Gita Gopinath on Why Interest Rates Have Surged All Around the World

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From Brussels, I'm following the politics, policy, and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money, and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech, or markets, you're hearing it while it happens. It's smart, calm, and to the point. And it fits into your morning. You can find new episodes of the Blue Bag Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin, and Paris. On Apple, Spotify, YouTube, or wherever you get your podcasts. Blue Bag Audio Studios. Podcasts, radio, news. Hello, and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wastenthal. Joe, the big story of markets right now has to be one of the big stories. The bond market sell off. By the way, as I say that, I just caught this massive feeling of deja vu because I'm pretty sure we've done a few episodes where I've started out in the exact same line. Well, I mean, one, obviously, this is sort of one of the trends of our time, which is that after a decade pre-COVID where we just sort of assume the rates were going to head lower. There's been a regime change as economists sometimes like to say. And so now we have rates pushing higher again. They've come back a little bit in the last couple of days, but that's not really the point. The point is it is this global phenomenon around the world. Rates going up. I would still say probably the big story in markets is AI and memory and chips. But if it weren't for that, everyone would be talking about interest rates higher in almost every country in the world. So here's the thing. I actually think AI and the rate sell off is kind of connected. So we're talking about yields going up generally in developed markets. And we've seen that recently. I know we saw, for instance, the long end of the UK guilt market hit like the highest since 1998. The 10 year US treasury yield was kind of inching up towards 5%. But it's come down mostly a lot of those yields have been moving in line with the oil price. So a lot of people will say that this is just because oil is going up. That's inflationary. Maybe we'll get higher rates. And so this is why yields have been backing up. However, there is an argument. I'm saying more and more people make this one that what's going on is actually a repricing of something less transitory. It might allow to say that word anymore. It's transitory and something more secular in what's happening with the rates market. Something that's more about the massive amounts of capital that AI is actually consuming and having a crowding out effect on sovereign bonds or maybe something that's more about the ability of the developed world to actually finance itself in the longer term. And so you're starting to see some of those bigger themes creep into the discussion about the bond market sell off. This idea that it's something else is happening here. Something more than the oil price. Totally. Actually, just speaking of the nexus between interest rates and AI torsion sluck hasn't good chart out. Came out this morning pointing out essentially that one thing with AI is the sort of FOMO aspect, not among investors per se, but about companies and not wanting to let their models be six months behind until they'll pay whatever the cost is to catch up. And therefore he argues that perhaps higher rates do not have the slowing effect that they might have had in another cycle. Because it's like, well, yeah, it's no fun to finance this data center at higher rates. But if the alternative is being consigned to the permanent underclass when the other company builds the most advanced model, you're going to do it nonetheless. And so yes, between oil, between the AI boom, between demographics and the challenges of sort of resourcing for care of the elderly of the infirm between all of these things that we are in this real secular shift and we have to understand it better. Yeah. So I am very happy to say we do in fact have the perfect guest to talk about all of this. We're going to be speaking with Gita Gopinath. She is, of course, a professor of economics at Harvard University, but also famously the first deputy managing director of the IMF. So truly, the perfect guest to speak to someone who's been talking about, you know, a secular change in the bond market for quite some time. Gita, thank you so much for coming on all thoughts. A pleasure, Tracy, Benjav, great to be on your show. So what's your take when you're staring presumably, you know, on a minute by minute basis at a chart of the US 10 year yield? What are you thinking? I mean, firstly, I think it's absolutely right to start with the conversation about what's happening in bond markets because frankly, despite all the many different shocks going around in the world, I actually do think the one that's most worrisome is what we see with public debt levels everywhere in the world. In the US, we've seen yields go up. It's a combination of things. You just talked about all of them, which is one is the fact that inflation is now expected to be higher. And there is a sense that the real rate at which the economy will stay, you know, at a somewhat stable level of inflation is higher. So the kind of the real interest rate has drifted up. The R-star has drifted up from pre-pandemic when it was like half a percentage point. Now it's a one percentage point. But on top of that, you have the premia that's coming from the risk of inflation from very importantly, the last fiscal deficits that the US is running and is projected to continue to run into the foreseeable future. And of course, the third element, which is the AI boom and the expenditure, the capital expenditure, that's being undertaken for that is also shifting the R-star up to maybe even higher than one percentage point. So because of all these reasons, we've