The Cheap Money Era Isn't Coming Back

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2:17If there is one thing I know about our president, Donald Trump, it is that he loves cheap money.

2:28To Trump, lower interest rates on mortgages, credit cards, whatever. It is the lifeblood of the U.S. economy. It's also a campaign promise. I'm getting interest rates down, getting the economy back. He thinks the U.S. economy deserves cheap money. And your interest rates are going to be tumbling down. And Trump's told voters he's going to deliver cheap money. But we're going to get interest rates down. Interest rates are going down. It's going to be brought down. We will cut interest rates and reduce the monthly cost of your typical mortgage by$1 ,000.

3:08It is also pretty clear that the president thinks there are people keeping him from delivering cheap money, particularly people inside the Federal Reserve, whose open market committee votes on monetary policy. Back when Jerome Powell was running the Fed, the president made a point of pressuring him publicly to drive interest rates down. Powell mostly brushed him off. And then Donald Trump got the chance to support his own Fed chair, Kevin Warsh, who a couple weeks back did something a little surprising. So maybe it shouldn't have been. Today, the Federal Reserve hiked interest rates for the first time in three years.

3:46President Trump's new handpicked Fed chairman, Kevin Warsh, defying the president's calls to cut rates. I kind of tell you, all this left me with a few questions. But that is why I've got Justin Wolfers on speed dial. Justin, can I admit something embarrassing to you? No one's listening, so sure. I have no idea what's going on with interest rates right now. Like, no idea. Oh, it's all so easy. Just like an economist to say that. Justin says all this back and forth over the Fed's interest rate hike, it's not even the most important thing going on here. because if you read between the lines, it seems like Donald Trump's handpicked Fed chair, he is inclined to continue raising interest rates.

4:38He thinks he hasn't tapped the brakes yet. He thinks he's only taken his foot off the accelerator. So Kevin Warsh is signaling to you that he is, he's going to raise rates again. He's almost certainly going to raise rates again. Yeah. What does that mean? Because that seems important. Not that interest rates were raised, but that interest rates will be continuing to be raised.

5:08For the last decade plus, you and I have lived in the land of cheap money. We've maybe built our worlds around it. The idea that we're going to jack up interest rates, it's a little freaky for me. Sure. There are people who are in their 30s who believe that interest rates are zero more often than they're positive. That's the thing. It's like this is a big change that seems to be about to happen. Do you feel like the American economy is ready for that change? My answer is, oh boy, I was going to say it is, but I think actually the answer I was going to give is we'll see, which is so gutless. Could it be enough to tip a weak economy from weak to recessionary?

5:58Sure, absolutely. Is it going to crash an economy the way it happened in the early 80s? I would find that very, very hard to see. Today on the show, I talk interest rate anxiety with Justin. Should all this make you worried? How much? I'm Mary Harris. You're listening to What Next. Stick around.

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8:31This whole show is going to be about interest rates and how they seem to be going up. Interest rates have been higher before, like not that long ago. And higher in different kinds of ways. Like pre 2008, interest rates looked a lot more like the direction they are in and trending towards now. Now, before that, in the 1980s, they looked even higher. Like, I have a core memory of if you go rent Ghostbusters, there is a line where Dan Aykroyd talks about having a 12 % interest rate on his mortgage. Which is, to me, is like proof like, okay, we've been here before. And yet, when I look at the Wall Street Journal, when I look at wherever to get my financial news, there is concern about what's happening now.

9:23So frame that for me because I feel like it's important to hold both things in your head at the same time. Yeah. I think it's actually a really, really useful frame. Interest rates are two things. They're the underlying rate of inflation plus a real interest rate. The real interest rate is if when I borrow money, the nominal interest rate, you know, my house, my home line is probably 3%. The nominal interest rate, 3 % is how many more dollars I have to pay than I took in. The real interest rate is how much purchasing power do I lose? because I end up paying dollars that are worth less because of inflation.

9:58So the other thing that was going on back in the 80s was high inflation, high and variable inflation. So that was an era that I think more or less ended in the mid-80s. So that's the era of, let's call that the Ghostbusters era. Yeah. And Ghostbusters is gone. It's behind us. And that's like double-digit interest rates. Right. Stagflation. Yep. Like all sorts of breaking breaks on the economy because things are looking real hot. Right. That was one era. Right. That was the Ghostbusters era. And then there was what you might call the era of normal. Post Ghostbusters through to 2007, where inflation was round about 2 % most of the time, sometimes one, sometimes three.

