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Moody's Talks - Inside Economics

Episode 25
September 24, 2021

Debt and Debt Limits

Mark, Ryan, and Cris welcome back Bernard Yaros, an economist from Moody's Analytics to discuss fiscal policy, the odds of a government shutdown, and the debt limit.

Full episode transcript can be found here.

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And look who it is, Mr. deRitis. Where you been, Cris?

Cris deRitis:                       Hey, Mark. I've been over in Italy, visiting family. So happy to be back though.

Mark Zandi:                      We missed you.

Cris deRitis:                       Missed the podcast, missed all of you.

Mark Zandi:                      Yeah, we definitely missed you. We talked about crypto. Were you on the crypto podcast? You missed that one-

Cris deRitis:                       I was. I was.

Mark Zandi:                      Oh, you were on that one?

Cris deRitis:                       I made a special effort to join that one.

Mark Zandi:                      Oh, that's right. Yeah. Well, we were to have you, and we'll talk a little bit more about that later, but it's good to have you and the sabbatical was good.

Cris deRitis:                       It was, it was.

Mark Zandi:                      Yeah, that worked out. You were gone for like three weeks?

Cris deRitis:                       Oh, felt like three years. Geez, only three weeks. Okay. Yeah. Okay. Yeah.

Mark Zandi:                      All right. I know Ryan missed you.

Ryan Sweet:                      Yeah. Very much.

Mark Zandi:                      [crosstalk 00:01:03] someone that can't answer his statistical riddles, so yeah, that's you.

Cris deRitis:                       Oh, did you keep up? Did you-

Mark Zandi:                      I thought I did pretty well, actually.

Ryan Sweet:                      You did really well. You were on a hot streak quick while Cris was gone.

Mark Zandi:                      I did. I was on a hot streak. You missed it.

Cris deRitis:                       Oh, wow. Okay, yeah.

Mark Zandi:                      You missed it, Cris. Yeah.

Ryan Sweet:                      I just miss having someone back me up when going back and forth about interest rates and housing starts.

Mark Zandi:                      That's true. That's true.

Cris deRitis:                       Well, we got a lot of talk about with the tenure today, so...

Mark Zandi:                      There is lot to talk about, and well, you've heard Cris' voice, he's the deputy chief economist and also just Ryan, Ryan's voice, the director of real-time economics. And Ryan has received an order from our producer, Ben. Ben has told Ryan not to mute himself. I'm not going to go into the reasons why, but apparently that's a dangerous thing in your household, Ryan.

Ryan Sweet:                      It's very dangerous because my children are going to come home from school any minute. It could get loud.

Mark Zandi:                      That's okay. I'm all for it. Yeah, I'm all for it. Yeah. I've had my problems with my dogs and who knows. And we also have our colleague Bernard Yaros. Bernard, good to have you back. You were on our podcast not too long ago, couple months [crosstalk 00:02:18]-

Bernard Yaros:                 I was back in May. Back in May, so it's a couple months ago.

Mark Zandi:                      Really? That long ago? Wow.

Ryan Sweet:                      Yeah, time flies.

Mark Zandi:                      I can't even believe it.

Bernard Yaros:                 Yeah. Yeah.

Mark Zandi:                      And Bernard is a renaissance man, he's the guy who can speak, if you can recall, like 10 languages or something. One which is Arabic, right? He roamed around Yemen for a year, something.

Bernard Yaros:                 Yeah.

Mark Zandi:                      I think I have that right, right?

Bernard Yaros:                 Yes. Yes. Yeah.

Mark Zandi:                      Yeah. And also he's a... I don't know if he still plays the squash, but he's legendary in the Philadelphia squash courts. Are you still king of the squash courts here in Philly or?

Bernard Yaros:                 I retired my racket several years ago actually, when I started at Moody's. So a month when I started Moody's, into my job here at Moody's, I tore my Achilles and for like the first year-

Mark Zandi:                      Oh, that's right.

Bernard Yaros:                 ... at the job, I was limping around with the boot and crutches and all that. And after that, I never wanted to play squash again.

Mark Zandi:                      You know at one point I was a pretty good squash player. At least in my own mind-

Bernard Yaros:                 Yeah, no, we used to play at the same club, Berwyn, right?

Mark Zandi:                      Yeah, Berwyn. I love Berwyn.

Bernard Yaros:                 Berwyn, yeah.

Mark Zandi:                      I'm like, I got to go back. I haven't played in such a long time. I miss it. I really do.

Bernard Yaros:                 Yeah, it's a great sport.

Mark Zandi:                      It's a great sport. Yeah, really great sport. And Bernard follows everything related to the federal government. And of course that's kind of front and center here in the public discourse around the budget debt ceiling, we're going to talk about that. Bernard and I wrote a paper about that recently that's on Economic View. And government shutdowns, and the reconciliation package, lot going on there. So that's the big topic for today, really. Or I should say policy in general, right Ryan? Because the Fed had a meeting this week, this past week-

Ryan Sweet:                      They did.

Mark Zandi:                      We want to talk about that as well. So let's just say that the big topic today is policy, monetary and fiscal policy. So we'll get to all of that in just a few minutes.

                                             We had a marathon podcast last week on the global supply chains, and that lasted, I think, an hour and a half. So I think that's a little long don't you guys? I don't know.

Ryan Sweet:                      Yeah, that's-

Mark Zandi:                      I got mixed reviews on that. So we'll, we'll try to keep this one a little shorter than an hour and a half. Although, with Bernard on, who the hell knows? He goes on and on and on, but we'll try to reign him in. Okay, let's talk about the statistics and we play a bit of a game here. Bernard, are you going to play this game with us? I think you did-

Bernard Yaros:                 Of course, yeah.

Mark Zandi:                      Yeah, of course you are. Yeah, absolutely. Okay. And Ryan, as increasingly per tradition, he's going to lead the way, right? Because he's the king of these statistics. So Ryan, what's your statistic of the week?

Ryan Sweet:                      17. I don't want to give you the units because it will give it away. But 17 is the number.

Mark Zandi:                      17. 17. And it is a statistic that came out this week.

Ryan Sweet:                      It did.

Bernard Yaros:                 17 days on market or?

Ryan Sweet:                      Bernard, good job.

Cris deRitis:                       What?

Mark Zandi:                      Wow.

Ryan Sweet:                      The number of day a existing home has been on the market before it sold in August was 17 days. Anything-

Mark Zandi:                      Bernard, Ryan gave that to you. He fed that to you.

Ryan Sweet:                      No, nope.

Mark Zandi:                      What the heck's that all about? I mean he said 17 and he just got... went right [crosstalk 00:05:38]-

Cris deRitis:                       That's impressive.

Bernard Yaros:                 Because I knew, if he said days, we'd all know immediately what it is.

Mark Zandi:                      Oh, that's right. And I that's a statistic that generally would come from Cris. Not from Ryan, because [crosstalk 00:05:47]-

Ryan Sweet:                      Yeah, I picked that one, because I was like, "Let's ease Cris back into this. Here's something housing related."

Mark Zandi:                      Right.

Ryan Sweet:                      He's a little rusty.

Cris deRitis:                       Yeah.

Mark Zandi:                      Makes a lot of sense. Makes a lot of sense.

Cris deRitis:                       But 17 is also the size of debt of households. That's where my mind was headed.

Mark Zandi:                      17 what?

Ryan Sweet:                      That's a good one.

Cris deRitis:                       17 trillion.

Mark Zandi:                      17 trillion.

Cris deRitis:                       17 trillion.

Mark Zandi:                      That is right. That's right. But that wouldn't have been fair for Ryan just to say 17 without the... Well, no, you're right, he said, "I'm not going to tell you the units."

Ryan Sweet:                      Right, if I said trillion, you would have known that right away.

Mark Zandi:                      Okay, so what's the significance of the 17 days on market?

Ryan Sweet:                      So even though the housing market appears to have cooled a little bit, demand remains very, very strong. It's more a supply side issue, kind of like last week we talked about all the supply chain issues, housing supply is very, very lean, particularly for the existing home market. And that's starting to cut into housing demand because affordability is dropping. But if you have it, if you own a house, you, put it on the market, it's going to sell very, very quickly in this current environment.

Mark Zandi:                      Although I think it has cooled a bit, hasn't it? A little less quickly than towards the beginning of the year, right? Because it doesn't feel as frenzied to me right now. Right?

Ryan Sweet:                      Yeah, sales have cooled off, but I think that's a reflection of lower affordability because house prices are rising quickly, but still existing home sales are above, well above, what we saw pre-pandemic.

Mark Zandi:                      Yeah. Right. Cris, do you concur with that diagnosis that Ryan just gave on the housing market?

Cris deRitis:                       I do, but I am concerned that things are slowing down.

Mark Zandi:                      On the demand side?

Cris deRitis:                       On the demand side, as well as prices continue to rise. Those affordably issues come into play and we see signs of buyer fatigue and people just giving up and saying, "I'm going to sit this one out after having lost 10 bits," right? So I agree that supply is the larger factor, but demand is starting to weaken as well, is my read.

Mark Zandi:                      Did you notice that the share of sales that are going to first time home buyers is now falling off pretty quickly? Did you catch that?

Cris deRitis:                       I did. I did.

Mark Zandi:                      Yeah. From both the realtor's data and from, I believe, FHA, they report... this is on the loans that they insure, they can identify whether someone's owned the home within the past... or has purchased a home within the past three years, if they haven't, they called them first time home buyers. And the share of loans that are ensuring, that meet that qualification, are declining. So it looks like first time home buyers are really the biggest causality of this surge in housing values and the decline in affordability.

