a lot of the interest in the and i was assigned we are working to be able to analyze that. we follow the house rules but we will do much more of this is there's legislative proposals to regarding the 2017 act. >> 20% of the tax cuts came back -- >> the analysis showed about 20% of the tax cut was offset by the stronger revenue generated at the time. that's right. what the effect of the economy was overall. >> that was based on the projection at the time of the tax cut.

we haven't gone back and we've done that again at events that make it challenging there's the pandemic and then the high inflation challenge. >> thank you so much and thank you very much alan for coming today. we will take a ten minute break and then resume at 10:00. [applause] welcome, everyone. we just heard all the reasons to be worried about the deficit and how basically it's going to be a massive problem. sa lot of people on the street and he said the deficit has been a concern for 30 years and never

has mattered and if you want to bet on this you would be wrong. here's the market perspective of why it matters and people care. i love the panel and these guests. you do put out charts and i want toan start with you mapping out why the deficit matters in terms of dollars and cents that have to be paid out in the near term. >> as we talked about when something continueshe to grow tn we do need to pay attention to it at some point when it could become an issue. i think there are different ways of tackling this that we should be looking at what's going on with how much it is maturing which this chart is showing and specifically if you can see here the top line is maturing in one year or less that is about

9 trillion. it's a bit more than a trillion and of the other line shows the share of gdp and we quickly figure out it has quitee a bit o the first point is who is going to buy this government debt. never mind the statistics that come out so there are reasons why at least get it may be this is not going to be dated could be a problem but nevertheless we do need to do our homework and think about what are the consequences in terms of the amount of debt coming in the

pipeline. also to keep in mind as it continues to go up there's a lot of questions about if they go up what does that mean in particular share of gdp and that is another way of showing the instruments. it's 41% bigger than in 2043. at this may not matter and things should f be fine. if there's not enough demand we may have a problem and finally looking at another dimension of this, an important issue is a

share the bottom line of all of this is to say yes we do worry about the debt that is rising with a share of gdp but one important way of looking at it is we need to look at what is going on in the structure coming toke the markets and more importantly how they are stopping at and what are the coming out that are suggesting whether there's more strength or any weakness. >> all this sounds like it could be scary and yet a lot of the money that has been raised by the government has gone directly to the private sector and helped bolster the exceptionalism we've been talking about. how much is this a negative and howe much is what the money goig to going to be a positive for the u.s. economy?

>> that may helpom to offset. good if you're just rooting for expenditure and what the doctor ordered. >> great if you are rooting to keep rising which is essentially what a lotch of people. others incredible research in the run-up to the financial crisis with mortgage rates and mortgage debt. there is a belief that crazies happen not in the public sector debt. this time could it be different or is t it the great fiscal transfer that has allowed consumers to maintain resiliency and every credit card data point should be coming out?

>> there's a few things there to unpack. this idea of the private sector and balance and there is a distinctct difference. with of the financial crisis the housing bubble that led was an in i balance that was severe and once you have this resetting of the collateral prices, it was a clear crisis. it's not the same story when it comes to sovereign debt and you think about the collateral. when we think about the u.s. and the dollar being in the reserve currency. so it's more thinking about how this high level of debt and interest rates that go with it comes into the economy and shifts what we may be seeing in terms of economic growth. so far i think we are still in an environment around this fiscal transfer. the economy has certainly seen a good amount of support coming out of the covid period both from at the time this one-two

punch of the fiscal stimulus coupled with monetary stimulus. the economy has been able to withstand high-level interest rates wellst and you could argue that part of that might have been probablygh was because you had a lot of fiscal support. youu had the cash transfers and when we look at some of the data there's a significant change to the manufacturing and consumer spending so it's not just the immediate transfer payments that potentially could have longer-lasting effects. >> how do you respond to that if

it's being used in new ways to address the economies? >> i don't want to say that 2020 was. everyone agrees that was necessary. i think part of it depends on your politics and some would see that as an investment. i think you could take those out of the picture. a pretty large number. >> which raises the question at what point e is it sustainable. we talk about the idea that it could probably be to the moon if you start to especially get a downturn, but there is a question of is there a lien in the sand of which it becomes overly punitive to the government, is that something that you study towards? >> we just don't know where that

is. the higher debt levels when you reach extraordinary levels eventually begin to cause problems and it may not be necessarily aci financial crisis but certainly does all kinds of othere things. so it could begin to have an impact and i think the most critical thing is where we think about if we don't know what that time is then we should probably watch as we go along whether we are going to that point and being very pronounced in the last decades as we have seen a shift in the base and it used to be that it was foreign officials buying thed u.s. treasuries not so much but because they wanted to keep it and if that is the

