredibly seductive. It always will be. It was even to me sometimes when I was younger, I have sadly now very much become the utter cliche of the centrist dad.

52:07So I am not in favor of burning everything down. I think things tend to work out in the long run. or not perfectly for everybody. Yeah, I mean, I think 2008, I mean, Tuz's book crashed is phenomenal. It really is incredible. And that he was able, he embraced complexity and nuance in a way that quite often people that write those big popular books do not. We got very, very close to apocalypse. And I think actually we also did, and this is less discussed, we got extremely close to apocalypse, financial apocalypse in March 2020.

52:41Felix Salmon: He wrote a book about that too. Yeah, that was I was scared. Obviously, the pandemic was no fun. But we got very close from not just having a global health crisis and a global economic crisis to just having I mean, since I'm Norwegian, I'm going to use the word Ragnarok, financial Ragnarok on top of it all, which would have been really unfun. And thankfully, central banks, they just sprayed money out the problem, enough money, all of them at the same time. It was going to be everything all at once central bank intervention. And it worked. I mean, they took everything they did in 2008. and just like from spinal tap, turn it to 11.

53:15And it was extremely the right thing to do. And kind of I actually thought central banks get too much shit for like, oh, we had a bit of inflation. Well, look, dude, if slightly high single digit inflation is the price we paid to prevent the complete collapse of the financial system in 2020, I'll live with it. Do you think that sets a little bit of a precedent for Warsh? You know, he sort of looks at what Powell did and said, well, he just kept going. and it worked. Walsh's criticism of QE, specifically like quantitative easing when the central bank buys bonds or just sprays money at stuff, is nuanced in that like he was for it and voted for it in 2008, but he did not like it.

53:56And frankly, that is a hallowed tool. I found examples, going back to Alexander Hamilton, basically doing QE in 1792, when America had its first big financial crisis as an independent country, when one of his buddies tried to corner the treasury market and blew up and caused all sorts of eruptions. And it actually led to the birth of New York Stock Exchange, which is kind of cool. But he bought bonds. He bought back bonds, treasury bonds, he'd been selling himself. So it was QE. So this is old. What was new after 2008 and 2020 was doing as an ongoing thing, as a stimulus tool. I think that's almost natural.

54:30Like we talked about, like the bond market is so big now that if you as a central bank want to regulate the temperature of the economy, then you have to care about what happens in the bond market, not just the short-term overnight interest rate market. So you have to buy bonds. But that is more controversial. And the evidence for how much it really helps stimulate the economy is kind of a little bit like that classic inkblot test. Central bankers think it helps. Not everybody agrees with them. And that was what is new. I'm sure if there's a massive crash tomorrow in the US, Kevin Walsh will definitely do QE.

55:03No questions asked. Is he going to stick to his principles and not stimulate the economy on an ongoing basis? That's what I don't really know, because clearly the Kevin Walsh of 2026 is not the Kevin Walsh that we used to know. So that could be interesting. He has made noise about wanting to shrink the Fed's balance sheet, too. Yeah. I mean, he can make as many noises as he wants. That's going to be very, very, very hard. The reason why the Fed balance sheet is, again, very slowly, very quietly expanding, because it has to back, like, it's kind of a bank. We talk about assets and liabilities, and it has to have assets to back its liabilities, which are like coins and money in circulation.

55:43So as the U.S. economy grows, and it's a giant economy, it's the envy of the world, it has to grow its balance sheet to kind of match that. Otherwise, it's basically contracting stuff. And that's why the Fed, whatever Walsh might say or think, look, it can rip up its entire framework. But I think that would be so nasty that Kevin Walsh will keep muttering about this, but he won't actually do anything. because doing that is so painful and difficult that he'll just learn to live with it and just stop talking about it at some point.

56:24I think we should have a numbers round. I'm going to do something I don't often do, which is stay on topic for the numbers round. my number is 5.033 which was the percentage yield on this year's government auction of five-year bonds we've been talking about the 10-year bond hitting five percent for a while now the five-year bond hitting five percent and not only hitting five percent but coming in significantly higher like and in a world where basis points are huge this is three basis points higher than anyone expected in the run up to the auction. This was an auction that really worried the markets folks.

