The Path Through Financial Repression | Charles Calomiris

Episode 419 https://hiddenforces.io/podcasts/the-path-through-financial-repression-charles-calomiris is the fifth episode in the Hundred Year Pivot podcast series. In it, Demetri Kofinas and Grant Williams speak with fmr. Chief Economist for the Office of the Comptroller of the Currency, Dr. Charles Calomiris about America's economic emergency and what our response to it should be once conditions push the country into a full-blown political crisis at some point over the next few years. In this incredibly timely conversation, Charles Calomiris explains what the recent moves in gold, bitcoin, and long-term bond yields suggest about where we are on the path toward financial repression as we explore the implications of this trajectory for investors, businesses, and everyday depositors who will be conscripted in the battle to fight the deficit as the nation moves from spending like a banana republic to inflating like one. We end the episode with a candid conversation about the sources of both America's decline and the country's potential for renewal once the reality of the current crisis becomes impossible to ignore. 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 Joining 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. 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 05/22/2025

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. What you're about to hear is the fifth episode in a podcast series hosted by me and my co-host Grant Williams, titled "The Hundred Year Pivot." In it, we speak with some of the smartest and most plugged in people we know to help position ourselves, our organizations, our families, and our portfolios for the once-in-a-century economic, political, and geopolitical reordering that we believe is currently underway.

• 0:44Demetri Kofinas?

  In today's conversation, Grant and I speak with financial policy expert, author, and former chief economist for the Office of the Comptroller of the Currency, Dr. Charles Calomiris, about the sources of America's economic emergency and what our response can and should be to it once conditions push the country into a full-blown political crisis at some point over the next few years. In this incredibly timely conversation, we examine what new all-time highs in gold and Bitcoin, along with rising long-term Treasury yields, suggest about where we are on the path toward financial repression and its implications for investors, businesses, and everyday depositors in the country's banking system, which will be conscripted in the battle

• 1:29Demetri Kofinas?

  to fight the deficit as we go from spending like a banana republic to inflating like one. We end the episode with a candid conversation about the sources of both America's decline and the country's potential for renewal, once the reality of the current crisis becomes impossible to ignore. The episodes in this series are published a week ahead of time on both the Hidden Forces and Grant Williams podcast subscriber-only feeds. If you want early access to these conversations, go to hiddenforces.io/subscribe and join our premium feed so you can listen to this episode and other subscriber-only content on your mobile device using your favorite podcast app. Just like you're listening to this episode right now.

• 2:13Demetri Kofinas?

  If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q and A calls with guests, access to special research and analysis, in-person events and dinners, 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. And with that, please enjoy this incredibly timely conversation about what is perhaps the most defining issue of our time with our guest, Dr. Charles Calomiris.

• 2:54Speaker 01

  Welcome, everybody, to another edition of The Hundred Year Pivot. Joining me as always for these shows is the great and good Dimitri Kofinas. Hi, my friend. How are you?

• 3:04Demetri Kofinas?

  I am very good. How are you, Grant?

• 3:08Speaker 01

  Yeah, pretty good, pretty good. I'm back in London and running around like a lunatic, but dropping everything for this conversation, which I've been looking forward to since we set this up. And it's, I mean, the timing could not have been any better.

• 3:20Demetri Kofinas?

  I mean, we were just saying that. This feels like the perfect timing for this guest and this conversation.

• 3:26Speaker 01

  Yeah, absolutely. So tell everybody who we're about to chat with and the connection and how Charles has ended up on the show with us today.

• 3:33Demetri Kofinas?

  So Charles Calomiris was on the Hidden Forces podcast, maybe, maybe three years ago. I can't quite remember.

• 3:39Speaker 01

  A while ago. Yeah, yeah, yeah.

• 3:41Demetri Kofinas?

  Long time ago. He was, among other things, he was the chief economist at the OCC, of the Office of the Controller of the Currency. And he's written on the subject of finance and the economy for decades. And in fact, if I'm not mistaken, he was also the professor of our mutual friend, Mike Green, probably during his master's program or something like that. He taught at Columbia, then he was at the University of Austin. I think he's now back at Columbia. He'll have to update us on that. But we had this fantastic conversation several years ago after he had published a paper titled Fiscal Dominance and the Return of Zero Interest Rate Bank Reserve Requirements. So this, I'm looking at the paper now. This is 2020. Three, which was must have been when we actually did the episode. So maybe two years ago,

• 4:23Demetri Kofinas?

  one and a half years ago. And it was a fascinating paper because what Calomiris basically suggested was that number one fiscal dominance was inevitable. And we'll get into what fiscal dominance is and how he defines it because it's a term that's been thrown around now for many years. But essentially that the way the government would achieve a state of fiscal dominance would not be by simply cutting checks and getting the central bank to pay for it by printing money and therefore generating inflation. But that the government would need to expand the inflationary tax base by going beyond simply devaluing the non-interest bearing cash stored under your mattress, which most people don't have much of anyway.

• 5:08Demetri Kofinas?

  And commandeering bank reserves themselves by both ending the practice of paying interest on reserves. And more importantly, mandating banks to hold a larger fraction of their deposit liabilities as zero interest reserves. And this would in theory allow the government to expand the money supply without generating as much inflation as it would were it to rely solely on the inflationary, again, quote, inflationary tax base of hard money in circulation, i.e. cash under the mattress. And I was telling you that I re-listened to some of that two hour long episode as I was headed into this one and went back through my notes and it felt like so much of what Charles talked about then is stuff that we are experiencing now.

• 5:54Demetri Kofinas?

  One of which is the upward move in bond yields and the potential for concerns about the sustainability of government deficits to become a self fulfilling prophecy. And the question is, for me at least, at what point does that actually happen? And we move into the next phase of fiscal dominance? And how far along are we on that path?

• 6:18Speaker 01

  Yeah, well, I mean, it's such a crucial question and we're, as you say, we're living this every day now. So I think I think the most sensible thing to do is actually ask Charles, what do you reckon?

• 6:27Demetri Kofinas?

  I think I'm very excited to do that. How are you doing Professor Calomiris?

• 6:32Speaker 02

  I'm doing pretty well. I'm, you know, scrambling here because I have to do some housekeeping today because my wife's arriving and I don't want to, to be as dusty as it is when she arrives. So that's, that's top of my chart today, activities that need to be engaged in.

• 6:54Demetri Kofinas?

  I can relate to that.

• 6:55Speaker 01

  Yeah, me too.

• 6:56Speaker 02

  And, and maybe making me a little edgy.

• 7:01Demetri Kofinas?

  Well, hopefully we can try to take the edge off with a very simple conversation about fiscal dominance and the future of fintech.

• 7:08Speaker 02

  Well, you notice what's going on in the bond market. It looks like maybe some, and Moody's finally woke up from their slumbers.

• 7:16Demetri Kofinas?

  I'm pretty sure I heard about this from some guy from Columbia.

• 7:18Speaker 01

  Yeah, a few years ago.

• 7:19Speaker 02

  Yeah, well, it wasn't the first.

• 7:21Demetri Kofinas?

  So are you still at Columbia? We were just wondering about that.

• 7:24Speaker 02

  I have left Columbia. I'm now emeritus at Columbia.

• 7:30Speaker 02

  And I've gone on three different Don Quixote adventures over the past several years. So first I decided to make the world a better place by becoming a financial regulator. And I did that for a year in Washington as chief economist and senior deputy comptroller of the currency at the OCC, which is the main bank regulator. That was very interesting and I think we did some good, but, you know, anyway, things were very undone by politics and a lot of stupidity and they remain in a kind of frozen, bad state. By the way, all that stuff that's going on right now in stablecoin legislation is very pertinent to all that.

• 8:15Speaker 02

  Europe has its own problems with stablecoin. So, once the legislation is finalized, which should be happening within a week or so, it's another topic that is worth going into. Stablecoins is the reason I went to the OCC. It has the promise to become the most transformational aspect of our financial system. Since the establishment of the Vissel Bank in sixteen hundred. But it also is very contingent on the politicians not screwing it up. And that's never good news. So I'm working on that. So I I went there. Then I went to try my Don Quixote skills. At the University of Austin. As the dean of social science and history.