Cris deRitis:                       Yeah. Supply at the lower end of the market is especially tight.

Mark Zandi:                      Yeah, right, right.

Ryan Sweet:                      Some cooling in the housing market is a good thing, as lon as it's orderly. I mean, the housing market over the last year was pretty unhealthy.

Mark Zandi:                      Well, here's my question, what happens when mortgage rate... I mean, all this has happened without any moving mortgage rates, right? Mortgage rates are still at record low, below 3% for 30 year fixed rate loan. What happens when mortgage rates just move up a little bit and conflate with these higher house prices? I mean, I don't know, makes me a little nervous about the market. The adjustment here is not going to be that easy, I don't think.

Cris deRitis:                       That's the trigger we've built into our forecast, right?

Mark Zandi:                      Yeah, exactly.

Cris deRitis:                       House price growth really decelerating dramatically, once interest rates start to rise even 25, 50 basis points.

Mark Zandi:                      Yeah. Yeah, good. And Cris, you, you brought up 17 trillion is... well, tell us what that was? Because you're right, it was 17 trillion.

Cris deRitis:                       17 trillion is household debt?

Mark Zandi:                      Is that your statistic or do you have a different statistic? Are you-

Cris deRitis:                       I have a different one.

Mark Zandi:                      Okay, good. Yeah, so tell us about the 17 trillion.

Cris deRitis:                       Okay. The 17 trillion is household debt, total household debt, as reported by the Federal Reserve earlier this week. So 11.3 trillion was mortgages, so that's still the dominant piece of it. It's rising, but it's not rising as quickly as assets overall. So my statistic [crosstalk 00:10:00]-

Mark Zandi:                      [crosstalk 00:10:00].

Cris deRitis:                       Yeah.

Mark Zandi:                      Yeah.

Cris deRitis:                       So my statistic actually was 19.6%.

Mark Zandi:                      Oh, is that the growth in net worth in net worth or something?

Cris deRitis:                       Yeah, that is the growth in net worth so it's related, but-

Mark Zandi:                      Ah. And net worth is the value of what people own less they owe, and you're saying... That's their wealth that, net worth is wealth. Assets less liabilities. And that's growing by 20%-

Cris deRitis:                       Almost 20% a year. $23 trillion in just one year.

Mark Zandi:                      Let me ask you a question, do you think they include crypto in there? Do you think they captured crypto in that... That's just data from the Federal Reserve, right? This is the financial accounts from the Federal Reserve that just came out, the Q1... excuse me, the Q2 2021 data.

Cris deRitis:                       Yeah.

Mark Zandi:                      I bet they don't pick up the crypto. What do you think?

Cris deRitis:                       Well, supposedly there's an other assets category in there. That should be [crosstalk 00:10:52], but I doubt-

Mark Zandi:                      Yeah. We should look at that, is that growing really fast?

Cris deRitis:                       I'll take a look. I'll take a look.

Mark Zandi:                      Take a look, yeah. I'm really-

Cris deRitis:                       I usually ignore it, but you're right, it might be a-

Mark Zandi:                      Yeah, right. They might not be picking up all that movement on the crypto side. Because I think wasn't the statistic, there's $2 trillion in crypto outstanding now?

Cris deRitis:                       Something like that. So pretty amazing.

Mark Zandi:                      Yeah.

Cris deRitis:                       Yeah. There actually was another 17 in that report, which also stood out to me.

Mark Zandi:                      Oh wait. In the financial accounts from the Federal Reserve.

Cris deRitis:                       In the financial accounts, which is really important, which is deposits. Household deposits.

Mark Zandi:                      I was going to say that, by the way. I was going to say that.

Cris deRitis:                       I knew you would. But that just blows my mind as well, $17 trillion in essentially cash, sitting in people's bank accounts. That's-

Mark Zandi:                      Yeah, that goes to the excess saving because people have been sheltering in place and all the government support. What was it before the pandemic, do you know?

Cris deRitis:                       Oh, I don't. I don't-

Mark Zandi:                      Yeah.

Cris deRitis:                       I know over the last year it grew... Well, I guess this is before the pandemic, is it grew by about $2 trillion.

Mark Zandi:                      2 trillion. That's pretty close to our estimate of excess saving. Excess saving is the saving above which people have would have done if there was no pandemic. And so we don't know what that exactly would have been, but that's our estimate. I think we were estimating 2.5 trillion in excess savings. So take 500 billion, invest in crypto and stock market and housing, that leaves you 2 trillion for your deposits. That all adds up.

Cris deRitis:                       It all works out.

Mark Zandi:                      It all works out somehow. You see how we do that, listener? That's how economists make all the numbers work. Yeah. Okay, so we got to your statistic too then, Cris?

Cris deRitis:                       Yeah, yeah, we folded that in.

Mark Zandi:                      We folded that in.

Cris deRitis:                       So let's move on to Bernard, I think.

Mark Zandi:                      But can I ask, just to flesh that out, just to big picture-esque. So what is the big picture that you got from the financial accounts data? The financial accounts from the Fed is the balance sheet of the economy. They look at the balance sheet. Everything else we tend to look at, income and everything else, profits, that's kind of the income statement for the economy. This is the balance sheet, assets and liabilities. So what was the big-picture takeaway from that?

Cris deRitis:                       Yeah, so households in aggregate are in great shape, right? Perhaps the greatest shape they've ever been in, in terms of asset growth over the last year has been tremendous, 23 trillion, and liabilities, although they've grown as well by about a trillion dollars, it's still relatively small compared to that asset. So that makes me quite optimistic. And then those deposits, right? Those liquid deposits being at $17 trillion, that's a lot of powder that can come right back into the economy at some point, certainly provide some support to downside risk. What's missing from this report though, is the distributional accounts.we'll get those in about two weeks. And I suspect what we'll see there is an awful lot of skewing still, right? The gains that we're talking about here and equities and house prices are really, truly [crosstalk 00:14:01]-

Mark Zandi:                      Distribution of accounts meaning looking at assets and liabilities and that... along the wealth distribution?

Cris deRitis:                       Correct.

Mark Zandi:                      Low-wealth households versus high-wealth households. Yeah, that's right.

Cris deRitis:                       That's pretty cool data actually. It's very cool data to look at.

Mark Zandi:                      It's great.

Cris deRitis:                       And it's very timely as well, usually it's... when we've done those studies we've had to look retrospectively.

Mark Zandi:                      Yeah. The financial accounts also provides a window into kind of the business' balance sheets, the corporate balance sheet. Did you happen to take a look at that as well? Any big picture takeaway away from that?

Cris deRitis:                       I didn't do a deep dive into that, but there was some growth in debts there as well, but not excessively. So it seems as though the business [crosstalk 00:14:44]-

Mark Zandi:                      Have cooled off.

Cris deRitis:                       Yeah, they're not taking on a whole lot of new debt, which again, gave me some encouragement about the future.

Mark Zandi:                      Yeah, I don't take as much encouragement. What happened, I think, is if you go back into the teeth of the pandemic a little over a year ago, debt surged because corporations took down a lot of their credit lines.

Ryan Sweet:                      [crosstalk 00:15:04].

Mark Zandi:                      Because they were worried about liquidity, that they might run out of cash because of the pandemic. And now they're just letting those lines get drawn down. But the level of debt, corporate debt, is still very, very high compared to pre-pandemic level. So I'm not sure I'd take too much solace in it.

Cris deRitis:                       Yeah. At least it's not moving up.

Mark Zandi:                      At least it's not moving up. Yeah, good point. Yeah, that's a great point. That's an excellent point. Okay.

Ryan Sweet:                      Oh, God.

Mark Zandi:                      And Bernard, you're up. What's your statistic?

Bernard Yaros:                 All right, so my statistic of the week is 2.9 trillion. And the hint I'll give is that this is policy related.

Mark Zandi:                      Oh thank you for that, Bernard-

Ryan Sweet:                      That's impressive.

Mark Zandi:                      That was a big hint. Jeez. Yeah, thank you so much. Yeah. Thank you so much. 2.9 trillion and my guess is it's got to be federal government related. Something related to the fiscal situation, right? No? Okay, no. Okay.

Bernard Yaros:                 Or... Yeah.

Mark Zandi:                      Okay. It's not that. 2.9 trillion.

Bernard Yaros:                 No, nothing. It has nothing to do the debt ceiling.

Mark Zandi:                      No fiscal, huh? Okay well, the American Rescue plan was 1.9 trillion, the reconciliation package they're debating in congress is 3.5 trillion. That's not 2.9 trillion.

Bernard Yaros:                 Well, I'll give you a further hint.

Mark Zandi:                      Okay.

Bernard Yaros:                 The source is the Joint Committee on Taxation and the Ways and Means Committee.

Mark Zandi:                      Oh, so you're saying this is the tax revenue that they're going to raise to support the $3.5 trillion in-

Bernard Yaros:                 Exactly.

Mark Zandi:                      Oh, okay.

Bernard Yaros:                 Exactly.

Mark Zandi:                      So explain the number for me. I spouted it out, but go ahead and explain the number.

