How Demographics Will Break the Bond Market | Manoj Pradhan

In Episode 481 https://hiddenforces.io/podcasts/how-demographics-will-break-the-bond-market-manoj-pradhan/ of Hidden Forces, Demetri Kofinas speaks with economist and Talking Heads Macroeconomics founder Manoj Pradhan about his and Charles Goodhart's new book, The Unanchored Central Banker, which argues that structural forces—aging demographics chief among them—are driving real interest rates persistently higher, deteriorating fiscal positions across the developed world, and ultimately forcing central banks to choose between monetary stability and accommodating the political demands of indebted governments. The first hour lays out the foundations of Manoj and Charles's thesis. They discuss why an aging population and a shrinking workforce put structural upward pressure on real interest rates through two primary channels: (1) rising public debt issuance to cover unfunded liabilities like healthcare and Social Security, and (2) persistent demand for new housing construction that competes for the same limited pool of savings as the elderly delay vacating their homes. They examine how other spending pressures—from defense and climate to digital infrastructure and data center buildouts—compound the fiscal problem, why Manoj expects this to eventually produce a regime of financial repression, and the role China has played and continues to play in this broader macroeconomic story. They also discuss why the bond market appears to be partially pricing in this thesis while equity and credit markets remain comparatively unresponsive, and what recent episodes of bond market stress in the UK, France, and Japan tell us about the proximity of the regime change Manoj and Charles have been forecasting for the better part of a decade. The second hour digs deeper into the housing market and the political economy of intergenerational wealth transfers. They explore Manoj's contrarian view on AI and inequality—drawing on the work of labor economist David Autor and Manoj's own experience implementing AI tools in his research—and why he believes the diffuse nature of this general-purpose technology's impact on white-collar work makes it qualitatively different from prior technological revolutions. They then turn to the two distinct channels through which central banks lose their independence: fiscal dominance and what Manoj and Charles call financial dominance. They discuss the political pressure currently being exerted on the Federal Reserve, the implementation of credit rationing as described by Russell Napier, and what all of this means for investors thinking about asset allocation in a world where the platform of global interest rates is structurally higher—where, in Manoj's words, equity markets will have to earn their earnings rather than be lifted by a tide of cheap capital. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 05/20/2026

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Manoj Pradhan, the founder of Talking Heads Macroeconomics and co-author along with Charles Goodhart of both The Great Demographic Reversal and their recently released sequel, The Unanchored Central Banker, in which they argue that rising real interest rates, driven by a number of structural factors, in particular aging demographics, will create a persistent and still underappreciated deterioration

• 0:43Demetri Kofinas?

  in the fiscal position of governments across the developed world, ultimately forcing their central banks to choose between maintaining monetary stability and economic growth and employment. Manoj and I spent the first hour of this conversation laying out the foundations of his and Charles's thesis. We discussed why an aging population and a shrinking workforce put structural upward pressure on real interest rates and the two primary channels through which this occurs: rising public debt issuance to cover unfunded liabilities such as healthcare and social security, and persistent demand for new housing construction and investment that will compete over the very same limited pool of savings as the elderly delay vacating their homes, making them otherwise unavailable to younger families

• 1:27Demetri Kofinas?

  at just the time that they will most need them. We also examine how other spending pressures, from defense and climate to digital infrastructure and the build-out of new data centers, compound the fiscal problem, and why Manoj expects this to eventually produce a regime of financial repression in which governments pressure central banks to keep bond yields artificially low. From there, we turn to the role China has and continues to play in this broader macroeconomic story, and why the bond market may appear to have started pricing in this thesis while equity and credit markets remain comparatively unresponsive, and what recent episodes of bond market stress in the UK, France, and Japan tell us about the proximity of the regime change that Manoj and

• 2:10Demetri Kofinas?

  Charles have been forecasting for the better part of a decade. In the second hour, we dig deeper into the housing market and the political economy of intergenerational wealth transfers. We discuss Manoj's contrarian view on AI and inequality, drawing on the work of labor economist David Autor and Manoj's own experience implementing AI tools in his own research, and why he believes the diffuse nature of this general purpose technology's impact on white collar work makes it qualitatively different from prior technological revolutions. We then turn to the title of the book and the two distinct channels through which central banks will lose their independence: fiscal dominance and what Manoj and Charles call "financial dominance."

• 2:53Demetri Kofinas?

  We discuss the political pressure that currently exists on the Federal Reserve, the implementation of credit rationing as described by Russell Napier, and what all of this means for investors thinking about asset allocation in a world where the platform of global interest rates is structurally higher, where, in Manoj's words, "equity markets will have to earn their earnings rather than be lifted by a tide of cheap capital." If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius

• 3:37Demetri Kofinas?

  Community, which includes Q&A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions.

• 4:18Demetri Kofinas?

  And with that, please enjoy this exceptionally enlightening and immensely valuable conversation with my guest, Manoj Pradhan.

• 4:29Demetri Kofinas?

  Manoj Pradhan, welcome to Hidden Forces.

• 4:33Speaker 01

  Thanks very much, Dmitry. A real pleasure to be here. I'm looking forward to this conversation.

• 4:37Demetri Kofinas?

  I'm super excited to have you on the show. You know, when I had Charles Goodhart on the program years ago, it was to talk about a book that you guys co-authored. And then subsequently, Patrick Boyle and I became friends, and he mentioned to me that you guys were friends or knew each other. What was the base? And he actually put us in touch. What was the basis of your relationship? Did you guys work together? I can't remember what he told me.

• 5:00Speaker 01

  We went to business school together at London Business School. It was a really long time ago, 20 years back, but we've been in touch. He's a great guy, really smart. I enjoy all my conversations with him.

• 5:11Demetri Kofinas?

  Yeah, I've told him this, too. We talk quite often. I said that I think he's the most successful, smart person I know in media, you know, with his individual videos consistently getting millions of views. It's just incredible. How does someone who's both putting out such high-quality information, also garnering such a huge audience? And my best guess is that he basically caters to the upper 20% of people in the distribution, and that's he is a big chunk of that. So this was meant to be an advertisement for Patrick, but certainly it should be, and everyone should go check out Patrick Boyle on Finance. So before we get into today's conversation, Manoj, tell me a little bit about you. What's your background? How did you become interested in finance? And how did you and Charles Goodhart begin

• 5:52Demetri Kofinas?

  your professional collaboration that led to The Great Demographic Reversal, which was your previous book, and now The Unanchored Central Banker, which we're here to talk about?

