Transcription
So, Hank, we have the war in Iran. Give us your preliminary take on what that could mean for the U.S. economy.
So David, this is preliminary because a lot of it has to do with how long it's going to take. And it's going to affect a lot of things when you look at jet fuel, diesel, gasoline, petrochemicals, you look at the military spending, you look at the deficit, you look at the dollar, and so on. But what we know for sure is right, we know there's going to be inflationary pressures. We know interest rates are going to be higher longer. We know that fertilizer prices, the farmers will be hit and that will impact food prices. We know that the airlines are going to be under pressure. Certain petrochemical companies, military contractors will do better. This is impacting the deficit. So as I look at it, if this war isn't extended, it's not good for the U.S. economy, but we will weather it better than anyone else. I think the biggest, looking at the war, the biggest impact, potential negative impact to the U.S. economy is what it does to the global economy. And this is a real global shock. And if it lasts a while, right? Then there's a danger that turbulence in the markets will spill over into the U.S. And so that would be perhaps the biggest risk.
Westin: If there is indeed a global shock to the economy, you've dealt with that before in the financial crisis. There was a time that you worked hard to bring the globe together on how to respond to it. Right now, the globe seems to be going in all different directions, with the U.S. different from Europe, different from China.
Yeah, that is, you've put your finger on the real difficulty. So the first thing is there's much more sovereign debt, not just in the U.S., but in Japan, really, all around the world. So you've got more debt. And then you've got a diversity of economic performance, right? At the same time, the U.S. economy is strong, China is weak. There are other strengths and weaknesses. So different macroeconomic policies, different monetary policies around the world. And so it's going to be very important to try to bring it together. That's why I think it is so important that the U.S. be talking with China and other major economies, monitoring what's going along, so they've got some basis to coordinate if and when there is a global crisis.
Westin: You mentioned China. Where is that relationship between the United States and China right now? Because it has been at odds sometimes.
Well, it's clearly, so here's the way you look at it. You and I have talked before how it is, by far, it's going to really set the geopolitical and geoeconomic landscape for the foreseeable future. But this relationship is fraught, right? That's going to be fraught for the foreseeable future. No doubt about it. But they are a strategic economic competitor. They're the adversary when it comes to military and security. But our economies are deeply linked, which creates a kind of tension, but also a sort of stability. Because each country knows that the other can do things to seriously damage their economy. Neither country can afford a trade war right now. Each knows that if it spins out of control, it reverberates through the global economy. And so there's a... This is what I would call a period of mutually assured economic disruption, right? Which results in a kind of stability. And not from the fact that each side trusts each other, quite the opposite, but because the costs of escalation are so high. And so as I look at this relationship, each side wants stability. And as I look forward to the summit, when our two presidents meet, and they will meet, you know, it, you know, it's scheduled to be mid-May, and if the ceasefire holds, it'll be then. Otherwise, it could be delayed. But they will meet, because the Chinese, it's fascinating, they're saying, "Please, don't go to war with Iran, but please, come on over here, right?" They want to talk. They're going to welcome our president with great pomp and ceremony and symbolism, and they do it so well, and he will like it. But then the focus is, don't expect big breakthroughs. They're going to want to preserve stability, work on implementing existing agreements, right? And then they're going to want to put together some kind of mechanism to monitor trade and sort of set the rules and the responses and monitor trade, hopefully do something on the investment side. I think they will, so there'll be clear rules. But the last point I would make, and this is my biggest point here, is ultimately this competition, and there is competition between US and China, will be decided not by rhetoric, or even by negotiation, but by how each country does domestically dealing with their economic challenges and their political challenges. and of course, in the US, I believe, we have far less economic challenges than China.
Westin: When you took the job as Treasury Secretary, in your book "On the Brink," you talk about debt, about entitlements, borrowing too much money. You were worried about it. It was part of the reason you took the job was to address that. Look at where we were then and where we are now. There is so much less fiscal headroom to deal with any of the disruption you talk about.
Wow, it's breathtaking, right? So the deficit is $1 trillion. We're on a path to have it be $3 trillion by 2035. $1 trillion is $7,800 for every household, right? And so you look at this, it clearly, we use the word "unsustainable" a lot, but this is on this path. It's on a path to destroy our economic well-being and our national security, which is rooted in our economic strength. The first rule of holes is to stop digging, right? And we're digging big time. So, but the good news is, and there is good news, we're a rich country. And so there's plenty we could do if we begin to act. It's going to take increased revenues, taxes, and dealing with expenses. And I know you can raise the revenues without a big drag on growth if you close preferences and loopholes in the tax code. And you can't deal with a problem unless you deal with entitlements, Social Security and primarily health care. And there, really, you can do that without putting a heavy burden. The last point I would make here is because I've worked with Congress before, and Congress doesn't like to do unpleasant things until there is an immediate crisis.
Westin: Are we any closer to having that emergency break the glass plan today than we were in 2007, when you were worried about it?
Of course, I'm not there now, but I doubt it. I doubt it. And this is, there's so many things out there to deal with right now. I think, you know, to give credit to policy makers, when you look at wars in Ukraine, in Iran, you look at all the conflict around the world, you look at what's going on with AI, you look what's going on with the environment, there's a lot of stuff going on. But we should not forget the deficit.
Westin: When you were Secretary of Treasury, part of your responsibility, I think, was being steward of the U.S. dollar as a reserve currency, as the dominant currency in the world. As we look at the Iran war, does it pose a threat to the dollar's position?
Well, what happens is, short term, what the war has shown is the dollar is, there's no other safe haven, right? So the dollar was declining for a lot of reasons that should have been declining, frankly. I didn't like to see it declining, but boy, in a crisis, the dollar strengthened. But I believe, to the extent it adds to our deficit, it poses a risk, a longer term risk. And that's why I really believe the independence of the Fed is so important right now. Because at the same time, because the independence of the Fed really increases the confidence that investors have in our economy, in our financial markets, and so on. And at a time when we're piling on so much debt, I think it's really important that we have that.
Westin: Has confidence in the Fed's independence already been undermined?
It has... There's issues that are raised, right? But I look at it, I look at, you know, when you have a chairman of the Fed, you want someone who understands the markets, who is a good communicator, has a good understanding of sound economic principles. And I think Kevin Warsh meets those tests, right? And he's been before, he's done it. Now I think his job becomes more difficult, because there's independence of the perception of independence. How this transition between Jay Powell, who's just been a star performer, and got great credibility and integrity, I think how that transition is handled, and how the administration deals with it, is either going to make Kevin's job more difficult, or, you know, somewhat easier. But Kevin won't have an easy job anyway. And, you know, I compliment the Trump administration on selecting him, right?
Westin: Finally, private credit's much in the news these days, about the risk from private credit. I'm not going to ask you how much the risk is, but do we know what the risk is for the banking system, systemic risk?
We don't know. But I do, we have to go through a credit cycle. And really what's been in the news is the fact that there's a preponderance of it going outside the banking system, into the shadow markets, right? And so people are worried about that risk. And we're not going to know until we go through a credit cycle. But at least my view is that there's some chance it'll actually be better, some chance, because the banks are highly regulated. And what happens when there's a crisis? The regulators push them to sell. Who buys it? Private equity. And private equity and private firms buy it and hold it, right? So it could be better, but we're not going to know until we go through it. We didn't know with the mortgage crisis the extent of it. And it's contagious and it can spread. So we could all depress ourselves talking about all these risks here today. But let's leave with the good news. Right now we're in the United States of America, and we've got the strongest, most resilient economy in the world and the best companies in the world. And it's a beautiful day outside.