• 9:01Speaker 02

  In a university that was committed to. Open inquiry and freedom of speech. And all sorts of other good things. But they forgot to raise enough money to actually be committed to. High quality too. So after a year there, I realized. It was kind of not real. Whereas my wife calls it Potemkin University. Do you know what that's a reference to?

• 9:25Demetri Kofinas?

  Yes.

• 9:26Speaker 02

  The Soviet Union.

• 9:27Demetri Kofinas?

  Yeah.

• 9:27Speaker 02

  The old Potemkin villages.

• 9:28Demetri Kofinas?

  Yeah, exactly.

• 9:30Speaker 02

  But now there's good news there. A friend of mine is coming in as the new president. Maybe they're gonna get serious. So I that was my second Don Quixote adventure. And then. Just because I like to do things in threes. Robert Barrow from Harvard and I decided to try to create a new think tank. Dedicated to non partisan, deep thinking and economics. And we spent the last year trying to raise money and. Organize that and have a seminar series. And we've given up on that. So here I am. Looking for a job.

• 10:04Demetri Kofinas?

  Well, you know, we actually have an opening for an additional podcast, so if you're interested. Yeah.

• 10:10Speaker 02

  I don't know. I mean, I really don't think it's for me because. I'm currently doing a lot of blogging and mainly in music. And so my music career has been taking off. My career as an economist is completely in shambles. Because Don Quixote can't find. Anything that will stick. But my music career is doing great. So I don't know. But thank you for even mentioning.

• 10:34Demetri Kofinas?

  Well, the door is always open.

• 10:35Speaker 02

  Yeah, I'm probably going. There's a chance I might end up moving to the UK for a few years, actually.

• 10:40Demetri Kofinas?

  Oh, really?

• 10:41Speaker 02

  That's the current negotiation, yeah.

• 10:44Demetri Kofinas?

  How terrific.

• 10:44Speaker 02

  But we'll see. Yeah, I'm just an unemployed economist who finds that the world is a very unwelcoming place to people who can do arithmetic. This is why the Trump administration is doing so well.

• 10:56Demetri Kofinas?

  Well, that's an interesting word you chose because it's actually the third word or the fourth or the fifth word in the abstract to your paper Fiscal Dominance and the Return of Zero Interest Rate Bank Reserve Requirements, Charles, which you published through the Federal Reserve Bank of St. Louis back in 2023. It was what prompted our initial interview. And actually, let me read from that transcript, and I think this is a good way to start the conversation. You write, "As a matter of arithmetic, the trends of U.S. government debt and deficits will eventually result in an outrageously high government debt to GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it?"

• 11:36Demetri Kofinas?

  And then you proceed to explain how the article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that, quote, "dominate the central bank's intentions to keep inflation low." I feel like so much of what you wrote then, I was telling Grant, which you wrote in the future tense, has actually is something that we're living through now. I'd love for you to just walk us through, one, just kind of what was the premise of the paper? What did you write about? And how much of that have we begun to see, do you think? And how much of that has been validated by recent events in the bond market?

• 12:10Speaker 02

  That's a great question. And you know, what I really want to emphasize, which is directly responsive to your question, is the contingent nature of the way markets and governments interact as this whole thing evolves. And that's the essence of news. The essence of what news means is that on some days you wake up and nothing really important happens, and on other days, something does happen that's important. And the path that we're describing of the market... Coming to the view that we're in an unsustainable situation and then reacting to

• 12:51Speaker 02

  that with very high bond yields and ultimately what would be fiscal dominance and high inflation, pushing that, like helping that to happen faster as a result of market beliefs. That process that I described in the paper, the awakening of the bottom vigilantes, is a contingent process because if, let's say, the government did something, suppose Congress and the administration in the US did something today that made people feel like there was political appetite for actually fixing some important elements of this problem, well, that would have a huge immediate positive effect in the markets.

• 13:32Speaker 02

  If, on the other hand, they do things that are signals that of the incapacity or unwillingness to do those things, then those will have opposite signals. And so we're all groping, evolving toward kind of seeing, let me put it another way, given my Greek background. Here's a trivia question for you. How did the Aegean Sea get named?

• 14:00Demetri Kofinas?

  I'm embarrassed to say I don't know or I don't remember.

• 14:03Speaker 01

  Come on, Dimitri, if one of us is gonna answer that, it should be you.

• 14:06Demetri Kofinas?

  I know, I know. Yeah, no, I don't, I don't remember. I feel like I learned this, but I don't remember.

• 14:12Speaker 02

  Theseus's father was King Aegeus, and King Aegeus was standing on a cliff, waiting for his son's return.

• 14:20Demetri Kofinas?

  Right, when he threw himself over the rocks.

• 14:22Speaker 02

  Where he was dealing with the Minotaur. And he kept straining his eyes, you know, looking at the horizon, and he knew that if he saw black sails, that meant his son died. Of course, he didn't think through the possibility that the white sails would have been destroyed, so they'd have to use the black sails. So he threw himself when he saw the, finally figured out definitely those were the black sails. And so imagine, that's what the market's doing. They're looking out there to see what's coming over that horizon. And when you first see those black sails, you kind of say, those sails look awfully dark, but, you know, you're still waiting, oh, yep, I'm getting a clearer and clearer image. And then finally, you just come to the conclusion that the sails are black.

• 15:06Speaker 02

  And that's kind of the way markets are learning about government intentions right now. There's still time, if the will is there, for the government to avert the crisis. In fact, I would even say to you, it's not, compared to what Alexander Hamilton did in 1790 and 1791, you might even say it's not even a very big lift. However, it appears to be beyond our Congress's and our president's political ability or willingness to do. It would require several simultaneous adjustments to Social Security and Medicare. But those are things that the government doesn't even want to talk about.

• 15:46Speaker 02

  And by the way, it looks like we're going in the other direction, removing taxes on Social Security. So what I conclude from all this is that swing state voters that are pivotal, sort of incremental voters in tilting the elections one way or the other, are older people who are very myopic and selfish. And it's just not really politically desirable for either party or for Congress or the administration to even discuss this problem, the arithmetic problem. And so when you have this kind of dysfunction in your polity, that's how you get these kinds of train wrecks.

• 16:29Speaker 02

  Just to give you another illusion, do you remember the movie called A Fish Called Wanda?

• 16:33Speaker 01

  Sure, yeah, absolutely.

• 16:35Speaker 02

  And there's a wonderful scene that I remember from that movie where somebody is standing in a concrete, liquid concrete path, waiting for this bulldozer to come over them. It's moving at a very slow pace and somehow they're not able to get out of the way of the bulldozer. And that's a very frustrating feeling. That's kind of where we are right now. It's not that the bulldozer's moving quickly. We probably have, I would say, still maybe two or three years before we hit this horrible moment. But what's so discouraging is, unlike historically, where as a historian of American political

• 17:17Speaker 02

  history and financial history, I can tell you that one of the hallmarks of the US and many other countries, but what made it a kind of successful democracy, was its ability to react to information, to avoid catastrophes, and at times of extreme fiscal stress, to then, after the extreme fiscal stress had occurred, to fix the problem, to go back in the other direction. And so when you see how dysfunctional we are right now, to see arithmetic staring at us and to simply do nothing, over and over and over again, every day that we do nothing,

• 17:59Speaker 02

  and especially when we start passing bills that show that... So we now have this sort of critical moment, right, where all of Congress is coming together, the Republican Party is coming together, it's making big decisions. That doesn't happen every day. A lot of days you wake up and there's no news. Today, there's news. Because today, you're seeing choices being made that are very, very illuminating about the political reality of what the choosers are going to do. That's why the bond market's reacting now. That's why Moody's is reacting now. It isn't a coincidence.