• 6:01Speaker 01

  With pleasure. I mean, my interest in economics really was a combination of two things. One is when I grew up in Mumbai, we lived very close to the stock exchange, where it was impossible to ignore the dynamics of the economy as the central hub of the Indian economy. So we were always cast in the middle of economic and financial news. My dad was a huge fan. He was really against the grain of conventional thinking, and he insisted, I think, beyond the usual medicine and engineering, which was the norm back then. And we're talking decades ago. So I was fortunate to have an upbringing like that. And then beyond that... I thought the interest really sprang from, you know, a few decades, which have been tumultuous.

• 6:45Speaker 01

  And paradigms kept changing, the way to interpret the world kept changing. So I was based in New York and teaching in university and trying to explain to students why economics was still relevant. And to do that, I had to convince myself. And then when I switched to Morgan Stanley, which is where I eventually met Charles, I tried to convince people there why structural forces still mattered, while it looked like the here and now was the only thing that really was relevant to financial markets. And that's how Charles and I actually began collaborating because I think we both came at this from very different perspectives, but both had a similar principle in mind, which is that the cycle, which ultimately is what matters to financial markets a lot more in the here and now,

• 7:27Speaker 01

  could not remain the same if the structural sands were changing below our feet. I mean, we talked about demography, we talked about how China, which was a huge focus for me, was changing as we witnessed it, and that could not leave the world intact. And at the time that we started collaborating, the whole thinking around financial markets in the world was this was a lower for longer regime, if you can remember back to that time. And we didn't think it would last.

• 7:52Demetri Kofinas?

  So I believe you and Charles first presented your demographic thesis on inflation at the Bank for International Settlements in 2017, while you were both working at Morgan Stanley. When and how did you guys begin developing this thesis? That's been central to not just this book, but the last book. Like, do you remember exactly the year?

• 8:11Speaker 01

  I do. It was about a year and a half before that. And we started gaining material to see whether we were on the right track. We had a sense that demography would be an inevitable game changer, but we needed to be sure that it hadn't already been incorporated in economic forces, in central bank thinking, in financial market pricing. And slowly we came to the realization that we had Something that was not being considered by either economic textbooks or central banks or the markets. And it really started with trying to understand whether debt would stand in the way of demography, whether neutral interest rates had been affected to the extent

• 8:54Speaker 01

  that at the time, people felt forces had taken equilibrium interest rates to negative levels. And we just didn't want to do any work on demography or interest rates without doing our due diligence. So it started about a year and a half before that BIS conference, which you're quite right, was the first time we really presented it to a wider audience.

• 9:14Demetri Kofinas?

  Now, the consensus, I mean, this is probably still true today, but it was certainly true then that the consensus was that aging populations drove interest rates, inflation and growth all down. So your thesis was genuinely contrarian. And then, of course, we got a price surge after COVID between 2021 and 2022, with many countries registering their highest rates of inflation in decades, though that ultimately proved to be transitory, whether a central bank tightening was causal or not. And we went from talking about stuff like commodity super cycles and sharing memes of Jay Powell standing at the podium with his Fed printer going brrr, to inflation feeling more or less anchored, albeit above

• 9:57Demetri Kofinas?

  the Fed's stated target of 2%. Where do you think the consensus sits today? And would you say policymakers and central planners have moved closer to your view? Or are the same frameworks for understanding inflation in vogue today?

• 10:13Speaker 01

  Well, first, I think you're quite right. When we first presented that thesis, I think both financial markets and academic or central bank conventional wisdom looked at it very differently. I can still tell you that the prevailing view among many, many, many investors and people that we speak to is that Japan was the paradigm and might still be for demography, that an aging population goes hand in hand with disinflation and probably outright deflation. And I think some of the conventional thinking around interest rates still remains in place. In our book, as you will have noted, we had quoted a bunch of conventional sources and recent models that argue that what you're going to get over

• 10:54Speaker 01

  a period of time is a return to deflation for a variety of sources, or at least inflation very close to target. I think what's changed in Overall thinking is that people are first hugely open minded now in their thinking. They're far more willing to engage with the concept that we might be looking at a regime change in inflation. They are more willing to think that the last 20 or 30 years might have been the abnormal part of economic history. And I think notably, a lot of models have now begun to actively incorporate not just demography, but a whole range of supply shocks. If I'm not mistaken, Christine Lagarde at a Jackson Hole speech spent almost the entire

• 11:38Speaker 01

  speech talking about supply side shocks. One more central banker of note is the chief economist from the RBNZ, Conway, who has talked a lot about supply shocks and the importance of these. These stories have begun to permeate conventional thinking. We don't think the treatment is quite there, and a lot of the old school thinking still remains in place, but I think there has been progress.

• 12:00Demetri Kofinas?

  So it seems that the bond market may be in the process of partially absorbing your thesis, though I'd say equity markets and private credit still appear to need some convincing. Why do you think that is, assuming you're correct? And what would it take for the laterary price?

• 12:19Speaker 01

  Well, first, I think the bond market has started looking at things slightly differently because if you look from first principles, the underlying security for a bond, which is a derivative, the most basic derivative, is the interest rate. And so when the interest rate is at risk from its two components, which is the real interest rate and inflation, the first impact must be on the most basic derivative, which is a bond. Equities, I think, are a step removed in the earnings process, and they're a step removed in the earnings process because the macroeconomic environment and interest rates have to be big enough to overwhelm earnings, which are coming from the real economy.

• 13:01Speaker 01

  So that interest rate shock or the inflation shock has to filter into the real economy and actually build up enough momentum that macroeconomics then become the prime driver of equity markets, which is not always the case. It always Happens beyond your normal thresholds. I mean, if you think of bands around the norm, then within those bands, the equity market has a life of its own. Beyond those bands, the bond market begins to dominate. And then if you look at credit markets, which, you know, the scenario that everyone's really worried about in those markets is the risk of default. That's a step further removed. So not only do you have to have a macroeconomic dominance in markets to affect equity prices, but they have to go a step beyond that to start thinking about the risk of default in some of these entities.

• 13:45Speaker 01

  So I can understand the sequencing. I don't think we've reached dire enough levels that some of these interest rate and bond market developments have really begun to affect equity markets or credit markets. But that may be a matter of where we are cyclically speaking. I think structurally, which is also part of your question, I think they're beginning to feel the stress. I think equity investors or credit investors understand that if these developments go further, if real interest rates and inflation rise and remain sustainably higher, their ability to generate returns will be affected. We're not very far, but I don't think it's quite cataclysmic yet that we can see it every day.

