I think the most important point in this conversation is not whether U.S. Treasuries are still “safe.”
They are.
The more interesting question is ... who becomes the marginal buyer of duration when governments and corporations are both issuing enormous amounts of debt...
For years, central banks, reserve managers and institutions with structural demand for safe assets absorbed Treasuries at very low yields.
That environment has changed.
Now the marginal buyer may be far more price-sensitive, balance-sheet-sensitive and return-sensitive.
That changes the clearing price.
Add massive fiscal issuance, corporate borrowing for AI infrastructure, lower demand for duration and a reduced Treasury convenience premium, and suddenly the long end has to offer materially more yield.
That does not require a dollar crisis.
It does not even require investors to believe the U.S. will default.
It simply requires **more supply than the traditional price-insensitive buyer base wants to absorb at yesterday’s price**.
For investors, that distinction matters enormously.
The real risk may not be the collapse of the Treasury market.
It may be a structurally higher cost of capital spreading through **equities, credit, housing and government finances**.
In global macro, I keep coming back to the same question:
Who is the marginal buyer and at what price will they step in?
If you think about markets through these kinds of cross-asset relationships, that is exactly what I explore in Global Markets Insights.
there was a moment in which foreign central banks wanted to sell Treasuries and the Treasury swap spread got unwound because of margin calls, and we did see big spikes in treasuries. And I think the swap lines that were created by the U.S., by the Fed and the like, were mechanisms to try to stabilize episodic things.” Way out of my comfort zone here but it seems to me both of these sages are talking about the danger of a disequilibrium - an abrupt change in demand for an asset class - to which central banks cannot respond effectively in the short term. Even a short-term blip - say a huge AI-caused disaster - could poison the economic waters long enough for most of us to feel the effects. Recovery would come eventually but we’d endure political/practical ramifications during and for how long? Love to hear others’ opinions.
Joanna, I really enjoy reading your thoughts. And honestly, “way out of my comfort zone” often leads to the most interesting conversations. Thank you for jumping in here. I’m glad you did.
Yes, I think your concern has merit, @Joanna Clancy. I’d just be a little careful with the word “put.” Treasury can influence liquidity and how supply reaches the market, but it cannot permanently remove the underlying fiscal risk.
More broadly, I tend to see the global economy as one interconnected system. What happens in the U.S. bond market eventually affects Europe, currencies, companies, portfolios and, ultimately, our everyday lives.
But for me, the important question is not whether we should worry about all of this. It is how we deal with it.
Whether we are in the U.S., Europe or somewhere else, we are all sailing on the same sea. We cannot control the weather, but we can understand it and position ourselves accordingly.
That mindset is really at the heart of what I try to do with Global Markets Insights… understand what is changing, what it means, and how to navigate it without being consumed by it. ;)
You use the skills that set our species above most others - our ability to respond effectively to changing environments! Sounds like a wise approach. Often, by contrast, individuals en mass, respond irrationally and destructively to such changes and can bring down the rest of us, however blameless. Some ‘blips’ lead more often to irrationality than others and can even cause wars. Sorry - I’m being tendentious here.
I just finished PK’s latest interview and have been reading these wonderful posts. Thank you all! The thing that struck me most was the statement regarding the capacity to respond effectively to changing environments. If only we could do that within our political system on even a limited basis. I don’t see much to be sanguine about at present. I hope you all have a great weekend! Well, I’m off to do dishes.
I'll be watching to see if the international investors conference coming up in Canada in a couple of weeks answers the question...
'When people say, “Oh, people are going to dump their U.S. bonds,” I always ask, “And buy what?”' .
A trade war closes the US market. To sell those products somewhere else requires investment in logistical infrastructure and services. Investment that used to go into building links with the US, will now go to building links between middle powers.
Although retaliatory tariffs do not impact the US much, it is vulnerable to the rising cost of debt that results from the world viewing the US administration as a sinkhole in the road, routing around it, and redirecting investment accordingly.
Retaliatory tariffs will hurt whomever issues them, as Trump’s tariffs hurt Americans. By the way, as a Canadian, I found it easy to dump my US Treasuries in favour of Canadian bonds. My personal bond portfolio (which isn’t going to disturb the market) is broadly diversified in European and Canadian debt, with a little Japanese thrown in for good measure. The US represents too much risk in every sense of the term.
"I'll be watching to see if the international investors conference coming up in Canada in a couple of weeks answers the question..."
You're talking about the International Investors Summit in Toronto, yes? There is something very symbolic about that location under the present circumstances.
And then the AIMA Global Investor Forum is happening here a month later. So confusing.
I assume that Carney is scheduled to speak at both of them?
And what the US delegates have to say - presumably not under White House marching orders, if they want to be taken seriously - will be especially interesting. That's assuming they are even allowed entry to Canada by then ... only half-joking there.
Greg, I think that is certainly possible. The interesting constraint, though, is that investors have to look at the alternatives globally.
Europe, Japan, China and the other major markets all come with their own structural problems. And when you need a market that combines scale, liquidity, rule of law, deep capital markets and a large supply of high-quality collateral, the U.S. still has something close to a monopoly.
So I can imagine capital gradually being redirected at the margin, especially into new trade relationships and infrastructure between middle powers. But replacing the U.S. financial system is a much harder proposition.
That is why I keep coming back to the marginal buyer. The U.S. does not need to lose its dominant position for yields to rise. The next buyer simply needs to demand a little more compensation.
Perhaps “ panic “ is too strong a word to use , but I fear that outside of AI investment opportunities in the US domestic market have dwindled - mainly bc the bottom 90 percent of us are struggling just to stay afloat . When we have so many eggs ( so to speak ) in the AI basket , if that bubble bursts - there isn’t enough diversification to bring us back quickly .
The 10 percent that do play in the bond market and foreign interests are in a different world from most of us . I don’t really understand it .
I believe history shows that when we get an inverted yield curve - recession usually follows - but we aren’t sure when . If a recession happens during this administration - I’m not at all confident that the leadership has the skills to get us back on track .
Paul, I think you understand more of it than you give yourself credit for. :)
Your point about having too many eggs in the AI basket is an interesting one. What matters to me is not simply whether AI is a bubble, but how dependent other parts of the economy and financial markets have become on the same underlying story.
That is where things get interesting, because equities, bonds, corporate investment, household finances and government debt may look like separate worlds, but they constantly interact.
And I agree with you on one thing in particular ... predicting exactly when a recession arrives is incredibly difficult. I find it much more useful to understand where the vulnerabilities are and then watch how the system responds when conditions change.
Thanks for joining the conversation, Paul. I really appreciate your perspective.
The US is losing the "rule of law" and possibly "large supply of high quality collateral" edge, especially with foreign bond buyers. A concerted effort by China to create a "good enough" bond and asset market might happen sooner than people think. The market doesnt have to be $40trillion deep, or perfect, to be a big threat to US financial dominance. It just has to be good enough to soak up the marginal buyers noted. Given the utter chaos and corruption in the US government, I think that any assertion that the role of the dollar/T-bill is safe is whistling past the graveyard.
The people being hurt by tariffs should have known that the Orange Mistake’s advisor on foreign trade is Peter Navarro . Sad that so many farmers are suffering now - many of them probably voted for our mango coated disgrace
- we ought to figure it out that when the farmers suffer - prices on the shelf keep going up even faster than before .
I am very grateful to you, Prof. Krugman, for defining the ‘terms of art’ for those of us who had zero economics classes. STEM majors(excepting mathematics) did not allow for many electives!!
This talk offers an excellent look into the capital side of macroeconomics, but it misses a critical opportunity by ignoring the human variable. By analyzing the *safe assets shortage* strictly through a capital lens, the discussion overlooks how the rise of AI shifts the balance and social equity, ie, the structural problem.
The creation and supply of pseudo-safe assets (whether via regulatory arbitrage, financial engineering, or fraud) only happen because there is an insatiable demand for them. However, by ignoring the structural lack of a meaningful minimum wage—and our deeply ingrained cultural attachment of human worth to wealth—the interview completely bypasses the recipe for massive social instability.
To truly understand what brought us to our current *democratic* bottleneck, we cannot ignore the tension between labor vs. capital and the ideological questions tied to it. Otherwise, we risk repeating the math *errors* of 2008—mistaking a larger volatile environment for a pseudo stable one, akin to using a Gaussian Copula to justify that the price of two BB bonds into a single AAAA asset will resist very long.