Bernard Yaros:                 So I guess you can decompose the number into two things. So about 2.2 trillion would be the tax increases that the House Ways and Means Committee, which are essentially the tax writers on the House side of Congress that they're proposing. And then there's about $700 billion that would also be... the other part is the $700 billion that would come from prescription drug reform. So all told, you'd get about $2.9 trillion. And this is to offset the roughly $3.5 trillion reconciliation package that's... it's now being debated.

                                             Right now, we've really only gotten drafts of the legislation from the House, but we still have yet to really hear details from the Senate. And this is a bit tantalizing because it's really, at the know the day, I think it's what the Senate wants is what the ultimate legislation is going to be, end up closer to. But already from what we've seen in the House Ways and Means Committee is that, the tax increases that they're proposing are just not as far reaching as the ones that Biden proposed. So a couple examples is, they're only raising-

Mark Zandi:                      Well, wait a second. Wait a second. Wait, wait, wait, wait, wait, wait, wait. So the $3.5 trillion package that's being debated that's about a trillion less than what Biden proposed, right?

Bernard Yaros:                 Yeah, exactly.

Mark Zandi:                      He proposed 4.5 trillion. So they don't need to raise as much revenue to make it all work out?

Bernard Yaros:                 Yeah. Exactly, yeah.

Mark Zandi:                      Okay. So now we're at 2.9 trillion, and of course this is over 10 years, right? So-

Bernard Yaros:                 Yes, over 10 years. Yeah.

Mark Zandi:                      So if you look out past the 10 year horizon, assuming they do everything they say they're going to do and future lawmakers stick to the script, they'll roughly pay for it, right?

Bernard Yaros:                 Exactly, yeah.

Mark Zandi:                      The 3.5 trillion will be roughly paid for by the tax increases or in other revenue source.

Bernard Yaros:                 But there's still some major wildcards, because there are also Senate Democrats that don't like the prescription drug reform proposal. We still don't have the SALT deduction, which is a very costly measure. And that is something that could be introduced towards the end, in order to get the final bill.

Mark Zandi:                      Although we did hear yesterday from Speaker Pelosi and Senate Majority Leader Schumer, that Democrats have agreed "on a framework for tax increases that will pay for the 3.5 trillion." We just, at this point we don't know what that is exactly, right?

Bernard Yaros:                 Yeah, yeah, yeah. It was just a very wishy-washy statement. It seems like they're agreeing to-

Mark Zandi:                      Yeah, right. Yeah.

Bernard Yaros:                 But still, there are a couple changes, I think a couple of distinct changes from what the Ways and Means is proposing as opposed to Biden. So under Biden he was proposing the top corporate tax rate to go all the way up to 28% from 21%. House Democrats instead are proposing it to raise it to 26.5. I'd say our baseline forecast is that that even goes down to 25% to be in line with what Joe Manchin is proposing. So that's what's in our baseline forecast. Also the top capital gaines rate, Biden in his budget proposal called for raising it from 20% to 39.6%. Whereas, again, Democrats are only looking for an increase to 25%. So it's much less than what the Biden administration was doing, was proposing. And also the Democrats are not going as far as Biden did, in terms of proposing greater tax compliance and even reforming international tax rules.

Mark Zandi:                      Yeah, and I think at the end of the day, 3.5 trillion is not going to stand either, right? I mean, when it gets-

Bernard Yaros:                 No. Our assumption is that that gets whittled down to $2.5 trillion. And next week when we discuss the October baseline forecast, we may even bring that down to 2 trillion.

Mark Zandi:                      Oh, see how he front runs us, guys? He's front running us saying, "Oh look, I'm going to propose this. Get ready for it."

Cris deRitis:                       He's seeding the fields here.

Mark Zandi:                      Yeah, so the Senate has got the reconciliation... in the House, got a package of 3.5 trillion in tax credits and spending increases over a 10 year period. And just given the politics here, Joe Manchin, the Senate Democrat from West Virginia, who's very moderate, has said, "I'm only willing to support a 1.5 trillion package." And right now we are assuming that everyone splits the difference and we land at 2.5 trillion.

Bernard Yaros:                 2.5, yeah.

Mark Zandi:                      You're saying, "Well, maybe that's even a little high given the politics here"?

Bernard Yaros:                 Yeah. That's the sentiment I'm feeling right now.

Mark Zandi:                      Okay. All right, fine. Let's have that discussion in debate, but 2.5 trillion, okay. Well, that's good. I've got a statistic, I've got three statistics, that all relate to each other. And I have to give you all three because it'd be too hard if I just gave you one. I know that sounds a little weird, doesn't it? These are all hints by the way. All right, you ready? And this is a statistic that came out this week and it's a monthly series, so it comes out every month. 0.9, 0.2, and 0.1. Any ideas what that is? 0.9, 0.2, and 0.1. You can ask me questions.

Ryan Sweet:                      I should know this.

Mark Zandi:                      That means you know it.

Ryan Sweet:                      No, no. Are you sure it came out this week? I always get worried.

Mark Zandi:                      I've done this before, I've done a head fake. But no, no-

Ryan Sweet:                      This one is...

Mark Zandi:                      This came out this week. Yeah, think it came out towards the end of the week, too. Yeah, recently. It's a statistic that people generally... it's an important one, but they don't... And when I say statistic, a release, let's say, that comes out. People don't generally follow it that carefully, but I find it quite informative, and I'll explain why once you guys fail to figure it out.

Bernard Yaros:                 Thanks for the confidence.

Mark Zandi:                      Yeah.

Ryan Sweet:                      Is it St. Louis financial stress index or...

Mark Zandi:                      No.

Cris deRitis:                       No, that'd be [crosstalk 00:22:58]-

Mark Zandi:                      0.9, 0.2, 0.1. So it's three different statistics within this particular release. You tell me when you give. I'll think if I can give you another hint. [crosstalk 00:23:07]-

Ryan Sweet:                      [crosstalk 00:23:07] it's the Conference Board Leading Index.

Cris deRitis:                       [crosstalk 00:23:11] leading index. Ah, yeah.

Mark Zandi:                      So what is it, Ryan?

Ryan Sweet:                      Leading indicators. Conference Board.

Mark Zandi:                      What's the leading indicator?

Ryan Sweet:                      0.9.

Mark Zandi:                      0.9?

Cris deRitis:                       0.9.

Mark Zandi:                      What's the 0.2? What's the 0.1? Oh, come on.

Ryan Sweet:                      One at a time here.

Mark Zandi:                      I'm spoon feeding you, man. All right-

Ryan Sweet:                      I give up.

Mark Zandi:                      Coincident indicator and the lacking indicator, right? You got the leading indicator, the coincident indicator... This goes to where we are in the business cycle and the leading indicator is a compilation of 10 different statistics that tend to lead contemporaneous economic activity. The coincident indicator is four indicators that are intended to... that are combined to reflect where the economy is currently, and the lagging indicator's what it sounds like, it's a set indicators that are a bit lagging. Which are also important because once they are definitively showing the economy moving in one direction or another, you know you're done. But I took some solace in it because it was a very strong increase, 0.9, in the leading indicator. That's a big increase in the month. And all but one of the 10 components actually rose. So that's an encouraging sign.

                                             And the coincident indicator I find useful, too. And that includes personal income, less transfer payments, jobs, industrial production, a measure of sales, of business sales. Because that really does a good job of pegging where you are in the business cycle. And I use this as a way to asses whether the economy is in recession in recovery or in expansion, but expansion meaning the level of the indicator is above its pre-recession level. And right now it's strongly indicating that the economy's in recovery, but has still a way to go to get back to pre-pandemic levels. So it's in recovery, it's not in an expansion.

                                             And I really find the lagging indicators particularly useful, because again, it's proof positive of where you are in the... if you've made a turning point in the business cycle, either down into recession or back up into recovery. So I do watch it pretty carefully. Very, very useful. Ryan's a little... he's just... "Oh, that's not a good indicator."

Ryan Sweet:                      No, it's a good one. I look at that one too.

Mark Zandi:                      You do? You do look at it?

Ryan Sweet:                      I don't look at the lagging indicator as closely as you do.

Mark Zandi:                      Yeah. I like that one. You know what's in there is commercial industrial loans. Those are business loans that banks make and I find that to be particularly useful. And inventories also, very, very useful indicator. Okay, before we move on to policy, I did want to call out some of the statistics that we've been watching on a regular basis. Two of them in particular. One is the 10-year Treasury yield. So that has been making a move again recently, Ryan, hasn't it?

Ryan Sweet:                      Over the last two trading sessions it's up 13, 14 basis points. So we're at 1.45% on the 10-year Treasury yield right now?

Mark Zandi:                      Yeah, pretty close.

Ryan Sweet:                      So it's been quite the move over the last couple days. And I think part of it, you've seen inflation expectations move higher coinciding with the increase in oil prices. But it seems to be more of a delayed response to the Fed meeting on Wednesday where they signal that tapering's going to happen.

Mark Zandi:                      Yeah, I don't get that explanation. Delayed response? I mean, investors are sitting there-

Ryan Sweet:                      It's a lot to digest.

Mark Zandi:                      ... drinking their coffee and like, "Ah, I don't know what to do. Oh, let me make up my mind. Let's let's do it." Really? Is that what you think?

Ryan Sweet:                      But remember, the trading session closes not that long after Powell gets done speaking. So it's possible. I have a hard time trying to explain what else would have driven a move yesterday.

Mark Zandi:                      What about the debt limit? What about the debt limit?

Ryan Sweet:                      It's too early. Too soon.

Mark Zandi:                      Really? You think so?