• 14:25Demetri Kofinas?

  All right. So we're going to have opportunities to revisit the contemporary landscape throughout this interview and discuss investor implications and policy implications and recommendations. But let's now just focus on the book, your latest book, The Unaccurate Central Banker, and lay out the foundations for the discussion. Again, many of these themes or topics were explored in your previous book, but you've fleshed them out and also incorporated more recent data into your argument. And while we're going to begin with the demographic argument, I should mention that there are a number of forces, for lack of a better term, that you talk about in the book, and some of them are related, for example, demographics and housing. There's also China, and China relates to the fiscal challenges the US faces, which you also discuss in great detail. You also talk about AI,

• 15:10Demetri Kofinas?

  which is exciting and something that again brings it very much to what is on the mind of very many people and how does AI impact the labor market? How does it impact inflation? Especially services inflation. But let's start with the demographic thesis. So in the book, you argue that an aging population and a decline in the size of the workforce will put upward pressure on real interest rates, as we've already talked about. And you identified two primary channels through which this occurs. The first is higher public debt issuance to cover unfunded liabilities, driven especially by public healthcare spending, which you expect to grow faster than GDP, both because the healthcare sector has a structurally lower rate of labor productivity growth than the rest of the economy, but because also of an expected surge in demand for health-related

• 15:55Demetri Kofinas?

  services from an aging population. And the second channel is the persistent demand for new housing construction as elderly people stay in their homes longer, creating a structural undersupply that keeps residential investment elevated and competing, this is important, for the same pool of savings that the government is also absorbing through bond issuance. You also argue that other public spending needs, things like defense, climate, digital infrastructure, things like data centers, and also grid modernization and expansion to feed those data centers will put further pressure on the budget, eventually leading to financial repression as governments pressure central banks to keep bond yields artificially low, which produces higher inflation and therefore even higher nominal interest rates for the private sector.

• 16:40Demetri Kofinas?

  So basically, this, I think, falls, this portion falls very much under the sort of, our traditional models around crowding out of private sector investment by public spending. How does this differ from how the consensus understands the impact an aging population has on interest rates and growth today? And then let's have you flesh out that thesis in more detail.

• 16:59Speaker 01

  So first, that was a really comprehensive way that you've just described the entire problem. It's very helpful in the sense that I think what you've done very nicely in that little introduction is you've collected a lot of the cross-currents that we try to cover in this book. And part of that approach is because life's never, you know, along one dimension. So this aspect of demography is going to filter into almost everything you do that is healthcare, that's the global economy, and it's going to have some challenges or offsetting factors which come from, as you mentioned, AI, it comes from healthcare, it comes from all other sources, including productivity. So I think that's a very useful way to summarize how broad the impact of demography is going to be. So let me start with the last bit of that snippet. And start working backwards.

• 17:45Speaker 01

  So what's the conventional wisdom, right? The conventional wisdom, which really comes from even recent models of thinking is that, well, first, the old don't spend, which itself I think is just incorrect, but I'll get to why the conventional thinking falls so far off the mark. And because they don't spend goes the the norm, they tend to be disinflationary or deflationary. And therefore, we don't really have a spending problem or an inflation problem or a real interest rate problem. The second channel or the way people think about this is it's actually really intuitive and it's very, very, very difficult when you put it that way to argue against it. So let me explain to you the way it's explained in these recent models.

• 18:27Speaker 01

  We live longer and because we live longer and we anticipate that longer lifespan, you tend to save more. And as you save more, part of those savings filter into financial markets. They go into the bond market. They go into all other kinds of savings vehicles. And those flows then tend to depress interest rates as we go over time. Makes complete intuitive sense. What both these lines of thinking completely miss is that a macroeconomic equilibrium must be a general equilibrium model. And what I mean by that is, yes, you've got the private sector. You've got the households who might spend more, save more, excuse me. And you've got the elderly, who even if you think that they spend less, which they don't, that's still part of the private sector.

• 19:11Speaker 01

  What you have to consider is what the impact of the same world is on government spending. And once you consider that as the number of elderly in the economy grow, the need for pensions, the need for healthcare and some of these productivity problems, which we've encapsulated in a concept that BOML product called BOML's Cost Disease and its impact on healthcare. Once you consider all that, whatever savings that the private sector generates is more than offset by the dis-saving of the government. That's really the crux of the matter. So as you said again in your comments, they're competing for a share of savings. If you consider that the private sector, the household sector is.

• 19:53Speaker 01

  Saving a little bit more in anticipation of a greater retirement, but that same longer lifespan is going to be compensated and more by government dis-saving. You're going to have a greater net demand for money. And that means interest rates and possibly inflation will both go up. I think that's really what's missing out there in the debate. As a final point, I understand it's for simplicity, but if you look at recent models, most of them seem to consider that government debt and deficits are a fraction and an exogenous faction of GDP over time. That simply makes no sense at all.

• 20:35Speaker 01

  Demography has a huge and clear impact on deficits and on housing, and both of these are going to change the outcomes in those models substantially. That's just missed by everyone.

• 20:45Demetri Kofinas?

  So I think people can intuit how those two are interrelated, but we'll dig into them in more detail later, as well as how they impact the broader fiscal picture. Before we do, you invoked Bommel's cost disease, which you also explore in the book, particularly as it relates to the healthcare sector as a structural driver of services inflation and as a contributor to the deterioration of the fiscal picture. For those who don't know or who need a refresher, what is Bommel's cost disease?

• 21:14Speaker 01

  Well, it's actually a fascinating way to look at the world, and it's really pertinent to what we're doing with public finance today. So Bommel's cost disease was an outcome of a study that he was doing, I think in the 1960s into the economy of the arts. And in that, the question he asked, which is really interesting when you think about it, was why should a string quartet playing a symphony be paid any more than they were being paid 100 years ago? The instruments haven't changed, skill of the musicians probably very similar, maybe their way of learning is slightly more advanced, but the output's largely the same. And so why should they get paid anymore? There's no real change in productivity.