This may be comforting for someone looking to relax with their savings. But for a realistic view of economic stability, I highly recommend checking out Bill Gates’ recent piece addressing the urgent threat to labor in the age of AI:
When foreign buyers of America's debt decide they need to be compensated for the "longterm risk" they're assuming, that means higher bond yields. At 5% there's a debt crisis and the country cannot service its debt. We're already seeing this in the 30y Tbill. If rising rates are no big deal, why the discussion about "storage of safe assets" and Bessent buying yen. Macroeconomists are concerned as they should be.
I think that is the really interesting question. Not simply whether 5% is dangerous, but what happens if the marginal buyer begins demanding structurally more compensation for holding U.S. duration.
Because then it doesn't stay in the Treasury market. It starts moving through government finances, mortgages, corporate credit, equity valuations and eventually global capital flows.
That is actually why I built what I call my Global Macro Map. I wanted a way to follow how a change in one part of the system travels through the others rather than trying to predict the next crisis.
I suspect we are looking at much of the same problem from different angles. Thanks for joining the discussion. I really enjoy seeing where these conversations lead.
You should try to factor into your global capital allocation model the fact that the Gulf sovereign wealth funds have less new money (and maybe less old money) to invest than they did before February 28.
That’s a very interesting point, Professor Clingan. I hadn’t incorporated that explicitly into my thinking about the marginal buyer.
I’d be particularly interested in your February 28 reference. What changed in your view that materially reduced the capital available to the Gulf sovereign wealth funds?
This is actually why I tend to look at these questions through what I call a Global Macro Map. I try to connect capital flows, fiscal policy, interest rates, currencies and asset markets rather than looking at Treasuries in isolation.
If Gulf sovereign wealth funds have less capital to deploy while Treasury issuance, corporate borrowing and global investment needs are all rising, that changes one part of the map. And eventually that change has to show up somewhere else, potentially in yields, currencies, relative asset prices or cross-border capital flows.
That is exactly the kind of relationship I try to understand in Global Markets Insights.
Thank you for adding that angle. I’d genuinely like to hear more about your thinking behind it.
Greetings to you in Germany. I lived in Bonn in 1988-89 doing the research for my doctoral dissertation. Studied at the university under Dr. Hans Pohl.
February 28 marked the closing of the Strait of Hormuz.
The Gulf sovereign wealth funds keep their details quiet. A few months ago I tried to review the funds and see if the crisis was having any effect. The approximate valuations are quite large: Kuwait = $1.07 trillion; Abu Dhabi = $1.128 trillion; Qatar=$580 billion; Dubai = $429 billion. I also tried to estimate their lost revenue *just from oil* (not LNG, petrochemicals, fertilizer, refined aluminum et al). The Emirates were losing $2.1 billion a month, Saudi $5.4 billion, and Kuwait $4.2 billion. So these are potential billions not being invested, but I would also guess since these countries are expensive to run that they may have to sell existing investments to fund their everyday revenue. I found one isolated data point that Saudi Arabia had reduced its "US portfolio" from $12.95 billion to $12 billion in the first quarter of 2026. If their currencies were not fixed, we would be able to get a clue from foreign exchange valuations about the flow of investment.
It's a frivolous example, but I suggest that the travails of the Saudi LIV Golf Tour give us a clue about the sovereign wealth funds.
Edmund, Bonn in 1988-89! You picked quite a remarkable moment to be doing doctoral research in Germany. I was still a child at the time, so I experienced that period from a very different perspective. :)
And thank you for explaining the February 28 reference. Now I see exactly where you are coming from.
The Gulf funds are an interesting piece of this because the transmission goes well beyond oil revenues. Lower inflows are one thing. But if domestic fiscal requirements eventually reduce foreign asset accumulation, or even require some liquidation of existing assets, that becomes relevant for global capital flows.
And I don’t think the LIV Golf example is frivolous at all. Sometimes seemingly peripheral things are exactly where changing financial constraints become visible first.
But now I’m curious: what was Germany like for you in 1988-89, looking at it as an American living in Bonn?
To put this into the context of our host's earlier columns about Europe and the US, I have been traveling to Europe since 1969. At the beginning, there were clear and large differences in the standard of living. I lived in the Federal Republic from Aug 4, 1988, to July 15, 1989. At that time, the differences were more subtle. I lived in an apartment that lacked a refrigerator. "Unfurnished" at that time could mean no appliances or light bulbs in addition to no furniture. I tried to buy a small refrigerator at a department store but was told I would have to wait at least six weeks.
I spent a week in Berlin and got to see the divided city from both sides of the wall. I've been back many times and I'm glad I had the experience.
I also spent a couple of weeks in the DDR. The crossing both ways took preparation but was fairly easy. What had been a small Fiat in the West became a behemoth in the East. The car got some dents and a parking lot attendant in Dresden joked that if we got a few more, we'd have a Trabant! The local roads were cobblestones or badly paved. There were signs of WW II damage including bullet holes in East Berlin and the ruins of the Frauenkirche in Dresden.
Never have I seen such a class-divided society. With our western car and currency, we could drive right up to the pump and get unleaded gas while the ordinary citizens waited in long lines for their miserable leaded gas. Signs told outsiders that the hotel restaurant was for guests only. Foreign currency got you Coca-Cola while the locals had to drink a revolting knock off. But I saw no signs that a revolution was coming, just as I saw no warning signs when I traveled North Africa in November 2010.
Edmund, thank you for sharing this. I really enjoyed reading it.
Your description of the DDR is fascinating, especially because you experienced it only months before everything changed. I grew up in West Germany, so the divided Germany was part of the world of my childhood, but of course from a completely different perspective.
What stayed with me most, though, was your last point. You saw no obvious signs of what was about to happen in the DDR, just as you saw none in North Africa in November 2010.
There is probably a lesson in that for all of us who study economies and markets... regime changes often look obvious in retrospect and anything but obvious while we are living through them.
Thanks for taking me back to a very different Germany for a moment, Edmund. I enjoyed the trip. :)
Being Canadian and a little unsure of the stability of the US market, I focused my moderate mutual fund investment on Canada, Europe and the Pacific rim democracies. So far, it has done very well. The US market has made me very nervous in the past almost 2 years.
I realize it is dependant to some degree on the US economy.
Hopefully the tarif wars won't lead me to regretting my decision.
I’m afraid my two semesters of undergrad economics nearly 50 years ago, was insufficient to help me understand what I’m sure was a very insightful discussion.
I think the take-away is that US Treasuries will continue to respond as they have in the past, irrespective of differing scenarios of systemic financial fraud, total debt, war, pandemic, etc. In other words, if Russia or China take over the United States, then you can worry about your treasury bonds. As always, the shorter the duration, the greater the safety and lower the return. You know there will be another crash. You just don't know when.
Wait a second. Didn't Russia already "take over the United States"? They installed their own useful idiot as President, and he appears to have plenty of fellow travelers.
Unfortunately Putin knows how to push the right buttons to manipulate the uneducated, blusturing, wishful thinking, insecure menace in the white house.
In a week DT can go back and forth from excusing Russia for its' crimes to promising to do the right thing for Ukraine.
He has no idea what he might do tomorrow.
His minions have many different motivations, which help with the chaos.
I didn't have those two semesters. Maybe it can be expanded upon. They understood each other saying very little, and I got some ideas, but not alot...still interesting!
Please don't be apologetic, Scott. I haven't even watched the discussion yet; I read through the entire transcript at my own pace, with lots (and lots) of backing up and re-reading.
I have no economics background at all. But I'm learning a lot in the comments from those who do!
Read my comment, I explain Caballero’s main argument, describe Interest rate swap spreads and what they are indicating as per Caballero etc. It’s a succinct explanation by another humble reader.
I fear that nothing that we thought was safe actually is safe. Or real. What’s emerging seems like one big movie set. But this regime won’t be in power forever. New growth always emerges from even the worst devastation. That new growth will reflect the values of those in power. It’s been ten years of teachable moments. I hope and pray that we’ve learned enough to know which wolf to feed. https://www.nanticokeindians.org/about/the-tale-of-two-wolves/
True, and there isn’t anything creative about Trump’s destruction. It’s simply ruinous, and it’s designed to let Trump, his family, and his oligarch backers to seize what little the rest of us have. Trump is one of those who knows the price of everything and the value of nothing. He also expects the rest of us to pick up his bills.
if the AI bubble bursts, I bet we go back to the same old method of rewarding the perpetrators and socializing the risk and losses not to mention more austerity
What they were saying that the bonds are safe in the sense that they won't default, but they risk to not keep pace with inflation. Which is a not an unimportant point. So capital will tend to look for higher returns, where available.