10:42Interest rates were a couple of points above that. So four, five, six, three, four, five, six. And where we were in that range, depending on what was going on with the economy. call that normal then for folks a little younger than us they will not understand 2008 and the global financial crisis was one of the most terrifying moments of our lives and we all became financial economists we all started to understand what was going on but the economy absolutely created and if the fed could have reduced interest rates by eight percentage points say from three to minus five it would have and the covert pandemic was actually a deeper recession at some level scarier um enormously more rapid interest rates went straight back down to zero again but the good thing about covert actually is our recovery from the covert recession was remarkably more rapid than the 2008 recession and so a few years after covert now we can we feel like the economy got back to normal, interest rates rise above 0%.

11:44I think the thing I want folks to understand from telling that potted history is the era after Ghostbusters through to 2007 was normal. The era from 2008, the financial crisis through to about 2022 was weird. We had two once in a century shocks hit the economy within a 12-year period. Well, so let's lay out what is happening now, because it's worth talking about it globally. Like, we're not just talking about what's happening at the Fed. We're also talking about what's happening with the bond market, sort of long term, short term. But the general picture is all of these interest rates are going up, right?

12:28Yep. Okay. We've talked about how Donald Trump really wants interest rates lower, has been talking about it for a long time. But the Wall Street Journal had an article like just a couple days ago. It basically piece by piece went through the fact that some of what's happening with the interest rates, especially with government borrowing with bonds, can be traced right back to Donald Trump because he's spending a lot of money, doesn't show a lot of fiscal control. and that makes people queasy. Then there's the fact that there's the war in Iran that is driving inflation. That also touches on what's happening at the Fed.

13:09So all of these things that are happening are happening within Trump world. You're saying it's normalization, but I see what Trump is doing is quite abnormal. So make that make sense to me. Great. Let me come back and try and answer what's going on. I want to draw a really sharp distinction. I'm going to try and... wow, this is in my economics textbook and I just don't know if it's going to work as a podcast.

13:35Let's talk about the market for apples. I know that's what you want it to do. 100%. Okay, so apples are bought and sold. There are farmers on the supply side and you and me on the demand side and there's a price of apples. Yeah. Great. The market for bonds works exactly the same way but we're not going to call it the market for bonds. We're going to call it the market for loans. Okay. You call it the market for bonds if you go to business school. Well, because it's loans to the government. Loans to anyone. Loans to anyone. Loans to anyone, right. There are bonds associated with private industry as well.

14:06So there's a market for loans. It's a loan. And do you have a mortgage, Mary? Okay, great. You're one of the buyers of loans. You're part of the demand side. Okay. I have some friends who are retired and they have large retirement savings. Their money is in the bank, but then the bank will invest it in bonds. they're part of the supply of loans. You're in the demand for loans. Okay, great. If a whole bunch of people walk into the Apple market and say, I want more apples, what's going to happen to the price of apples? No, they'll go up. Great. If a whole bunch of people walk into the loan market and say, I want a new loan, what's going to happen to the price of loans?

14:43It'll go up. Great. The price of loans is the interest rate. Yeah. Okay. So when people are saying - A lot more people want money is what you're saying. They want to borrow money. Yeah. The government wants money. The AI industry wants money. All these people want money. They want money to come to them. They're like, hey, hey, bro. They're buying apples, right? Yeah. You just nailed the whole darn thing. You are amazing at this, Mary. Thank you. So that's the story, which is a whole bunch of people suddenly want more apples. Apple prices go up. A whole bunch of people suddenly want more loans.

15:18The price of loans, the interest rate goes up. That's when people say bond rates have risen. That's what they're talking about. And you just nailed the first two big causes. One, who's the biggest borrower in the world? The U.S. government. Well, Donald Trump has done nothing to signal that the U.S. government will be ramping down its borrowing anytime soon. Great. So actually, let's think about three actors. There's the current U.S. government. The current U.S. government is running the largest peacetime non-recessionary budget deficit on record. It's 6 % of GDP. It's absurd. That's what we would do if we were in a terrible, terrible hole.

15:52They're spending like drunk sailors. So when you run a budget deficit, there's less money coming into the government than going out. How do they pay their bills? They borrow. So they've run into the Apple market, the bond market, and said, I want to borrow money. Okay, that's the first group. Here's the second group. Next year's U.S. government and the year after's U.S. government, which is the bond market has suddenly realized not only are these blokes borrowing a lot of apples slash borrowing. a lot of money, they're going to do the same again next year and the year after, because there's absolutely no interest anywhere in Washington for reducing the budget deficit.