case to make sure they limited and if it did go up they did that by fine dollars. they are no longer doing that because now they have a list of other problems and we see a shift when interest rates have up. over the next decade or two we no longer have this that we are buying no matter what because they simply have no number. what happens when so that's a

very important dynamic. who is coming into by and is there a lot on the sand because the deficit. at what point do they become punitive for consumers because we w are seeing incredible resilience. how much of m that is a timing issue with the locked in debt obligation versus something that could be t the new normal and that's fine. >> there are dynamics in play. first if you look at the debt service ratio for aggregate households it has an increase despite the interest rates being

higher but that's the aggregate measure. as a result shifting in terms of prioritization purchasing power the bigger story for the consumer has been the market it's led to this exceptionalism and the economy. the labor market continues to show expansion on the labor force not only at the demand for labor about the supply for labor and that is keeping the wages increasing so for the consumer they doo have to think about their debt dynamics and a lot of consumers have a good amount of purchasing power to go out and engage in the economy and that is very much still in play. we see that very clearly when we look at the consumer spending

terms. >> people were complaining of the rate ever rose they would be blown out because they have these higher interest cost. the data structures we haven't seen it, they are expanding. how much is this something that isng sustainable and to this pot if it is for .6% that's fine if we have close to a 5% rate they could survive. i think last spring we may have begun to see respect for something breaking with the crisis now and guaranteeing the uninsured deposits and short-circuiting that. but i would say many of us are still puzzled by the fact. maybe that is the only break in the cycle but the longer we stay

here the longer the firms. it's looming but it keeps getting pushed out i a little b. >> and another way of asking the question is how much has it slowed economic growth? >> this is kind of getting back to the same question. >> i'm going to ask five differents ways. [laughter] >> there's a couple of things. growth is going well. i think it is just kind of reframing the question. that doesn't really tell you anything about the o economy. there's the fact that a strong immigration growth is temporarily boosting the potential gdp growth and what we

should think of as strong gdp growth so over the last year when we have had a strong gdp growth it has risen half a percentage point which may tell you it's a little softer so that has to be one part of the story. and i think just generally the post pandemic had longer legs than we thought and a lot are going to be interesting so over the past year, where you've seen the outside employment growth was government primarily state and local government and healthcare and those are probably the two incentives i can think of. part of that is rehiring and getting back up after the sure productions and that normalization period stretched on longer. way of rephrasing the

question, the reason why the rates haven't worked the way we thought it would, it has been impacting those that are weak in other words consumers that have a lot of debt have been impacted.ms if you look at the venture capital, it is characterized and very little cash flow. venture capital has interest ratess going up so think of this they've been much harder impacted and likewise households that have a lot of debt haven't been benefiting from the higher cash loads.

it's the high level because everyone above that is not in the interest rate and mortgages which isn't always the vast majority of the credit market thatat means except for those tt have benefited. >> this is not a uniform story forrm the economy, and i think that's been the case throughout the cycle. the pandemic infected for the state economy very p differently when you think about the early stages of the pandemic for the experienced economy travel, leisure was in a deep recession that lasted for a while and the economy burst into expansion and then that reversed. ....

which is the reason why this has become increasingly political. as a question of what happens if you have a cohort that gets left behind and dropped off further at a time when the rest of the economy is expanding. i would ask you, it raises a question about independence and cea certain way. not necessarily politics. but at what point will the fed be called in to monetize this debt to keep rates lower? this seems like there's been a bit of a shifting line in the sand in terms of what to more important outpatients will be with inflation coming down. is that something you see in the cards?

>> no. the undercurrent concept. not be pushed into doing something. might the independence being studied are frittered away. we get to that point i'll have to rethink my answer. right now this with the personnel in place can't afford to be solely focused on that. quick switch again goes back to this issue. if that's the case and there's there's notevidence any of you o have uniform downshifting andhi growth. at what point do they need to and what point does the death ih overhang punitive to growth? whether itn history was japan or the economy there is a feeling more debt led to slower growth.

this inflation was part of the reason we had low rates. why is it so different this time? >> interest rates is just a lot lower. there are two things partly because consumers have fixed mortgages they mean the consumers are centered on the mortgage site which makes about 35% the debt what encourages the pandemic to lock in their debt levels much lower leavens than i did before. everything fixed rate at the for perthe long duration when it cos to interest rates depending on where you look exactly. i think the interest rate sensitivity is gone down. the chips act, the infrastructure act and more recently we've had a very significant easing and financial

positions. still talk about rate cut the rally and consumption last year was about 19 trillion. a strong period of time retail sales including on a wednesday can be quite strong the consumers powering ahead. not all because the tailwind but easing financial conditions were significant support. those two things the significant are coming from are the reason why the economy is still hanging in there. what such as white as he like all systems are go. even if things slow it's not ism a sharp drop-off. sort of hinted at this research but what happens when there's a downturn. i went fiscal room does u.s.