As I was reading this, I was thinking the vast concentration of wealth over the last 50 years has changed the attitude of ppl owning the wealth toward much higher risk. People with $5 billion wealth assess the risk of losing $50 million far less than someone with merely $50 million, so they can accept more risk for more return, especially when much of the risk is spread out over the entire country, and if it all goes kerflooey, they'll get bailed out by ppl making $10/hr.
This makes our investment economy far more fragile.
The solution is left as an exercise for the student.
as an afghan veteran who was left behind after so many promises from the current U.S. government, I understand the part about confidence and trust very differently. Once people lose trust,it is not easy to rebuild it with speeches or financial tricks. America still has enormous power and resources, but credibility is also an asset. When promises are made and people are later left behind,that credibility slowly becomes weaker. I think this connects with what you both said about drift
Successive US governments - and most especially the current one - have betrayed and abandoned their allies all over the world, even the closest and most longstanding ones, and are continuing to do so. I'm writing from Canada... we are just sick and tired of the incessant ignorant disrespect from our closest neighbour, including of our military history.
We are fortunate that it hasn't noticeably been costing actual Canadian lives (yet), as it unfortunately has for our brave Afghan allies, but at this point the bar of our expectations has been lowered so much that it is underground.
So we are passing our time waiting for the passing of a President - one way or another - by stealing the leading scholars from American universities, and very likely many top scientists from decapitated American agencies too. I'm sure Professor Krugman would be welcomed at any time. :)
Regarding AI, Prof. Caballero says, "I’m very optimistic about this technology." In my econ 101 class I learned the term "economic cost" and considering AI's economic cost in terms of environmental damage, I don't see anything at all to be optimistic about even if it does help Krugman convert a pdf to spreadsheet.
One thing we’re really starting to see is the effects of global warming. It may have contributed to that big slide in Nepal (currently no one seems to know exactly what happened).
But an article I read on it noted that the Himalayan glaciers have been shrinking steadily (same with the Canadian Rockies).
The technology as such offers advantages, much as the now ubiquitous micro computers do. But the benefits with be shared, both for producers and users.
The values behind the usage are important. Hopefully European requirements, based on respecting human rights end up dominating. It already has influenced some US developers of AI.
AI is a sophisticated form of heuristic programming, known since the 1950's.
It depends on rules on a set of data. The rules have become much more sophisticated, and the data can now be found with an internet search.
It is similar to the progression of microcomputers, from the 1970's to today. The main change there is more sophisticated software, with improvement in computer hardware.
Same idea, same progression.
The transfer of data in a PDF file to an excel spreadsheet is conceptually simple, but considerably faster (and less prone to error) if done by machine.
The risk that future outcomes will not be as expected is being undervalued and thus the price of equity and debt is too high. This goes beyond AI; there is geopolitical risk; there is United States political risk; there is climate risk. None of this is being priced into the price of financial assets, except, maybe, until recently with the lower price of bonds. Central banks around the world need to raise interest rates so the financial markets begin to price risk correctly. But...this has to be done in concert with a fiscal policy that staves off a global recession. This means for the US that tariffs have to be discontinued; taxes have to be cut for the lower tiers, but increased at the upper tiers of income of people and corporations; military and anti immigration spending has to be cut and transferred to spending on health, education, income security and transportation. This is a tricky maneuver: tight money with a transfer of wealth within society. Yet the alternative is a financial collapse when the risk of an adverse outcome transform into that adverse outcome...in other words, when the monster appears, and it will. It is lurking out there somewhere. And getting closer.
I mostly agree, but taxes should not be lowered for lower income earners, since that pays for a lot of the services now received. Raising taxes for higher income and wealthy will reduce deficits which affect interest rates.
Combined with this, a universal one payer health insurance system like Canada and other countries will greatly reduce health costs, benefiting lower and middle income earners.
It would reduce fraud and other costs by private insurers.
This doesn't have to eliminate private insurers. They still exist in Canada, mostly for supplementary benefits. Main health insurance outside the govt plans exist, but are more expensive, used by hockey players, for example.
According to the Tax Foundation (yes they have a dog in the fight) contributes the bottom 50% of income earners in the US about 3% of Federal taxes. In fact, many of the lowest-income households actually have a negative income tax rate, thanks to the refundable Earned Income Credit and the Child Credit.
Don't disagree with your figures, but I was thinking more of middle income tax payers. It is the top 10% at least who should pay more taxes. That combined with a minimum tax rate (after basic deductions) for those with special exemptions should raise considerable amounts as well.
I consulted the Tax Foundation again. US middle-income earners contribute about 10% of all taxes collected. The top 20% of earners pay 85% of all taxes collected.
The problem is that the Uberrich are well positioned to accept the risk of economic disruption, so they gladly accept higher risk for higher return, especially since most of that risk is borne by the whole population, not them.
The present regime is a mob government, like “roving bandits”, stealing as much as they can before they get turned out.
(I think one can argue that Corporate Dems and 'Traditional Republicans" are like “stationary bandits”, milking the country for their benefit without trying to destroy it.)
"autocratic political leaders come in two types: “roving bandits” and “stationary bandits”. As Olson (1993, p 567) writes:
“Under anarchy, uncoordinated competitive theft by “roving bandits” destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can be better off if a bandit sets himself up as a dictator--a “stationary bandit” who monopolizes and rationalizes theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide a peaceful order and other public goods that increase productivity.
Whenever an autocrat expects a brief tenure, it pays him to confiscate those assets whose tax yield over his tenure is less than their total value. This incentive plus the inherent uncertainty of succession in dictatorships imply that autocracies will rarely have good economic performance for more than a generation.”" https://www.sciencedirect.com/science/article/pii/S0264999321003035
Very interesting. Trump would describe himself as a "stationary bandit" but I agree he is really a "roving bandit" because he is not secure in himself and too stupid to understand the benefits of being a stationary bandit. He provides no peaceful order and no public goods that increase productivity. Just the opposite, in fact.
Inflation remains high, AI investment is demanding more capital, and people perceive that the return of equity/debt has been way too unfavorable for debt - all of those factors are pushing up the cost of debt. And there is no very long term vision of how government debt can ever stabilize instead of creeping ever upward. All of those non-mysterious factors are pushing in the same direction.
Plus, there's a guy in the White House with a degree from Wharton proclaiming this to be a 'Golden Age', despite his own administration's figures showing that over the 12 months from March 2025 to April 2026 there were only 193,000 jobs created around the country - less than a dozen jobs per day per state for an entire year (193,000 jobs/50 states/12 months/30 days - imperfect, but makes the point). All hail our glorious Golden Age under this GOPer ! Definitely getting "sick and tired of winning" - and all the lying obfuscation.
Actually, DT’s ham-handed tariff misadventure is the one factor pushing in the direction of the lower rates that he wants. But his tax cuts and his stupid war and the whole AI phenomenon are all pushing in the other direction. Not to mention the whole “what crazy thing will he try to do tomorrow” phenomenon..
The immediate concerns from my perspective are first, that returns on AI investment still appear to be a long way off. Second is that there appear to be too many players in that market right now; if the eventual shakeout sees the collapse of, say, ChatGPT, the probable effects are scary. And third, there are a great many possible disruptive technologies out there, including from China. But the big takeaway is that whether you're investing a dollar or a trillion dollars, there is an expectation of a return on that investment. Hopes for a huge ROI are entirely speculative at this moment and yet the bet riding on the come is breathtakingly large.
Thank you Paul. I am listening to this on your YouTube channel. As a sign of your importance. Searching KRU brings up your feed. Glad so many people are discovering you and finding what you have to say relevant.
Something I never thought of which is a take a way from listening to this conversation. Drift.
Under trump no investment is safe because the whole administration runs like a sloppy, greed‑soaked circus rules bent, watchdogs muzzled, everything smelling like backroom deals and dirty pockets. The system looks rigged, the guardrails ripped out, and the public left holding the bag while power chases cash in the open.
Exactly: trillions of $ shoved around mafia bosses. No meaningful conversation can lead to understanding of any econ balance/ imbalance and supply/ demand, " stability” etc. Try analyzing drug cartel science! The US gov tax base is a source of Atlantic city Trump buildings- pure evil went down charging 10,000 $ rooms, dealers in princely suits yawning away the nights until legit bankruptcy took it all away.