• 18:44Speaker 02

  This is a moment of choice. And that's why the markets are starting to wake up, because this is a moment where we're starting to learn some things. And what we're learning is... That we know we already have 100 trillion present value of contingent debt in Medicare and Social Security. We know that defense spending is going to go up. We know that we've increased Medicaid. And despite some of the conservatives wanting to bring it back to a lower level of spending, the political will isn't there to do it. So these are the big items. Medicaid's not as big as defense, which is not as big as Social Security,

• 19:25Speaker 02

  which is not as big as Medicare in terms of the size of the challenges. And what did we do instead? We created this Doge distraction. Look at that as a political choice. That, why did we create this Doge distraction? It was a brilliant thing for the administration to do. Because it allowed them to grab the label of fiscal conservative. When in fact, it was shares moving on the deck of the Titanic. You know, if Doge had gotten everything it wanted, it would have probably produced something like 200 or 250,

• 20:08Speaker 02

  maybe 300 billion in savings a year. When, to even have a chance of succeeding, the number has to be more like 1.5 trillion. So, and even that's probably not enough anymore. Every year it gets worse. And, you know, I was talking to my wife about this. And I said, you know, I'm just so upset about what's going on. And, you know, I don't want to blame her or, you know, or out her. But she's saying, well, you know, old people, you know, they have their needs too. And I'm thinking, yeah, but they have children and grandchildren. And every year it's delayed. What you're basically saying is, yes, I realize there won't be enough for you, but that's too bad. And I think it's despicable.

• 20:53Speaker 02

  We live in a democracy. We're only as good as the people. And the people, especially the old people, are very much behaving in a selfish way. You could say, well, they're not conscious of how destructive their behavior is. I don't buy it. I think they're quite conscious of it. So there's a, you could call it a moral degradation of our society. A lack of willingness to do something for your country and be willing to make some sacrifices. You know, my taxes should be higher, not because I think it's a good idea to increase taxes. I don't. It will reduce growth. It's a bad idea. I wish we didn't have to do it.

• 21:35Speaker 02

  But it's part of the solution. It's part of the obvious political compromise that's necessary. Benefits have to be cut. Retirement ages have to be extended. Inflation indexation of benefits has to be made more realistic. And progressive taxation of benefits in social security and Medicare have to be increased. And by doing all of those things together, you can solve the problem in a way that doesn't cripple the system and destroy anyone. But the problem is that nobody's even talking about this. The only candidate who was talking about it was Nikki Haley, and you see how far that got her.

• 22:14Demetri Kofinas?

  I mean, so much of what you said resonated with me, Charles, and I know it resonated with Grant, and I know it's going to resonate with the audience. I have a lot of questions, but I don't want to be selfish here. So Grant, I asked the first question. Why don't you jump in with?

• 22:27Speaker 01

  Thank you. Charles, fascinating stuff, and thanks again for doing this. Couple of things there that, as you went through there, they kept ringing little bells in the back of my head. The first one is the inconvenience of arithmetic as a problem. Because if you're facing a problem that is defined by arithmetic, it's not really a problem. There's only one solution because arithmetic generally tends to be pretty definitive. And you talked about the bond vigilantes waking up there. And of course, people have been searching for them for a long time. And we had this ever since really the TARP and post-GFC, where people were worried about the bond market vigilantes. But my contention has been all along that the bond vigilantes, they're not a not-for-profit organization. I mean, these are the, these are the most profit-driven.

• 23:13Speaker 01

  People on the face of the planet. So all the time that they realized being at the government's back, no matter what the numbers were, was going to make them more money. If they're going to drive rates negative, we're going to buy all the bonds we can and we're going to go that way. Now, things are slightly different because they realize that this arithmetic is becoming a problem and the government are running out of options. So I'm curious as to your thoughts on that, about the fact that the bond vigilantes have been there all the time. It just wasn't in their interest to hold the government's feet to the fire. And also, the fact that they have now realized that, okay, now this is the point where the arithmetic matters, so we can push them in the other direction. You've gone from symbiosis between the two to a direct confrontation, and

• 23:57Speaker 01

  it feels to me as though, that for me, anyway, is the big tipping point. I'd be curious as to your thoughts on that.

• 24:03Speaker 02

  I think your question's great. I'm going to come at it slightly obliquely. I think that one of the things that we in financial economics love to talk about, which most people regard as a very second order or third order kind of topic, is what we call agency problems. And I want to suggest to you that a major answer to your question has to do with agency problems in financial services. Here's what I mean. I think that if the bond vigilantes were only investing

• 24:44Speaker 02

  their own money, they would have awakened a long time ago. It's the agency problem which leads you to have, through your own commissions and your own management fees, potentially shorter time horizons, that allow you to collude or cooperate, whatever word you want to use with

• 25:09Speaker 02

  Forecast, by the way, all forecasters try to minimize their variation from what the Federal Reserve says. Forecasting is not an honest business, macro forecasting. There's a lot of bias that's predictable in Federal Reserve forecasting. It's very political, by the way. And yet, what you see is that nobody seems to deviate very much from the Fed. This is a big problem. And similarly, the bond vigilantes seem very interested in being part of the herd. And the herd, I think, is dominated by short-term focus. I think it's a powerful explanation for understanding why things are moving so slowly in asset managers waking up to these risks.

• 25:53Speaker 02

  Now, there's another influence, and I can't really tell you which one is the more important. The other influence is that bond markets are largely dumb, for good reason. So, notice that the sharpest MBAs I trained over the years, they were going to be stock market analysts, not bond market analysts, to be honest. Bond markets, that senior claims, they're not as exciting, right? And there's another element, which is, if you look at long-term bondholders, like insurance companies, they're often inherently hedged. So hedgers aren't smart. They don't need to be. They just need to buy long-term bonds at whatever the price is

• 26:37Speaker 02

  and can behave very passively because they're hedgers. So one of the things I've learned from talking to many people in the bond market over the last decade is that the hedging demand for long-term bonds has been very high in recent years. So those are my explanations, Grant. It's a combination of some agency problems. And the very large size of hedging demand in the bond market, it just means that there are a lot of people willing to buy bonds without worrying very much about this arithmetic problem. That's the best I can do.

• 27:12Speaker 01

  I think Dimitri and I are going to arm wrestle this. I'll just ask one follow up. No, please, please. I can see him making a whole bunch of notes there. You know, this idea about the decisions that can be made, and as you say, you know, there is still time. But it's very interesting, this idea. I have a friend, Marco Pappucci, who talks about this framework of constraints and preferences. And he says, you know, if you think about the preferences that politicians have, they're pretty straightforward. And there are times when they can make policy in line with their preferences. But you get to these moments where they are constrained by these constraints, and they have to face those. And it feels as though there are economic constraints here, but there are also political constraints. And unfortunately, one will trigger the other. If you cater to the economic constraints, you're probably going to have

• 27:56Speaker 01

  to do things that are politically incredibly impalatable, and you're going to end up getting voted out anyway. And the opposition will likely join the public in condemning your actions just to get in power. And if you trigger the political side of things, and you do the things that you think are expedient for your base and will result in you maintaining a grip on power, you're going to trigger the economic constraint. So as I kind of look at these two, these two kind of pressures weighing on everything here, I struggle to see a way in which you can move within that constraint that will, as you say, ameliorate the problem in time. And so I'm curious, you're the first person of any standing that I've heard say there is time. And so I'm fascinated to see.

• 28:35Speaker 02

  Well, three years.

• 28:37Speaker 01

  Right.

• 28:37Speaker 02

  I'm thinking of it as three years or so. So, you know, with these things, everything's a little contingent. Let me give you an example. Covid was a helpful shock, on the one hand. On the one hand, it wasn't, which is it caused a huge buildup of debt. But on the other hand, it created an unanticipated inflation shock that eroded the market value of government debt by, you know, more than, I think, 12% or so. And that actually meant that the constraint, this sustainability constraint, was ameliorated by a sort of downward adjustment of government debt.

• 29:19Speaker 01

  Yep.

• 29:19Speaker 02

  And market value by a huge percent. Right now, I think tariffs are likely to do something similar. So, you know, with, let's say, long-term bond rates upwards currently of yields of 5%. But that's embedded in that is an inflation expectation over that time horizon of probably something like 3.5%. But inflation isn't going to be 3.5%. The tariffs in the US are likely to make inflation just over the next year something like 6%. Beyond that, we don't know. There's reason to think that it might come back down after that. But my point is, that will also be a helpful shock in terms of

• 30:03Speaker 02

  causing an unanticipated, market-unanticipated reduction in the value of government bonds. And of course, if we have a really big shock from tariffs, if President Trump decides to impose very, very high tariffs, then the shock would be even bigger. So, as an economist, as you're looking at all these things, you kind of have to make your forecast very contingent. And I think we do have a couple of years of breathing space to resolve this.