government have to respond to it? a new paradigm for the trajectory. what is your sense? i was her with you michael in the sense of how much more severe could a downturn be on. the fiscal impulse? and if there is, what does that mean for the haven a bit of treasury of the people go there if the government's going to be raising money by selling debt? was one thing i would say in regards to the question is with the nominal issuance dramatically. during the intermediation is not increased on terms of balance sheets. we bounced 10 or 15 years. the complete infrastructure and

that issuance that would guarantee we don't have problems perhaps it echo. so, and look up we have a physical shock as i said the shock absorbers in the market but that's another concern. made fun of or effacing could face them over in the u.s.? >> for different reasons. [laughter] >> ob for different reasons. we don't have the same ldi community here. i negative announcements catastrophic. we could significantly digest

that in a way bigger because of thee volatility? to cushion some of the volatility. >> there's a recession or a weakening or a downturn what is the policywn response pre-covid the balance are already hide the burden is going to be on the fiscal side. if they start using a cycle tot see if they will maybe it's debated as you pointed out. but likely go slowly. they will be careful. they go back to zero very quickly. the recession or crisis for the space for the federal reserve to

support very, very quickly. perhaps less of the burden. so there is a difference relative to a rework prior to the covid shock. >> you agree that could offset some of the physical going forward? >> if rates are high ambient esonce income they responds we have a crisis let's agree a rising debt level is just high. what the response exactly would be ultimately stories will do qe again. but with the fiscal response be? i still think we can quickly agree and send him deficits had

a good economy and 6% of gdp it is making you more vulnerable to different types that could begin to have more significant indications for. >> the infrastructure is in place to handle an i expansion f the debt load expansion of thesi u.s. treasury debt market. over the buyers are coming from. it's not the same kind of buyers in the same way. is that a real concern that can lead to emptiness? >> look at this chart here is it neutral issued scenario. this is the forecast of one of the think on a neutral issue scenario? is the issuance across the yield curve in the first thing that stands out is the treasury seemingly think it should be higher. then the long curve. look at 30 common bonds.

the prediction is 300 billion. let's issue a trillion. the pension funds will get $100 and every month. $200 in supply we can't bile that supply. that's what the purpose of the g pack is to sitit down on the tae and saye maybe we issue is much the long interview curb. the reaction from the pension cansi meet that's why another wy to answer your question is a surprise to sit and think hard about if there is some limits on demand maybe that's the reason why it's high. and of course that warrior into this risk which says at the moment thinking so much i'm thinking how much are coupons cosmic how much your t-bills]

think they're going. bigger in the bigger it gets. it's what showing here. the more at the risk of what the fed is doing because t-bills are low interest rates it's really important for your costs. the most extreme case of thisn when i joined the ins in the 1990s where a crisis in timing. at the time was two weeks. we have the right to have government debt. that uk is more like 20 years. i can raise all kinds of questions and markets. it all depends where on the curve where the bias is willing to buy. is something that can interfere with the policy is too much on the front end. at this point everything is good and fine and it will be for a significant amount of time.

but if you want to do your ouhomework this is the place to look for and across the different segments. >> at a time when janet yellen's been doing a pretty good job and unless a managing print there's a shock to markets with may be pushing to the front end to not necessarily cause thehe undo increase in yields in the long ended. michelle, from your vantage point if yields stay where they are here on the long and let's just say, what is it just the housing market going forward given the fact so my people are waiting to move are not going to move if they have a mortgage that might be at 3% they don't give that up to go anywhere. >> the mortgage market and mortgage rates are much more closelyrt tied to the longer end of the curve. it's a 10 year point your thinking about the duration of household and homes. i think it's been really interesting with interest rates remaining high we have started to cease and pick up in home sales already. so yes, there's mortgage at

lock-in. if you're sitting at 2.5% interest rate it's really hard targets they were going to get that out. but time passes and new homeowners come in. there's a certain amount that's happening and you look at the least housing numbers which are starting to seehe pickup. i think a part of that is in part of the lack of inventory that is out there as well. much of the increase of home sales coming from new building home building their sink opportunities to add inventory where there is demand and people need those homes and they have to take the higher interest rate to do that. look, it has higher level of interest rate is going to create some challenges for the housing market inevitably. i don't think it prevents further growth and expansion. i don't think the locket is across-the-board. i think if natural movement and the housing market which is