• 21:55Speaker 01

  And his answer, which makes perfect sense, was because productivity was higher in other sectors. And if you don't pay Pay musicians a higher wage, you start pushing them away from music and into the other sectors. And so what happens from the opera houses standpoint is, well, you're paying your musicians more, but their output hasn't really changed, which means profitability for the opera house has gone down. And that means the opera house then has to change their prices to the upside. And so when a sector lags in productivity, you actually see that their prices and wages rise for reasons that have nothing to do with what's happening within that sector. And that's true for healthcare, because healthcare has lagged in terms of,

• 22:39Speaker 01

  I wouldn't say productivity, but output per hour, because they deliver such idiosyncratic services that you really have to see other sectors not showing any higher productivity for healthcare costs to remain the same. And that's simply not been the case. So as productivity in the economy has grown, wages and prices in the healthcare sector have gone up. And that has helped make healthcare spending a larger share of the budget over a period of time. It's grown faster than GDP and make healthcare spending such a big deal in the economy.

• 23:12Demetri Kofinas?

  So one of the things that we've also seen, just this one example of it over the last several years, is that a lot of people end up driving for Uber. And some of those people have been displaced. Either they may not be making enough money at their current jobs, but I've actually had conversations with people who actually had other jobs or who are kind of semi-retired or whatever, and are doing it to pick up a little extra money. And where I'm going with this is BOMOs cost disease does not capture, correct, the dynamic of, let's say, AI displacing workers, engineers or other people, and some of those people migrating into the healthcare sector. Because now it's an adjacent field where they can seek employment. In other words, it's only capturing the equilibration of wages across the economy. It doesn't capture this additional dynamic,

• 23:57Demetri Kofinas?

  which is that people getting displaced due to automation in high productivity sectors could end up in some part actually transitioning to these lower productivity sectors, therefore driving up the number of people within those sectors getting those wages. And that, of course, doesn't also capture the additional thing we've been talking about, which is that as populations age, there will be more demand for healthcare workers, therefore further expanding the size of this relatively unproductive sector.

• 24:23Speaker 01

  I think you're quite right. There's a lot it doesn't capture. It's a very simple way of thinking about one of the dimensions of healthcare and healthcare spending that we have to deal with. It's just very interesting because we continue to remain in an economy where productivity in some sectors is far outstripping others and it hasn't yet come to healthcare. In the book, we make a point about education, but we are at a really critical point with AI and education where we don't know what the future of the education sector looks like. So your point right there is that the sector itself can change. The demand and supply of workers can certainly change. The second thing I think Bommel's healthcare disease, sorry, cost of disease doesn't capture also

• 25:04Speaker 01

  is the changing nature of the population. So as the population ages over a period of time, what we've made a particular point of addressing in our first and second book and something that we're both very proud of, given that both our families have personal history of neurodegenerative diseases, is that the need for caring can also rise exponentially. So a lot of medical research shows that medical dependency, not demographic dependency, where you actually need people to look after you, rises exponentially from the sixties to the seventies, to the eighties, to the nineties, when it comes to aging, because the incidence of neurodegenerative diseases increases exponentially. And that's a very particular task because

• 25:47Speaker 01

  when you're afflicted with one of these neurodegenerative diseases, you can't really look after yourself or you can't perform the same task, which means you do need carers. So answering your question in one way, I think the need for carers is still underestimated. That's number one. Number two is because these needs are going to rise over a period of time in a way that we can't yet see. We can see at a micro level, but we can't visualize it yet at a macro level. We need some jobs to be destroyed in other sectors. If jobs were not destroyed in other sectors, I think there would be a problem because the demand for labor would far exceed its supply. And a couple of other things to add in there, that the, that model doesn't also incorporate the political climate we're in.

• 26:33Speaker 01

  That people have found for healthcare problems over a period of time have tended to include immigration. But so strong is the political desire to curb immigration at the moment that that's a source we can't rely on. And finally, if you look at the political climate and you look at these budgets and budget deficits that we're looking at, what's adding to the complications also is the need to get reelected. And that is creating a political desire behind fiscal spending, which that model also doesn't capture. So it's a shorter, briefer model, which is not quite as rich as what we would like it to be.

• 27:07Demetri Kofinas?

  I'm so glad that you brought up immigration because that's another example of a trend that isn't just a headwind, but was previously a tailwind. So that's the other thing. We've got a series of tailwinds that have turned into headwinds, which exacerbates the scale where the move from one extreme to another. I'm sure a lot of people who heard you talk just now might have thought to themselves, well, what about robotics? You know, the Japanese are introducing robotic helpers and companions in their economy. How is that? How could that possibly drive down the costs of labor and increased productivity in the healthcare sector? We're going to have a chance to talk about that when we get into AI in more detail. But I want to switch back to the conversation about fiscal spending and the role of the government in all of this.

• 27:47Demetri Kofinas?

  Because in the 30 years or so between the end of World War Two and the mid to late 1970s, the cost of borrowing on average for the government was lower than economic growth adjusted for inflation, something that you write about quite a bit in the book. And in other words, means that the economy was growing faster than its borrowing costs, which along with the use of financial repression, helped to reduce the debt to GDP ratio for the government. Since roughly the late 1970s to early 1980s, that relationship has operated in reverse. In other words, real interest rates have exceeded real rates of growth. And this has contributed to a rise in the debt to GDP ratio for the government, with some notable exceptions being the mid 2000s, housing boom and the post-GFC period.

• 28:33Demetri Kofinas?

  Your thesis, as I understand it, is that we are entering a new phase within this larger trend that has been in place for the last 40 years, where demographic pressures continue To keep real interest rates elevated while simultaneously slowing economic growth, therefore putting further pressure on government finances. If you're right, and we are entering this new phase, what does this mean for the government's finances, for the fiscal deficit, for the government debt, the economy and inflation? Spell that out for us.

• 29:04Speaker 01

  First, I'm really glad you took that time series that you did because there's a lot of rich information in that where comparability really matters, right? So let's start by fleshing out some of those comparative statics as economists would like to call them, right, a snapshot of the seventies and eighties and a snapshot of where we are today and the critical differences. There are some similarities, but let me start with the differences first. You know, it's very widely and popularly known that Paul Volcker, when he came in, saw inflation numbers that were just unrealistic to think as sustainable for the future. And he raised interest rates very sharply and generated two recessions, one smaller one, one larger one, which is widely credited with bringing inflation down

• 29:47Speaker 01

  and helping to solve a credibility problem that the Federal Reserve may have had. Now, one important difference between that period and where we are today is the stock of debt. If you look at any measures of the stock of debt, the Congressional Budget Office usually comes out with wonderful statistics and outlooks for where we were and where we are going. You will see it very clearly that the stock of debt or the debt to GDP ratio at that time was low enough that Volcker and the Federal Reserve could raise interest rates aggressively without really damaging the economy. And in other words, they could focus almost single-mindedly. I don't want to say purely single-mindedly because there's a lot going on and the impact on unemployment,

• 30:30Speaker 01

  but they could focus almost single-mindedly on bringing inflation down. If you follow that strategy today, let's say there is a shock that comes our way and raises inflation close to double digits. And the Federal Reserve thinks, well, we are really going to have to solve this problem. Now there's an inherent tension because the stock of debt is so high. Famously, just a few weeks ago, The US debt to GDP ratio has passed a hundred percent. If you now raise rates as aggressively as you did in the past, what would change is the borrowing cost of financing that stock of debt. And that would raise the interest expense component of the deficit, which would be added to the stock of debt and would have to be financed again next year.

