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Can Governments Afford These Interest Rates? · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Merrin
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  Speaker 1: Talks Money Market Wrap, where we talk about the biggest
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  Speaker 1: moves in the markets this week and what is driving them.
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  Speaker 1: I am Merrin Somerset-Webb, UK editor-at-large.
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  Speaker 2: And I'm John Stevig, author of the Money Distilled newsletter
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  Speaker 2: and a senior reporter at Bloomberg.
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  Speaker 1: And still here. Still, yeah. John, this isn't going to
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  Speaker 1: be an AI podcast, but I've been watching you on Twitter. Well,
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  Speaker 1: I watch you on Twitter all the time. That's just
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  Speaker 1: the way it is. I'm atypically active, even by my standards.
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  Speaker 1: I know you are. You really believe that AI could
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  Speaker 1: lead to our extinction. I don't, by the way, believe
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  Speaker 1: that for a second.
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  Speaker 2: No, no.
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  Speaker 1: Nonsense propaganda ahead of big IPOs.
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  Speaker 2: No, I think that basically, I think AI is at
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  Speaker 2: risk of doing something if we don't hold the companies
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  Speaker 2: responsible for it, more responsible for what they're doing. And
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  Speaker 2: I think at the moment they're trying to cover up
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  Speaker 2: the fact that they're actually not taking very good care
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  Speaker 2: of what they're doing. Mm.
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  Speaker 1: But they're also asking, aren't they, to have their liability
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  Speaker 1: taken away from them. Exactly. By saying, oh, we need
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  Speaker 1: to slow down. Oh, we need regulation. Someone else needs
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  Speaker 1: to take responsibility for the bad stuff that we might do.
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  Speaker 1: I mean, this is very big corporations in the EU,
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  Speaker 1: isn't it? It is.
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  Speaker 2: And it's also their own in-house regulator because all of
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  Speaker 2: these regulators, or sorry, the regulator that certainly Anthropic suggested
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  Speaker 2: has its roots in the effect of altruism movement. And
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  Speaker 2: without getting too conspiratorial, because obviously people who believe the
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  Speaker 2: same things flock together. But do you know.
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  Speaker 1: John, how we keep saying these days that one day
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  Speaker 1: something's a conspiracy theory and the next day it's true.
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  Speaker 1: So we have to be careful about how you label
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  Speaker 1: stuff these days. Exactly.
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  Speaker 2: But I do think, yeah, no, I think everybody, basically
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  Speaker 2: there's a load of people that believe and actually genuinely
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  Speaker 2: believe that AI is going to be a super being
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  Speaker 2: at some point. And to me, that's a very religious belief.
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  Speaker 2: And I think that some of them are being partly
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  Speaker 2: taken for a ride. And there is also a lot
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  Speaker 2: of skewed incentives. But I do think equally that AI,
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  Speaker 2: as in misuse of LLMs and them charging ahead and
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  Speaker 2: trying to get them to work in certain ways, could
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  Speaker 2: kind of, you know, cyber hacking, if it breaks something
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  Speaker 2: in the, you know, air traffic control system or something
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  Speaker 2: like that, that'd be pretty bad. So it's not extinction
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  Speaker 2: level stuff, but it's kind of catastrophe stuff.
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  Speaker 1: John, it kind of seems to me, I keep thinking
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  Speaker 1: about this, you know, and if you really believe, if
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  Speaker 1: you really believe that LLMs are that powerful, I don't,
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  Speaker 1: by the way, and if you really believe that it's
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  Speaker 1: possible that we will develop genuine AI at artificial artificial
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  Speaker 1: intelligence instead of man-made data analysis, which is what it
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  Speaker 1: is at the moment. If you actually believe that, would
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  Speaker 1: you actually invest in AI? Of course you wouldn't. You'd
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  Speaker 1: spend all your money right now. Right now, because either
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  Speaker 1: we're all going to die or money isn't necessary because
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  Speaker 1: we move into a utopia, right? So, you know, spend
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  Speaker 1: your money now, go on holiday. Don't invest in these IPOs,
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  Speaker 1: waste of time.
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  Speaker 2: Aye, it's an abundance outcome or a disaster outcome.
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  Speaker 1: Yeah, this is very.
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  Speaker 2: But yeah, and I do agree. I think fundamentally, the
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  Speaker 2: guys do need the hype. And I do find it
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  Speaker 2: amazing that, well, there's two groups. There's people who seem
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  Speaker 2: to be totally naive to me, and they just take
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  Speaker 2: this all at face value and say, oh, well, even
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  Speaker 2: if there's a 1% chance it could wipe us out,
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  Speaker 2: we need to do this, this, and this. And then
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  Speaker 2: there's the people who are still sort of saying that
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  Speaker 2: AI is basically nothing. And I think they're wrong as well.