We seem to be following similar conditions that led to the French Revolution:
"Between 1715 and 1789, the French population grew from 21 to 28 million, 20% of whom lived in towns or cities, Paris alone having over 600,000 inhabitants.[8] This was accompanied by a tripling in the size of the middle class, which comprised almost 10% of the population by 1789.[9] Despite increases in overall prosperity, its benefits were largely restricted to the rentier and mercantile classes, while the living standards fell for wage labourers and peasant farmers who rented their land.[10][11] Economic recession from 1785, combined with bad harvests in 1787 and 1788, led to high unemployment and food prices, causing a financial and political crisis.[3][12][13][14]"
If we were a wiser species, we would stop bit/bad-coin mining, we would not invest (throw) such amounts of money into AI, we would postpone sending metal penisses up into the air. Instead we would do whatever we could to make our world a better place by distributing money and knowledge to less-fortunate countries. We would train doctors and nurses, build hospitals and clinics. Together we would fight diseases. We would train teachers and build schools. We would help improve the harvests, we would help to build water-wells, houses, factories, farms, roads, bridges, harbours, etc.
We would do this to protect ourselves from the large waves of young and desperate people that cannot build a life currently in their home country. We could that way also stop (some of the) violence - poverty breeds crime. The previous solution "go somewhere and build your fortune" is no longer doable. People should not emigrate, they should stay where they belong, with family, in their own culrure. We should work harder, allocate more money, to make this possible.
I know that may sound a little self-centred, but I hear you saying the US should act a little more like Canada and Europe. (Compared to the US BEFORE Trump cutbacks.)
However everybody could do better.
Immigration in itself is not a problem. But immigration in response to catascrophic situations in one's source country is.
A lot of foreign aid by Canada is govt paid post secondary education for promising students from developing countries, investing in health care abroad, assisting development of modern legal systems in former colonies, etc. The goal being to help poorer countries develop like we have been able to.
Canada has temporarily cut back in these efforts from time to time, but they continue to be popular.
Immigraton is a problem. (EDIT: has become a problem.) It is also cruel. For the immigrant, his family, and especially for those that are left behind. Many migrants leave thinking they will be able to return one day to their home country, with money earned. It does for most not work out that way. Immigration turns out to be a one-way street. And an immigrant is, and always will be, an outsider.
Man, I was stopping the conversation, backing up, listening, creating a new tab when I wanted AI to explain to me what this word or that phrase meant...I'm green and had to look up words like arbitrage, basis points and evergreening loans. I think an underlying aspect of this discussion is that Paul Krugman has been a spokesman for concern that we all are sharing because of the disaster that is trump and Caballero was tamping down that anxiety. Krugman was awfully twitchy, lots of ticks, and Caballero was playing the calm economist. Same old-same old. They both had their differing reactions to the 2000 dot com boom crash and the housing boom crash of 2008. That was interesting. AI...I am so ambivalent about what it means. These proposed data centers seem like Joanie Mitchells' "Paved paradise and put up a parking lot" theme. AI also helped me to work out how to repair my zero turn mower and write folk songs like John Prine...damn!
How much energy does each use? How much CO2 does each contribute? We can only compare when we know what the actual environmental cost are and the cost of mitigation, if possible.
Oh yeah...Pig Farms. Safe to eat, low fat pork and a shitty mess. I'm hanging on to my omnivore nature but cattle, pigs and chickens as food and how it is produced is a sad, depressing story.
I am not sure what you mean by "Headlines are manipulative". Right now, my wife, who is caught up in different aspects of TDS (trump derangement syndrome) spends her mornings perusing her internet headlines. She is focused and stressed about what some headlines are telling her. The daily right wing barrage of disruptive acts was/is exhausting as it is intended to be. She brings up the stuff like "Do you know what trump did yesterday?" or she comments when Governor Hochul talks about preventing the data center invasion from coming to NYS for a year or so (politics).
And, me, I have retreated from a lot of that alarming stuff. Every morning conversation with my wife, would roil my stomach, cause me agita I am pretty sure that she was scaring me. I've been alarmed since 1968, when I flew back from Vietnam wondering what were we fighting for, quit the Marine Corps and started wising up. It's almost sixty years since I have been wising up. The 1970s right up until now are what have concerned me. Nixon, Reagan, Limbaugh, Fox, Clinton, Bush, Cheney...Internet, social media and on and on. Still got a ways to go. Instead, I have been wondering what it will take to right this ship if in fact there is a desire to do that. Will it be possible? The framers wrote into the Preamble "In Order To Form A More Perfect Union". I would say "that ship has sailed" or, if you want "That train has left the station".
Forget perfection. Right now, what I think is happening is that this ever-present aspect of human nature and culture we call wealth and the accumulation of it. That... is what is in charge. History tells us this ain't our first rodeo. Philosophers have been telling us that our best chance is some form of social contract, some form of democratic participation and even then, the bad shit will out. Economists tell us how these stories of wealth occur and how they go wrong (or right). Taking this interview with Caballero seriously is a part of my "Wising up". So when I read Mickie Morganfield's reply up above, I thought "oh Yeah". There is a scene in the movie Magnolia, where every screwed up character in the movie starts singing a song about wising up. https://www.youtube.com/watch?v=gC96_vph-oI
So what does all this mean for the "average" retired 80 year-old with combined assests of 2 mil in equities and fixed retirement (bonds?), excluding my home? Where do I safely save and where do I invest?
In a similar vein, how in hell are my grandchildren ever going to be able to afford a home of their own and maybe even have children of their own to worry about?
Well, many are deciding not to have children, and this is a global phenomenon. Populations are projected to decline. As the US is already below the replacement birth rate (currently 1.79/woman), it is a very stupid move to both stop immigration and deport many of the non-permanent resident immigrants.
Laddered maturities for your treasuries. Make sure they’re in an account by which you can benefit by their preferred tax treatment. 60% of your assets should be in US stocks.
Part of what's interesting to me about Caballero's "wealth boom has boosted aggregate demand and that has increased equilibrium interest rates" argument is that it seems to more analogous to the line of thinking Summers was championing around secular stagnation: that interest rates are more a story of the real economy than of financial plumbing and the over/under-supply of specific types of risk assets.
I like to think of portfolio composition as trying to fill in a set of shelves - allocators are trying to fill out different types of risks, and get a good mix for diversification purposes. There's a bit of flexibility around sizing those shelves (although regulation can harden the rules). The way I understood Caballero's safe asset story is that there was a lot of demand for the "safe assets" shelf, and an undersupply. It was that mismatch that changed the safe interest rate. But it also can't actually change the return on capital (which is the very thing he pointed to against Summers)
There's a reading of this moment of AI boom/growing deficits that is the reverse of that story: now its about the shelves getting too crowded. This also ends up in a higher interest rate - but because its a "crowded shelves" phenomenon, its going to be much more sensitive to financial plumbing than the "wealth boom boosts aggregate demand" story that Caballero suggests. And the changing lines between Fed/Treasury could have a much more rapid effect
> "wealth boom has boosted aggregate demand and that has increased equilibrium interest rates" <
But it isn't "lifting all boats." The K-economy is only helping the wealthy, and rising inequality is worsening it. Coupled with the GOP deliberately looting what remains of welfare, the population is experiencing declining income and wealth.
Too wonky for this old man. Are the bond issuers and investors who could understand this important stuff able to help steer the ships? Or are we all just along for the ride? Mark Williams
I think the most important point in this conversation is not whether U.S. Treasuries are still “safe.”
They are.
The more interesting question is ... who becomes the marginal buyer of duration when governments and corporations are both issuing enormous amounts of debt...
For years, central banks, reserve managers and institutions with structural demand for safe assets absorbed Treasuries at very low yields.
That environment has changed.
Now the marginal buyer may be far more price-sensitive, balance-sheet-sensitive and return-sensitive.
That changes the clearing price.
Add massive fiscal issuance, corporate borrowing for AI infrastructure, lower demand for duration and a reduced Treasury convenience premium, and suddenly the long end has to offer materially more yield.
That does not require a dollar crisis.
It does not even require investors to believe the U.S. will default.
It simply requires **more supply than the traditional price-insensitive buyer base wants to absorb at yesterday’s price**.
For investors, that distinction matters enormously.
The real risk may not be the collapse of the Treasury market.
It may be a structurally higher cost of capital spreading through **equities, credit, housing and government finances**.
In global macro, I keep coming back to the same question:
Who is the marginal buyer and at what price will they step in?
If you think about markets through these kinds of cross-asset relationships, that is exactly what I explore in Global Markets Insights.
there was a moment in which foreign central banks wanted to sell Treasuries and the Treasury swap spread got unwound because of margin calls, and we did see big spikes in treasuries. And I think the swap lines that were created by the U.S., by the Fed and the like, were mechanisms to try to stabilize episodic things.” Way out of my comfort zone here but it seems to me both of these sages are talking about the danger of a disequilibrium - an abrupt change in demand for an asset class - to which central banks cannot respond effectively in the short term. Even a short-term blip - say a huge AI-caused disaster - could poison the economic waters long enough for most of us to feel the effects. Recovery would come eventually but we’d endure political/practical ramifications during and for how long? Love to hear others’ opinions.