• 31:14Speaker 01

  So maybe you get a downturn today and that downturn today brings inflation down. And the Federal Reserve has quote unquote succeeded in the near term. But what you have done is you have added significantly to the stock of debt that has to be financed. And in order to finance that enhanced stock of debt sometime in the future, you're going to have to start running higher inflation. So in a highly indebted society, the ability of the central banker to really tackle inflation is significantly lower and it has to be balanced against a counter objective, which is to maintain financial stability. Paul Volcker did not have that particular problem, but central bankers of today are going to have that problem already.

• 31:57Speaker 01

  So when you add demographic layer on to what the debt profile will look like, particularly given all these things that we have discussed, you can see why the need for AI is so high or the need for some fiscal control is so high. But how do you do it when your population is aging? One small thing I would add is an interesting similarity and an interesting lesson for financial markets out of the seventies and today is the way interest rates behaved. So another thing that we mentioned in the book is that part of the reason that inflation started rising, not only in the seventies, but also starting from the sixties, is that policymakers wanted to run the economy hot. They wanted to get labor markets to be vibrant.

• 32:38Speaker 01

  They wanted them to be tight in order to give some relief back to workers who had suffered since the Second World War. And what that led to was an uptrend in inflation already in the sixties. Now, in that first inflation spike of the mid sixties, if you look at the one year and the 10 year yields, they're actually flat, which means the yield curve says, okay, inflation went up. I don't think that's a problem. It's a one time deal. I'm not going to punish anyone for this. Then the seventies shock comes in. And at that point, the bond market does two really interesting things. Number one, it demands action from the central bank. So the one year yield then climbs higher than the 10 year yield, which means the yield curve inverts. But really interestingly, after that recession.

• 33:20Speaker 01

  The 10-year bond yield does not go back down to where it was before. And then comes the bigger shock of inflation and you see the same dynamics happening. Until it is convinced that you take decisive action by creating a recession, bond yields don't fall. I think we're in a very different scenario right now where the central bank simply cannot afford to act that way.

• 33:40Demetri Kofinas?

  So I feel like now is probably a good time to bring up what is a core, I would say a core intellectual innovation of the book, which is your argument that there are two Phillips curves. Now, remind me, did Bill Phillips introduce the Phillips curve before we began to see evidence of cost push inflation, driving prices higher in the economy, or had it already been developed as a theory? And then it was just adopted because the environment seemed to confirm what the theory already suggested to be true about the sources of inflation?

• 34:12Speaker 01

  No, I think that concept was around for a very long period of time because we had had supply shocks in the past. We had had wars in the past, so I think it was well incorporated. But this one worked as a relationship in normal times. In normal times, when you had a very little economic slack and very little labor market slack, the demand for workers would be higher and obviously push wage growth up. But they did have a very clear understanding what cost pressures and supply-side shocks could do. It's just never been the norm in the past. So supply shocks were more rare, they were more associated with random events that lasted for a period of time, and therefore not the way to construct conventional thinking for 90% of what our life used to be back then, which is a demand-led world, not a really supply-dominated story.

• 34:56Demetri Kofinas?

  Great. So since I think you've already pretty much defined what the Phillips curve was, what I think is a core innovation of the book is, as I mentioned, the separation of the Phillips curve into two curves, one being a domestic services curve and the other being a goods curve. And your argument, at least as I understand it, is essentially that the two have decoupled as a result of this period in which China became the world's factory floor. And you argue furthermore that conflating the two has led to decades of macroeconomic misdiagnosis by central banks, much of which people will be familiar with, though maybe not in this particular model that you described, but certainly as a result of conversations we've had on this podcast for years.

• 35:38Demetri Kofinas?

  Why is your decomposition into two curves important for understanding not just what's happened in the economy with inflation, but also what could happen going forward?

• 35:47Speaker 01

  Okay, let me start with the question you asked, because that's really the crux of the matter. If that's not relevant, I don't think that decomposition matters at all, right? So I think it's relevant because separating inflation into what drives goods price inflation and services price inflation is almost a kind of separation of history. So the separation of history element comes in thinking that when we look backwards at the last decade since the 1990s, the dominance of goods inflation in determining the overall part of inflation has been critical. And that coincides with the time that China has seen both a real benign disinflation

• 36:31Speaker 01

  and a malign disinflation. In the future, we feel China's role is going to be a little bit more normalized. They won't really be able to exert the same kind of disinflationary pressure, maybe it'll last for a year or two more, maybe a little bit beyond that because it's very uncertain times in China at the moment. But what changes over the coming decades is that the role of services inflation, which is domestically generated, which is linked to the labor market, becomes far more dominant. And a critical aspect of that is if the labor market becomes tighter, faster in the circle, in the cycle, excuse me, because of demography, because of a shortage of workers, because

• 37:11Speaker 01

  of immigration restrictions, then what you will see is that wage growth starts picking up perhaps earlier in the cycle than would have been the case in the decades past. So really, the way goods inflation has influenced overall inflation and the way services inflation will influence the future is changing, and that's why that decomposition is important. So let me take a step back and talk about why that decomposition has been misunderstood, even though it is well defined. For example, again, I had mentioned President Lagarde. She has been very clear in calling services inflation domestically generated. Every central bank in the advanced economies and many in emerging market economies separate goods inflation and services inflation,

• 37:55Speaker 01

  and they've got many refinements on this. So we're not pretending that we've come up with some novel concept. We argue, however, that the genesis of these two parts of inflation have not been clearly defined by central banks. So let me work this through with a simple example, right? I was having this conversation with the head of European Central Bank, and they were mentioning that, look, their job is to control inflation. Why does it matter whether it comes from goods and services? They've delivered stable inflation, and it's absolutely right. I don't think that's something that can be contested. I think that's a spot on point. The difference, I think, however, is that how you've developed that inflation profile changes. So for example, let's say you're the CEO of Starbucks,

• 38:39Speaker 01

  and you want to deliver the best priced coffee that you can in a cup to a customer. What you've already done is you've cut down as much as you can the cost of those barista machines, the cups that you buy, the coffee that you source, because that's your bargaining power, and you've really managed to squeeze every last bit of cost savings that you can. Now, if you get a cost shock, and you want to keep your coffee costs low, you're going to have to start closing down branches or reducing the number of workers you have. And just recently, I think Starbucks also had count reduction in executives. That's the difference between goods and services inflation. Goods inflation has delivered to us already. In the future, if you really want to deal with services inflation, you're going to have to take very, very, very difficult steps.