Ryan Sweet:                      And usually the debt ceiling goes the opposite way, it push long-term rates lower.

Mark Zandi:                      Hey, Bernard, what do you think? Do you think that the markets are starting to react to the debt limit yet, or debt ceiling? Or not yet, you think?

Bernard Yaros:                 If you look at 26 week Treasury bills that are maturing in late October, early November, you are starting to see a kink in the yield there, which is indicating that there's... investors are trying to avoid some of those bills that are maturing around the potential drop-dead date, where there could be a potential default scenario or delayed payment scenario. But it's nothing to the extent that we saw in 2013 or 2011.

Mark Zandi:                      Yeah. So still early.

Bernard Yaros:                 But again, the longer we get to that date, the more we're going to see movement there.

Mark Zandi:                      Yeah. I guess it's hard to read too much into any one two-day movement of bond yields anyway.

Bernard Yaros:                 Right.

Mark Zandi:                      There's so many technical factors going on, that we... it's very difficult to discern. But the bottom was what? 1.15? 1.2?

Bernard Yaros:                 Mm-hmm (affirmative).

Mark Zandi:                      So we've moved off that. We're still well below the 1.75 that we were back in, I believe, March of this year when we thought the economy was really rip roaring. But now it's starting to move back up again. Okay.

Bernard Yaros:                 Well, for now. For now.

Mark Zandi:                      And Ryan, you think it's going to continue to move higher?

Ryan Sweet:                      Through the rest of the year? No. I think it's going to head back down. I think the debt ceiling will take some steam out of the bond market.

Mark Zandi:                      Oh, you're saying just the opposite of what I'm saying?

Ryan Sweet:                      Mm-hmm (affirmative). Yeah, if you look at 2011, 2013, the initial thought was when you get close to the debt ceiling, interest rates are going to rise. But it's the opposite. The bond market starts pricing in the apocalypse and rates actually go lower.

Mark Zandi:                      Wait, wait, wait. You, I think, did a study back on the 2013 debt limit-

Ryan Sweet:                      I did.

Mark Zandi:                      ... and rates rose, you said, six to 10 basis points. Bernard, he doesn't even remember his own study.

Ryan Sweet:                      No, I remember that. But I thought [crosstalk 00:29:11]-

Mark Zandi:                      It was actually a damn good study.

Ryan Sweet:                      Yeah. It was looking at the cost to the taxpayer of the debt ceiling fight. And I think we used short-term rates as well. I think it was all in. But I can go back and look, but...

Mark Zandi:                      Take a look, yeah.

Ryan Sweet:                      ... if I had to bet 10-year's coming back down over the next few months.

Mark Zandi:                      Okay. So you're saying there's two countervailing forces here. One will lead to higher rates and that is, "I'm nervous that I'm not going to get paid on time. I'm Mr. Bond Investor. Therefore, I'm going to start selling or I'm going to stop buying as much," yields rise. And the other countervailing force is the one you're describing, "Well, the debt limit is bad for the economy. It's going to take steam out of the economy. Makes it less likely the Fed's going to raise interest rates. Take the knots out of... potentially out of inflation expectations because of the weaker growth and that lowers your yields." And you're saying, if you had to take one side of that or the other, that it's the lower yields that's going to prevail here, the worries about growth?

Ryan Sweet:                      Yeah. Yeah, I think we'll get back some of these gains in the 10-year over the next few weeks. And then towards the end of the year we'll see rates rise as the fed actually begins to taper their 120 billion in asset purchases.

Mark Zandi:                      Hmm, interesting. Right. [crosstalk 00:30:24]-

Ryan Sweet:                      It's a little bit of a rollercoaster ride. It all depends on what happens with Washington. I mean, if they botch and we have our government shutdown or a nasty debt ceiling fight, they're not going to taper.

Mark Zandi:                      Sure. Yeah, so that's interesting. So you're saying, if we actually have a nasty dead ceiling battle and we come up right to the... we head towards the drop-dead date, which we'll come back to when we get to this as the big topic, the Fed's going to delay when it starts its tapering and that will be a reason for lower yields? Yields will go down?

Ryan Sweet:                      Correct.

Mark Zandi:                      Interesting. Okay.

Ryan Sweet:                      And this isn't the beginning of a taper tantrum. This is very orderly. This isn't 2013 all over again.

Mark Zandi:                      Right, so-

Cris deRitis:                       It was communicated well-

Ryan Sweet:                      Mm-hmm (affirmative). Yeah.

Mark Zandi:                      What were you going to say, Cris?

Cris deRitis:                       I said it was communicated well. [inaudible 00:31:17]. It was very clear.

Mark Zandi:                      Yeah, we'll come back to that. Okay, interesting. I don't know, that makes me even more nervous because policymakers see interest rates go down, they go, "What are you economists talking about?" And raises the odds they actually do break the debt limit default. Interesting. Okay, the other statistic we've been following that I want to call out is unemployment insurance claims. Cris, that was your... that's been your statistic.

Cris deRitis:                       Yeah.

Mark Zandi:                      It actually moved back up in a pretty definitive way last week, right?

Cris deRitis:                       Yeah, 351,000 last week up from 335,000, so wrong direction. And then if you look at some of the state level detail, California and Virginia had some of the largest gains. And so that suggests at least that COVID, that Delta variant, may be playing a role here in terms of deterioration in the economy, people having to apply for insurance due to that weakness.

Mark Zandi:                      What about Ida? We had this hurricane blue blow through during this period, scramble things, do you think that played a role at all? Could you see it... I don't know, Ryan, you look at this really carefully, did you see Ida in there at all?

Ryan Sweet:                      Two weeks ago. So we went from claims that were like 308,000 up to 330, somewhere around there. That was Ida.

Mark Zandi:                      That's Ida.

Ryan Sweet:                      Because you look at it, Louisiana, you saw a big increase in unemployment insurance benefits there. This past week, that Cris referenced, when we went up to 351, Louisiana actually saw a decline in unemployment insurance benefits. It's California, it's Virginia. There was no hurricane Ida effect.

Mark Zandi:                      Okay. So should we be at all nervous about what's going with UI claims? 350's high. Our benchmark for really good is at least 250, right?

Cris deRitis:                       Right.

Mark Zandi:                      We debated, but say 250. So we're 100K above what we consider great or good and it's moving up a little bit. Or is it just the data?

Cris deRitis:                       Little bit of [inaudible 00:33:20]. If you look at the four week moving average, it's flat. So it's-

Mark Zandi:                      Okay.

Cris deRitis:                       I would say it's in the yellow zone with caution, but yeah, assuming COVID, some of the more recent trends continue, we get some improvement there, we should see some pickup in employment and that should temper things down, or tap things down.

Ryan Sweet:                      Why last week's number was important is it includes the September payroll reference period. And if you look at claims between August and September payroll periods, it's flattish, like Cris described. So it would at face value suggest that we're not going to get a big bounce back in job growth in September.

Mark Zandi:                      Yeah. I was going to say that. In August, we got to gain of 250K, I believe, in payroll. I mean, in the month before we got a million, the month before that we got close to a million. So August was really disappointing. I mean, are we lining up for 250K or maybe not that low?

Ryan Sweet:                      It's hard to say. I'm still digging into it-

Mark Zandi:                      Hard to say, yeah.

Ryan Sweet:                      ... because we have the hurricane Ida effect. So it's going to take me a little bit longer to pinpoint that number.

Mark Zandi:                      Yeah. Okay. All right. Hey, Cris, I wanted to ask you one other thing. I believe the state level employment data came out for the month of August and we've been scouring that data to get a sense of whether the supplemental unemployment insurance program has distorted decisions by workers to go back to work. There's been a lot of debate about that. The July data showed that there was no difference in employment growth in states that held onto the supplemental UI to the end, it ended in early September, compared of those states that ended the supplemental UI early. Leading to the conclusion, or at least the tentative conclusion, that the supplemental unemployment insurance had no meaningful effect on the job market, that it wasn't constraining job creation. Did you look at the August data by chance?

Cris deRitis:                       Yeah, I did.

Mark Zandi:                      You did, okay.

Cris deRitis:                       And colleague, Adam [Caymans 00:35:24] also had a really nice write-up on the Economic View on this topic. So if you want more details... But the August data also refutes the notion that extended UI benefits were holding back this surge of employment. We just didn't see that. So if you look at employment from May to August across the different states, you actually see that employment growth was weaker in those states that ended the extended benefits early, right? So again, refuting this theory that if we cut the benefits, then folks will rush back into the labor market. And actually the bottom 10 performance, eight of the worst performance in terms of employment growth, were those states that had terminated the unemployment insurance benefits early.

Mark Zandi:                      Oh, is that right? Oh, jeez.

Cris deRitis:                       Yeah, so it's-

Mark Zandi:                      Just the opposite.

Cris deRitis:                       You know, there are some other factors. I won't say it's [crosstalk 00:36:19]-

Mark Zandi:                      Yeah, sure.

Cris deRitis:                       You have to control for a lot of things. But at least on the surface, there's very... I don't see any evidence that suggests the opposite.

Mark Zandi:                      Mm-hmm (affirmative).

Cris deRitis:                       It seems like a policy mistake was made here to cut those benefits early.

Mark Zandi:                      Okay. Anything else to add on that, Ryan, that point, that question?

Ryan Sweet:                      No, I agree with Cris that we've rank ordered why people are not reentering the labor force and that was at the bottom of the barrel. I think number one is childcare issues and then right behind it is concerns about COVID. But what is interesting, if you look at some of the summaries of corporate earning calls, they are blaming UI benefits.