Joanna, I really enjoy reading your thoughts. And honestly, “way out of my comfort zone” often leads to the most interesting conversations. Thank you for jumping in here. I’m glad you did.
Thanks for your kind words! Do my suppositions have any merit? If Bessent is actually issuing ‘puts’ on govt debt, shouldn’t we be concerned?
Yes, I think your concern has merit, @Joanna Clancy. I’d just be a little careful with the word “put.” Treasury can influence liquidity and how supply reaches the market, but it cannot permanently remove the underlying fiscal risk.
More broadly, I tend to see the global economy as one interconnected system. What happens in the U.S. bond market eventually affects Europe, currencies, companies, portfolios and, ultimately, our everyday lives.
But for me, the important question is not whether we should worry about all of this. It is how we deal with it.
Whether we are in the U.S., Europe or somewhere else, we are all sailing on the same sea. We cannot control the weather, but we can understand it and position ourselves accordingly.
That mindset is really at the heart of what I try to do with Global Markets Insights… understand what is changing, what it means, and how to navigate it without being consumed by it. ;)
You use the skills that set our species above most others - our ability to respond effectively to changing environments! Sounds like a wise approach. Often, by contrast, individuals en mass, respond irrationally and destructively to such changes and can bring down the rest of us, however blameless. Some ‘blips’ lead more often to irrationality than others and can even cause wars. Sorry - I’m being tendentious here.
I just finished PK’s latest interview and have been reading these wonderful posts. Thank you all! The thing that struck me most was the statement regarding the capacity to respond effectively to changing environments. If only we could do that within our political system on even a limited basis. I don’t see much to be sanguine about at present. I hope you all have a great weekend! Well, I’m off to do dishes.
I'll be watching to see if the international investors conference coming up in Canada in a couple of weeks answers the question...
'When people say, “Oh, people are going to dump their U.S. bonds,” I always ask, “And buy what?”' .
A trade war closes the US market. To sell those products somewhere else requires investment in logistical infrastructure and services. Investment that used to go into building links with the US, will now go to building links between middle powers.
Although retaliatory tariffs do not impact the US much, it is vulnerable to the rising cost of debt that results from the world viewing the US administration as a sinkhole in the road, routing around it, and redirecting investment accordingly.
Retaliatory tariffs will hurt whomever issues them, as Trump’s tariffs hurt Americans. By the way, as a Canadian, I found it easy to dump my US Treasuries in favour of Canadian bonds. My personal bond portfolio (which isn’t going to disturb the market) is broadly diversified in European and Canadian debt, with a little Japanese thrown in for good measure. The US represents too much risk in every sense of the term.
"I'll be watching to see if the international investors conference coming up in Canada in a couple of weeks answers the question..."
You're talking about the International Investors Summit in Toronto, yes? There is something very symbolic about that location under the present circumstances.
And then the AIMA Global Investor Forum is happening here a month later. So confusing.
I assume that Carney is scheduled to speak at both of them?
And what the US delegates have to say - presumably not under White House marching orders, if they want to be taken seriously - will be especially interesting. That's assuming they are even allowed entry to Canada by then ... only half-joking there.
Greg, I think that is certainly possible. The interesting constraint, though, is that investors have to look at the alternatives globally.
Europe, Japan, China and the other major markets all come with their own structural problems. And when you need a market that combines scale, liquidity, rule of law, deep capital markets and a large supply of high-quality collateral, the U.S. still has something close to a monopoly.
So I can imagine capital gradually being redirected at the margin, especially into new trade relationships and infrastructure between middle powers. But replacing the U.S. financial system is a much harder proposition.
That is why I keep coming back to the marginal buyer. The U.S. does not need to lose its dominant position for yields to rise. The next buyer simply needs to demand a little more compensation.
Perhaps “ panic “ is too strong a word to use , but I fear that outside of AI investment opportunities in the US domestic market have dwindled - mainly bc the bottom 90 percent of us are struggling just to stay afloat . When we have so many eggs ( so to speak ) in the AI basket , if that bubble bursts - there isn’t enough diversification to bring us back quickly .
The 10 percent that do play in the bond market and foreign interests are in a different world from most of us . I don’t really understand it .
I believe history shows that when we get an inverted yield curve - recession usually follows - but we aren’t sure when . If a recession happens during this administration - I’m not at all confident that the leadership has the skills to get us back on track .
Paul, I think you understand more of it than you give yourself credit for. :)
Your point about having too many eggs in the AI basket is an interesting one. What matters to me is not simply whether AI is a bubble, but how dependent other parts of the economy and financial markets have become on the same underlying story.
That is where things get interesting, because equities, bonds, corporate investment, household finances and government debt may look like separate worlds, but they constantly interact.
And I agree with you on one thing in particular ... predicting exactly when a recession arrives is incredibly difficult. I find it much more useful to understand where the vulnerabilities are and then watch how the system responds when conditions change.
Thanks for joining the conversation, Paul. I really appreciate your perspective.
The US is losing the "rule of law" and possibly "large supply of high quality collateral" edge, especially with foreign bond buyers. A concerted effort by China to create a "good enough" bond and asset market might happen sooner than people think. The market doesnt have to be $40trillion deep, or perfect, to be a big threat to US financial dominance. It just has to be good enough to soak up the marginal buyers noted. Given the utter chaos and corruption in the US government, I think that any assertion that the role of the dollar/T-bill is safe is whistling past the graveyard.
I mostly agree, but lacks in "rule of law" in the US, especially in terms of international relations leads me to look for alternatives.
The retaliatory tariffs affect some sectors more than others. Some farmers are being hurt, for example.
The people being hurt by tariffs should have known that the Orange Mistake’s advisor on foreign trade is Peter Navarro . Sad that so many farmers are suffering now - many of them probably voted for our mango coated disgrace
- we ought to figure it out that when the farmers suffer - prices on the shelf keep going up even faster than before .
I agree, the farmers really blew it by voting for Trump. They knew he was a tariff maniac.
But it was all worth it to put in a government that would deport the folks that pick their crops. No .... wait...
I am very grateful to you, Prof. Krugman, for defining the ‘terms of art’ for those of us who had zero economics classes. STEM majors(excepting mathematics) did not allow for many electives!!
This talk offers an excellent look into the capital side of macroeconomics, but it misses a critical opportunity by ignoring the human variable. By analyzing the *safe assets shortage* strictly through a capital lens, the discussion overlooks how the rise of AI shifts the balance and social equity, ie, the structural problem.
The creation and supply of pseudo-safe assets (whether via regulatory arbitrage, financial engineering, or fraud) only happen because there is an insatiable demand for them. However, by ignoring the structural lack of a meaningful minimum wage—and our deeply ingrained cultural attachment of human worth to wealth—the interview completely bypasses the recipe for massive social instability.
To truly understand what brought us to our current *democratic* bottleneck, we cannot ignore the tension between labor vs. capital and the ideological questions tied to it. Otherwise, we risk repeating the math *errors* of 2008—mistaking a larger volatile environment for a pseudo stable one, akin to using a Gaussian Copula to justify that the price of two BB bonds into a single AAAA asset will resist very long.
This may be comforting for someone looking to relax with their savings. But for a realistic view of economic stability, I highly recommend checking out Bill Gates’ recent piece addressing the urgent threat to labor in the age of AI:
https://www.linkedin.com/pulse/turbulent-ai-era-here-choices-we-make-now-critical-bill-gates-kkmze/
When foreign buyers of America's debt decide they need to be compensated for the "longterm risk" they're assuming, that means higher bond yields. At 5% there's a debt crisis and the country cannot service its debt. We're already seeing this in the 30y Tbill. If rising rates are no big deal, why the discussion about "storage of safe assets" and Bessent buying yen. Macroeconomists are concerned as they should be.
I think that is the really interesting question. Not simply whether 5% is dangerous, but what happens if the marginal buyer begins demanding structurally more compensation for holding U.S. duration.
Because then it doesn't stay in the Treasury market. It starts moving through government finances, mortgages, corporate credit, equity valuations and eventually global capital flows.
That is actually why I built what I call my Global Macro Map. I wanted a way to follow how a change in one part of the system travels through the others rather than trying to predict the next crisis.
I suspect we are looking at much of the same problem from different angles. Thanks for joining the discussion. I really enjoy seeing where these conversations lead.