already underway. if you look at the housing cycle cland this. it's fascinating to play out. he a very strong growth in home sales went went vote at very low level in the industry during the pandemic housing construction fell, residential investment was a drug to gdp growth throughout the second half of 21/2022. but by the end of last year the housing cycle had turned positive. even before the feds are cutting interest rate last quarter residential with the big positive contributor. the last two quarters. so yes lower interest rates would help. i don't think is the housing markets. >> the putdown is it's up now more than 70% yield. home price go upp again it's a very good indicator of opi and the data. given housing has a weight depending how you look at 35 or 40% of the gpi if home prices

are going up and the worst cases other primary indicators have a start to flatten out the really bad case to go higher. when the fundamental slow down to 2% without a slowdown in housing market? >> the home prices are fastened in for a variety of reasons. thein only witness for monetary policy be a go back and say that turn in the housing market was a current homeowner you've a lot of equity in your home now. people are downsizing even accessing and interest rates because of that. entering the housing market you're seeing the combination of high interest rates and high home prices per depending on how you're your participating in housing right now you have a very different perception of the assess ability of theng housing market. >> i'm not hearing crisis.de not hearing government debt burden is somehow going to act as a huge wet blanket on growth that has been what some people say exceptional bit slowing.

michael, i'm going to try is questionable more time. it's the question that is underpinning quinn to start caring about this? not just made political sphere because people say the reason why we've never had a crisis is because there are not enough people to worry about it. a line in the sand with yields or in terms of volatility in the treasury market it becomes an on ignorable drag on growth. >> we heard the first panel were suddenly endangered. >> i guess i would say is over the past two years five year interest rate, not inflation. you've moved up about 225 business points. now, this could be but again you

look at facilities survey of professional forecasters, long-term growth expectations have been unchanged at the same low levels they were the last cycle. so if there is some sort of -- it's hard to say this is being driven by a newfound of long growth prospects. it could be that perhaps we are already seeing and dented in real business rates the crowding outwd effect it's kind of linea. you think it moves up. i think you get to a crisis again you get to the accelerants he could get a crisisve again. if you wanted to sketch it out it would be an unfortunate fiscal policy announcements iscoupled again with the structe have acquits us goag there to te election later this year.

[laughter] some kind of fiscal announcement raises this question over the weekend from donald trump the upper class will get a tax cut, the middle class will get a tax cut. the lower class will get a tax cut. everybody gets a tax cut. from your perspective how does this ship doctrine will expand the deficit that is positive. go ahead. >> first of all i think both parties will probably want to extend that d cja provisions.s as they go to the personal he would probably tell you the dynamic effect he mentioned how it boosted growth.

that is in dollar terms a small part of the over all. that's really where you get the extra. at least. and i doi not know. i'm not politically savvy enough. >> that something that is thrust here. i will go to you on this one regardless of who stays in power or comes to power they will probably be more tariffs. will probably announce them tomorrow. this public more industrial policy bringing back creating an efficiency inherently and some of the supply chains for national security purposes. how much is this increase in inflation outlook that adds to this potentially new and start with a premium for the extra debt that the u.s. has?

>> with inflation already in the last several months beginning to show signs adding on top of that may be not here in the near term but at least down the road will raise all these questions may beat the level of inflation more firmly. there's a deep mobilization or defense spending. you should expect. the review that is upcoming. two they want to raise inflation target which surely we all debate all the time. it becomes really, really important it's the framework has the right one a lot of the moving parts were talking about the. >> i know were getting to the point where people could ask questions. but michelle, final word? >> you both mentioned it could be because of long-term growth prospects. could beat because of higher inflation. i think it comes to the same

point we are probably in an environment where interest rater are likely to be higher for longer. and potentially the structural economies underwent. we made it very, very clear a lot of the corporate have not been able to stand higher interest rates well. which also supports the idea of potentially higher for longer. the point i think alan made in the panel before this concept prior to the pandemic of stagnation very low levels of interest rates. permanently, that i think is been really, reallyen challenge. i think we are all in agreement around that. questions? quickly for the microphone.