suddenly moved away from the pre-pandemic period of low for long interest rates and what we were talking about, you know, the end of, I think we are at the end of secular stagnation at this point. This stagnation was about the fact that there was not enough investment happening, especially in the private sector, that is no longer an issue anymore. So because of the combination of inflation, AI boom, fiscal deficits, all over the world, high public debt everywhere, you know, we are seeing yields go up and that's true in the US too. I want to drill into all of these specific things. But let's start with like the high level of public debt. That was the thing that people were talking about quite a bit prior to the pandemic as well and race just kept going lower and lower, including famously in Japan where debt to GDP levels are even much higher than they are in the Western world. And that was sort of famously known as the widow maker trade because rates kept going lower. What changed between pre-2020 and post-2020 such that this suddenly in your view and perhaps the markets view, this became an important thing that was not perceived by the market as being important pre-COVID. A few things changed. One, the AI boom was unexpected. That was not something that was being priced in markets, pre-pandemic for sure. That big increase in demand for capital coming from the private sector is one big change. The other big change is the fact that fiscal deficits are now projected to state levels that nobody was expecting the US to run close to 7% fiscal deficits for the foreseeable future. That is the another important factor. And the third is the composition of who's the marginal buyer of this debt. So we had a period when central banks everywhere were buying government debt. And that also helped put keep interest rates low. In fact, that was part of the strategy of how to strengthen the economy, wanted the debt of easing was part of the toolkit. And so that helped keep the interest rates low. But that's changed. And now we have the central banks everywhere who are either stock buying or they're running it down like it's happening in Japan. And the marginal buyer are the more volatile investors, the page funds in the US are the market makers over here. And so whenever there are any shifts in global market conditions, you see a lot more rate sensitivity than you would have seen if it was mainly official credit flows. And by the way, that's also true about capital flows coming into the US. US, previously the buyers of US Treasury used to be foreign central banks. They're not doing as much anymore. It's mainly coming from non-bank financial institutions from the rest of the world. And so there are also much more volatile and flea trees. You're going to see just generally high volatility in the yield curve. Can you talk a little bit more about the AI boom? Because we hear people talk about a crowding out effect. And I think this is actually like something that is just starting to get a lot of attention. But the proportion of issuance in the corporate bond market that's coming from AI companies or AI related investment right now is just insane. And you mentioned Torsten's lock chart. Torsten is going to be at our upcoming. That's right. We're recording this on May 27th. Our upcoming live show in New York. And so I've previewed some of the charts. He's going to be sharing there. There's a chart there that shows basically the proportion of AI in the corporate bond market. It's now 50% of all investment grade issuance year to date. And in even junk rated debt. It's creeping up to like almost 40%. So this is a significant amount of debt that's being issued into the market. Is it reasonable to think that investors are maybe going to think like, well, I'll buy some big tech mega cap IG debt versus a US treasury. At least when we look at the pricing in markets, that seems to be the case, especially when it comes to equity. Do you everybody wants to have a piece of the AI boom? And yes, I think there is that sense that, well, this is a sector where we could really see real gains, especially in terms of productivity increases and profitability. And that's going to help. That's going to be something that they want to be a part of. So there is that demand for corporate bonds and for US equity, which is coming again, both from domestic investors but also from international investors, where AI is the trade. I mean, that's where all the dynamism is. And that's where people want to park their money. Now, we pointed out all the reasons why rates are likely to stay high. But I just want to point out that we, since we still have the ongoing Iran conflict and we still have the straight-up or most closed, if that is not resolved in any time soon, like the next month or so. And you see a even steeper increase in oil prices, and crude prices going up to say $160 a barrel, which is what some of the projections would be in that case. Then we could see much more demand destruction that we are seeing today. And we could be back in that space where at least at a short end, interest rates are being cut pretty rapidly. On this question, going back to the effect that the AI build out is having across rates and bonds and so forth. I want to sort of get some clarification here of what either you or the economists mean when they talk about, say, like crowding out, because there's one version of it that is like, there's a lot of debt being issued right now by very highly rated companies, probably yields a little bit more than US government bonds. That is attractive for investors, perhaps. And maybe that has some sort of crowding out in the financial markets. The other way that one can, that I tend to think of crowding out is that the AI build out. It's like, they're taking up all of the wind turbines. They're taking up all of the trucking capacity to