57:09And I think one of the lessons of the twos books is that when the markets folks start getting worried, it's worth taking those worries seriously. Because on one level, it's market plumbing. If it comes in at three basis points over 5%, honestly, what does it matter? but market plumbing really matters and if the plumbing seizes up which it can do incredibly quickly very bad things can happen and five percent on the five year just feels to me to be a much bigger sort of watershed than five percent on the 10 year and i don't know why i feel that way but i i it does kind of make me sort of sit up and take notice amelie what's your number

57:54Felix Salmon: My number is 5.50. Very similar to yours because of the number, but that's dollars,$5.50. That's the average price of an iced coffee in New York City per square. And the reason I've used this as a number is to talk about a big controversy. Should you bring an iced coffee to a job interview? There is a TikTok from a corporate recruiter named Caitlin. I can't pronounce her last name, so I'm skipping it. And she says, don't bring an iced coffee to a job interview. It looks like the interview is just a stop on your list of errands, like go to Target, go to the supermarket, hit Starbucks, hit up the interviews, whatever.

58:36Felix Salmon: Don't waltz into your interview all casual with an iced coffee, she said on TikTok. Now, people are upset about this advice. They think it's offensive to Gen Z because Gen Z has been through the ringer, as we all know. And fuck it. They can have an iced coffee in a job interview. Employers, they don't care about us, right? They don't even respond. You go to an interview, they don't even tell you if you got the job or not half the time. Who cares? Bring your iced coffee. Be chill. That's their argument. That's their side. I feel really conflicted about it. And for some reason, I think a hot coffee is more acceptable than an iced coffee, but I couldn't quite explain why.

59:13The iced coffee has condensation and you need to put it down somewhere and it's going to cause a condensation ring. And like, iced coffees are messy in the way that hot coffees are.

59:22Felix Salmon: So you agree, don't bring it. I think the conflict is really about what people expect from younger people versus older people. I think if you were interviewing an executive for a high-level position, they walked in with an iced coffee, you just think, oh, they have a lot of shit going on. They're important, blah, blah, blah. But if you're interviewing an intern, it looks like they're not taking it seriously. As someone who has seen a lot of executives come in, do interviews, like, no, they don't. They don't have a nice coffee? Executives walking around with a nice coffee from Dunkin'. No, they don't.

59:55I've been in a bunch of tech, maybe it's just industry specifics, but I've hired a bunch of tech people and I've been in tech companies and I think it's not uncommon for people to walk into an interview with something. Yeah. A job interview? Yeah. Yeah. I mean, I think I also get the impression like big sort of non-tech companies, people bring them coffee, like the CEOs. So that's why they have plebs that will do that for them. Yeah. I mean, I've been to interviews and had people interview for me with coffees and I honestly couldn't give a shit. Who cares? I mean, all the scale of things you care about in an interview and judging somebody's worth is just sub-zero importance in my view.

1:00:37But it's nice to have something for people on TikTok to talk about, though. Yeah, it's good. It's like these intergenerational arguments. We haven't had many of them. At least we haven't had one in the past 12 hours. So I think that's great. I'm going to have to check that out. Also, just to get back to the number, $5.50 is the median iced coffee in New York. It's as obscene. Average, average, yeah. I thought that was crazy. That's what I reacted to. I thought that was horrible. So that means there's a whole bunch of people out there They're spending like$7,$8 for their iced coffee. Come on, people.

1:01:06Felix Salmon: I get an iced coffee from Starbucks. I know Starbucks is obscene, but it'll be like$7. And I'm like, what am I doing? This is bad. Maybe I get judged in the interview for spending so much. I mean, I understand what cold brew, maybe it's more effort or fancier coffee, but iced coffee. Why is it more expensive than hot coffee? Cold brew does take more beans. And I'm going to talk about cold brew, which is a different thing. There is coffee bean inflation. And I think in New York, to be fair to New Yorkers, we are sophisticated people with sophisticated palates and we require cold brew. We're not just dunking a bunch of ice into like a bun machine.

1:01:45Come on, people. We require cold brew. I know. Is this like Gen Z's eggflation? You know how everybody lost their shit over eggs becoming more expensive? They were very expensive. Yeah, they were very expensive. We are going to have a Slate Plus segment about the degree to which the kids these days seem to be attracted to extremely expensive commestibles. But before we get there, we have two more numbers to go. Elizabeth. My number is 11, and that's the number of months before Elizabeth Holmes leaves prison to go to a halfway house. Thanks to a 2008 law that sort of reduces prison time for people who've behaved well and are less likely to.

1:02:20How long will she have been in prison at that point? I'm not sure when she went to prison, probably like three years or something. But I mentioned this because I am completely obsessed with this documentary that's coming out that Nathan Fielder is doing with her, where he basically moved in with her for two weeks right before her sentencing. And it looks completely insane. I've never been this excited about a documentary. We might need to have an entire Slate Money episode just devoted to it. What's the title? It's got a great title.