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  Speaker 2: I mean, they're as wrong as the people who said
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  Speaker 2: the internet was no better than the fax machine. where
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  Speaker 2: back in, you know, 2000, it was clearly a thing.
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  Speaker 2: I mean, I'm still coming down on, it's a big
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  Speaker 2: technological deal that's been massively overhyped. And we're probably, sorry,
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  Speaker 2: I was about to swear, spending too much capital.
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  Speaker 1: On something that's not going to work.
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  Speaker 2: Isn't very loud swear on these podcasts. I was going
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  Speaker 2: to say f * * * ing away, but no, no, okay.
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  Speaker 1: No, they're not loud swear on these podcasts.
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  Speaker 2: I need to play that one out.
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  Speaker 1: All right. Okay, okay, John, now we are going to
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  Speaker 1: talk about the thing that might, actually bring down the
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  Speaker 1: ai bubble.
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  Speaker 2: If it is a bubble of course they're.
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  Speaker 1: Really bringing down which of course is the rising cost
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  Speaker 1: of credit yes uh so we are in uh interest
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  Speaker 1: rate week yeah yeah and this week we've had the
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  Speaker 1: fed putting up rates yeah not by much.
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  Speaker 2: No but well i wasn't surprised but it was kind
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  Speaker 2: of i think markets thought all right warsha actually does
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  Speaker 2: mean business Was it a surprise to you? It wasn't
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  Speaker 2: a surprise to me. But if you look at the
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  Speaker 2: kind of markets then and the kind of general reaction was, OK,
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  Speaker 2: so this guy is actually serious and he does want
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  Speaker 2: to tackle inflation. He's not going to be bullied by Trump.
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  Speaker 2: He's going to be bullied by the bond market instead.
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  Speaker 2: And also it was, what do you call it? It
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  Speaker 2: was a consensus vote, which is not that unusual for
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  Speaker 2: the Fed, but they were all behind them.
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  Speaker 1: OK, so rates up in the US rate to not
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  Speaker 1: up here. Yeah.
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  Speaker 2: No, no. I mean, that was interesting because, I mean,
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  Speaker 2: obviously the Bank of England is kind of a bit, yeah,
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  Speaker 2: it's not a high conviction. I think if the Fed
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  Speaker 2: had put up rates and they had been aware the
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  Speaker 2: Fed was going to put up rates, they might have
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  Speaker 2: kind of copied it. But the more interesting thing they
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  Speaker 2: did was change quantitative tightening. And although that's very confusing
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  Speaker 2: and all the rest of it and kind of nobody
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  Speaker 2: really understood what QE did in the first place and
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  Speaker 2: no one really understands what QT does. Probably the biggest thing,
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  Speaker 2: the Bank of England has been selling, actively selling gilts
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  Speaker 2: into a market which is already sick of gilts. And
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  Speaker 2: what the bank has now finally said after three years,
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  Speaker 2: four years in fact of doing this is that, oh, actually,
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  Speaker 2: maybe we should stop. And not only that.
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  Speaker 1: Because that's part of what is pushing yields up. So
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  Speaker 1: one of the things in the UK is that we
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  Speaker 1: look at our, Bond yields, gilt yields, and they are
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  Speaker 1: higher than other people's. And everyone says, well, why is that?
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  Speaker 1: And we say, well, it's because we have no plan
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  Speaker 1: to deal with our worst public debt. And it's because
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  Speaker 1: we're more prone to inflation than other countries, et cetera.
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  Speaker 1: But also in there is the fact that if you
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  Speaker 1: increase the supply of something, obviously you push the price down.
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  Speaker 1: And with bonds, you push the price down, the yield
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  Speaker 1: goes up. That's just how it works. If you take
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  Speaker 1: that supply out of the market, you might expect yields
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  Speaker 1: to falls slightly.
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  Speaker 2: That's the idea and that's what's happened um in fact
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  Speaker 2: the the yields on the long-term bonds because what they've
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  Speaker 2: said is for a start we're going to pause selling
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  Speaker 2: any for just now until we've worked out a kind
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  Speaker 2: of conversation with the debt management office that's that's another
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  Speaker 2: issue we probably shouldn't talk about yet but in terms
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  Speaker 2: of the actual long bonds so anything that matures after
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  Speaker 2: 2049 they're not going to sell them they're going to
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  Speaker 2: sit on them um until they mature And so that
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  Speaker 2: means looking at it, about 20% of the long-dated gilt
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  Speaker 2: market is on the Bank of England's balance sheet. So
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  Speaker 2: you've basically removed an overhang of about a fifth from
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  Speaker 2: the market. So it's not really any wonder that the
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  Speaker 2: 30-year yield, which was threatening to go above 6%, has
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  Speaker 2: kind of dropped significantly today. And also, I mean, you know,
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  Speaker 2: maybe this marks a lull and the kind of bond
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  Speaker 2: market panic. I don't know that it's a turning point
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  Speaker 2: because we've got plenty of inflation to come.
