Hi, this is Steve Eisman and welcome to another episode of the Real Eisman Playbook. We have a variety of wonderful guests that we've had over the last year and a half. We've had economists, we've had analysts, we've had authors, and once in a while we get someone who's kind of a combination of all of those. Today's guest is Ben Steil, who is the director of international economics at the Council of Foreign Relations, and he's also an author of multiple books, three of which I've read, and we're going to talk about that. But Ben, welcome to the show.
Thanks for having me, Steve.
So let's start with something mundane.
Like the Fed.
Something unimportant. From your seat, what do you think's happening? How much inflation pressure is there? You know, I got a question from a viewer after the Fed raised rates, which I thought was actually kind of a very interesting comment, where the viewer basically said, "Isn't the problem just oil prices? And the Fed can't change oil prices, so it feels like the Fed is like that guy who has the hammer and everything is a nail."
And so that's my intro to you. Take it away.
Well, indeed a lot of economists do make that argument. Certainly Kevin Hassett, who said the numbers were disappointing today, which is a major concession from him.
The day we're recording is October 14th, and it was bad inflation numbers.
There were bad inflation numbers today, 3.7%, which exceeded market expectations, which were 3.6%, but that's significant when they do come in on the upside. Now, economists would say that if you've got an oil shock that's temporary, you could treat it as a one-off.
That would not feed into the wider price level, so you should quote-unquote look through it. And indeed the Fed had considered doing that for quite some time. But inflation's been persistent. It's clear that it's not coming down. Although we haven't seen any significant rise in longer-term inflation expectations, the Fed is genuinely concerned that if they don't move now and make it clear that they are dedicated to the 2% long-run target, that inflation expectations will become unmoored and it will make their job much harder in the future.
So don't delay because if you delay, the problem gets worse.
That's right. And so we're in an interesting situation right now because as you know, the Fed meets at the end of the month.
Kevin Warsh no doubt was praying for...
Praying. Well, it was on...
You got to pray for something.
for good inflation numbers.
He didn't get it. And this is going to cause him enormous grief in that meeting.
Pause there for a second. Because not everybody understands that the head of the Federal Reserve can't just do whatever he wants.
He's just... he's a committee.
When you say that today's inflation numbers are going to cause grief for him in the meeting, elaborate on that. Like what do you mean by that?
Well, there looks now like there may well be a majority for hiking rates.
Which people were not anticipating.
Well, that's it. The futures markets have reevaluated it today. And the last figure I saw before I came into the show showed that expectations had gone over 50% for a...
Right. But clearly two days ago they were below 50%.
down about 36%, I believe. So that's material. The last thing Kevin Warsh wants is to be a dissenting vote in a committee he supposedly leads as chairman.
But he also doesn't want to infuriate the man who appointed him, Donald Trump.
Yes. Yes. So if you were him...
It's a cheap question, but I'll ask it anyway. If you were him, what would you do?
You know, Steve. You know the old story about asking the old Irishman for the road to Dublin. He says, "If I were you, I wouldn't start from here."
I wouldn't start from here.
starting from there. Okay. Okay. So obviously he's in a hard spot. But let's...
He's in a very hard spot.
He came in and basically said, "I can't stand quantitative easing. Not all of quantitative easing, but I think it was way overdone. The Fed now has a huge balance sheet of six and a half to seven trillion. And I don't like this forward guidance stuff." So I'm going to keep my mouth shut and let the rest of you ponder, like maybe we'll go back to the days of Greenspan where we were looking at his briefcases and how many papers were in it. What do you think about his philosophy? Forget about whether he should raise rates or not. As an economist, what do you think about his philosophy about quantitative easing and lack of forward guidance?
Speaking, I'm not a big fan of his philosophy.
Well, the conservative portfolio of constantly questioning the Fed's balance sheet and what distortions that could have on the economy. All the evidence we have right now is that the Fed is perfectly capable of controlling interest rates when we're well above the zero bound with quote-unquote interest on reserves, the interest that the Fed pays the banks to park...
money at the Fed. And the fact that the balance sheet is much, much bigger than it was before, say, the great financial crisis, is in no way a problem for the Fed in controlling inflation. Having said that, the one part of his agenda I do agree with is getting rid of quote-unquote formal forward guidance.