• 30:31Speaker 02

  But like the fellow standing in the concrete in The Fish Called Wanda, I'm not sure that the two or three years is going to be very helpful. Because, and you see, the key point, Grant, in this, you pose this difference between the politics and the economics. But I want to emphasize, that's not always the case. Sometimes, the right thing to do in terms of overall economic policy, the things that will create a stable and productive, growing economic environment, those things are popular sometimes. But sometimes, they're not. And the key thing is, if the crucial constituencies that are important incremental voting blocs in important swing states

• 31:14Speaker 02

  that are having a lot of power in deciding the outcome of political deals. If those people have a vested interest in preserving this unsustainable status quo, call them old people who vote, and they do, then you're kind of stuck. It's not always the case, but it's a very inconvenient reality right now. And it's not just the US, I think. I think this is a problem. It's kind of like the shadow of the baby boom, right? That this is, this is a very important constituency, not just in the US, but in a lot of countries. And it's leading to a kind of global dysfunctional fiscal management problem.

• 31:57Speaker 02

  So I, I think it's demography to a large extent that's to blame. And by the way, birth reductions, we haven't even talked about that. But if, if population growth doesn't reverse, if we don't start getting growth in population, that's going to make the fiscal sustainability problem much worse. So we have our work cut out for us. We have to make politicians willing to be defeated in elections, willing to lose their jobs, as you said, that's not very likely. And then we have to convince all these young selfish people to start having more babies.

• 32:39Speaker 02

  So we've got old selfish people who want big benefits, young selfish people who don't want to have babies. And I think this is the beginning of a potentially a serious long-term inflation problem. And what, you know, when we're done talking about this, the, the next thing, of course, to talk about is how will it play out? How big will, will the inflation have to be? What are some of the imponderables, hard things to predict that are going to happen? So I have my own list of, you know, how bad will it be? What will be the, the?

• 33:19Speaker 02

  The chain of events that it will start to create. What have we learned from some past episodes about what that likely chain is? And, you know, I'm trying to think way ahead of where this is likely to go. Because I think that once this hits, things are going to start moving very quickly.

• 33:39Demetri Kofinas?

  Well, I've heard you say in the past, Dr. Calomiris, that if you're gonna spend like a banana republic, you are going to inflate like a banana republic.

• 33:49Speaker 02

  Yeah, you have to.

• 33:50Demetri Kofinas?

  It does feel like we've been spending like a banana republic in this country. And our politics seem to resemble more of what we would have expected to see in Latin America 20 years ago than, or 30 or 40 years ago than what we're accustomed to in the United States. What does inflating like a banana republic look like in this country? And paint that picture for us. Take us through your imagination.

• 34:10Speaker 02

  So first of all, let me just talk a little bit about the arithmetic that will help you understand that. There is this inflation is a form of taxation. And that form of taxation, the inflation tax, if it's something that you see coming, we call it the expected inflation tax. That's the most important part of it. So it's the recurring constant part of the inflation tax. And the inflation tax is the result of the product multiplication of the inflation tax rate, which is roughly speaking equal to the inflation rate, multiplied by the inflation tax base.

• 34:52Speaker 02

  The inflation tax base are government liabilities that don't bear interest. Because if they bore interest, they would compensate you for the inflation. Now, traditionally for banana republics, that inflation tax base is zero interest reserves at the central bank plus currency.

• 35:14Speaker 02

  Now, currently in the US, that inflation tax base is just currency because we have no required reserves at the central bank and all excess reserves, all the reserves are bearing market interest. If we keep with that, if we only keep an inflation tax base equal to the roughly $2.5 trillion of currency outstanding, I think that's about right, I haven't checked recently, we would have to have a 40% rate of inflation roughly to pay the real bills, the real costs of our deficits.

• 35:56Speaker 02

  So the inadequacy of what I'll call direct taxation, income taxation, sales taxes, those kinds of things, relative to our expenditures, can be paid by this other kind of taxation called inflation taxation, and that's the arithmetic for helping you figure out how big would the inflation be, because you know how big the expenditure gap is, and so then the question is, well, what's the inflation tax rate have to be if when multiplied by the inflation tax base, you get a total that fills the gap? If the inflation tax base is just outstanding currency, which is what it is in the US today, the rate of inflation would have to be around 40%.

• 36:40Speaker 02

  And the good news, bad news is, that would probably allow us to continue to pay Medicare and Social Security and grow defense with an inflation rate of about 40% annually. I don't think that would be very popular. And so the most obvious thing, I think, almost immediately that will happen if the Congress doesn't solve the problem in the next couple of years, is that when the bond vigilantes start coming out, like you saw that we had a disappointing Treasury auction yesterday. When we have a really bad series of disappointing Treasury auctions and people in the market start to see, because I already talked about this kind of follow the trend mentality, once

• 37:25Speaker 02

  they get that follow the trend mentality, so that they can no longer hide behind the crowd and they have to start, you know, getting more aggressive, then very quickly, bond yields are going to start going up. The Federal Reserve is going to see this problem and it's going to have to come in and fill the gap. That's when fiscal dominance becomes a reality and it dominates monetary policy. And when it does that, it's going to see immediately that it's going to have to restore reserve requirements and pay zero interest on bank reserves. And let's

• 38:04Speaker 02

  just to be concrete, that means require that banks keep, say, 20% of their deposits as zero interest reserves at the Fed. That will then, the inflation tax then will be in large part a tax on the banking system. If they did that, they could probably get the inflation rate to fall to something like 10, 12%.

• 38:26Speaker 01

  From 40.

• 38:28Speaker 02

  Right. And so that will be something that is clear. The Federal Reserve Board has the power to set reserve requirements and to set the interest on reserves without any congressional approval, and they will do that because Congress and the President will tell them to do that because that's the obvious immediate thing to do. Now, the tricky thing is that still 10, 12% inflation is not going to be popular. So now you have to figure out, well, does this, is this the wake-up call that leads to fiscal reform or not? I don't know the answer to that. And then furthermore, a question is, if it doesn't lead to fiscal reform and you trash the banking system, what happens next? The

• 39:11Speaker 02

  obvious answer is the shadow banking system grows. So the bank tax base shrinks. And then that means the inflation has to rise because total deposits shrink and therefore reserves on deposit shrinks. And then you have to start thinking, well, how does Congress react to that? Congress could decide to start taxing shadow banks, extending reserve requirements to non-bank entities. That was imagined by the way 55 years ago by Eugene Fama in an article. So we, as economists, we realize that it's not just banks that could be required to hold zero interest federal money. So these are the imponderables. How do we adjust?

• 39:59Speaker 02

  We could say, well, you know, obviously, if Congress doesn't have the political will, we'll probably do what banana republics do and tax the banking system. But now we have a lot of technological alternatives. We live in a modern economy with a lot of fintech. And then the question is, well, will that tax base shrink? And if it does, then you're talking about inflation going higher than that 10% or 12%. And eventually, this can't work. So the inflation tax base is not coming from God. It's coming from the financial system. And if the financial system innovates and Congress doesn't pivot in another direction, then you're back to very, very high rates of inflation.

• 40:42Speaker 02

  So I guess this is what I do at night, is I think through scenarios that have this interplay between politics and economics. So the economics tells you, here's what inflation tax is, here's what the arithmetic says, here's how high the inflation will have to be. Then the politics says, well, how do we react to that? How does the Fed react? How does Congress react? Then how do the markets react to that? More goes to fintech. Well, then how does the government react to that? So that's what I mean by a kind of sequence of imponderable scenarios. You know, so we soon get to a point where the ability to forecast the inflation rate or how the financial system will evolve becomes very difficult.

• 41:27Speaker 02

  We know that the initial shock will be to trash the banking system, to drive up inflation. But then beyond that, it's a little bit tricky.

• 41:35Demetri Kofinas?

  So I'm very excited to pull on this thread around fintech and financial innovation, especially considering the fact that we have stablecoin legislation, the Genius Act, which I think began as the Stable Genius Act, which speaks to the banana republic that we live in today.

• 41:50Speaker 02

  Yeah, it started off as a really good act. The bills that came out of both houses of Congress were very encouraging. But there's a lot of dealing going on right now. And at the end of the day, I don't know what we're going to end up with. It might be worse than no bill at all.