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  Speaker 1: Yeah, and there's plenty of reasons to think that the
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  Speaker 1: UK is not going to be better managed going forward
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  Speaker 1: than it is at the moment. No, no, definitely not.
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  Speaker 1: And we definitely expect rates to go up over the
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  Speaker 1: rest of the year, right? So we stick at 3.5%. 3.75% now,
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  Speaker 1: but there's every expectation that it goes up to 4%
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  Speaker 1: and then 4.25%, maybe 4.5% by the end of the year.
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  Speaker 1: Not by the end of the year, by the beginning
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  Speaker 1: of next year. So you've got that coming, and we
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  Speaker 1: know that inflation is probably going to push up. what
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  Speaker 1: is it, just over three now, put up over four.
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  Speaker 2: It almost has to because gas prices are going, or
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  Speaker 2: the energy prices are going to go up by 25%
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  Speaker 2: or something, or likely to at the next quarterly reset. So, yeah,
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  Speaker 2: above 4%.
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  Speaker 1: And the longer that lasts, the more likely it is
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  Speaker 1: that rates have to keep rising.
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  Speaker 2: Well, yeah, because the bank looks stupid.
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  Speaker 1: Again. And they have to keep writing these letters to
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  Speaker 1: the Chancellor.
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  Speaker 2: Yeah.
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  Speaker 1: They must have a stock one for that by now.
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  Speaker 2: I mean, they've got to be getting chat GPT to
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  Speaker 2: do it.
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  Speaker 1: I think. Finally, an effective use for AI. It doesn't
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  Speaker 1: matter how many mistakes it makes because those letters are
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  Speaker 1: full of nonsense anyway. All good. But listen, here's a question.
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  Speaker 1: So it's not just here, but it is everywhere that
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  Speaker 1: as rates rise, the interest burden for governments gets increasingly intense.
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  Speaker 1: So everywhere the percentage of tax revenues that goes on
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  Speaker 1: paying interest alone gets higher and higher and higher and
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  Speaker 1: higher and higher. And over the years, you and I
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  Speaker 1: have spoken a lot about financial repression. And now we
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  Speaker 1: get out of this. And the way that you get
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  Speaker 1: out of large amounts of public debt is not by
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  Speaker 1: having high interest rates. That's not how it works. You
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  Speaker 1: need to have interest rates below inflation or below nominal growth,
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  Speaker 1: at least. So I was reading something today that basically said, look,
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  Speaker 1: at this point, everyone's in the same trouble. So it's
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  Speaker 1: not like just one country will run finance repression or
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  Speaker 1: two will run finance repression. Basically, everybody's got to get it.
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  Speaker 1: rates below inflation or below nominal growth. So the great
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  Speaker 1: global devaluation is almost upon us. The question being, how
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  Speaker 1: long can all the big economies keep rates at this
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  Speaker 1: level or have them higher? It's unsustainable. So at some point,
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  Speaker 1: either inflation has to go much higher, or rates have
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  Speaker 1: to stop falling again, or this debt interest burden becomes unsustainable.
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  Speaker 1: So the purchasing power of every currency will fall soon
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  Speaker 1: by gold.
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  Speaker 2: I mean, yeah, I mean, I think buying gold is
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  Speaker 2: perfectly reasonable, valid, you know, and we've said it a
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  Speaker 2: million times, but it makes a lot of sense. And
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  Speaker 2: I do think, well, I mean, the other thing the
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  Speaker 2: Bank of England did do today was something that looks
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  Speaker 2: as if it might end up being like the kind
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  Speaker 2: of Besant style operation twist thing. So basically it said,
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  Speaker 2: the longer dated gilts to the debt management office and
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  Speaker 2: they replace it with shorter dated ones um and so
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  Speaker 2: you know to kind of bring down longer term interest
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  Speaker 2: rates and again it's all very financially repressiony um manipulatively Well,
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  Speaker 2: it'll be interesting to see what happens in the budget
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  Speaker 2: and if they make any more steps towards capital nudges
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  Speaker 2: or even kind of capital controls.
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  Speaker 1: And there you have it. I've found the one man
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  Speaker 1: in London who's looking forward to the budget.
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  Speaker 2: I can't wait.
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  Speaker 1: Oh, wait. Thanks, John. Thanks for listening to this week's
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  Speaker 1: Merrin Talks Money Markets Wrap. If you like us, rate,
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  Speaker 1: review and subscribe wherever you listen to podcasts. Also be
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  Speaker 1: at MerrinSW and John underscore Stepak. This episode was produced
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  Speaker 1: by Sam Asadi and Moses Andam. Questions and comments on
• 10:52
  Speaker 1: this show and all our shows are always welcome. Our
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  Speaker 1: show email is merrinmoney at bloomberg.net.