Mark Zandi:                      Are they?

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      Really.

Ryan Sweet:                      It's this disconnect between the data and what you hear-

Mark Zandi:                      The anecdotes.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Yeah. I'll go with the data.

Ryan Sweet:                      I agree.

Mark Zandi:                      Of course I say that with some trepidation, because it could be revised, I guess. Right?

Ryan Sweet:                      Yeah.

Mark Zandi:                      So we'll see. Hey, before we move on to policy monitoring and fiscal policy, one last topic I wanted to ask about is what's going on in China? The Evergrande kerfuffle. This is the big real estate company, Chinese real estate company, that I guess is defaulted now, right? They missed a debt payment, I believe. They're in a grace period when they can kind of make it up, but it doesn't look like they're going to. Seemed to be creating some consternation in markets. The stock market was down a few days, ostensibly because of that, who knows? But ostensibly. Any points you want to make about that? Any insight with regard to Evergrande? Let me ask it this way, do you think there's any connection between what Evergrande and what's going on in China and what it means for the U.S. or the rest of the global economy? Anything at all? I mean, were stock investors right to be worried about this? Cris, do you have any views on that?

Cris deRitis:                       I think it's part of that broader narrative in terms of concerns about the opacity of data and in China overall, right? And so this is a manifestation of some of those concerns that there's more below the surface than what we're seeing. So I think that is certainly continuing to drive investors away or think twice about investments in China.

Mark Zandi:                      Yeah.

Ryan Sweet:                      There was a clear market reaction, but the good news is the high-yield corporate bond spread, it didn't blow out, it didn't increase substantially. It did widen. But overall it seems like the corporate bond market took the Evergrande issue in stride, the U.S. corporate bond market.

Mark Zandi:                      Yeah. I find it hard to connect the dots, certainly directly connect the dots between Evergrande and the obvious broader stress in really the high leverage in China and the U.S. economy or even the global economy. I assume there's indirect effects of Evergrande suggests that Chinese economy is going to grow more slowly because it has to adapt and adjust to righting the wrongs it's been engaged in with regard to over-borrowing. But those are more indirect. I don't see them as a direct effect. You would agree?

Ryan Sweet:                      Yeah, I'd agree.

Mark Zandi:                      You wouldn't disagree with that? Okay.

Ryan Sweet:                      Unless it really causes a sustained response in U.S. financial markets.

Mark Zandi:                      But why? What's the why-

Ryan Sweet:                      I'm saying I don't think it would, but that's the only dot that I can connect.

Mark Zandi:                      Yeah. Yeah, there's no... Evergrande has three.. at least the reports are 300 billion in liabilities debt, and it doesn't appear that U.S. or other developed world financial institutions have any real exposure to that. That's almost entirely domestic.

Ryan Sweet:                      Correct.

Mark Zandi:                      So the other thing I'd say is, I can't imagine Chinese authorities allowing it to get to a place where it's going to do any real damage to the Chinese economy. I mean, they have bailed out other companies, so if it looked like this is going to be a systemic problem, meaning the default on that debt takes out Chinese banking institutions and other financial institutions, and this becomes kind of a self-reinforcing mess, like our own financial crisis a decade ago, the Chinese authorities would step in right away. I would think. I can't imagine they wouldn't. So hard to see the fallout here, but anyway...

                                             All right, let's turn to policy. Let's begin with monetary policy and the Fed met this week and kind of advanced the ball on their thinking around QE and their forecast around future rate increases. Ryan, you follow the Fed closely, you want to fill us in on what they said and what your interpretation is of what they have in mind here going forward?

Ryan Sweet:                      Yeah, of course. So all eyes were on any indication that the Fed was going to announce any tapering plans. They didn't, but they took the long anticipated first step in their advanced notice that tapering is coming and that was included in the statement. And it seems like they're going to start tapering either in November or December, depending on what happens in financial market conditions, what happens out of DC. But it seems like we're headed for an eight month tapering process. So roughly 15 billion reduction per month in their asset purchases. The other notable thing in the FOMC's meeting was they released their updated summary of economic projections. This includes their projections for GDP, unemployment, inflation, and the so-called dot plot, which shows participants' expected path of the fed funds rate. And they're divided. So nine participants expect the first rate hike in 2022 and nine expect it in 2023.

Mark Zandi:                      Yeah. The fed funds rate's the rate they control. So you're saying they-

Ryan Sweet:                      Correct.

Mark Zandi:                      ... I guess 18 members on the Federal Open Market Committee, FOMC, that's the policy making committee of the Federal Reserve, said that they think the first rate crisis will occur in 2022. And nine said first rate increase in 2023. So it's kind of evenly split.

Ryan Sweet:                      Correct.

Mark Zandi:                      And our forecast is still for, what, January of 2023?

Ryan Sweet:                      Correct.

Mark Zandi:                      January-

Ryan Sweet:                      And that's where I think the Powells, the Brainards, the Claridas, the ones that really matter on the FOMC, I think that's where they are right now.

Mark Zandi:                      So those dots are not all equal?

Ryan Sweet:                      They're not.

Mark Zandi:                      One dot is not as heavily weighted as another dot.

Ryan Sweet:                      Every summary of economic projections, I kind of put names on dots.

Mark Zandi:                      So when your wife asks you what you do for a living, yeah say, "I look at dots and I decide"-

Ryan Sweet:                      Exactly.

Mark Zandi:                      ... "which dot is J. Powell and which dot is"-

Ryan Sweet:                      Brainard.

Mark Zandi:                      "... Brainard and Kaplan," and so forth and so on.

Ryan Sweet:                      Fullard.

Mark Zandi:                      That's what you do for a living.

Ryan Sweet:                      Oh yeah. That's what I do.

Mark Zandi:                      And people pay you for that.

Ryan Sweet:                      Well, you asked me what's going to happen at interest rates and you got to know whose dot's whose.

Mark Zandi:                      Bernard, can you imagine that's what someone does for a living. Can you imagine that?

Ryan Sweet:                      Kind of looks like my first grader's artwork.

Mark Zandi:                      Pretty funny, actually. Yeah. So on QE, quantitative easing, that's bond buying, they've been buying 120 billion in Treasury securities and mortgage backed securities a month since early on in the pandemic. And they're now signaling that they're going to start so-called tapering, which means reduce the amount of bonds they are buying. And right now you think that that process of reducing the bond buying will be, when? Is it December of this year? December of 2021?

Ryan Sweet:                      I think it's November. They want to wrap this up by mid next year. And if you listen to Powell's press conference... And yes of course I listen to Powell's press conference and put names on dots. He kind of had a wink-wink moment where he was like... reading between the lines, it seems like he wants to go in November, barring any issues on the debt ceiling and at least a decent September employment report.

Mark Zandi:                      Yeah, I suspect though, who knows, but I suspect that the September job number's going to be on the soft side, too, going back to the UI claims and given other evidence that Delta has done some real damage here to the economy. And also, this brinkmanship over the government shutdown and debt ceiling, that's going to be pretty messy, I think. Don't you think?

Ryan Sweet:                      Oh, yeah.

Mark Zandi:                      So don't you think the odds are pretty high here? If I were them, why wouldn't you wait a month just to make sure we're on the other side of the debt limit and the government shutdown and we're on the other side of the Delta? Why not? Why wouldn't you do that?

Ryan Sweet:                      I think that's why we keep our forecast. I mean, as of today, I think it's possible-

Mark Zandi:                      Oh, okay. So our Forecast is still December of 2021-

Ryan Sweet:                      I would not change it. Yep.

Mark Zandi:                      You would not change it. Okay.

Ryan Sweet:                      I think they want to go in November, but in reality, given all the headwinds over the next few weeks, it's going to be December.

Mark Zandi:                      Right. Okay. Anything in the statement, in the forecast that they put out and in Powell's press conference afterward that surprised you or you just said, "Oh, that's interesting. I didn't know that," or, "That's an interesting way of looking at it." Anything that stood out?

Ryan Sweet:                      Nothing that jumped out. I mean, I think they are still buying into the transitory argument. They revised higher, their forecast for-

Mark Zandi:                      Transitory argument? Nobody knows what the heck you're talking about.

Ryan Sweet:                      Temporary. All right, [crosstalk 00:46:06]-

Mark Zandi:                      Temporarily what?

Ryan Sweet:                      I'm getting there.

Mark Zandi:                      Okay, sorry. Go ahead. I get impatient. Bernard knows.

Ryan Sweet:                      Did you have your Wawa coffee yet today?

Mark Zandi:                      The problem is I had too much Wawa coffee.

Ryan Sweet:                      Oh, there you go. Right, yeah. So inflation has accelerated noticeably this year and it's transitory factors, so temporary factors, are behind the increase. And as those fade, so the reopening of the economy, the supply chain issues that's driving used car/new car prices higher, once we're on the other side of that, inflation's going to moderate. It's going to slow down. And the Fed boosted their inflation forecast for this year, just reflecting new data that came in and they really didn't adjust their forecast for inflation over the next few years, which has it coming back down towards their 2% target. So they're not wavering yet on the transitory inflation view.

Mark Zandi:                      Hey, I got a good question, one more question on monetary policy and we'll get to fiscal policy. How would you define transitory? What is transitory exactly? When does it become non-transitory or persistent?