• 42:05Demetri Kofinas?

  Yeah, so I'm very much looking forward to pulling on that thread. However, I just want to ask one question or open one door here, which I feel like has been... We've been circling around it. I'm sure many members of the audience are wondering about it. And that has to do with the dollar, because when we're talking about the sustainability of US government deficits, we're talking about the value of the dollar, because the United States has been running consistent capital account surpluses for many years as a function of its trade deficit and its current account deficit. And this administration, the president and his treasury secretary, seem to have been proceeding along with an assumption that they would be able to pass tax cuts and not necessarily address some

• 42:47Demetri Kofinas?

  of the spending issues by the US government by relying on tariffs as a revenue tool. And that presumes that the dollar would remain stable. And I'm just curious, how prudent are those assumptions?

• 43:01Speaker 02

  Oh, no. Tariffs are not, are just like, again, it's like Doge. I think you have to understand this as a political device, that what the Trump administration is doing with its discussion of revenues from tariffs is similar to what it's doing with its discussion of Doge. That is, Doge is a distraction. It's not quantitatively important to solve these fiscal problems, but it makes you look good. And I think the same is true of tariffs. So let's look at where we are with tariffs. The most likely outcome under the current, and you know it changes pretty quickly, but under the current administration position,

• 43:41Speaker 02

  my best estimate is that the average tariff rate will be about 15%. That's a very big shock to the economy, by the way. I'll tell you, my back of the envelope calculation is that the hit to GDP as a result of the tariff will be about 3.5% negative, which puts us into a recession, I would say, by the end of this calendar year. The inflation consequence will be about, as I said, about 6% inflation for now, for the next year. So those are not very helpful economic consequences for taxes generally, right? So if the tariff causes GDP to shrink by 3.5%, income tax goes down, sales tax goes down, a lot of things go down.

• 44:27Speaker 02

  But even if you took the imports, which are about, I think, eleven percent of GDP right now, and you said you're gonna get fifteen percent of eleven percent of GDP, that's not a very large number. And from the actual so far tariffs collected, maybe you're talking about something like a hundred billion dollars a year additional. Again, this is not a lot of money. So I think you really have to understand that people are gripped by psychological forces. The most obvious one, the most powerful theory in all of social science is the theory of cognitive dissonance, which simply says, people like

• 45:07Speaker 02

  to believe and will tend to believe what is easy and pleasant for them to believe. Donald Trump is a really good PR guy, and he makes people feel good, and people want to believe what he's saying. So when he says, "Dojos and tariffs are gonna fix our fiscal problem, just, you know, like the early republic will rely on the Department of External Revenue," and he makes up these great sounding things, I don't know why people don't probe more deeply and ask some questions and pull out their calculator and see whether any of this adds up. I don't know why they don't, but part of the answer is cognitive dissonance.

• 45:50Speaker 02

  They like going to his rallies. They like cheering this sort of thing. And so, of course, this is nonsense. And by the way, and I'll just reveal, I'm a Republican. By the way, I voted for Donald Trump. Why? Because my choices were so horrible. I don't blame people for voting for Trump. I'm a Trump supporter. But of course, with friends like me, he doesn't need any enemies, right?

• 46:19Speaker 02

  But so, yeah, I mean, we're kind of stuck, right? The Democrat Party is even less popular than the Republican Party, and for good reason. So that's, you know, we're really in a tough situation. People aren't being very thoughtful. Of course tariffs aren't going to solve the fiscal problem.

• 46:39Demetri Kofinas?

  So the, the other argument for why tariffs are a good thing, if you don't buy the revenue generating argument, is that they will do the opposite. They will reduce the value of the dollar and make America's export sector more competitive. And I'm just curious, how much does that argument rely on an American economy that looks very different from the one that exists today?

• 47:00Speaker 02

  That argument's just fallacious. It doesn't rely on any logic. Okay, so let, let me just remind you of a couple. Again, this is a, so Abba Lerner got a theorem named after him for just doing arithmetic. It's called the Lerner Symmetry Theorem. The Lerner Symmetry Theorem, we teach to every undergraduate in international trade. What the Lerner Symmetry Theorem says is, if you tax imports through tariffs, that effectively taxes exports. Because, over some sufficiently long period of time horizon, imports and exports balance. Now, you might say, well, wait a minute, they're not balancing right now. We have a trade deficit.

• 47:44Speaker 02

  That's true. And so it is true that you could, by damaging the value of the dollar, you could make the trade deficit smaller. That, by the way, would be crazy, because it would force up interest rates in the US. You know, what Trump and his advisors have said recently, which is just like beyond belief, is maybe if we made US debt less desirable...

• 48:10Speaker 02

  We'd reduce the trade deficit.

• 48:13Demetri Kofinas?

  It's important also how that trade deficit would be reduced and how much heavy industry already exists to supplement imports.

• 48:20Speaker 02

  Exactly. So my point is, yes, it's true that by making the dollar less attractive as a reserve currency, you could reduce the trade deficit, but you wouldn't be increasing exports. So we have a very clear arithmetical and economic answer to the question. If we made the dollar less attractive, what effect would that have? And we use, let's say tariffs as part of the tool, but they're also talking about taxing foreign holdings of US treasuries. Don't forget. That's how crazy they are. And of course, that won't happen. Congress isn't that crazy. But to use tariffs or even this additional tool that they've been flirting

• 49:01Speaker 02

  with, yes, you will make the dollar less attractive and you will reduce the deficit. But you'll reduce the deficit by having imports fall by more than exports fall. Both will be falling. Tariffs cause exports to fall. So it's very important. These are not even difficult things for economists. These are like arithmetic things, theorems. They're the things that we teach undergrads. That's what's so strange. Like arithmetic is the first math we learn. I think I learned probably new multiplication by fourth grade, didn't

• 49:46Speaker 02

  I? And addition and subtraction, I think probably by third grade. So I'm trying to figure this out. Like, what is the level of education necessary for people to be able to understand some of this arithmetic? And, you know, some of it's a little more complicated.

• 50:06Speaker 02

  But as I said, you know, no, it's not complicated. It's not a question of whether tariffs will cause exports to go up or down. They will cause exports to go down. They may cause, especially if in the current administration's proposals, may cause imports to go down by more than exports go down. That's true. Is that a win for us? I'm having a hard time understanding how anyone could think it is. And I think we're looking at a situation, let me remind you like what the basis is for my calculations about why I'm looking at something like a three and a half percent decline in GDP. This is gonna happen pretty quickly. So Mario Cuccini wrote a very important article in the early 1990s.

• 50:50Speaker 02

  He's now a professor at Purdue, I think. Mario wrote an article showing that the Smoot-Hawley tariff of 1930 caused GDP to fall by about two percentage points, which was a very micro exercise. It was a very credible and good micro study. So I'm gonna use that as my benchmark. That was a tariff increase from average level of about 10% tariff to about 17%. So a seven percentage point increase. The current change is moving from about a two and a half percent tariff to about a 15% tariff. So that's about a 12 percentage point increase.

• 51:32Speaker 02

  But it's even worse than that because the former Smoot-Hawley was mainly tariffs on final goods. The current system, a significant portion of our imports are intermediate goods, which are used as part of very productive supply chain kind of operations. So putting a tariff, and of course, we have part of the, big part of the increased tariff over the 10% baseline, is aluminum and steel, to give you a sense of it. So that means that the tariff consequences for GDP and for inflation, per unit of percentage increase, will be greater. So I think it's actually a conservative guess to say it'll be about negative three and a half percent.

• 52:18Speaker 02

  And it's going to happen pretty quickly. And by the time the administration realizes that it'll be too late to correct in time for the midterm elections. So talk about further fiscal consequences. Now we have to factor in, we're going to have a divided government, most likely because the Republicans will lose control of the House probably. So I mean, I'm sorry, I'm just thinking out loud with you, but you're not going to get, even if you manage to damage the reserve currency status of the US, which they could do, they could do some damage. Yes, that'll just be counterproductive. It'll make interest rates go up all the more, leading to the fiscal problem hitting us even harder. And it'll

• 53:02Speaker 02

  cause exports to go down, not up.