• 39:24Speaker 01

  That's what we believe central banks haven't quite grappled with. They've looked at the past, they've looked at the way core inflation has behaved, and whether they are fully right or not, they can take some credit for controlling inflation, but not as much as they assume. Falling goods inflation has done most of the heavy lifting before the great financial crisis, afterwards, and even after the pandemic. The choices in the future are going to be much harder.

• 39:51Demetri Kofinas?

  So you mentioned that there's a faster transmission mechanism for services versus goods inflation. And as your Starbucks example just now illustrates. Because labor costs as a percentage of inputs are higher for services relative to goods manufacturing, this also means that services inflation is stickier and that in order to get those costs down, businesses will have to make more difficult decisions with potential political ramifications for companies as well. This also seems consequential when we're talking about the prospects for the durability of inflation, no?

• 40:26Speaker 01

  I think so. It'll be very difficult to control that for two reasons. Number one is depending on where you're talking about in the services sector, if it's in the lower income part or the lower productivity part of the services sector that you're talking about wage pressures, those jobs tend to be much more fungible. I don't think anyone with higher education can switch jobs relatively easily. People with lower skill, who are very essential for the economy, can switch jobs far more easily. So you see wages transmitting from one sector to the other far faster in lower skilled, lower wage sectors. That's a critical point. I think it will also be the case that once the persistence sets in, it's very difficult to get rid of.

• 41:10Speaker 01

  Here in the UK, during the pandemic and after, some of the wage settlements that were given by both the Conservative and the Labour governments have been quite large wage settlements. And whether those settlements were justified or not, I think it sets the trend for the private sector to then go and demand higher wages. You're seeing similar stories play out in Japan with wage negotiations. There's a certain inertia in price and wage setting when you can see it changing in front of your eyes, right in your domestic economy. That inertia is hard to get rid of.

• 41:41Demetri Kofinas?

  So in the book, and you also address this a bit so far in our conversation, you express strong skepticism about whether China will continue to export disinflation, but you also acknowledge near-term uncertainty around the forecast. This seems like a common sense. Position, in my view, and I would say even consensus position. But regardless, can you walk me through your thinking on this anyway? Just so we understand why you feel this way. And then let's dig into some of the assumptions behind it.

• 42:07Speaker 01

  I'd be happy to. It's a really, really interesting topic and an incredibly difficult juncture at which to separate these forces. So I'm glad we have a chance to talk about it. Let me start with the conventional way of thinking and the problems very briefly within China. The conventional thinking around China is that if you look at the way those exports and current account surpluses have moved recently, you've seen a significant rise in the current account surplus. And commensurate with that, you have seen a fall in export prices, particularly in electric vehicles, in solar panels, and that has created knock on effects in many other economies in internal combustion engines and electric vehicle industries across the world. Germany has felt that, I think Detroit has felt that.

• 42:52Speaker 01

  And obviously, solar panels have made either production cheaper or impossible for others to compete with. And so I think the problem that many people see with China is that there appears to be a strategy of deflating export prices in order to raise the level of exports, therefore raise the domestic manufacturing footprint within China and create greater employment. That's a problem. If that continues, that can have a significant disinflationary, deflationary impact on the world, which is almost a mercantilist policy that there's a small cake and I'm going to try and take as big a share as I can. Where we disagree with that story is on both of its components.

• 43:37Speaker 01

  First, demography. We don't think the current account surplus is here to stay forever. We feel that, as we had discussed right in the beginning with perhaps your first question, aging societies will start seeing greater spending. In this case, particularly within China, I think that story is going to move much faster. The government will have to provide much higher protection for an elderly population. Families themselves have been saving because they can see what's coming in front of them. The combination of the two, I think, is going to move spending higher and therefore the current account into deficit. So part of the problem that conventional economists see is not going to last forever.

• 44:19Speaker 01

  Second, and I think a more, more, you know, tangible part of that problem is that there's almost an argument that export prices have been deflated as a strategy. I don't think that's right at all for two reasons. Number one, deflation in the Chinese economy comes from three broad sources. Number one, it comes from a vicious fight in electric vehicle and battery makers that has lasted three to four years because the government has provided a subsidy to get those vehicles and batteries fast-tracked. Similarly, it comes from solar panels, which have deflated and prices have fallen by about seventy, seventy-five percent over the last three or four years.

• 44:59Speaker 01

  Both those industries are now going through a vicious consolidation, which is really biting into profitability. It's making it impossible for entrants to come in, and Chinese policymakers don't like it. So they have tried to introduce explicit policies to try and get over that deflation. The other source that is driving deflation is the housing market. And obviously, that was something that policymakers wanted because it was a continuation of a past adjustment that hadn't yet gone through full completion. But now, I think you can see that there is a desire to draw a line under the housing problem, not in a way that brings up another housing bubble, but just to make sure it doesn't get any worse and the improvements are slow and steady.

• 45:41Speaker 01

  So Chinese policymakers are fighting the deflation that many people believe is a strategy of the policy machine. And the current account surplus that many are worried about over a period of time will turn into a current account deficit. So we don't see China as a lasting problem. It's uncertain because we don't know how the electric vehicle companies or the solar panel industry or the housing market are all going to react over the next year to two to three. But that's not a sustainable strategy, and I don't think China sees it that way either.

• 46:12Demetri Kofinas?

  So I want to address a few of your points, one of which is the uncertainty around the near term forecast. How can we tell if a deflationary or disinflationary wave coming out of China is temporary or not?

• 46:25Speaker 01

  I think you can in a few ways. Number one, the consolidation process within the auto industry, for example, at home is quite advanced now. There are four or five companies, main companies, which includes BYD obviously, have gained a large share of the market. So any industry that opens up new goes through a period of what, you know, we would have all learned in economics textbook called supernormal profits, right? Which is that there's a new market, it opens up, everyone rushes in because there's money for everyone. And then over a period of time, that story becomes a lot harder because some have an intrinsic superiority in that market and they start to gain a larger and larger share and that drives out new entrants.