Okay, elaborate on that. Why?
Okay. A number of reasons. First, the empirical evidence is absolutely overwhelming that the Fed is not good at predicting the future. And we...
But by the way, nobody is. Thank you.
This is a very fair point.
I will say that about myself. I am not very good at predicting the future. Neither are you. I think I go out on a limb to say neither are you.
And neither am I, but the Fed has been systematically worse than so-called blue-chip private-sector forecasters for many, many decades now, including according to the findings of Fed studies. So when people say that the Fed should provide forward guidance, they should tell us what they're planning to do in the future.
That assumes that the Fed has good information about what the future will be.
And therefore they are helping us by telling us what they will do.
But if their information is not better than what we have, and in fact their forecasting abilities are worse, you can imagine all sorts of problems arising from Fed officials telling us that I expect to vote for X or I expect to...
Because they lock themselves in.
They don't want to be... See, my attitude about all this is this shouldn't be this complicated. If the inflation data is bad, they'll raise rates. And if the inflation data gets better, they won't. And so pontificating about it all the time is kind of a waste of time.
My personal opinion is that FOMC members love the rock star status.
They do. They love to get on TV and talk about what they want.
to speak at institutions like mine, for example, where they get a big educated audience who hang on their every word.
And particularly when the Fed chairman is being quiet...
their views are elevated. So they're very happy with this moment.
Very easy to get on the front pages of the Wall Street Journal these days. Yeah. All right, let's move on. We got so much to cover. Let's talk about Scott Bessent.
There's another guy with an unenviable position.
Yeah, unenviable position. We're going to come to the deficit and interest rates in a bit. But I just want to first focus on Scott Bessent, who came out with this plan which he called, I think it's called Operation Twist, where he goes out and the Treasury Department shorts, like sells short-term Treasuries and buys long-term Treasuries to the tune of six billion.
Which is the sort of thing he criticized his predecessor Janet Yellen for doing fiercely.
Yes. Leave that aside.
What I don't understand about it, and maybe you do, is the size of the federal deficit is 40 trillion. So coming...
Going up $7 billion a day.
Let's leave that aside. Let's just stick with 40 trillion, okay?
40 trillion, and you're trying to lower long-term rates by buying six billion.
What am I missing? Because it seems to me that's like bringing a butter knife to a gun battle.
We agreed, but what Bessent would say if he could talk to you away from the cameras is, hey look, I'm just making a shot across the bows. I want to show the markets that if they mess with me and long-term rates get too high, I'm going to come out with heavy ammunition and I'm going to hit them where it really hurts, when they least expect it. And it did not work.
It's not even close. The first reaction from the market is, oh my gosh, what's up? And we did see a brief...
It lasted less than a day. Right. But when the markets realized, hey, this is 0.016% of the...
of the percent of the treasury...
market. Right, the treasury market.
Right. So this is nothing on its own. And when they calculated what sort of ammunition Bessent could actually bring to the fight, they said 40 trillion is just overwhelming. It's just too big. So you can't head-fake this market. And remember, Bessent is not buying back long-dated Treasuries with cash. That's...
No, he's issuing debt to buy debt.
Exactly. So he's got to borrow more short-term to buy back...
long-term. Again, exactly the sort of thing...
he criticized his predecessor for. I don't know if you remember the Japanese operation he...
So what Bessent was very concerned about was that the Japanese were intervening in the currency markets in order to push up the yen, and he did not want the Japanese to be selling Treasuries in order to...
So instead of them selling Treasuries, he lent them money to buy the yen.
He told them to go to the Fed and use a certain Fed facility.
And he declared victory because the operation did push up the yen.
But, fascinating coda here. A month later, the Japanese released statistics on their foreign securities holdings, and what we learned was that the Japanese Ministry of Finance had intervened in the currency markets to the tune of about $99 billion, and they had sold $88 billion worth of foreign securities, all or almost all of them...
presumably US Treasuries in order to do it.
So Bessent's logic did not work. The Japanese did in the end clearly sell Treasuries in order to buy yen.