You should try to factor into your global capital allocation model the fact that the Gulf sovereign wealth funds have less new money (and maybe less old money) to invest than they did before February 28.
That’s a very interesting point, Professor Clingan. I hadn’t incorporated that explicitly into my thinking about the marginal buyer.
I’d be particularly interested in your February 28 reference. What changed in your view that materially reduced the capital available to the Gulf sovereign wealth funds?
This is actually why I tend to look at these questions through what I call a Global Macro Map. I try to connect capital flows, fiscal policy, interest rates, currencies and asset markets rather than looking at Treasuries in isolation.
If Gulf sovereign wealth funds have less capital to deploy while Treasury issuance, corporate borrowing and global investment needs are all rising, that changes one part of the map. And eventually that change has to show up somewhere else, potentially in yields, currencies, relative asset prices or cross-border capital flows.
That is exactly the kind of relationship I try to understand in Global Markets Insights.
Thank you for adding that angle. I’d genuinely like to hear more about your thinking behind it.
Greetings to you in Germany. I lived in Bonn in 1988-89 doing the research for my doctoral dissertation. Studied at the university under Dr. Hans Pohl.
February 28 marked the closing of the Strait of Hormuz.
The Gulf sovereign wealth funds keep their details quiet. A few months ago I tried to review the funds and see if the crisis was having any effect. The approximate valuations are quite large: Kuwait = $1.07 trillion; Abu Dhabi = $1.128 trillion; Qatar=$580 billion; Dubai = $429 billion. I also tried to estimate their lost revenue *just from oil* (not LNG, petrochemicals, fertilizer, refined aluminum et al). The Emirates were losing $2.1 billion a month, Saudi $5.4 billion, and Kuwait $4.2 billion. So these are potential billions not being invested, but I would also guess since these countries are expensive to run that they may have to sell existing investments to fund their everyday revenue. I found one isolated data point that Saudi Arabia had reduced its "US portfolio" from $12.95 billion to $12 billion in the first quarter of 2026. If their currencies were not fixed, we would be able to get a clue from foreign exchange valuations about the flow of investment.
It's a frivolous example, but I suggest that the travails of the Saudi LIV Golf Tour give us a clue about the sovereign wealth funds.
Edmund, Bonn in 1988-89! You picked quite a remarkable moment to be doing doctoral research in Germany. I was still a child at the time, so I experienced that period from a very different perspective. :)
And thank you for explaining the February 28 reference. Now I see exactly where you are coming from.
The Gulf funds are an interesting piece of this because the transmission goes well beyond oil revenues. Lower inflows are one thing. But if domestic fiscal requirements eventually reduce foreign asset accumulation, or even require some liquidation of existing assets, that becomes relevant for global capital flows.
And I don’t think the LIV Golf example is frivolous at all. Sometimes seemingly peripheral things are exactly where changing financial constraints become visible first.
But now I’m curious: what was Germany like for you in 1988-89, looking at it as an American living in Bonn?
To put this into the context of our host's earlier columns about Europe and the US, I have been traveling to Europe since 1969. At the beginning, there were clear and large differences in the standard of living. I lived in the Federal Republic from Aug 4, 1988, to July 15, 1989. At that time, the differences were more subtle. I lived in an apartment that lacked a refrigerator. "Unfurnished" at that time could mean no appliances or light bulbs in addition to no furniture. I tried to buy a small refrigerator at a department store but was told I would have to wait at least six weeks.
I spent a week in Berlin and got to see the divided city from both sides of the wall. I've been back many times and I'm glad I had the experience.
I also spent a couple of weeks in the DDR. The crossing both ways took preparation but was fairly easy. What had been a small Fiat in the West became a behemoth in the East. The car got some dents and a parking lot attendant in Dresden joked that if we got a few more, we'd have a Trabant! The local roads were cobblestones or badly paved. There were signs of WW II damage including bullet holes in East Berlin and the ruins of the Frauenkirche in Dresden.
Never have I seen such a class-divided society. With our western car and currency, we could drive right up to the pump and get unleaded gas while the ordinary citizens waited in long lines for their miserable leaded gas. Signs told outsiders that the hotel restaurant was for guests only. Foreign currency got you Coca-Cola while the locals had to drink a revolting knock off. But I saw no signs that a revolution was coming, just as I saw no warning signs when I traveled North Africa in November 2010.
A few impressions from a different time.
Edmund, thank you for sharing this. I really enjoyed reading it.
Your description of the DDR is fascinating, especially because you experienced it only months before everything changed. I grew up in West Germany, so the divided Germany was part of the world of my childhood, but of course from a completely different perspective.
What stayed with me most, though, was your last point. You saw no obvious signs of what was about to happen in the DDR, just as you saw none in North Africa in November 2010.
There is probably a lesson in that for all of us who study economies and markets... regime changes often look obvious in retrospect and anything but obvious while we are living through them.
Thanks for taking me back to a very different Germany for a moment, Edmund. I enjoyed the trip. :)
Being Canadian and a little unsure of the stability of the US market, I focused my moderate mutual fund investment on Canada, Europe and the Pacific rim democracies. So far, it has done very well. The US market has made me very nervous in the past almost 2 years.
I realize it is dependant to some degree on the US economy.
Hopefully the tarif wars won't lead me to regretting my decision.
I’m afraid my two semesters of undergrad economics nearly 50 years ago, was insufficient to help me understand what I’m sure was a very insightful discussion.
I think the take-away is that US Treasuries will continue to respond as they have in the past, irrespective of differing scenarios of systemic financial fraud, total debt, war, pandemic, etc. In other words, if Russia or China take over the United States, then you can worry about your treasury bonds. As always, the shorter the duration, the greater the safety and lower the return. You know there will be another crash. You just don't know when.
Wait a second. Didn't Russia already "take over the United States"? They installed their own useful idiot as President, and he appears to have plenty of fellow travelers.
Unfortunately Putin knows how to push the right buttons to manipulate the uneducated, blusturing, wishful thinking, insecure menace in the white house.
In a week DT can go back and forth from excusing Russia for its' crimes to promising to do the right thing for Ukraine.
He has no idea what he might do tomorrow.
His minions have many different motivations, which help with the chaos.
This is true. Hopefully Europe will bring Putin to his knees. At present, we have abdicated our role. As for China, flip a coin.
For China, I suspect they are quite happy that Russia isn't winning, making Russia much more dependant on China.
If China took over the US government, the country would be forced to learn how to deal with a competent administration.
Don't feel too bad. I've got an MA in economics and I had to review the specifics of swaps in order to follow the conversation.
I didn't have those two semesters. Maybe it can be expanded upon. They understood each other saying very little, and I got some ideas, but not alot...still interesting!
Please don't be apologetic, Scott. I haven't even watched the discussion yet; I read through the entire transcript at my own pace, with lots (and lots) of backing up and re-reading.
I have no economics background at all. But I'm learning a lot in the comments from those who do!
Wait are you parodying Baghdad Bessy ? Or are you him in drag ?😳
Read my comment, I explain Caballero’s main argument, describe Interest rate swap spreads and what they are indicating as per Caballero etc. It’s a succinct explanation by another humble reader.
I fear that nothing that we thought was safe actually is safe. Or real. What’s emerging seems like one big movie set. But this regime won’t be in power forever. New growth always emerges from even the worst devastation. That new growth will reflect the values of those in power. It’s been ten years of teachable moments. I hope and pray that we’ve learned enough to know which wolf to feed. https://www.nanticokeindians.org/about/the-tale-of-two-wolves/
We the people will still endure the financial pain.
Agreed. Regardless of what happens in November, the little guy will continue to pay the price.
Not only that, but all Trump and his minions are able to is to destroy things. They are incapable of creating anything good.
There is creative destruction, then there is Trump's destruction which financially benefits the Trump family while harming many.
True, and there isn’t anything creative about Trump’s destruction. It’s simply ruinous, and it’s designed to let Trump, his family, and his oligarch backers to seize what little the rest of us have. Trump is one of those who knows the price of everything and the value of nothing. He also expects the rest of us to pick up his bills.
Well said, Kathy.
They can loose power in Congress, which will block much of their misdeeds.
Impeachment in the House becomes possible again, and with enough R abstentions in the Senate, there is a very long shot chance on conviction.
if the AI bubble bursts, I bet we go back to the same old method of rewarding the perpetrators and socializing the risk and losses not to mention more austerity
What they were saying that the bonds are safe in the sense that they won't default, but they risk to not keep pace with inflation. Which is a not an unimportant point. So capital will tend to look for higher returns, where available.
Wonderful story!