get the goods to the data centers. They're taking up all the skilled contractors and laborers within the regions that these data centers are being built. And that creates inflationary pressure that adds to the strain. And therefore, all things being equal that says higher inflation, therefore higher rates for longer to maintain that. Which of those two models, whether it's the sort of financial markets version or the sort of real economy version, is a more useful way of thinking about that linkage between private and public sector spending/debt. So both of those are in play right now. So that's the difference between what's happening to real rates versus what's happening to nominal rates. And what's happening to the pricing of the fed rate path. So the first channel that you mentioned, which is just the fact that there is so much of demand from the private markets, from AI investors, for AI companies, for capital, is going to raise real rates, even if there is no effect on inflation or inflation expectations are not moving, which you'd expect to see real rates rise. And that's certainly we're seeing some of that. And then the other is the effect that's working through the demand for the different inputs that go into AI. And that's creating an inflationary pressure, which would then need higher nominal rates. And that is also playing out. I think right now, I suspect that the real rate piece is more important. The inflationary part has been driven a lot by what's happening with energy prices and the path through from energy prices into also core inflation. So I think that's the more of the higher inflation, higher rate path story is coming from other forces on inflation, as opposed to what's coming from AI itself. And then you have the real rate path, which is going up also because it's the general risk in mind that we're in, but also because of what's coming from this increase in capital demand, coming from the AI sector. Data centers need electricity, AI needs copper, reshoring needs steel, and gold's run may tell you something about how the world is repricing money and debt. 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What are the reasons we wanted to speak with you is because you do have that very significant policy experience. When faced with potentially rising real rates because of an AI boom, what should policymakers be doing here? Certainly in the US, we've already seen some Fed officials or outgoing Fed officials start to argue that they can look through the AI boom and its impact on inflation. But if real rates are structurally rising, if our star is structurally higher than it was before, is that the right move? What matters crucially is what we believe are the main drivers of our star at this moment. Is it coming because of higher productivity growth, which is then leading to higher investment and therefore demand for capital? All of that is good as a kind of good kind of increase in our star. Because that's an economy that is projected to grow at a faster rate. And that helps on many fronts, including in terms of bringing debt to GDP down. The other reason our star is going up is because of the increase in fiscal deficits and just general higher levels of government borrowing in the US. That is less appealing because that tends to be not necessarily growth enhancing. That the money that's being raised is not for productive, necessarily productive infrastructure investment that's going to generate enough growth. So that's more problematic because it's just generating our star without generating the higher growth that should come with it. And that can be a problem. From a policy makers perspective, of course, you have to firstly be able to tell where what is driving the R star? Is it a good kind or is it a bad kind? But regardless, if our star is drifting up and you have an inflation target of 2%, you are looking at high nominal interest rates. Right. So right now the Fed has an R star forecast of about 1%. People put 2% inflation on top of that as their target. We're looking at 3% nominal rates, which is a clear shift away from what it used to be pre-pandemic. Then you have to check to see whether the R star increases is actually slowing the economy down or the increase in your nominal rates are slowing the economy down. How much higher than that R star do you have to be to be able to bring inflation down? Because there is obviously a above target inflation in the US at this moment. That is now the big question whether the productivity boom is going to mean that you don't need that much of a above our star interest rate. Or do we have many other forces coming from energy prices passing through into core inflation, the lesser lower levels of immigration in the country? just general trade disruptions, supply chain disruptions, and those are the main drivers in case in which case maybe you need to keep interest rates even higher. So being able to tease that apart is, you know, I think that's where the tough decisions are. But what is squarely the case is that we are looking at high nominal interest rates. I mean regardless of whether our star is coming from the good kind or the bad kind. You know, there is this fantasy and hopefully it comes true, but there is certainly this fantasy of a lot of people who are into AI, which they would call like the disinflationary boom, right? So let's just imagine we have extremely powerful artificial intelligence that is capable of delivering incredible material gains for people. It makes healthcare really easy and quick. It can power robots that care for us, it can build things, etc. Meanwhile the cost of commodities collapses, maybe the cost of labor collapses. Is that a scenario in which it's worth contemplating and thinking about? So everything gets really cheap because it all gets super automated, but also our standards of living rise