• 47:08Speaker 01

  Unless you're really innovative, you can't really enter that market again. So we are seeing consolidation, which is quite mature in that industry, which means that the fight to really cut prices and get a larger share should abate to some extent. Second, you are seeing some pushback, right? Tariffs are coming into play, quantity restrictions are coming into play, and that means the ease with which some of these advantages can be driven may not transmit globally as quickly. On the housing market side, I think things are also showing some promise. One of the main reasons that policymakers did want to change the way housing is sold in China is because it was sold almost as a Ponzi scheme, where property developers

• 47:48Speaker 01

  would ask buyers to stump up a bunch of cash and then that cash would be used as revolving capital for other projects. And then if one of them went belly up, a lot of them would go belly up and some projects were never delivered. And it's really a burden on consumers in every sense and it's a problem to financial stability. So they did want to change that system. But now what you're seeing is the policy machine has begun to hum the other way. The hook-up population, which is a type of passport that you need if you're a rural resident to stay within urban areas, they had significant restrictions. Restrictions on what property they could buy and other social amenities they could use. And those property restrictions in particular have been dissolving very, very, very quickly.

• 48:32Speaker 01

  And that's a clear signal that China's policymakers want new buyers or understand that the housing market requires some support. And I think things are beginning to show, even in the housing sector, some signs of lifting. It's a deep shock. So I don't think it can dissipate. And there may be unintended shocks or unintended consequences of that over the next year or two. But I think the delta of both of those things in the consolidation in some of these high-tech sectors and within the housing market, which looks quite mature, it's impossible to say. I think both of those suggest that you won't change this overnight, but the process is fairly mature in terms of getting rid of disinflation or outright deflation in both parts.

• 49:13Demetri Kofinas?

  So you referenced the consolidation of the auto sector at the beginning of your answer. And this would be an example of where Beijing sees ruinous competition in sectors of the economy that have benefited enormously from the productivity gains and gains in market share abroad over the years, but which at the same time risk accelerating debt deflation domestically, given how much regional governments and Chinese banks have invested in many of these companies and projects. My question for you is, and this is a pushback or a counterargument. Even if Beijing succeeds in this effort, doesn't the sheer volume of Chinese EVs and solar capacity and battery capacity

• 49:57Demetri Kofinas?

  represent a deflationary overhang internationally for years to come? And isn't it possible to argue that, in fact, what this policy does is it makes the deflationary overhang worse because it's propping up domestic prices and preventing the market from clearing? Which importantly preserves capacity that would otherwise have been wiped out.

• 50:19Speaker 01

  I think it does. I don't think that's a question. Just because you've made it difficult for them to export, it doesn't mean that technology won't have a depressing effect on prices. But it's a sectoral price shift. I think if it was something that was happening in every sphere of the economy and every good that was being produced, I think the story might have been different. But we've seen that kind of a shock over the last decades. In fact, your question on the two Phillips curve was grounded precisely on that, that a very broad range of goods had not found a new equilibrium price, given that China was producing it. So if you thought of the price before China as being up here and the price after China's entry for a washing machine being down here,

• 51:01Speaker 01

  it took quite a few years for that equilibrium price to globally drop and drop and drop. And I think we're fairly close to a situation where you have extracted a lot of that disinflationary pressure for a broad variety of goods already. And China's labor costs themselves, not least because their demography is changing, are beginning to slowly rise so that the equilibrium cost of producing goods is a little bit more settled. So if you look at goods inflation, it drops very quickly when China has a problem, which means that it's not necessarily a structural force from here on. Prices will remain low, but I don't think it's the kind of new disinflationary pressure

• 51:42Speaker 01

  that we saw in the 90s or even the collapse of the housing bubble created after the GFC. Some of those sectoral stories, I think, will be dominant and they will take a toll on the counterparts in other economies, which they already have. But it's not the broad-based deflation that was a shock to the global economy, whether benign or malign.

• 52:03Demetri Kofinas?

  So one more point of pushback, though, I'm not even convinced by this question, but I'm just going to raise it because some people are going to ask about it. So China maintains an onshore and offshore renminbi. You know, the impossible trainee suggests that with capital controls in place, China could, in theory, inflate domestically while deflating export prices through currency management. How much room does Beijing have to do this? Or it does not really matter because to your larger point, there are political forces at work. Because it seems to me that besides the demographics being an underlying structural force, from a policy standpoint, you're also making a statement about what you you think Beijing is intending to want to accomplish. So that therefore, the fact that they have the ability technically or theoretically to do this isn't really relevant.

• 52:47Speaker 01

  I do tend to agree with you in your first reading of that particular question. I think you can always devise mechanisms in theory that could work. Practically speaking, I think that's incredibly hard to do. I think there have been many instances in which offshore investors have attacked offshore renminbi and then authorities have had to really aggressively raise the offshore costs of borrowing to try and prevent that. Thinking of that as a structural solution to separate the two worlds, I think is very difficult. I think if it was that successful, other countries would have tried it and succeeded. I don't think anyone has. You could make an argument that China is different because of their clout and the global economy. If this decided to do something, they might be able to just do something that others

• 53:32Speaker 01

  have not been able to do. But it seems very hard in the day of Bitcoin and digital currencies and the leakages that you've seen in export invoicing in China, that you're able to sustain two vastly different exchange rates and interest rate regimes and no one in China is able to find loopholes to get their money in or out. I think it sounds very difficult. Is it possible? Yeah, sure, in theory, but I think practicality is really make it. You could do it for a few months, but I think stretching it beyond that would make life very difficult for everyone involved in such a strategy.

• 54:05Demetri Kofinas?

  So I have a few more questions for you before we move to the second hour, Manoj. And one of those has to do with social security, which faces a very well documented funding cliff around 2033. By the way, it's also interesting, I don't know if you feel this way, but I do. It's interesting to look back on the discussions that I heard as a young person around the unsustainability of social security and some of these other unfunded liabilities, because at the time, these were presented as long-term problems, and they were, that, you know, if we were smart and proactive and responsible, we could get ahead of them. And I feel like so much of what we're experiencing today, and we're talking about even in this conversation, are the chickens that we were once talking

• 54:50Demetri Kofinas?

  about then, finally coming home to roost today. You know, that in other words, these aren't new concerns. They've just moved from the theoretical of the remote to the here and now. So I just thought I'd throw that out there because it's so often in the back of my mind during conversations like this, and I wonder if other people feel the same way. But in, in the book, you suggest that politicians will bail out social security rather than cut benefits of the elderly voting block that has traditionally been more easily mobilized. And of course, politicians respond to incentives, and that's a powerful incentive. What does that bailout look like? And what do you think it's going to ultimately cost in practice?