As I was reading this, I was thinking the vast concentration of wealth over the last 50 years has changed the attitude of ppl owning the wealth toward much higher risk. People with $5 billion wealth assess the risk of losing $50 million far less than someone with merely $50 million, so they can accept more risk for more return, especially when much of the risk is spread out over the entire country, and if it all goes kerflooey, they'll get bailed out by ppl making $10/hr.
This makes our investment economy far more fragile.
The solution is left as an exercise for the student.
I agree but the dems MUST stop the insider trading of congress which I believe may prevent the opportunists to enter congress for the wrong reasons
as an afghan veteran who was left behind after so many promises from the current U.S. government, I understand the part about confidence and trust very differently. Once people lose trust,it is not easy to rebuild it with speeches or financial tricks. America still has enormous power and resources, but credibility is also an asset. When promises are made and people are later left behind,that credibility slowly becomes weaker. I think this connects with what you both said about drift
Successive US governments - and most especially the current one - have betrayed and abandoned their allies all over the world, even the closest and most longstanding ones, and are continuing to do so. I'm writing from Canada... we are just sick and tired of the incessant ignorant disrespect from our closest neighbour, including of our military history.
We are fortunate that it hasn't noticeably been costing actual Canadian lives (yet), as it unfortunately has for our brave Afghan allies, but at this point the bar of our expectations has been lowered so much that it is underground.
So we are passing our time waiting for the passing of a President - one way or another - by stealing the leading scholars from American universities, and very likely many top scientists from decapitated American agencies too. I'm sure Professor Krugman would be welcomed at any time. :)
Canadians really understand your message. The US will suffer from this, as Europe and middle powers strength their relationships.
Regarding AI, Prof. Caballero says, "I’m very optimistic about this technology." In my econ 101 class I learned the term "economic cost" and considering AI's economic cost in terms of environmental damage, I don't see anything at all to be optimistic about even if it does help Krugman convert a pdf to spreadsheet.
Not to mention the opportunities lost by diverting all that capital investment into [money-losing?] AI.
One thing we’re really starting to see is the effects of global warming. It may have contributed to that big slide in Nepal (currently no one seems to know exactly what happened).
But an article I read on it noted that the Himalayan glaciers have been shrinking steadily (same with the Canadian Rockies).
But nothing much is being done about it.
Indeed, the slides in Nepal/Tibet were caused by a glacier crumpling due to global warming.
In Canada, a glacier which in the 1950's extended to the Vancouver, BC area, by the 1980's had retreated over 100 km (60 miles) to the north.
Yep, it’s bad news.
The technology as such offers advantages, much as the now ubiquitous micro computers do. But the benefits with be shared, both for producers and users.
The values behind the usage are important. Hopefully European requirements, based on respecting human rights end up dominating. It already has influenced some US developers of AI.
That definitely needs to be controled.
Paul, better check the numbers in that AI excel spreadsheet match your original numbers👍
AI is a sophisticated form of heuristic programming, known since the 1950's.
It depends on rules on a set of data. The rules have become much more sophisticated, and the data can now be found with an internet search.
It is similar to the progression of microcomputers, from the 1970's to today. The main change there is more sophisticated software, with improvement in computer hardware.
Same idea, same progression.
The transfer of data in a PDF file to an excel spreadsheet is conceptually simple, but considerably faster (and less prone to error) if done by machine.
The risk that future outcomes will not be as expected is being undervalued and thus the price of equity and debt is too high. This goes beyond AI; there is geopolitical risk; there is United States political risk; there is climate risk. None of this is being priced into the price of financial assets, except, maybe, until recently with the lower price of bonds. Central banks around the world need to raise interest rates so the financial markets begin to price risk correctly. But...this has to be done in concert with a fiscal policy that staves off a global recession. This means for the US that tariffs have to be discontinued; taxes have to be cut for the lower tiers, but increased at the upper tiers of income of people and corporations; military and anti immigration spending has to be cut and transferred to spending on health, education, income security and transportation. This is a tricky maneuver: tight money with a transfer of wealth within society. Yet the alternative is a financial collapse when the risk of an adverse outcome transform into that adverse outcome...in other words, when the monster appears, and it will. It is lurking out there somewhere. And getting closer.
I mostly agree, but taxes should not be lowered for lower income earners, since that pays for a lot of the services now received. Raising taxes for higher income and wealthy will reduce deficits which affect interest rates.
Combined with this, a universal one payer health insurance system like Canada and other countries will greatly reduce health costs, benefiting lower and middle income earners.
It would reduce fraud and other costs by private insurers.
This doesn't have to eliminate private insurers. They still exist in Canada, mostly for supplementary benefits. Main health insurance outside the govt plans exist, but are more expensive, used by hockey players, for example.
According to the Tax Foundation (yes they have a dog in the fight) contributes the bottom 50% of income earners in the US about 3% of Federal taxes. In fact, many of the lowest-income households actually have a negative income tax rate, thanks to the refundable Earned Income Credit and the Child Credit.
Don't disagree with your figures, but I was thinking more of middle income tax payers. It is the top 10% at least who should pay more taxes. That combined with a minimum tax rate (after basic deductions) for those with special exemptions should raise considerable amounts as well.
I consulted the Tax Foundation again. US middle-income earners contribute about 10% of all taxes collected. The top 20% of earners pay 85% of all taxes collected.
The problem is that the Uberrich are well positioned to accept the risk of economic disruption, so they gladly accept higher risk for higher return, especially since most of that risk is borne by the whole population, not them.
The present regime is a mob government, like “roving bandits”, stealing as much as they can before they get turned out.
(I think one can argue that Corporate Dems and 'Traditional Republicans" are like “stationary bandits”, milking the country for their benefit without trying to destroy it.)
"autocratic political leaders come in two types: “roving bandits” and “stationary bandits”. As Olson (1993, p 567) writes:
“Under anarchy, uncoordinated competitive theft by “roving bandits” destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can be better off if a bandit sets himself up as a dictator--a “stationary bandit” who monopolizes and rationalizes theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide a peaceful order and other public goods that increase productivity.
Whenever an autocrat expects a brief tenure, it pays him to confiscate those assets whose tax yield over his tenure is less than their total value. This incentive plus the inherent uncertainty of succession in dictatorships imply that autocracies will rarely have good economic performance for more than a generation.”" https://www.sciencedirect.com/science/article/pii/S0264999321003035
Very interesting. Trump would describe himself as a "stationary bandit" but I agree he is really a "roving bandit" because he is not secure in himself and too stupid to understand the benefits of being a stationary bandit. He provides no peaceful order and no public goods that increase productivity. Just the opposite, in fact.
Inflation remains high, AI investment is demanding more capital, and people perceive that the return of equity/debt has been way too unfavorable for debt - all of those factors are pushing up the cost of debt. And there is no very long term vision of how government debt can ever stabilize instead of creeping ever upward. All of those non-mysterious factors are pushing in the same direction.
Plus, there's a guy in the White House with a degree from Wharton proclaiming this to be a 'Golden Age', despite his own administration's figures showing that over the 12 months from March 2025 to April 2026 there were only 193,000 jobs created around the country - less than a dozen jobs per day per state for an entire year (193,000 jobs/50 states/12 months/30 days - imperfect, but makes the point). All hail our glorious Golden Age under this GOPer ! Definitely getting "sick and tired of winning" - and all the lying obfuscation.
Actually, DT’s ham-handed tariff misadventure is the one factor pushing in the direction of the lower rates that he wants. But his tax cuts and his stupid war and the whole AI phenomenon are all pushing in the other direction. Not to mention the whole “what crazy thing will he try to do tomorrow” phenomenon..
The immediate concerns from my perspective are first, that returns on AI investment still appear to be a long way off. Second is that there appear to be too many players in that market right now; if the eventual shakeout sees the collapse of, say, ChatGPT, the probable effects are scary. And third, there are a great many possible disruptive technologies out there, including from China. But the big takeaway is that whether you're investing a dollar or a trillion dollars, there is an expectation of a return on that investment. Hopes for a huge ROI are entirely speculative at this moment and yet the bet riding on the come is breathtakingly large.
Thank you Paul. I am listening to this on your YouTube channel. As a sign of your importance. Searching KRU brings up your feed. Glad so many people are discovering you and finding what you have to say relevant.
Something I never thought of which is a take a way from listening to this conversation. Drift.
Under trump no investment is safe because the whole administration runs like a sloppy, greed‑soaked circus rules bent, watchdogs muzzled, everything smelling like backroom deals and dirty pockets. The system looks rigged, the guardrails ripped out, and the public left holding the bag while power chases cash in the open.