• 53:05Speaker 01

  Yeah, Charles, I love the fact that you're thinking this through with us because thinking about the stuff on the fly, it just makes it that much more interesting to me because we don't come at it with preconceived ideas. And I think this idea of determined outcomes, we hear a lot of people talking and commenting about this has to be, this is the outcome we have to achieve here. The steps to achieve that outcome, slightly grayer in nature. And I'm reminded of that famous Upton Sinclair quote about it being difficult to help a man understand something if he's not understanding it. His salary depends upon that. And so I look at the constituents here and I look at the politicians, they agree that the arithmetic,

• 53:46Speaker 01

  to come back to your first point, is solid and it takes us down a very dark road. There seems to be some agreement on the fact that we need to find a way to cut entitlements. We need to do all these things. And then you get down to, as I say, the constituents. And for the politicians, it means somebody needs to make some guaranteed politically suicidal decisions.

• 54:11Speaker 01

  And or the electorate have to be the turkeys that vote for Christmas and and agree to take massive cuts in their benefits and extend the retirement age, et cetera, et cetera. And whichever way I come at this, I think about the the incentives and the outcomes aligning, and it seems very difficult to me that anything is going to be a choice that's made. This is going to, the car has to hit the wall for something to happen, because we can talk all we like about it. I mean, you could give them three years runway, you could give them five years runway. The answer is the car is going to hit the wall in three years or five years, or probably sooner.

• 54:49Speaker 02

  I agree. I agree with you. And in fact, I said so even in my 2023 article.

• 54:53Speaker 01

  Yeah.

• 54:54Speaker 02

  It was already apparent to me at that point, because we were already seen in the presidential election. We were seeing that almost no candidates in as of 2023 were raising this issue. So it was very telling, kind of, you know, the dog that didn't bark. It was very telling, even in 2023, what we weren't talking about. And as I said, Nikki Haley started to talk about it, and it was not helpful to her. Nobody wanted to hear about it. So, you know, the voters get what they deserve. I love to tell people, and I'll tell this to all of your viewers who are looking at this and tutting along with many

• 55:34Speaker 02

  others, look yourself in the mirror. Take a hard look, because you're the problem. That's the thing about a democracy. Are you having the tough conversations? Are you talking about the selfless things that you need to do? And I think, you know, that's, that's the hard thing. And I'm going to even go like, really flip it on you now and say, how much of this has to do with a kind of moral and spiritual degradation of our society? You know, we, we've had a slippage in the number of people who are expressing, especially young people, who are saying that they are are members of some religious organization.

• 56:19Speaker 02

  We're just seeing lots of evidence of. These problems and then the economic problems that are a manifestation, I would say of that, exist alongside a bunch of other problems, like young people saying that they feel lonely and lost. So, you know, let me remind you that the Greek word economia, on which economics is based, is actually a much broader philosophical term. In fact, you'll find it many times in the New Testament. Saint Paul uses it quite a bit, because it's really about stewardship. It's really about who we want to be as a society, what kind of guidance we want. And

• 57:00Speaker 02

  I guess you could probably tell, I am a seriously religious person, as well as an economist. I can do arithmetic and pray. And I think that, you know, and by the way, those are things you usually learn by kindergarten, right? So, I think we have a problem here. And the problem is that if we actually, if we actually saw our fiscal economic problem with a broader moral scope, and said, who do we want to be? How do we want to engage in a debate about our economic lives? You know, if we were able to rise to that, and

• 57:42Speaker 02

  make the debate more about what we're willing to give, I think that could be the beginning of fixing the problem. And it's going to require us not just to do political calculations, but to actually take stock in our own moral degradation, and our own spiritual vacuum as a society. And you don't usually hear economists talking like that, I know. But I'm going to tell you that I believe that that's the essence of the problem.

• 58:15Speaker 01

  I can see my words forming on Dimitri's lips, so I'm going to let him go with this.

• 58:19Demetri Kofinas?

  Just Grant, isn't it fascinating to hear Charles talk about this?

• 58:22Speaker 01

  Yeah, it really is. It really is.

• 58:24Demetri Kofinas?

  This is what propelled this entire series that Grant and I put together. We had a conversation together on his podcast, which we released to the public, and it got... Just an incredible response from his listeners and from my listeners, where we talked exactly about this, about the moral decline in America.

• 58:40Speaker 02

  I didn't know. I didn't know. I was not pandering to your...

• 58:44Demetri Kofinas?

  You're literally saying exactly what we talked about. It's remarkable. You said at the beginning of the interview, we didn't comment on it, and here you are again.

• 58:51Speaker 02

  And let me point out another, like, part of this. I don't know if you noticed, there's something called the, um, I forget if it's called the Global Human Flourishing Project, something like that. It was just, uh, two weeks ago, they just launched it. It's a joint effort of the, the Nature Journal, the top science journal in the world, and Gallup. And what they're doing is they're looking at, I think it's, they've made a huge investment in surveying people in 22 countries about their feelings of well-being, uh, their, their feelings of flourishing, and trying to understand and create a longitudinal database

• 59:35Speaker 02

  so that they can go back and track things over time to understand what are the things that make people happy and don't make them happy? What are their initial findings so far? Well, they're not surprises because polls have been finding these, surveys have been finding these. So first of all, people in the richest countries are not the ones who express the greatest feelings of happiness. That's a problematic thing. I mean, there's a lot of discussion of what that really means, but first of all, you might think that material well-being and happiness are the same. They're not. And then you might say, well, what are the correlates? What are the things that tend to make people happier?

• 1:00:18Speaker 02

  And they find that participating in religious activities is one of them.

• 1:00:24Speaker 02

  Being married as opposed to single is another one. And on and on. And so as we as economists, our job is not to figure out how to maximize the value of your checking account. Our job is to figure out how to maximize human flourishing. And so this is a really interesting global new initiative from the journal Nature with a whole group from around the world of academics of all disciplines, not just economists, working with Gallup to try to talk to people and find out what makes us tick and how we can get better. So I think this is really a great conversation for us. We should take these

• 1:01:05Speaker 02

  very narrowly defined fiscal issues and broaden the conversation because the solution in these democracies, and of course, the problem is the world's becoming more autocratic, not more democratic, but within our democracies, this is really our existential threat. Can we govern ourselves? I'll just stop the sentence there. Can we govern ourselves?

• 1:01:28Demetri Kofinas?

  So I, man, so many things to to talk about. I mean, you you mentioned earlier that the Greek word economia, ikos, you didn't mention this, but ikos means family. And it does feel like, at least in this country, if we want to extend the the umbrella term family to the nation, we have lost a sense of a common identity. And in so doing, we've lost a sense of the common good. And we've lost the ability to speak to the public interest. It seems like it's everybody for him or herself. It's a kind of rape and pillage capitalism in this country. It's become very extractive. And it feels very much like as we're busy kind of shuffling paper around in this country and sort of engaging in Ponzi economics

• 1:02:14Demetri Kofinas?

  while a country like China is actually building and investing in their economy. Granted, they have their flaws, but it they're really

• 1:02:21Speaker 02

  They have major flaws, yeah. I'm optimistic, yeah. So I'm optimistic. You know, I see all that you're saying, but I also want to point out some other things. Part of the MAGA movement's appeal in the United States is some idealism too about love of country. About wanting to appreciate veterans and police officers. And so it isn't all just selfishness. Donald Trump is not popular because he's preaching selfishness. Part of the reason he's popular is that that feeling of the gap, the spiritual gap that we're talking about,

• 1:03:06Speaker 02

  he's tapped into that by legitimizing a lot of some of his policy ideas through this appeal to something bigger than the individual. So that's a hopeful sign. I'm not telling you, you know, that it's the solution. And, you know, there's even been in the Trump administration, discussions more about religion, more about defending Christianity, some things that are really kind of interesting. So it's not as depressing in the sense that it isn't all about selfishness. But unfortunately, President Trump, in his policies,

• 1:03:48Speaker 02

  has not really translated that into individual responsibility for being a member of society who's going to stand up and be willing to sacrifice. So he hasn't gone there, I agree. But what's hopeful to me is that I think people do have a sense of yearning. You know, the fact that so many young people feel hopelessness, feel lost. They're living in this life that you and I didn't have to live with, which was all this online stuff and chatting and, you know, the video games. And these things are, you know, deeply kind of, you know, soul destroying kinds of things that are invading their lives

• 1:04:33Speaker 02

  and making them so unhappy. So I feel like we don't want to underestimate our ability as people because we're very adaptive, human beings are hugely adaptive, to diagnose a problem and maybe come to grips with it. I try to be optimistic about it. And there are some political leaders who we can see do this. So, you know, I teach a course on economic development. And one of the things that I do in that course is I talk to students about leaders who have found their moment, who have Been the right person at the right place to cause real lasting transformation in their societies.