>> jp how good i did not hear much talk about wages. if your time what the interest rates the problem would be although higher wages under policy, minimum wage people some more spending room there and theynd could begin the extra spending taxed out yet. it seems like that would be a factor. biden inflation, higher interest cost, higher interest, that new income. >> and willing to take>> that? cookson have a type of the wage environment. rage growth has been strong. depends on what measure you look out but the running about 5%. which hasn't been fairly broad-based. that simple point that's really important to think about the resilience of the economy and the high interest rates.

wage growth has been felt a lot different sectors it if cohorts for a variety of reasons. a wage growth at 5% is running aboveun underlining the pi. supporting the consumer a big factor for why there has been some ability to absorb higher levels of interest rates. so to me the second part where the path of interest rates will go. the abilityy of the economy to handle these. as the months went away in? >> thank you for coming. first, as you know and october interest rates on the tenure went up to 5%. and i wonder if you would agree the loss of the duration buyer is in itself shot across the bow and terms of the loading

confidence in the u.s. i am looking at an intermediate terms of her ears as you suggested. they're certainly one view on the street the way this is going to unravel, if it did, would be a problem with the auctions. the fed has to monetize coupled with financiald repression. would you agree with that? >> that? >> very important discussion. if it were to come to a point not necessarily like in some emerging markets like turkey with other reasons to intervene i believe the u what mike was saying i don't think that would side. response from their obviously we do have anhe econo.

whatever reason rates are going up like they do in europe say for save the economy will be stepping in and providing support. i do think this step line up to get to that point it does require and the economy. many associate quite substantially. justify the type of response. i don't think they would do that unless they are forced to do it. >> thank you. a question on, there is more talk about perhaps a very concentrated increase in the tax rate on the ultra- wealthy. i don't arthel b.1% or whatever. but that be primarily symbolic and a political gesture? could that have an impact on the

debt trajectory? >> michael to take that? >> i don't't know. sorry. >> thank you. this is been a great discussion. mainly u.s. and focus they want to bring the restt of the worldg into it. one is what happened to the aggregate supply in the debt and the rest the world. and second, we talked about how far can we go? what's the type of issue? the question is are the things in other countries that could happen in other countries customer get oil in the middle east, something like that that

could materially affect how far we can go with our debt. the european accent. has been quite strong interest rates are really low here and growth prospects are not that great. maybe i should invest in the u.s. treasury. they called the decoupling it's a new source of buying. that's almost theth opposite to recycle into treasuries. that is been important of an important shift it. broadly speaking away from china and more towards european private buyers. but from the savings perspective the u.s. still is an exceptional

at all the things that go into the discussion. for that reason this higherre growth in the u.s. we have higher interest rates that probably also means they will continue to come to the u.s. the question is whether that u exceptionalism will continue. what will be the reason for why this could be undermined if it's really important of the debate supporters participating. that's an important foreign participation treasury options which comes out literally with everything in the treasury auction. >> michael jordan to weigh in? >> i guess i will start. >> the current account for how much global forces in domestic interest rates. that u.s. current is a little under 3%. not as large as it was during part of the pandemic but pretty

large. some will be pushing u.s. interest rates down by over a percentage points. our should be even higher. >> you had your hand up. keep talking. okay thank you. keep talking. okay thank you. nkea appreciate the look into the treasury data. i monitor that pretty closely. i have ai question and also for michael. we always want to know at what we start being worried? that data give the auction sizes are very large. >> more recently suggesting. >> you talk about the foreign buyers over the last 10 -- 15

years i've seen a large investment fund buying more atar auction. wonder if you have any thoughts about that? in the second question also to michael about the mediation. but is certainly something we at. and just kind of wondering not as at this point seeing a lot of trouble with that. but, with the fact they haven't changed over many years. wondering what you are seeing and considering the toolboxes if there's any other opportunities? >> when interest rates went up there are three new buyers that emerged because they liked high interest rates. number one was households. households have significant buys of treasure but also significant buys of credit because they have for years and in some cases decades been waitingng for heigt yields that's way across the

board and household demand hasn't been much stronger since they began to rain raise rates. using pension funds for high interest rate what pension funds are doing at the moment is they are finally fully funded because all the equities are bringing up to 100 in terms of funding. that means a sample more recently kodak laid off the whole pension department. i no longer worry about the risk we are not fully funded. and therefore pension funds have become significant bias when interest rates went up. and finally good law insurance companies are so biased because anyone's with annuities at the moment there's a lot of sales because a lotot of retirees like the higher cash vote interest rates went up that means into insurance companies.

they have also been significant buyers of treasuries and fixed income. back to the point all of these thate certainly appear now would work woodwork and said we like to buy treasuries because the yield never was so high. will these buyers sell? will they move around? or just a lot of things with yield sensitive buyers and rates it makes this discussion much more worrying mix a whole new set of a bias that what we had before. these bias only came in because the number feels map so much. >> i disagree all is, well as we have in the past decade. i think on days like today you don't have these issues are buying a a lot obliquity will be turned.