Exactly: trillions of $ shoved around mafia bosses. No meaningful conversation can lead to understanding of any econ balance/ imbalance and supply/ demand, " stability” etc. Try analyzing drug cartel science! The US gov tax base is a source of Atlantic city Trump buildings- pure evil went down charging 10,000 $ rooms, dealers in princely suits yawning away the nights until legit bankruptcy took it all away.
we have to wait for similar evetns after Nov.
We seem to be following similar conditions that led to the French Revolution:
"Between 1715 and 1789, the French population grew from 21 to 28 million, 20% of whom lived in towns or cities, Paris alone having over 600,000 inhabitants.[8] This was accompanied by a tripling in the size of the middle class, which comprised almost 10% of the population by 1789.[9] Despite increases in overall prosperity, its benefits were largely restricted to the rentier and mercantile classes, while the living standards fell for wage labourers and peasant farmers who rented their land.[10][11] Economic recession from 1785, combined with bad harvests in 1787 and 1788, led to high unemployment and food prices, causing a financial and political crisis.[3][12][13][14]"
-source: https://en.wikipedia.org/wiki/French_Revolution
If we were a wiser species, we would stop bit/bad-coin mining, we would not invest (throw) such amounts of money into AI, we would postpone sending metal penisses up into the air. Instead we would do whatever we could to make our world a better place by distributing money and knowledge to less-fortunate countries. We would train doctors and nurses, build hospitals and clinics. Together we would fight diseases. We would train teachers and build schools. We would help improve the harvests, we would help to build water-wells, houses, factories, farms, roads, bridges, harbours, etc.
We would do this to protect ourselves from the large waves of young and desperate people that cannot build a life currently in their home country. We could that way also stop (some of the) violence - poverty breeds crime. The previous solution "go somewhere and build your fortune" is no longer doable. People should not emigrate, they should stay where they belong, with family, in their own culrure. We should work harder, allocate more money, to make this possible.
I know that may sound a little self-centred, but I hear you saying the US should act a little more like Canada and Europe. (Compared to the US BEFORE Trump cutbacks.)
However everybody could do better.
Immigration in itself is not a problem. But immigration in response to catascrophic situations in one's source country is.
A lot of foreign aid by Canada is govt paid post secondary education for promising students from developing countries, investing in health care abroad, assisting development of modern legal systems in former colonies, etc. The goal being to help poorer countries develop like we have been able to.
Canada has temporarily cut back in these efforts from time to time, but they continue to be popular.
Immigraton is a problem. (EDIT: has become a problem.) It is also cruel. For the immigrant, his family, and especially for those that are left behind. Many migrants leave thinking they will be able to return one day to their home country, with money earned. It does for most not work out that way. Immigration turns out to be a one-way street. And an immigrant is, and always will be, an outsider.
Sigh. I'm gonna need another cuppa coffee to decide if they said what I thought they said. I hate getting old.
I am going to get chatgpt extract a summary & see what is the lesson I can take from a wholelotta word salad…
Me too. That transcript makes it easy.
Man, I was stopping the conversation, backing up, listening, creating a new tab when I wanted AI to explain to me what this word or that phrase meant...I'm green and had to look up words like arbitrage, basis points and evergreening loans. I think an underlying aspect of this discussion is that Paul Krugman has been a spokesman for concern that we all are sharing because of the disaster that is trump and Caballero was tamping down that anxiety. Krugman was awfully twitchy, lots of ticks, and Caballero was playing the calm economist. Same old-same old. They both had their differing reactions to the 2000 dot com boom crash and the housing boom crash of 2008. That was interesting. AI...I am so ambivalent about what it means. These proposed data centers seem like Joanie Mitchells' "Paved paradise and put up a parking lot" theme. AI also helped me to work out how to repair my zero turn mower and write folk songs like John Prine...damn!
My impression was that PK was out of his comfort zone on this subject.
How much energy does each use? How much CO2 does each contribute? We can only compare when we know what the actual environmental cost are and the cost of mitigation, if possible.
Yes, but we can EAT bacon, while all we get from data farms are more surveillance and manipulation.
Oh yeah...Pig Farms. Safe to eat, low fat pork and a shitty mess. I'm hanging on to my omnivore nature but cattle, pigs and chickens as food and how it is produced is a sad, depressing story.
I am not sure what you mean by "Headlines are manipulative". Right now, my wife, who is caught up in different aspects of TDS (trump derangement syndrome) spends her mornings perusing her internet headlines. She is focused and stressed about what some headlines are telling her. The daily right wing barrage of disruptive acts was/is exhausting as it is intended to be. She brings up the stuff like "Do you know what trump did yesterday?" or she comments when Governor Hochul talks about preventing the data center invasion from coming to NYS for a year or so (politics).
And, me, I have retreated from a lot of that alarming stuff. Every morning conversation with my wife, would roil my stomach, cause me agita I am pretty sure that she was scaring me. I've been alarmed since 1968, when I flew back from Vietnam wondering what were we fighting for, quit the Marine Corps and started wising up. It's almost sixty years since I have been wising up. The 1970s right up until now are what have concerned me. Nixon, Reagan, Limbaugh, Fox, Clinton, Bush, Cheney...Internet, social media and on and on. Still got a ways to go. Instead, I have been wondering what it will take to right this ship if in fact there is a desire to do that. Will it be possible? The framers wrote into the Preamble "In Order To Form A More Perfect Union". I would say "that ship has sailed" or, if you want "That train has left the station".
Forget perfection. Right now, what I think is happening is that this ever-present aspect of human nature and culture we call wealth and the accumulation of it. That... is what is in charge. History tells us this ain't our first rodeo. Philosophers have been telling us that our best chance is some form of social contract, some form of democratic participation and even then, the bad shit will out. Economists tell us how these stories of wealth occur and how they go wrong (or right). Taking this interview with Caballero seriously is a part of my "Wising up". So when I read Mickie Morganfield's reply up above, I thought "oh Yeah". There is a scene in the movie Magnolia, where every screwed up character in the movie starts singing a song about wising up. https://www.youtube.com/watch?v=gC96_vph-oI
So what does all this mean for the "average" retired 80 year-old with combined assests of 2 mil in equities and fixed retirement (bonds?), excluding my home? Where do I safely save and where do I invest?
I'll check later if anyone answers.
In a similar vein, how in hell are my grandchildren ever going to be able to afford a home of their own and maybe even have children of their own to worry about?
Well, many are deciding not to have children, and this is a global phenomenon. Populations are projected to decline. As the US is already below the replacement birth rate (currently 1.79/woman), it is a very stupid move to both stop immigration and deport many of the non-permanent resident immigrants.
As expected, ICE/CBP are deporting the wrong migrants.
This is a serious problem and I think it’s driving young people to radical politics like the DSA.
Laddered maturities for your treasuries. Make sure they’re in an account by which you can benefit by their preferred tax treatment. 60% of your assets should be in US stocks.
A great interview!
Part of what's interesting to me about Caballero's "wealth boom has boosted aggregate demand and that has increased equilibrium interest rates" argument is that it seems to more analogous to the line of thinking Summers was championing around secular stagnation: that interest rates are more a story of the real economy than of financial plumbing and the over/under-supply of specific types of risk assets.
I like to think of portfolio composition as trying to fill in a set of shelves - allocators are trying to fill out different types of risks, and get a good mix for diversification purposes. There's a bit of flexibility around sizing those shelves (although regulation can harden the rules). The way I understood Caballero's safe asset story is that there was a lot of demand for the "safe assets" shelf, and an undersupply. It was that mismatch that changed the safe interest rate. But it also can't actually change the return on capital (which is the very thing he pointed to against Summers)
There's a reading of this moment of AI boom/growing deficits that is the reverse of that story: now its about the shelves getting too crowded. This also ends up in a higher interest rate - but because its a "crowded shelves" phenomenon, its going to be much more sensitive to financial plumbing than the "wealth boom boosts aggregate demand" story that Caballero suggests. And the changing lines between Fed/Treasury could have a much more rapid effect
> "wealth boom has boosted aggregate demand and that has increased equilibrium interest rates" <
But it isn't "lifting all boats." The K-economy is only helping the wealthy, and rising inequality is worsening it. Coupled with the GOP deliberately looting what remains of welfare, the population is experiencing declining income and wealth.
Too wonky for this old man. Are the bond issuers and investors who could understand this important stuff able to help steer the ships? Or are we all just along for the ride? Mark Williams
If you want to dump your bonds, you could always buy toilet paper futures!
Unfortunately, I think you're right. But I'm an English major, so don't listen to me!