16:29And that sense that Washington's given up on this game means there's going to be a whole lot of Apple buyers tomorrow, so I don't want to sell my apples too cheap today. That's the second force pushing up bond yields, which is expected future deficits. And the third force is Sam Altman and Anthropic, and they've just run in screaming, I just want so many apples so I can build data centers. And that is basically what's going on with the bond market. Every time someone's a bond market, it's bond market that. It's basically the supply and demand of loans. There's an immense increase in the demand for loans, partly because of what the government's doing, partly because of what it's expected to do, and partly because of the AI build out.

17:08So these interest rate situations are feeding on each other. You have the bond market doing its thing. Yes. And then the Fed coming and being like, oh, bond market looking kind of hmm. and putting additional interest rate. Right. And that was the reason I wanted to tell the story separately, partly because I think it makes it easier in one's head because if you think it's just about the Fed, then you miss half the story. And if you think it's just about demand and supply, you miss half the story. One of them plays out at this very long-run end and the other is playing out what will tomorrow's interest rate be.

17:40Tomorrow's interest rate is determined by the Fed. when we come back more about why Justin expects interest rates to keep going up before I go to an ad here though quick reminder we are in the middle of Slate's pledge drive that means you can join Slate Plus for half off right now but just for the next couple of weeks it would be such a boost to the team if you joined us the way to do it is to go on over to slate.com slash whatnext plus then when you're checking out use our code whatnext50 That is WhatNext 5-0. Thanks.

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20:17Here is something I don't get that maybe you can explain to me. um after the whole like oh my gosh the fed raised interest rates of this past meeting there then all of a sudden became a lot of speculation about the next meeting and whether interest rates will go up again and the reasoning for that was that the economy looks too hot right now and we need to cool it down like you look at stuff like the survey from S &P Global, which showed that U.S. business activity surged to a five-year high in September. You can even look at the retail sales report, which seems robust, stronger than expected jobs report.

20:57And all of those signals are interesting to me, but they're also confusing to me because I think a lot of Americans are not feeling like the economy is hot for them personally. They're feeling like everything costs more. So explain to me how this all makes sense together. so basically there's two questions there one is is the economy so hot and then two what's the divergence between reality and perception i want to start with the first one i don't think the feds actually argue and the economy is way too hot i don't think anyone thinks the economy is way too hot um what you just did is you plucked three numbers from the approximately 30 000 numbers that the fed watches the reality is no we can all of our economic indicators are incredibly noisy This is like trying to guide ourselves, you know, steer the ship through fog.

21:49So are those outlier numbers? A little bit. Yeah. Huh. And so if you look overall, the economy is doing okay. So let's come back. What I wanted to – what you almost – simple habit of mind, if you don't mind me putting my teacher hat on, is almost never look at an actual number. Step back and think about an array of numbers. So I'm going to step you back and I'm going to say, what does it look like overall? it looks like what we call the real side which is activity how much stuff people are doing how many people have jobs stuff like that that's pretty pretty okay 4.1 unemployment look my heart believes for every one of the folks who can't find work but i still want to notice that that's lower than it typically is and that's pretty good so the fed's like i'm not worried about that stuff but what i'm worried about is price tags keep getting changed and keep going up so that's rough so that's not the economy's way too hot it's that there's too much inflation and what's going on with unemployment is not that worrying so the fed is thinking about interest rates as a way to cool inflation um can interest rates cool inflation if the inflation is being driven by a war in iran that's raising oil prices yes and and yes but um so So yes, you can reduce inflation even when it's caused by a war in Iran.

23:14I'll explain more about that in a moment. The one thing the Fed can't do is get oil out of the Strait of Homois. Second thing the Fed can't do is reduce tariffs. Those two problems create inflation, but they also create an array of other problems as well. So what the Fed can do is reduce the inflation that they cause. But here's how it does it. When the Fed raises interest rates, it makes it more expensive to build a new house. So construction falls. It makes it more expensive for businesses to invest in a new branch office, a new factory, a new product line. And so they stop doing it. And so that actually pushes the economy from being pretty good to slower and worse.

23:59It costs people their jobs. I was going to say, yeah, aren't people losing work in that scenario? Yep. So that nice like 4.1 % unemployment rate. Could well go up. could get worse yeah absolutely and so it's expensive it's costly to reduce inflation because what the fed's tool is is it basically crushes some of the economy enough that everyone's scared enough they stop raising prices so let's come back to i think the genesis of your question is if you're worried about inflation fueled by an oil crisis or inflation fueled by tariffs, the simplest, cheapest way to get rid of those problems is to get rid of the oil crisis and get rid of the tariffs.