All right, let's switch topics. We've only covered small things so far. Let's talk about... I'm very curious. You're an economist, I am not. The US federal deficit and...
Currently running about...
6% of GDP annually. So my question for you is: first, I'm going to ask you what's your position about the threat of the debt, of the US debt, to the overall economy and the Treasury market, but I want to preface it by saying, you know, people who are... call them doomsayers about the US federal deficit, and there are many people and they're very respectable. What I say about them is, I don't have a strong opinion on this topic. All I know is that you guys have been making this argument for 40 years. Because I remember Pete Peterson in the '90s making literally every single sentence that Ray Dalio utters now, Pete Peterson was uttering in the '90s.
And when you make an argument for 40 years and you've been wrong for 40 years, there's got to be a reason why you were wrong for 40 years. So that's how I want to preface. Take it away.
Yeah, so you know, the best way I've heard the US dollar described is as the winner of an ugly dog contest.
That you can only compare this particular dog to the rest of the dogs that are out there in the competition.
Everybody knows, when you trade currency, you're always trading it relative to other currency.
There it is. That's right. So it's not clear if you're losing faith in the dollar whether the United States would, for example, have to inflate away its debt, what you're going to move into.
Right. So broadly speaking, major central banks around the world have been answering that question over the past 20 years. They have not, broadly speaking, sold dollars for other currencies, but they have...
Okay. And do you know historically, gold has been the foundation of global financial markets. You go back to the late 19th century and the top currency, the leading currency, is sterling.
By the way, just to interrupt for a second, there was a movie I saw a long time ago. It was like a Sherlock Holmes... it was a Sherlock Holmes movie. And the story basically was that all the gold of all the major countries was in New York...
at the New York Fed, and each country had its own storage unit. And so whenever there was trade, they would move it from one locker to another locker. And the great thing about the movie was Sherlock Holmes got called in because they opened the door one day and there was no gold.
And they freaked out. And so I'll just finish the story. What had happened was the bad guys had built an alternative floor just on top of the floor. And so it looked exactly the same except no gold, which gave them a lot of time to pull the gold out. But I just thought it was fascinating. All the gold was in one spot and they were just moving the gold from one locker to another.
Right. And historically that's the way it's been done. That's the way the Bank of England did it in the 19th century. But as I was saying, to go back to the late 19th century and the leading currencies in the world — sterling, the Deutschmark, the French franc, the US dollar — were all more or less credible vouchers for gold.
So fast forward to the end of the Second World War and now the US dollar was the only credible voucher for gold.
Because we were the only country left standing, basically. The only economy left standing.
We had about 60% of the world's monetary gold reserves. Over time, we cut that link, as you know, Nixon closed the gold window in 1971. Having said that, countries have learned that during a crisis gold is approximately as good, some could argue better, than the US dollar because gold tends to do well during times of stress.
And so the Chinese and the Russians in particular have been building up their gold stocks. They've been moving them to safe locations, re-domesticating it. As you know, even the Dutch recently repatriated their gold holdings from the New York Fed. And one of the benefits that that has is that, as you know, the US has been very aggressive in recent years with dollar-based financial sanctions. In other words, if you cross us on a foreign policy initiative, we will cut you off from the dollar-based financial...
Absolutely. So countries are learning that they need alternative vehicles for storing their sovereign...
Outside of the dollar. But where do you go?
Well, yeah, I mean, we could go through them all. Now, the euro... the euro has...
Please. Please. So we don't need... All we need to say is the euro, we can move on.
RMB, that's not going to happen.
What we did see was a sort of test case earlier in the year, quite fascinating. The Chinese have been building an alternative international settlement system. It's called CIPS.
Which is trying to compete with the huge international system called SWIFT.
Right. And what we did see was that early on in the Iran crisis, when Iran closed the strait, there was a shift in payments from SWIFT to CIPS. Why? The Iranians were, as you know, tolling the strait.
They demanded to be paid in Chinese RMB or cryptocurrency.
So these transactions moved out of SWIFT, out of the US dollar, into RMB. But when Donald Trump announced the ceasefire — unfortunately that didn't last terribly long — but when he announced it, you saw it go...