Ryan Sweet:                      That's a great question and I get that one a lot from clients. So [crosstalk 00:47:17]-

Mark Zandi:                      I've got an answer, by the way, and I think it's a surprising one.

Ryan Sweet:                      Yeah, I want to compare mine to yours to Cris's.

Mark Zandi:                      Yeah, go ahead.

Ryan Sweet:                      I say nine to 12 months.

Mark Zandi:                      Oh, you actually have a time, there's time dimension.

Ryan Sweet:                      There's a time.

Mark Zandi:                      Nine to 12 months.

Ryan Sweet:                      Oh, where are you approaching this? You're talking about the rate of inflation?

Cris deRitis:                       As a trigger?

Mark Zandi:                      Okay. I'll let you know in just a second. I just want to hear what Bernard and... if Bernard or Cris have a different definition of transitory.

Cris deRitis:                       I was thinking 12 months. So still...

Mark Zandi:                      Well, so what does that mean? So you mean-

Bernard Yaros:                 Less 12 months.

Mark Zandi:                      ... 12 months from now, inflation has to be back to target or?

Ryan Sweet:                      No, no, [inaudible 00:47:52] going to be moderating.

Cris deRitis:                       Moderating, yeah.

Mark Zandi:                      And your forecast is for it to get back to target?

Cris deRitis:                       Yes.

Ryan Sweet:                      Correct.

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay. That's my definition.

Ryan Sweet:                      Oh, okay.

Mark Zandi:                      That inflation expectations are stable, firm, people believe still that inflation is going to come back into the Fed's target. And the other is, this is a more fundamental definition, the other is labor costs. That if labor costs, meaning wage growth less the growth in productivity, or unit labor costs, use a technical description of labor costs, that that's stable. That it's not accelerating in a definitive way. So if those two conditions are holding, then this is transitory. It's going to fade away, inflation's going to come back to... It may be six months and may be nine months and may be 12 months, it could be 24 months, but I still view it as transitory. It's not going to be a persistent, elevated level of inflation. Because I'm not sure if it's nine or 12 or 18. So what do you think of that way of thinking?

Ryan Sweet:                      I'm surprised by that. That you don't put the time.

Mark Zandi:                      Oh, really?

Ryan Sweet:                      I thought you would have a time dimension on transitory. Because I got you pined as an inflation hawk.

Mark Zandi:                      I am an inflation hawk. What do you mean?

Ryan Sweet:                      So if you were on the Fed, I know exactly what dot you would be.

Mark Zandi:                      Really?

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      Well, so would I be into 2022 or '23?

Ryan Sweet:                      Yes. '22.

Mark Zandi:                      Yeah, I'd be in '22.

Ryan Sweet:                      See?

Mark Zandi:                      I would be in '22. You're right about that. Yeah. But I'd be a flexible hawk, I think. I mean, [crosstalk 00:49:32]-

Ryan Sweet:                      [crosstalk 00:49:32] realistic. Yeah, a realistic hawk.

Mark Zandi:                      Yeah, facts man. Okay. All right, anything else on monetary policy? Anything else? No? Okay-

Ryan Sweet:                      I mean, if you want to go international, the Bank of England meeting was pretty interesting. They-

Mark Zandi:                      Oh, why?

Ryan Sweet:                      They really boosted their inflation forecast and, unlike the Fed, they're getting nervous about inflation. So a rate hike this year is on the table for the Bank of England. And they're also doing something different than the Fed, where they will start raising interest rates before they start reducing their monthly asset purchases. So we kind of have-

Mark Zandi:                      Talking about hawks.

Ryan Sweet:                      Yeah, exactly.

Mark Zandi:                      What's the deal there?

Ryan Sweet:                      Kind of reminds me of what the ECB back in... was it 2013? When they saw the first whiff of inflation and they started raising interest rates and then we know what happened after that.

Mark Zandi:                      Yeah. That's crazy. Huh. All right. That's good to know. All right, fiscal policy. So Bernard, how scared should we be here, right? I mean, we've got the government is going to shut down on October 1, the start of the new fiscal year for the federal government, if there's not a piece of legislation that provide funding, at least for some period of time. And by our calculation, or I should say your calculation, by October 20th, the Treasury will run out of cash to pay everyone on time. Someone's not going to get paid. And actually I was looking at data you put together, on October 20th, there's a big payment to social security recipients. I believe a $20 billion payment on that day. And they may not get paid.

Bernard Yaros:                 It's October 15th. You get some interest payments, the child tax credits go out-

Mark Zandi:                      I'm telling you, on October 15th there's a big payment, and then they have a cash surplus on the 17th and 18th. You're talking to a guy who just looked at this data. And you're telling me I'm wrong? Is that what you're saying, Bernard?

Bernard Yaros:                 In mid-October, it's really the 15th that I see the biggest pressure point for cash reserves at the Treasury.

Mark Zandi:                      You think drop-dead date is the 15th?

Bernard Yaros:                 No, no, no. So I'm just saying what really leads up to that October 20th-

Mark Zandi:                      Oh, I see.

Bernard Yaros:                 ... drop-dead date is that on the 15th you get a lot of payments and that just really whittles the borrowing capacity under the debt limit to just dangerously low levels. And then we finally hit the X date on the 20th.

Mark Zandi:                      Yeah, X date. Everyone was calling it the X date. Okay, so all right, bottom line, how nervous should we be here? What's going to happen?

Bernard Yaros:                 So I'm not nervous at all about a government shutdown. I'm a bit more worried about the debt limit. So with the government shut down, the House recently passed legislation that would fund the government past October 1st through early December. And then they paired that with a debt limit suspension, so suspending the debt limit through December 2022. So that passed into House with... I think it was a very... it was a party-line vote. I don't think you had any Republican support that. And now it's going to the Senate where Republicans have vowed to block it. And I think the tactic-

Mark Zandi:                      Block it means filibuster it.

Bernard Yaros:                 Filibuster it or not to... Yeah, Filibuster it. And I think that what Democrats were trying to do is get Republicans on record that they're willing to risk a shutdown just because they don't want to raise the debt limit and they're also trying to dare them to block a package that would also provide hurricane assistance for Ida, which affected red states, like Louisiana. And then there's also popular provisions that would provide assistance to Afghanistan, Afghani refugees. But I still don't think Republicans are going to cave. I think they're going to block it, they're going to follow through with [crosstalk 00:53:51]-

Mark Zandi:                      Block it means? Just I want to make absolutely clear.

Bernard Yaros:                 Filibuster. Yeah, filibuster.

Mark Zandi:                      They're going to filibuster this. Yeah, okay.

Bernard Yaros:                 Exactly. They're going to filibuster this. And then at that point, Democrats, they're going to have really have no other choice, but to redo that bill, just make it a clean, continuing resolution that just extends the funding for the government through early December, provides hurricane assistance, assistance to Afghani refugees, and so on and so forth, but without any debt limit suspension. And they should be able to do it in time. If not, at the very worst, I'd-

Mark Zandi:                      In the next few days.

Bernard Yaros:                 Yeah.

Mark Zandi:                      In the next few days.

Bernard Yaros:                 Next week, yeah. The next week. [crosstalk 00:54:33].

Mark Zandi:                      Next week they got to do that. Okay. So this is all going to play out, what you just described, this scenario, is going to play out next week and by the-

Bernard Yaros:                 Next week, yeah.

Mark Zandi:                      Yeah. By... I don't know when October 1 is, I guess it's the following Monday or something.

Bernard Yaros:                 It's a Friday, I think.

Mark Zandi:                      Oh, it's on next Friday. Okay. Oh yeah, that's right.

Bernard Yaros:                 Yeah, we could potentially have a shutdown, a one day shutdown.

Mark Zandi:                      Yeah, right.

Bernard Yaros:                 So on Friday you get a shutdown and then on Monday the...

Mark Zandi:                      Reopens.

Bernard Yaros:                 Over the weekend they get together and they pass [inaudible 00:54:59] resolution and everyone's back to work in the federal government on Monday. In 2018 we did have a... I think it was like a one or two days shutdown. The economic effects of that is almost... it's so [crosstalk 00:55:15]-

Mark Zandi:                      Yeah, it's not a deal.

Bernard Yaros:                 ... it's not going to show up. You really have to have two to four weeks of a shutdown for that to really show up. And even there, that's not a-

Mark Zandi:                      Well, I think in 2013... and this is work we did back in 2013. 2013 was the last time we shut the government down, I think for 16 days. No, no, no, wait-

Bernard Yaros:                 No, no, in 2018-

Mark Zandi:                       2019. But that was also [crosstalk 00:55:39]-

Bernard Yaros:                 [crosstalk 00:55:39]. And that was the record long shutdown. That was the longest shutdown we ever had.

Mark Zandi:                      Yeah, yeah, yeah. I'm sorry. That's also though, when we had the last real debate over the debt limit was 2013. And we combined with-

Ryan Sweet:                      Correct.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Yeah. So it was government shutdown, so similar kind of environment as we have today where they're putting-

Bernard Yaros:                 I'd actually say the closest environment to the one we're in today is 2017, because we also had... on various aspects. So you had a shutdown risk, also a debt limit risk. Then you had all the... had hurricane Harvey, Irma, Maria, and there was a lot of pressure to provide aid there. And then also at that same time, just like now, Republicans were considering reconciliation to the tax cuts and jobs acts. So it was [crosstalk 00:56:24]-

Mark Zandi:                      But just to go back to the question about the economic impact of the government shut down, we didn't do a study on the 2017 or '19 shutdowns, but on the 2013, when the government was shut down 16 days, we found that it shaped almost a half a point off of that growth in the fourth quarter of 2013. So it was meaningful, small in the grand scheme of things, certainly in the current context, but not inconsequential.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Yeah. Okay. So the debt limit-

Ryan Sweet:                      I think our rule thumb is...