24:41Yes. If you still want to get rid of inflation, you can do it, but you're going to kick people out of their jobs in order to do it. That doesn't seem like a good scenario if you're running the country. I do believe that policy errors are a bad idea. And I believe that invading a country without a plan for ending the invasion, invading a country without understanding or having a plan for how to keep a major shipping route open, I believe those are policy mistakes. I believe likewise, not just starting a hot war, but starting a trade war with nations we depend on is also a very bad idea. I think this gets to what had been the second part of your question, which is, hey, these statistics show that the economy is not doing terrible, but everyone I talk to has it.

25:36Feels pretty bad. Yeah. Well, here's the thing. I think it's the first time in your career this is true, Mary. The single greatest threat to the American economy is the American government. Oh, yes. I would say that for sure. Normally, economic management is the world throws up curveballs that are hard to deal with. There's a sudden financial crisis. There's a pandemic. there's a geopolitical blow up somewhere and then the job of economic policymakers and of the White House is to try to fix the problems caused by external forces. The two largest shocks affecting the American economy right now are the tariff shock or maybe three largest are the tariff shock, the Iran war and what the budget deficit is doing to the bond market.

26:20Some would just sum those up as President Trump. Yes, the problems coming from inside the house. So why do you feel that feeling in the pitiate stomach because the bloke who's meant to protect us from this is causing it i mean the fed next meets at the end of october right before the midterm elections um the people who predict these things are saying it's very likely they raise interest rates again 70 30 yeah i mean a that's not something donald trump wants b it signals what might be coming is what you just talked about, which is a slowdown of the economy that would make people potentially lose jobs.

27:02Timing seems bad for Donald Trump. Timing of this is never good if you're an American worker. Right. I care less about the president's feelings, more about American workers. We just sounded really pessimistic. Let's sound optimistic. So it's okay that we have a tariff shock. It's okay we have an energy shock and it's okay we have a fiscal shock. They're not okay. But given that we have those things, the decisions that the Fed is making is in the neighborhood of the best possible response to the shitty hand the president dealt us. You sound kind of optimistic about Kevin Warsh.

27:42I'm still waiting to be persuaded. I'm somewhat more optimistic about the Federal Reserve Board. So Kevin Warsh is something of an unknown. the fact that he was appointed by a president who tends to appoint people who do truly bizarre and bad things made me innately cautious um the choices that he subsequently made have been pretty defensible they've not been crazy it's not like the department of justice which became the department of vengeance um but kevin wash has also chosen to be silent kevin and if he really had a good news story to tell. If he'd actually tell it, it would be a lot easier for me to believe that he's definitely one of the good guys.

28:25But he's taken a vow of silence, evidently. He wants to keep you gassing. That spotlight shines. But the reason actually I'm optimistic is even if Kevin Walsh does something crazy, the spotlight's going to move off him, which is the Federal Open Market Committee is actually who determines interest rates, not the Fed chair. Historically, the Fed chair has been an incredibly strong voice, but that has been an earned respect. If you're the smartest person in the room with the best briefings and the strongest arguments, fellow economists give you respect. That's an earned respect. Ben Bernanke earned it.

28:59Janet Yellen earned it. Jay Powell earned it. If handsome Kevin decides to go off and do silly things, the rest of the Federal Reserve Board is not going to go with it. you say you think he's earning his stripes right now i hope so unanimous vote for raising interest rates sort of thing i think unanimity was a message and the question is who's it a message to is it a message to wall street um we're serious is it a message to the president you can try and pressure us but even that you can't fire us according to the supreme court and we're going to do the right thing by the american people so you may as well quit I'm not sure what the message is, but it certainly seems interesting that 12 out of 12 voting members thought that this latest interest rate move was the right choice.

29:48And that includes folks appointed by Trump, Biden, and Obama. And so when the president says it was a bad choice, who are you going to believe the unanimous vote of 12 people from across the ideological spectrum who have deep expertise and substantial briefings or a bloke in a room that doesn't have any corners.

30:12Justin, I'm really grateful for your time. Thank you for explaining all this. Sure, absolutely. Justin Wolfers is an economics professor and the host of Platypus Economics. And that's our show. What Next is produced by Evan Campbell, Madeline Thames-Dusharm, and Patrick Ford. Paige Osborne is the senior supervising producer of What Next and What Next TVD. Mia LaBelle is the executive producer of podcasts here at Slate. Ben Richmond is the senior director of podcast operations. And I'm Mary Harris. Go track me down on Blue Sky. I'm at Mary Harris. Thanks for listening. Catch you back here next time.

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