• 1:05:16Speaker 02

  And it's not, you know, that doesn't fix everything forever, but one example is Enrique Cardoso in Brazil in the 1990s. He was a sociology professor, a socialist. Believe me, I know a lot of professors. It's pretty unlikely to think that a socialist sociology professor is going to do much good in the world. And yet he did, because he articulated two things that were the basis for the transformation of Brazil. They got rid of high inflation, they got rid of their autocracy, they got rid of things that seemed to be lasting positives. Despite the bumpy road they've been having the last decade. What did he say to people?

• 1:05:59Speaker 02

  What he said was, "Look, you guys, you Brazilians, you've lived long enough to know that a government who stands up and tells you that over my four years of my term, I'm going to fix poverty. You know they're lying. You know that they can't do it.

• 1:06:18Speaker 02

  You also know that the real fix to poverty is going to be a generational struggle. It's going to take a while. And what we really need to do is make two commitments. We need to make the commitment to invest in the distant future, which usually democratic governments aren't willing to do. And we need to, to make that investment credible, we also have to commit to fiscal responsibility. And so he said, "We need two things, a real long-term commitment to inclusion, to giving people a chance through education. And a real short-term commitment not to spend money on other things."

• 1:07:01Speaker 02

  Now, you might say, "That's a loser."

• 1:07:06Speaker 02

  But it wasn't in his case, because what he did was he went to people and told them. They already knew that that was the right answer. And it resonated with people. And that made him a transitional, huge transitional figure in his country. Because he correctly articulated at the right moment. What everyone knew was true, deep down. And then showed them what the path was to actually doing. Educational reform to create inclusion that really gave up opportunities. And fiscal discipline. And even though they've had a bumpy path since then. You'd have to look back and say. That was the message. That was the moment, that was the person.

• 1:07:52Speaker 02

  That came together. So. I could point to some other examples of this. They're fairly rare. But I don't think we want to lose hope. Because the crisis will itself create the opportunity. For leadership. So we have to try to think about what we can do as people individually. To be part of that conversation, to be part of that solution. Part of my effort is, I'm on this podcast. I know by the way that as an economist and a Republican, coming out and saying these things. About why the current congressional Republicans and the administration are so irresponsible. Is not going to help my career.

• 1:08:38Speaker 02

  I'm not trying to say I'm some selfless saint, okay, but I'm telling you, I know it's true. Trust me. However. I have to wake up and look myself in the mirror, right, so we all need to start thinking like that. And. Eventually, I agree with Grant, and I've been saying for a long time, we're not going to solve this before we hit the fiscal wall. But then what are we going to do and what lessons we take from it? And. What sacrifices we're willing to make is going to define. Whether we solve it, so I think we have to be optimistic and speak to the better angels. Within all of our brothers and sisters. To try to get to this solution, I know it sounds.

• 1:09:22Speaker 02

  May sound trite to talk that way, but there's no other way.

• 1:09:26Speaker 01

  Charles, fascinating. There's so much in there. And as Dimitri said, you know, this was one of the major impetus for us going down this road. It really was this idea of this moral vacuum and this this loss of some kind of galvanizing spirituality, whether you call it God or you call it energy, whatever it may be, that's clearly missing. And I'm fascinated in what you just said there. A couple of words came up a few times that a lot of people associate with a religious aspect of some kind, and that's leadership and sacrifice. And I think you're right, that the sacrifice has to come from the bottom up. We all have to look in the mirror, as you say, and make sacrifices. But unfortunately, until you see your leaders making those sacrifices, it's very difficult to galvanize

• 1:10:10Speaker 01

  people into getting that ground swell. And you know, when I think about Trump as president for these times, I can't help but feel as though, yes, he's talked about religion and he's kind of tried to bring that back into the discussion, which is great. And yes, he's an agent of change for a sclerotic system, which is also great. But I can't help thinking of him as perhaps the last guy who has to take this down. And I base that on the fact that there is a level of self-interest there and not sacrifice. And we've seen this in the one of the things that started this with Dimitri and I was the meme coin on the Evis inauguration, that that pocket lining exercise, the Qatari jet, the real estate deals, all

• 1:10:55Speaker 01

  this stuff, that is the antithesis of sacrifice. In fact, it's quite the opposite of that. It's self enrichment within the office that you're supposed to sacrifice and show leadership and all those kind of moralistic things that we like to think our leaders will represent. So I think, again, we all understand what we need. And there is an enormous spiritual, religious, whatever way you like to frame it, component to that. But I feel like the fact that the car has to hit the fiscal wall before it changes, it feels to me like, even though we all kind of can agree that there's something lacking, some substance lacking

• 1:11:34Speaker 01

  here in this moral vacuum, it's not until someone tears the whole thing down, that it gets rebuilt from a point of sacrifice and from a point of leadership. And I'd be curious to hear what you think about that.

• 1:11:47Speaker 02

  Well, no, Grant, I think, look, I mentioned Enrique Cardoso.

• 1:11:51Speaker 01

  Yeah.

• 1:11:52Speaker 02

  As a leadership figure. If it hadn't been for Brazilian hyperinflation, there wouldn't have been the opportunity for that leadership.

• 1:12:00Speaker 01

  Right, right.

• 1:12:01Speaker 02

  So, in fact, the book to read about this is Brazil in Transition, which was written by a bunch of people, including Lee Alston. And I recommend to you that you get Lee Alston to come in and talk to you about leadership. Because that book, believe it or not, written by economists and political scientists, tries to actually formally model what leadership means. And let me tell you what I think leadership means, drawing exactly from that book. Leadership is the coordination of opinion about how to move from one equilibrium to another. And if it's good leadership,

• 1:12:43Speaker 02

  it's a realistic vision of that change. In other words, the leader begins by telling you what you already know are the characteristics of your bad equilibrium. We are dysfunctional because of this and this. You know not to believe any politician, Cardoso says, who tells you he'll solve poverty in four years. You know that inclusion through education is the right long-term path. You know that fiscal responsibility is necessary to be able to afford that inclusion. So I've just told you everything you know about what's wrong with the current equilibrium. Let me tell you one more. Corruption feeds on itself because people are corrupt

• 1:13:27Speaker 02

  as part of believing they're in a corrupt equilibrium. And why should they not be corrupt if everyone else is? And now I'm going to tell you that there's this other equilibrium. It's an equilibrium where there's much less corruption, where there's fiscal discipline, and where there's inclusion. And now I'm going to tell you the story about how we get from here to here.

• 1:13:55Speaker 02

  That is what leadership does. That's all in the Alston book. Don't credit me with that. And no other economist has ever written a book to try to articulate what leadership means. I thought it was a really interesting contribution. I think he should have gotten a lot more, they should have gotten a lot more credit for it than they have. But we don't see a lot of great examples of it constantly. But you know, we do see some examples. Winston Churchill was a failed politician until the Nazi threat made it his moment. You know, bad outcomes and bad equilibrium create opportunities for leadership, as I've

• 1:14:38Speaker 02

  just defined it, to seize the moment and give people an alternative. And people will come together and sit together and listen when they're faced with a really significant crisis. By the way, there's no magic formula. You know, I teach emerging markets, developing economies. Some countries like Mexico, when they experienced their crisis in 1994, 95, they did some things that caused improvement. But then, within a decade or so, they backtracked and now Mexico is a narco state run by a populist government that's, you know, very dysfunctional.

• 1:15:21Speaker 02

  Argentina, its crisis of 2002 led it down a path of destruction from which it still hasn't emerged. So I don't want to give you a Pollyanna story, right? It's not like leadership always steps up and leadership always, crises always lead to good outcomes. They don't, but they sometimes do. And so, it's in our hands.

• 1:15:46Demetri Kofinas?

