Jim Millstein on the Massive Risks of Any 'Mar-a-Lago Accord'

SPEAKER_2 (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

So Tracy, you know, there's obviously a lot of anxiety these days, really for a while, but going into the election post about the size of the US debt, the size of the US deficit, et cetera. And the way I like to think of these things is that any discussion of federal spending is about a competition for resource allocation, right? So we know that a huge component of what drives persistent deficits is the social safety nets, social security, Medicare, Medicaid, et cetera. And when we talk about the debt or the deficit in the abstract and when people talk about tackling the debt or the deficit, what they're really talking about is freeing up resources somewhere, freeing up consumption somewhere and creating availability for consumption and resources elsewhere in the economy.

Tracy Alloway (1:14)

Are they?

Joe Weisenthal (1:16)

Well, maybe they're not saying... I mean, yeah, I think I would say so.

Tracy Alloway (1:19)

It seems to me there's a desire to like pay down the debt and then not necessarily do anything else. Like what's the else here?

Joe Weisenthal (1:27)

Well, so for example, Secretary Scott Besson and some of his recent interviews talked about, you know, we want to re-leverage the private sector. It's who we want to get rates down and therefore that makes investing more appealing for companies, et cetera. And so the idea of like, OK, we're going to like reduce demand, reduce consumption from various sectors of the economy that are perceived to be unproductive, such as retirees, et cetera. And then open up expansion, so then there's less consumption. And then that creates resource availability for other things which are perceived to be more productive, like re-industrialization.

Tracy Alloway (2:06)

OK, maybe. What I would say, you know how I like to think about this?

Joe Weisenthal (2:10)

Sure.

Tracy Alloway (2:11)

I like to ask, like, think about the big picture in bonds. And I always say bonds are built on norms, right?

Joe Weisenthal (2:19)

Yeah.

Tracy Alloway (2:19)

So government spending is built on norms. So you lend money to me and I pay you back. It's basically a promise, which means it's a human construct. And there are all these values and norms and narratives that are embedded in those constructs, in those promises. And that's what I find really fascinating, especially when those values start to change. And I think that's what's happening now.

Joe Weisenthal (2:44)

Yeah. Well, you know, absolutely. And obviously, you know, we did that conversation with Jim Bianco about either a literal or a metanomic Mar-a-Lago accord. And then we talked to Ray Dalio and he slipped it in there. And I thought it was like, kind of, he's like, well, maybe they'll restructure the debt in some way or return it out. And to me, that screams default. You know, I mean, that's just a, you know, it's a polite way of saying default.

Tracy Alloway (3:06)

But one man's default is another man's restructuring, Joe.

Joe Weisenthal (3:09)

That's right. But I think if I were a treasury holder, I would be very upset if the thing that I considered to be the most liquid, safe asset of the entire world, that the entire finance system runs on, the one thing that's perceived to be genuinely risk-free from a credit standpoint suddenly gets like, oh, this is a five-year bond and now a seven-year bond, and you're going to get the same money in the end. Like, I think that would be very disruptive in a way that is not disruptive, say, like, you know, when a hospital chain has to restructure its debt.

Tracy Alloway (3:39)

It is definitely the risk-free rate upon which, like, all the other markets are basically built on. Should I do a reminder of what the Mar-a-Lago accord maybe says about this point? So the way I think about it, it's an attempt to resolve some of the tensions embedded in the Trump administration's economic agenda. We spoke about it with Jim Bianco, and those tensions are primarily the desire to reshore manufacturing, and shrink the deficit, and also, I guess, address the sort of emotional sense that the US isn't getting compensated enough for its role in the global economy or global security.

All while paying down the debt, right? So having your cake and eating it too. And I should just emphasize, this isn't a hardcore plan. This is based on a paper that Stephen Miran put out last year that people started getting very interested in and talking about. And that's why we're talking about it.