1:02:49Felix Salmon: It's called something like You Can See Everything. You Can See Everything. And it has that A24 wash on it too. That makes it kind of like seem like a horror movie. Robin, is it coming out in Norway? I don't know. I honestly, I'm also obsessed with it, but I don't think I could be able to watch it. It just looks like torture to watch. It's three hours long. Oh my God. I mean, this is like stuff you can show to people in Guantanamo Bay. It's the length of the Odyssey and it's just Nathan Fielder and Elizabeth Holmes, both of whom are just incredibly cringe. And you're like, can you live for three hours with those two humans?

1:03:20I think somebody described it when the first trailer came out and they were just sort of staring at each other in this unsettling way. It's like Nathan Fielder is a guy who pretends to be a lunatic and you see it quietly dawning on him that he's actually meeting one. Robin. So I guess I'll also stay somewhat on theme with you also, Felix. at 7.03, which is the now, as of yesterday, the average cost of a 30-year mortgage in the United States. I think that's kind of interesting. It's one of the reasons why we've seen Scott Besant flail around with the bond market. The midterms are coming up, affordability, you know, whether it's eggs or iced coffees, people worry about it.

1:04:03And the cost of a 30-year mortgage is something that's easy to check. Most people obviously in the US already have some cheap locked-in mortgage they hopefully got at some 2-3 % when rates were mega low. But 7%, crossing the 7 % mark this week, that's kind of a, I feel it's a bit of a moment. That's high, yeah. One of the reasons why 7 % mortgages are so painful is that house prices don't come down when mortgage rates go up. And normally, we bond market reporters understand that price moves inversely with yield. And if the yields go up on mortgages, and that's how you buy a house, then obviously, you're going to be able to afford less house for your monthly payment.

1:04:44And so the price is going to come down, right? But it just doesn't seem to work that way. Well, it's because a lot of people have cheaper mortgage, but also one of the weird things, and look, the 30-year mortgage in America is an incredible thing, right? But in a way, only by the Danish mortgage, which is... Yeah, I mean, the Danish mortgage, which is definitely an episode just on that. That is wild, actually. But it's like people don't want to move. I can imagine if you have like if you're sitting somewhere like in San Francisco, and you've got a 30 mortgage at 3 % and you get an amazing job off of like twice the money somewhere in New York, you don't want to take it you financially shouldn't take it because you suddenly if you're going to buy somewhere place in New York.

1:05:23So just kind of locks people in in a weird way. It actually makes the US economy a little bit less dynamic. This is why you shouldn't buy you should only rent. But if you bought and got a 2 % mortgage, then that was smart.

1:05:35Felix Salmon: How many houses do you own? I'm tired of this argument from you. Are you a renter? No. It's true. Do as I say, people, not as I do. Yeah, that's why I tell my kids as well. Do what I say, not what I do. We all want the best for our kids. And the best for our kids is probably not writing 400-page terms on the bond market. I don't know. I'm going to force them to read them at some point. Wow, what? We are glad that you did it. You did it so they don't have to. Thank you so much for coming in to talk about this one. Thank you to Jessamyn Molly at Seaplane Armada for producing. Thank you to all of you lovely listeners for listening and for being Slate Plus members.

1:06:13If you are a Slate Plus member, do stay tuned because we are going to have an amazing segment about$60 loaves of bread. And with that, we'll sign off and see you next week on Slate Money.

1:06:38Felix Salmon: This episode is brought to you by Perk. Now, if you work in an office on a scale of mild annoyance to I am going to throw my laptop into the ocean, where does booking work travel and filing expenses land for you? Because the numbers are staggering. Every person on your team could be losing up to seven hours every single week to the work behind the work. We're talking about matching receipts, managing travel, nearly an entire workday spent doing administrative chores nobody was actually hired to do. It's a massive drain on productivity, which is why Perk exists. Perk is the intelligent platform for travel and spend.

1:07:15Felix Salmon: Instead of suffering through five different tabs and a broken spreadsheet, Perk combines business travel booking, expense management, and corporate card control into one single system. Your finance team gets real-time visibility, and everyone else gets their sanity. back. Save yourself the headache. Sign up at perk.com slash slate money to enjoy no platform fees for the first three months. That is perk.com slash slate money. New US-based corporate customers only. Terms apply.

1:07:47Hey, this is Adam Grant, host of Ted's podcast, Rethinking with Adam Grant. This podcast is supported in part by Bill, the intelligent finance platform that helps businesses and accounting firms scale with proven results. One assumption many organizations rarely rethink? How their financial operations actually get done. That's why smart leaders turn to Bill. With AI-powered automation, Bill isn't just moving money. It's reducing the manual work of invoices and expenses for nearly half a million businesses. Eliminate the friction and start scaling with a platform built to evolve with you. Visit bill.com slash proven to talk with an expert about automating your business finances.

1:08:25Thank you.