Mark Zandi:                      Oh, go ahead. Yeah. What is the rule of thumb?

Ryan Sweet:                      The rule of thumb is a 10th of a percent off GDP per week of a government shutdown.

Mark Zandi:                      Oh yeah, it's a pretty good one. Yeah. It's a pretty good one.

Ryan Sweet:                      So it's kind of easier to think about it on a week to week basis, how much is it? [crosstalk 00:57:05].

Mark Zandi:                      Yeah, that's a good rule of thumb. Yeah. Okay. So the debt limit will not be part of the so-called continuing resolution, that's the short term funding bill. You think they get that through, Republicans want... don't want to shut the government down, that isn't great politics. And of course there's money in there for... particularly because there's money in there for Ida hurricane victims. And so you're saying the debt limit increase will be then folded into the reconciliation package. That's the $3.5 trillion package that's before Congress.

Bernard Yaros:                 Exactly. Exactly. And this is something that you and I dug into over the past couple weeks because the media really hasn't been talking about all the procedural or hurdles it would be to do this through reconciliation. It's really not as easy as I think people think. So to start the reconciliation process, which is passing spending tax legislation with only a simple majority and with the filibuster-proof simple majority in the Senate, you first have to pass a annual budget resolution, which is essentially is... sets the priorities for fiscal policy over the next several years. And you can only pass one budget resolution per fiscal year. So in August, they already passed the budget resolution for fiscal 2022, they can't do another one. So they have to amend this current budget resolution and include instructions to raise the debt limit by a certain amount.

                                             And this is where the Senate parliamentarian, who interprets the rules of the Senate, starts to come in play. So, if the parliamentarian says, "Okay, Democrats, you can make that revision," I'd say Democrats would be able to pass the reconciliation bill that addresses the debt limit, I'd say in one or two weeks. But this still assumes Republicans don't obstruct the process, by denying them a quorum in the Senate budget committee or offering unlimited amendments that really gum up the works. But even in this case, I don't think Republicans would be obstructive. While Republicans don't want to help Democrats raise the debt limit, they're not going to prevent them from doing so, because, as I said, they want Democrats to 100% own this debt limit increase so they can attack them in next year's midterms for being fiscally irresponsible. But then there's this other scenario that I-

Mark Zandi:                      Wait a second, before you go on, before you go on, the one nuance here is that in this reconciliation package, it's very unlikely they could actually suspend the debt limit, like they have been doing for a decade. They're going to have to increase the debt limit and it's going to be a big increase, right? It's going to be-

Bernard Yaros:                 Yes, yes, yeah.

Mark Zandi:                      And that complicates the politics of this even more, right? Because getting 50 Democrats, 50 democratic Senators to agree, even without this debt limit increase is... we're watching it, it's not easy.

Bernard Yaros:                 Yeah, yeah.

Mark Zandi:                      Because you've got folks, progressive Democrats, you've got moderate Democrats, finding the middle ground is, as you can imagine, a process. And then you throw into the whole mix, this you got to raise the debt limit, increase it, which is politically not a great thing. It complicates it even more. So that does raise the degree of difficulty. This is like a gymnast on the parallel bars and this is a high level... The degree of difficulty was already... I don't know what the numbers are, but let's say a 9.5, and now it's like a 9.9 kind of doer. Did I get that right? You get my drift, right?

Bernard Yaros:                 Mm-hmm (affirmative).

Cris deRitis:                       Do we have a Simone Biles senator out there?

Mark Zandi:                      And if they get the twists, we're doomed, right? We're doomed. So do I have that right? Did I get that that right, Bernard?

Bernard Yaros:                 Yeah. You got that right.

Mark Zandi:                      Okay.

Bernard Yaros:                 So if you suspend the debt limit, you kind of wash your hands and walk away and you don't really know... no one can tell how much the debt is going to increase over that suspension period. But if you say we're going to increase it by a dollar amount, let's say by $1 trillion, that's where next year Republicans can come at Democrats and say, "Hey, they increase the debt by $1 trillion." And again, it's, it's a good soundbite that really hurts Democrats, even though, as we all know, raising the debt limit doesn't approve new spending, it only helps pay for... allows the Treasury to pay for bills that have already been approved by Congress.

Mark Zandi:                      Yeah.

Bernard Yaros:                 But again, that's too much for a soundbite on the political trail. So that's where it's-

Mark Zandi:                      Okay, so you're saying, "I'm not worried because I do think this is the way it's going to play out. It's going to feel uncomfortable, come down to the ninth hour." What do they say, the 10th hour? The 12th hour?

Bernard Yaros:                 11th hour.

Mark Zandi:                      11th hour.

Ryan Sweet:                      11th hour.

Mark Zandi:                      I knew there was a number. 11th hour. "11th hour, and they're going to figure this all out and life goes on." Okay. Is there any, though, downside to this? I mean, does this have any longer term implications? If that's the scenario, the most likely scenario, does that have any fallout, that scenario?

Bernard Yaros:                 Yeah, basically, it means that from now on whenever a party is fully in control of the White House and Congress, and there's a debt limit standoff, it means that the party in the minority is going to say, "I don't want to help you. I don't want to help the majority out. You guys do it on your own. We're not going to be part of this." And so in that sense, going forward, debt limit episodes are going to just... there's not going to be any really will to... any bipartisan will to help each other.

                                             And also, this scenario could also turn a darker turn. So let's say the parliamentarian who I just mentioned, let's say, they say you can't actually revise the budget. And there's the parliamentarian has given some guidance that suggests that she may even actually rule against this. You could have a case where the vice president, who is the presiding officer in the Senate, actually overrules the parliamentarian. And this would also be just a very rare occasion, something that we haven't seen in decades. So that would also sort of set a bad precedent that I don't think Democrats would want to [crosstalk 01:03:40].

Mark Zandi:                      Yeah. So what you're saying, just to reiterate is, okay, even if you get this, what you consider to be a reasonably graceful scenario, there's fallout because going forward, the precedent has been set that the party in power is going to have to do this on their own. Which means it's going to be... the degree of difficulty going forward is now perpetually higher.

Bernard Yaros:                 Exactly.

Mark Zandi:                      That means more uncertainty, and that may men, by definition, economic implications, higher interest rates, all that stuff.

Bernard Yaros:                 Exactly.

Mark Zandi:                      Yeah. Very unfortunate. Okay. And we did consider the darker alternative, one variation of a darker alternative scenario, where they don't agree to... They can't figure it out for whatever reason. They can't raise the debt limit in time. And they do default and this drags on through... basically through Thanksgiving. That's a pretty dark scenario, right?

Bernard Yaros:                 Exactly.

Mark Zandi:                      Hard to imagine.

Bernard Yaros:                 Yeah. So if we are right, and October 20th is the drop-dead date at which the Treasury can no longer meet all of its obligations on time and in full, because we run annual deficits, that means that on a day-to-day basis, the Treasury's going to have to cut its spending in order to match incoming revenues. And over, let's say from October 20th through the end of November, revenues... we're estimating that the Treasury should receive enough revenues to pay for about 60% of the bills that are going to need to be paid. But that's still a 40% decline in spending. And based on the math that we did, that would equate to more than $200 billion in unpaid bills over this period of time. Which if you annualize it, that comes to about a whopping 10% of GDP.

                                             And this is where you get into all sorts of prioritization scenarios. Which are really impractical or even illegal. I think it'd be easy for them to prioritize interest and debt payments just because all that's managed through a different computer system known as Fedwire. But everything else is very highly computerized. And it would be just technologically very difficult to-

Mark Zandi:                      Yeah, a mess.

Bernard Yaros:                 ... say, "Okay, we're not going to be paying social security beneficiaries this day, but we'll pay veterans benefits," and just sorting through the millions of payments that go on each month is just impossible.

Mark Zandi:                      Yeah, so I mean the point is that going down the dark path is so dark, there's no chance they're going to go down it. That's what we're saying. They're just not going to do it. Hey, have you heard about this trillion dollar platinum coin? Have you been following this?

Bernard Yaros:                 Yeah, I've been hearing that, but what I've heard is that's impractical or I don't know.

Mark Zandi:                      Well, explain what it is, and tell me why you think it's a hair-brained... I'm guessing you think it's a hair-brained idea.

Bernard Yaros:                 So I think it's calling for the Treasury to mint a trillion dollar platinum coin, which they would then use to-

Mark Zandi:                      Deposit at the Fed and the Fed-

Bernard Yaros:                 Deposit it at the Fed and then use that as-

Mark Zandi:                      Cash.

Bernard Yaros:                 ... cash to-

Mark Zandi:                      To pay their bills.

Bernard Yaros:                 That's-

Ryan Sweet:                      To pay down the debt.

Mark Zandi:                      And apparently the way the law is written, it actually says the Treasury can mint a platinum coin of any denomination. I mean, it's actually there.

Bernard Yaros:                 Mm-hmm (affirmative).