dramatically because the AI takes care of it for us. Is that conceivable? Is there such thing as the disinflationary boom? We're in the deflationary boom even. So this is about making a distinction between now and what comes next. Now clearly it is about the high levels of investments. Right. Clearly right. Now it's pushing everything up. But let's imagine 10 years from now and we've done it. We have this incredible and somehow we've solved all the sci-fi scenarios so that the AI doesn't want to kill us all, etc. Let's just imagine the rosy scenario in which we have this like a critical. Like there are some under-disgust risk factors in the sky. No, but right. Like let's just say assuming the robots don't kill us. Assuming we solve that and the AI works on our behalf and it does what we wanted to do and it can create incredible material gains while also delivery cheaply because it's just one AI, etc. Is that a contemplatable scenario from an economist's perspective? There is absolutely a scenario where we could be in that wonderful place with high productivity growth at the same time we don't have civil unrest or rogue forces using AI for ill. That is a scenario but I do not know a single person who will put a probability on that scenario and say that that's going to happen with a significant amount of certainty. There is a very high degree of uncertainty and there are several who also believe that it's yet to be seen whether there is going to be any major productivity gain of the kind that there are analysts who believe that productivity could go up by two percentage points a year over and above what's where it is right now which is around two percentage point a year. There is no evidence right now of that kind of productivity wave coming through so it's early but I use the technology and I find it terrific. It's been really great for my own productivity. It's not affecting my wages or anything so far but it's there. It is a very valuable technology but there is a lot of uncertainty and which is what is very curious about markets. On the one hand it is impressive where the stock markets are again at the close to a record high and maybe one can explain that by saying that there is a scenario where everything goes perfectly well but there are so many other scenarios that could play out between now and next year or even two years from now and you barely see that being priced in markets. That's probably most surprising than just looking at what's happening with just the level of the stock market. So we keep talking about the stock market and debt issuance in the corporate bond market and how everyone wants a piece of AI. Does that basically mean that we're seeing maybe scarcity of capital versus the global, we used to call it a global savings club in the early 2000s which ended up perperenaky pushing yields lower. Does anyone still talk about a savings club or should we all be talking about capital scarcity? We don't have a global savings club anymore and proof of that is real rates going up, interest rates going up so that's that. What we certainly seem to have in the US is I don't know for what to call it but gluttonous demand for US equity coming both from domestic investors but also from foreign investors. I mean we're at 40 trillion in terms of foreign holdings of US equities. That is at a historic high even if you look at it as a share of the rest of the world's GDP. It's about twice as high as what it was just before the 2000 dot com bust I guess the peak of the dot com. The world has never been that invested in US equity markets. It's like a zillion game in town. So if there's a gluttony rather I would say this for US equities. We're all in this together. And as we know in terms of what's coming into the markets right now we have some very big IPOs and that will make us even more all tied at the hip when it comes to AI and stock markets. Speaking of big IPOs Tracy this reminds me of saying this to message short producers. We should really do an episode soon about are you including voice memos to producers? Yeah. I'm not putting voice memos to producers. No I really want to do an episode soon about the fact that all the big index funds are going to have to include companies at basically their peak where you think like historically okay like a company like Apple like it enters the S&P 500 it I don't know maybe a $20 billion market cap and then it's a multi trillion dollar market cap. This will be the first time that the index fund owners are going to eventually have to buy these really big companies without having ever experienced any of the gains from the run-up. And I think that's like going to be a historic moment for both markets indexing and ETFs. This has been one of my long running criticisms of the big benchmark index providers which is like they always say that they're not making investment judgments they're just holding up a mirrored market but like actually a lot of these decisions are like incredibly embedded with judgment calls and they do end up having an impact on the entire market. Yeah this is I think it'll be a historic time for sort of index investing. Anyway I know that this is a divergence I just needed to get that voice memo into our producers. Yes I mean what we could was you know hey there are now more ETFs than there are actually companies being created on the market so if one needs if you want to spend a lot of time picking and choosing you could be you could be selective too. Yeah I want to switch ETFs but then I have to take a capital gains hit so I can't you know this is the anyway we're we're getting pretty side tracked here. I want to talk more I mean there are many phenomenon or many things going on at once but when we think about these pressures one of and it relates to AI but it also relates to commodities itself is this idea of essentially national resource hoarding