• 55:31Speaker 01

  Well, first, let me say, thank you really for bringing that question in that particular way up, because as you will clearly recognize, that is a problem that pertains to the horizon of thinking around demography as well. Right? People are really concerned and interested about demography. But the reason I think they tend to downgrade its impact is because they feel that's something that's going to happen in 10 years, 15 years, 20 years. We've got plenty of time to deal with that. But the manifestation that you discuss is the very thing that brings it to today. The fact that social security pressures are only going to get worse, because as you mentioned, the way the social security system works

• 56:14Speaker 01

  is that you collect payroll taxes, and that is the majority of the receipts. And you have to give social security benefits to a larger share of the population, while the share of workers in that population is becoming smaller. So you're getting smaller revenues, and you have to give larger receipts. And right now it's been funded through that reserve fund which runs out in twenty thirty three. Those population pressures are only going to get larger. And what's going to be more interesting is that elections are going to be determined by the way people view these particular challenges and solutions. And politicians who stand are going to find it incredibly hard to say before they are elected, well, bite the bullet, I'm sorry, this is what we need to do.

• 56:57Speaker 01

  Those kind of solutions are usually implemented only after a crisis. In a slow burn, if you will, which probably is what we're seeing right now. I don't think any politician gets elected by going up to the population and saying, I'm going to get elected and I'm going to cut the money that you receive because this is what's needed fifteen years or twenty years down the line. It just doesn't happen. And I think the solution that most political parties will find when they stand for election is to probably not mention it at all. Because both sides of that political divide have a inclination to not discuss solutions to problems that they both know they cannot solve. And when it comes to that impending problem, let's say we are on the eve of a

• 57:41Speaker 01

  fiscal cliff for the social security system. And whoever's in charge, whether you're left leaning or right leaning, has to solve it. The chances that they really let it fall off the cliff are high only if there has been a preceding panic in the bond market that says, if you bail it out, I will raise interest rates as a risk premium on you by tens of basis points, hundreds of basis points, and that's a crisis. If you don't have a crisis and you're approaching that cliff, I think chances are that you create an emergency solution for the next four years. Or you have a path that reduces that spending over a period of time.

• 58:22Speaker 01

  There have been periods in which governments have come up and slowly reduced those obligations. For example, in the pension system, we define, we move from defined benefits to a defined contribution. That was a watering down of obligations. Slowly over time that will happen, but I think letting it collapse as a fiscal cliff is difficult. The solution you find will be equally slow. You may be able to water down some of those obligations and therefore create a smaller increase in interest rates, but you will raise debt. And if you don't raise debt, what the implications on the private sector will be also interesting. So I'm not inclined to save much because I know I'm going to get a social security transfer in the future.

• 59:05Speaker 01

  If I don't get the social security transfer in the future, maybe I raise my savings, maybe I work a little bit longer. Those could be offsets, but our point is all of those are solutions. We don't think people will work less or they won't save more if the government doesn't bail them out. But you have to get to a point where the government has the political capital to say, no, we are going to let this thing expire and you are going to have to take care of it and still get reelected. That's the tricky part.

• 59:32Demetri Kofinas?

  Great. So to your point, we've already seen evidence of bond market stress in the UK under Liz Truss in two thousand twenty two. We've seen a significant repricing in Japanese bond yields. In fact, I think we're at roughly thirty year highs. I think where Japanese bond yields are today on the ten year, which last I checked was something like two point seven three or two point seven five are roughly where they were in nineteen ninety seven. And there's ongoing stress of the bond market for a French government debt that could produce another sovereign debt crisis in Europe's largest economy. Are these early signals of the regime change that you've been predicting?

• 1:00:09Speaker 01

  I think the answer is an unambiguous yes, along with the US debt story, which we've already been discussing. The three examples that you use are unimaginable a decade ago, unimaginable. This is the kind of stuff that emerging markets get penalized for almost all the time. If you show an unfunded increase in public spending in emerging markets, the currency takes a beating. That raises the inflation profile. Central banks are forced to defend the currency and that forces the government back into its pen or back into a more conservative position. In the past, the advanced economies have never ever had to deal with such problems.

• 1:00:50Speaker 01

  Where the market says, no, you can't raise fiscal spending in an unfunded unsustainable way while the economy's productivity profile doesn't rise. I think it's a clear signal, even though many of those situations, we've been able to get bond deals under control. For example, in the trust administration, the Bank of England stepped in and did a one-time QE. We've had all kinds now. This is a one-time QE for financial stability, which goes to our earlier discussion about what central banks can and cannot do in a highly indebted economy. I think it's a clear signal that markets are saying, we have reached a point where the future of debt and the current debt to GDP stock is so high that without lower interest

• 1:01:33Speaker 01

  rates and lower borrowing costs, you can't sustain it and we won't allow unfunded debt to really be forced down our throats. I think that's an entirely different world that governments are living in now.

• 1:01:46Demetri Kofinas?

  And I didn't even mention the fact that 30-year Treasury yields are now at levels that we haven't seen since before the great financial crisis. So again, to your point, there may already be signs of your thesis playing out here in the United States as well. I'm going to move us to the second hour, Manoj, and I'd like to start that part of the conversation with a discussion about the housing market, which we spoke a little bit about, but which I'd like to dig into in more detail as it pertains to mortgage rates, investment in new housing construction, intergenerational wealth transfer, and whether or not this may actually become a hot-button political issue, as well as a lever on which

• 1:02:28Demetri Kofinas?

  governments can pull to make up shortfalls in their revenues through things like land taxes or floor space taxes, which you write about in the book. We're also going to have time to discuss the effect AI could have on the labor market, ways in which it could both mitigate and exacerbate some of the underlying structural forces. That we've described so far and that you go into much more detail about in the book, as well as implications for central banks, if and when we enter into a regime of fiscal dominance, and what this means for central bank independence, and if and when we enter into a regime of fiscal dominance and what this means for central bank independence, implications for investors, and much more. For anyone new to the program, Hidden Forces

• 1:03:11Demetri Kofinas?

  is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Manoj, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Manoj, stick around. We're going to move the second hour of our conversation onto the premium feed.

• 1:03:47Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.