Mark Zandi:                      It's actually there. So let's say they can do that. Let's say they legally can do that, which I guess is going to still be a question. Someone, I suppose, will challenge it, but although, I don't know who has the standing to challenge it, I'm not sure. But let's just say that it was challenged. But regardless, why wouldn't that work?

Bernard Yaros:                 I-

Mark Zandi:                      Or don't tell me you think it is going to work?

Cris deRitis:                       It's going to work.

Bernard Yaros:                 I think, again, it's just another precedent that they don't want to establish. It's just very-

Mark Zandi:                      It's not going to work, guys. It's not going to work. I'll tell you why it's not going to work. Because a global investor's going to see that and say, "Are you guys out of your mind? That's not sustainable."

Cris deRitis:                       It's not, but it's exactly what we need to get rid of this crazy debt ceiling discussion every few years, right?

Bernard Yaros:                 We should just eliminate the debt ceiling. I think that's the [crosstalk 01:08:05]-

Mark Zandi:                      Oh, eliminate the debt ceiling, all for that. No, I think global investors look at that and they throw up all over it. They'll say, "That's even worse because you guys are going to turn yourself into a pretzel to do that?" And so it's not going to work and at the same time you destroy the... our system of government, right? Because at that point, president is... Can you imagine, President Trump, I guess, could have issued a platinum coin to fund the building of the wall, right? Is that what we're saying?

Bernard Yaros:                 Yeah.

Mark Zandi:                      Right? Cris, you're the defender of this policy?

Cris deRitis:                       Yeah. But if-

Mark Zandi:                      That makes sense to anyone. That the president can... completely unfettered here, could do whatever he wants. So that [crosstalk 01:08:48]-

Cris deRitis:                       [crosstalk 01:08:48], are you defending the debt ceiling? Do you think this is a-

Mark Zandi:                      No, I hate the debt ceiling. I say get rid of the debt ceiling, but I'm not saying issue a platinum coin-

Cris deRitis:                       So this is a mechanism to spur that change, right?

Mark Zandi:                      Oh, are you kidding me? It won't spur that, it'll just create even more acid politics. I mean, it'll send us way off the rails. But I've seen... I think, Krugman endorsed it, I believe. Paul Krugman, the New York Times columnist. Nobel laureate in economics, yeah. So it's gained some traction, I guess. Cris over here is a convert. Ryan, do you have a view on this platinum coin? I think we lost Ryan. Did we lose him?

Bernard Yaros:                 Yeah.

Mark Zandi:                      Yeah. He's frozen.

Cris deRitis:                       I've got an improvement on it though.

Mark Zandi:                      Oh, well, okay. What is it?

Cris deRitis:                       Two trillion dollar-

Mark Zandi:                      Crypto. We should issue crypto.

Cris deRitis:                       Two coins.

Mark Zandi:                      Two coins. Okay. Yeah, I like that idea. That's a great idea. We wrote a paper on this, going through the dark side scenario and it's, as I mentioned earlier, it's on Economic View, and I just wanted to ask about the way I wrote the conclusion, what'd you think? I thought it was very eloquent. My own personal view. I don't know what you think.

Bernard Yaros:                 Yeah, about how this is the full faith in credit and defending that is really tradition-

Mark Zandi:                      Well, I brought up Alexander Hamilton.

Bernard Yaros:                 Alexander Hamilton, yeah. Yeah.

Mark Zandi:                      Hamilton paid off the revolutionary war bonds, 100 cents of the dollar, since that day we established the credit of the United States. If you invest in the debt of the United States of America, it is money good, you're going to get your principal interest on time.

Bernard Yaros:                 Exactly.

Mark Zandi:                      That has led to very low interest rates, lowest in the world. It's established the U.S. dollar as the reserve currency, and the benefits of this are incalculable. And we are going to give all of this up for what, exactly? Because of a debt limit that never worked in the first place? I mean, it's just mind boggling. It's mind boggling.

Bernard Yaros:                 I do want to make a point. So when the debt limit was originally conceived, I think it was around World War I, it actually was a good idea and it did... or it was an improvement upon the prior situation that gave more flexibility to the Treasury to manage the nation's debt. And that's because prior to World War I, Congress had to approve each... the dollar amount of every debt issuance, and as well as the purpose that that issuance would serve. So that was just a very cumbersome process. So around World War II, they said, "Okay, we're just going to put an aggregate limit and it's up to the Treasury to issue the debt that it wants for the purpose that it wants. And then every now and then, when the debt limit needs to be raised, we'll come back and address it there."

                                             And I think until the '90s, this never really was much of a contentious issue, but it was really, I think, when you had former President Bill Clinton going head-to-head with-

Mark Zandi:                      Newt Gingrich.

Bernard Yaros:                 ... Newt Gingrich, who at the time was trying to push through his contract with America, which were spending cuts and tax cuts. That's where it started to become weaponized or being used as a political football to make these debt limit standoffs.

Mark Zandi:                      Hey, I got one proposal for you though, how about if we... and then we'll call it a podcast. How about if we... if the law was changed? No debt limit, at least as currently designed, structured. But with each spending or tax bill, where the CBO, the congressional budget office, the folks that do the forecast here on the budget, determine that there's going to be a deficit as a result of the spending or tax bill. At that point in time, with that legislation, Congress and the president have to agree to raise the debt limit sufficient to pay for what they just voted for. That, to me, seems reasonable.

Bernard Yaros:                 That's the best proposal I've seen. Yeah. Because the whole idea is that by the time-

Mark Zandi:                      Oh, I thought that was my proposal. What the heck? You've seen that proposal?

Bernard Yaros:                 Yeah, I've seen it.

Mark Zandi:                      No, I'm kidding.

Bernard Yaros:                 Yeah, Committee for Responsible Federal Budget, they've put out-

Mark Zandi:                      No, no, really? It was theirs? That was their idea?

Bernard Yaros:                 I think, yeah, it's-

Mark Zandi:                      It's been around.

Bernard Yaros:                 ... been out there a lot. Been around.

Mark Zandi:                      Yeah, okay.

Bernard Yaros:                 And I think, again, in an alternative universe where there's constructive debate over budgets and fiscal policy, I think that would be fine. As soon as people are making changes to taxes and spending that are going to affect the long term debt trajectory, they're going to have to... they're going to see the implications right away on the debt limit. Whereas now it's so after the fact, by the time we're dealing with the debt limit, all these decisions have already been made years or months ago.

Mark Zandi:                      Well, so bottom line, we're saying we're going to get a funding bill to keep the government open, maybe it's closed for a day or so. That we are going to get a debt limit increase and that'll be part of the reconciliation package that the Democrats get through ultimately, through Congress and signed by the president. And then we'll get the reconciliation bill. It won't be 3.5 trillion, but it'll be something... still a matter of debate, but say about two and a half trillion. So at the end of the day, this is not pretty to watch, but it's not going to be... it's not going to change our forecast in any way. That's our forecast. That's where we land. Okay.

                                             All right. Very good. Well, the United States of America, if you're a Game of Thrones fan, and I guess I was until the last episode, but I view the United States of America as the Lannisters, we pay our debts. And to even contemplate not paying our debts is just plain dumb. Just plain dumb. Because it's going to cost us as taxpayers and American households, just the economics of it, it's going to cost us a lot. And not for a little bit of time, for generations, right? Because it took us generations to build up our credit and get us to a place where everyone trusts us. By the way, the only beneficiary of this in my mind is Cris. You know why? Crypto. His crypto's going to be worth more because debases the value... It goes right to what the crypto guy's say about fiat currency, about, "Look, these guys are going to screw it up." because they can, and they will ultimately screw it up, and that's why you need crypto because people aren't involved, they're not going to be able to mess with it.

                                             So on the day, if we ever defaulted on our debt, that's the day crypto goes to... what is it now? $40,000? It'd go to $80,000 or something like that. Maybe that's a reason to invest. I'm not sure. Yeah. This is-

Cris deRitis:                       Janet Yellen will save the day.

Mark Zandi:                      Yeah, Janet Yellen will save the day. Okay. All right, guys, I promised this wasn't going to be the marathon that the last one was. We have been chatting for a bit though, so any last words? Anything anybody wants to say? That offer does not extend to Bernard. He's not permitted to answer that question. Because then he'll start speaking in Arabic or some other 10 languages he knows. Anything? Ryan?

Ryan Sweet:                      I think we're good. Until next week.

Mark Zandi:                      We're good. Cris, you good?

Cris deRitis:                       Yep, all set.

Mark Zandi:                      Good to have you back, Cris, I missed you.

Cris deRitis:                       Thanks. Same here.

Mark Zandi:                      You're back with your Howdy Doody shirts. You know, we needed the whole Howdy Doody shirt there. Right? Look it, they're all-

Ryan Sweet:                      How is this a Howdy Doody shirt?

Mark Zandi:                      Button down collars and blue and... Anyway, I'm only joking.

Cris deRitis:                       I missed the teasing.

Mark Zandi:                      All right. All right. All right, listener, I hope you enjoyed the podcast. Give us ideas. Go to Economic View, not Economic View, Go to Click on the Inside Economics button and vote. Hey, I just had a debate on ESG investing. The proposition was ESG investing is... will undermine the American economy. I did not support that proposition, I was against that proposition. How about that for a topic? That's kind of cool, huh? Should we have that as topic?

Ryan Sweet:                      Great topic.

Cris deRitis:                       Who's taking the other side?

Mark Zandi:                      All right, listener, if you think of another topic, let me know. That'd be good to debate that one, anyway. All right, take care now, until next week.