and the decline of sort of free trade and so the fact is it's like maybe at one point we could say you know what a country could say you know it it's great that America is building a bunch of fighter jets so we don't have to have our own indigenous fighter jet industry etc. How much when you look at what's going on with the rates picture and pushing up inflation and so forth is this phenomenon in which no country fully trusts other countries to deliver goods for them and therefore there's a lot of replication or duplication of capital investment happening in every country all at once simultaneously. We seeing a lot of that I mean we moved squarely firmly decisively away from a pure efficiency based model of I'm going to buy from the cheapest place and I'm going to sell if I'm the cheaper source to one where everybody is building up their own capacity as much as they can and of course depending on the country and depending on how much of physical space you have that can be a small group of things or a big group of things. For sure energy security is everybody's paying attention to it how do we make sure that we don't have to import fuel from the rest of the world and how can we have our own fuel at home at the three renewables whatever we need to do or maybe just return to coal for now. That is we're going to see we're seeing that defense expenditure we need to be able to not just spend more on defense but make sure that we can actually produce more of the weapons that we need. Sam I conduct the chips rare earths yes there are you know I think there's so little trust in the world right now in terms of relying on your trading partners. That countries are just going to be spending a lot more on this. It's just that it depends on whether you're a country that can afford to raise the finances for it or not and but everybody is heading in that direction. So if you look at the list of you know all the sources of demand for capital that is a very very long list. Yeah. sources of supply of capital. There's just one category which is aging them demographics. And you know, that's, you know, we often tend to blame all people for the fact that we need to spend so much on retirement and on health for their future. But the truth is the reason interest rates are not much more high than they would have been is because of the supply savings coming from aging demographics around the world. Well, you mentioned fiscal space. And I know you've talked previously about the need to, you know, reduce some entitlement spending if governments are going to be serious about reducing deficits. And yet we've seen numerous attempts in the developed world to actually cut back on government spending. And it seems very, very hard to do in elected democracies, right? Like it is not a popular platform to be elected and say what we really need is austerity for the longer term. And all of you are going to have to suffer in the near term. How are policymakers like realistically supposed to navigate that tension, assuming that they're up for election every two to four years? I mean, we have the additional problem that I think policymakers actually are not really keen or particularly worried about where they're dead to GDP is. If you look around the world, again, except for places where the bond markets are simply just not letting you do more spending. Even in the US, I don't believe there's anybody in Congress who's truly worried about there are sorry not there are a couple in Congress who are worried about the US debt level, but not enough given where that levels are and given the foreseeable path of spending that's happening. But again, just step back and see it's helpful to look at what has happened historically and when have countries been able and how have they been able to bring their debt to GDP levels down. It's a couple of things. It is one is just a sport of growth that has come about either because you are some sort of a commodity exporter and you just had positive terms of trade shock. And because of that, your debt to GDP comes down. You hit the jackpot basically. Yes, exactly. You got lucky. Or productivity growth, the boom, above average growth. And I believe that's what we're betting on this time with AI. The hope is that with AI, we will get growth from 2% up to 4%. And then that will certainly solve a lot of our problems if we have that on a persistent basis. Countries, especially developed countries, have tended to rely on that. And then you have inflation. If you go back even further and also, obviously, during right after the pandemic, inflation helped bring debt to GDP levels down. And then, of course, the third is what we see with developing countries is you end up with default and restructuring and crises. And then, again, you bring debt to GDP down that way. So those have been this typical path. We've never had to worry about debt crises in developed economies. But now more and more. And I think this is also a new feature of the world we live in. Is the developed world is moving into that space where their debt costs and the borrowing costs are far more volatile, far more sensitive to market conditions. I mean, the stock case is the UK where you see that on a day-to-day basis. But you see that in other countries too, in Europe, in some of France. And more generally, even Japan, where for the longest time, we didn't have to worry about borrowing costs. Those have squarely moved up. The 10-year rates have moved up. You know, Germany's 10-year rates have moved up. So everywhere we are seeing developed economies also now having to face higher borrowing costs. The US, I think, is still the exception in the sense that even though 10-year yields are at say, we're 4.5% right now, just given the level of supply of debt and what's expected to come out in the future, markets are still treating it as giving it some privilege. You