  I mean, again, you touched on multiple things that Grant and I spoke about in that initial episode, and one is the danger of falling into that self-reinforcing downward spiral where you become a kind of banana republic or a failed state, where everyone loses faith in the institutions and also adopts the principle of, I'm going to do what's in my best interest, because what am I, a sucker? Am I going to do what's in the public interest, where everyone else does what they're in their self-interest? And that's where it's important to have a North Star, and to have integrity, and to have courage. And I feel like, quite honestly, many people, at least in my, this is true across all sorts of domains, but I see it in the media. I see people are incentivized,

• 1:16:28Demetri Kofinas?

  especially because the algorithms today reward you for this, are incentivized to focus on giving people what they want to hear, or what narrative will be easily monetizable, because that's more important than speaking from the heart, and waking up in the morning and looking at yourself in the mirror, and speaking truth. And so, even though I said I wanted to pull on the thread of fintech, Charles, I feel like that almost cheapens this conversation. I don't necessarily feel called to bring us back to that. So maybe the last question I would ask you, and then I'll kick it over to Grant, is, is it important to try and develop a set of heuristics, or a way of identifying and elevating leaders,

• 1:17:11Demetri Kofinas?

  people with integrity, people that we respect and admire? I mean, I try and do that through my show, and in my daily life, in my own way, but is that something that's important during these times, that each of us who, let's say, those who resonate with the message that you've conveyed today, that we seek to try and lift other people up, instead of focusing just on ourselves?

• 1:17:33Speaker 02

  Absolutely. I mean, I think it's an obvious, it's too easy to answer that question, yes. The harder thing is how. And, you know, you guys, like all of us, are faced with constraints. You have to run a podcast, you have to find something that resonates with your audience. You have to find an audience. Those are your constraints. So let me, in the spirit, though, of answering your question more concretely, let me tell you something that I've done, that I regard as quasi miraculous.

• 1:18:09Speaker 02

  I decided about 10 years ago to go back to serious commitment to composing music. Why? Because I think that music is largely drivel right now. And I decided that I wanted to take whatever abilities I had and try to create a community of musicians and empower a community of musicians to start doing music that was working in themes that were more meaningful and really dealing with questions that weren't popular and using instrumentations that were not popularly appealing. And I founded something that's called the Panohora Ensemble.

• 1:18:54Speaker 02

  You can find our website online. It's been quite successful. Not financially. It's cost me some money, to be honest. But I feel like we're building something. Now, that's an example of doing something that really runs against the tide, that makes you feel like, whether it's your podcast, or my ensemble, or whatever. And I think that part of what makes people willing to do those things is that they do have a North Star. So for me, I'm a faithful person. I don't really care so much, by the way, how popular I am.

• 1:19:35Speaker 02

  Because I do care, for me, it's about my relationship with God. Now, I know that's a very strange thing in today's secular... I've been a cart-carrying member of the secular elite for 40 years, okay? But I'm gonna tell you, that's the reality. That's why I did what I did. That's why I'm doing what I'm doing. And some people who are listening to your podcast are gonna hear me, and they're gonna think about it. And they're gonna think about what they can do, whether it's in their community or in some other way to just...

• 1:20:11Speaker 02

  Use their resources. So let me tell you my, what I suggest to everyone. Make a list. Sit down with a piece of paper and a pen and make a list of what your resources are, who you trust, who you think you can talk to about these kinds of issues. What kind of actions you could take, what kind of organization you might create? What kinds of questions and topics you might want to address? Maybe it's just forming a book group in your neighborhood. So I think that that's what we need to do and it's a success if you do it. My friend, the great Armenian-American oud player, Ara Dingchian, always tells me whenever I do something, he says, well, you did that. That's a success.

• 1:20:55Speaker 02

  Don't be looking for something beyond it. That's the success that you did it. So that's how I think about it. Yes, you should be holding up people who are models of things. But the real success is coming from what you do in your everyday lives. Whether you make that list of what are the resources you have, the people that you can work with to make little, little changes. And then ultimately those will be people who, when the moment comes, will be ready to engage in the bigger question and to help choose maybe the right kind of leader. That's the best I can come up with.

• 1:21:31Speaker 01

  Yeah, Charles, I don't want to ask you another question because I think that's such a a beautiful way to wrap this up. You know, we started talking about the nuts and bolts of fiscal dominance and US finances. And I think the place we've ended up is incredibly representative of, of why Dimitri and I are trying to have these conversations because we don't, we don't come at them with a rigid framework in terms of here's what we need to find out. We want to talk about things, but try and see how they fit in in a much, much bigger picture, a picture in which finance, it plays a tiny, tiny part, you know, it's so much bigger than finance at this point in the cycle. So we're incredibly grateful to you, not just for giving us the time and sharing the thoughts with us, but also for taking this in places that it may not have gone

• 1:22:14Speaker 01

  had it been left purely to Dimitri and I to drive where we went. So thank you for sharing a lot of that with us.

• 1:22:19Speaker 02

  Well, it's been a pleasure and, you know, I think it's not a coincidence that many things are happening right now. This human flourishing project I mentioned, it's unprecedented. You know, nature is an important journal. Gallup's an important organization. They're taking this on with a big network of academics. You guys are doing a transcontinental partnership. That's pretty interesting. I've started a music ensemble. So the world is a puzzling place in good ways. So we have to stay optimistic and don't lose hope. And thanks for your service. Thanks for taking all this on.

• 1:22:58Demetri Kofinas?

  Well, I want to also just put out for listeners again. You mentioned Panohora Ensemble that you're part of. The website is spelled P A N O H O R A followed by the word ensemble. And it looks like you even have a few Greek artists and that Manos Hadidakis is one of your musical inspirations. So many of our Greek listeners will be happy to hear that.

• 1:23:22Speaker 02

  Well, I hope so. And we have lots of fun things going on with that. It keeps getting, scale keeps getting bigger. And it's not mainly Greek musicians. In fact, we have all sorts of people. I'm very committed to making a truly global, inclusive organization, but we do have a few of us Greeks involved too. Because after all, feloxenia is a Greek word and it means loving the whole bundle of humanity.

• 1:23:53Demetri Kofinas?

  What a wonderful way to end this conversation, Charles. Thank you so much for coming on this program.

• 1:23:58Speaker 01

  Charles, thank you.

• 1:23:59Speaker 02

  Thanks. Hope to do it again. Good luck. Let me know if you need anything.

• 1:24:03Speaker 01

  We will. Thanks again.

• 1:24:05Demetri Kofinas?

  My gosh, that was amazing.

• 1:24:07Speaker 01

  Yeah, wasn't that great? I mean, who knew? That's where we'd end up.

• 1:24:11Demetri Kofinas?

  Right? Exactly. Who knew? I had no, no idea at all. I did not expect this. This was a totally...

• 1:24:18Speaker 01

  You know, in some ways, when I spend a couple of seconds thinking about it, it's almost inevitable that we'd end up there because I think all this stuff is tied together. All the questions that we started off with granular finance questions and we sit and talk about this stuff and it takes us down places that we're thinking about and we're chewing over in our minds, but you can't push those back. They're way too important. And so for Charles to take us where he took us, in some ways, makes all the sense in the world to me that we'd end up there because I think that's where all this ends up, you know, somehow.

• 1:24:50Demetri Kofinas?

  You know, I feel like we're part of something really cool here, man. You know, I feel inspired from some of our conversations, especially this one. And this one in particular in ways that aren't common for me in the conversations that I have. And I'm hopeful, I'm hopeful that this is, that we're embarking on a journey that resonates with a lot of people and more and more people. And that it serves as a source of inspiration and a guiding light during these very, very challenging times that we're entering into.

• 1:25:21Speaker 01

  Amen, my friend. Amen. Well, all that, all that remains is to thank sincerely our guest, Charles Calomiris, for his time and his thoughtfulness and all the incredible things he's doing. And to thank you, of course, for listening to us and taking this journey with us. As, as we said at the beginning of episode one, we have no idea where it's going to go. And I think today has illustrated that more than we could in words, Dimitri. So again, you know, another fantastic conversation. I look forward to the next one.

• 1:25:43Demetri Kofinas?

  I as well, Greg.

• 1:25:44Speaker 01

  All right, my friend. I will talk to you soon.