may have been, if it was not as big as it is just in the past. [Music] Harness the power of Bloomberg Intelligence every business day. Hi, I'm Scarlett Foe. And I'm Paul Sweeney, inviting you to join us for the Bloomberg Intelligence podcast. We bring you deep dives into the company's moving markets from stocks like Apple, Nvidia, Microsoft, and Alphabet to private companies in the news like OpenAI and SpaceX. Listen on your way home from work to catch up on the analysis that keeps you ahead of the competition. Subscribe to the Bloomberg Intelligence Podcast today on Apple, Spotify, or anywhere you listen. What does it, in your view, a debt crisis look like in a country that borrows in its own currency? Because obviously, politically, maybe the debt sale doesn't get raised, there were certainly political ways to default, but economically, the US never theoretically has to run out of dollars per say. In fact, I would say it's the same thing with the UK. You say it's the same thing with Japan. They can't run out of yen the same way in the same way that say an emerging market that borrows in a foreign currency could theoretically run out of dollar reserves, which is why we watch reserve levels when we talk about sort of on the edge, emerging market. To you, what does a debt crisis look like in an advanced economy in which all of its debt is denominated in its own currency? A crisis in developed economy would look more like a credit crunch that then leads into a financial crisis. So we would see a shop increase in borrowing costs. That will affect many other asset classes. You would see a slumping investment. The economy says, "Is this debt overhang, high levels of debt, and that you have to roll over on a daily basis?" That overhang, which slows growth, slows dynamism, that is what a typical crisis looks like. And yes, you can have financial crisis. One of the wonderful things about the last several years is despite all the shocks we haven't had in financial crisis, in developing what we're in an emerging market, in a big emerging market. And that has been very helpful to bring back a fast recovery of the world economy every time after every shock. And we talk about resilience. So in a case where we end up with just debt levels that are really high, it's just costs going up everywhere. And that will eventually slow down economies, if not just trigger if financial crisis right away, give in how sanguine financial conditions have been. You mentioned that one of the things that's changed pre-to-post pandemic has been the change in marginal position of central bankers with respect to the bond market and the fact that they've gone from being, although even in the US, I mean quantitative easing ended in the 2010s, etc. But what happens if we say we talk about central bank and one of these developed markets? And they say, "You know what? We're going to just get to, we're going to cap the long end, we're going to buy bonds until the rates are, you know, they don't go above 2%, or 3%, or etc." Seems very plausible that something like that could happen in the developed market before too long. What would be the sort of fallout if a central bank explicitly came out and said, "We are going to buy government debt and just hold down the rates in a very explicit manner like that?" If a central bank comes out and says that we are, you know, different from our mandate of price stability and full employment, regardless of what's happening there, if we are going to go out and buy long term debt, then that's what's going to happen is you're going to see inflation expectations drift up and then the nominal rates are going to go up. And real rates will also go up because of the risk associated with inflation. Premium will go up. And that will be, you know, the end of the wonderful letter that we've had of central bank independence and that's helping to keep interest rates low. So that strategy just doesn't exist. You can play for it for a little while, but eventually it gets priced into markets. So, I mean, unless, of course, it is a tool for monetary policy because you hit the zero lower bound. Sure. And you still need to simulate the economy, then you do that. But right now, we have five on the zero lower down. Right. That is, we currently have the opposite. We have the opposite. So it is, countries try have tried it in the past, and these are usually the countries that the IMF works with because they eventually find themselves in crisis. But what typically happens is you get a tiny period when it looks like this is helping, and then you just get much higher interest rates and you just don't get any of the benefits of the central bank buying your debt. You know, you mentioned earlier that we haven't really had a major financial crisis in recent years. And if we could just broaden that idea out a little bit, I think that the resilience of the global economy and certainly the US economy has been surprising to a lot of people. We've had multiple shocks, but overall, certainly in America, people just keep spending. Everything kind of keeps ticking along. Is there something that economists are maybe like underestimating when it comes to why it seems like again, the global economy to a lesser extent, but certainly the US economy seems so resilient in the face of all these once in a lifetime shocks that we keep seeing. There have been a combination of things that have helped, and some of it have been surprises. Again, just we're talking about debt that that increase in debt has come about because of the very large amount of support that governments around the world gave during each of these crises. So during the pandemic, in advanced economies, about 25% of GDP, if you look at the combination of not just outright support, but all kinds of loan guarantees and equity infusions and so on, that was huge. That was those were much higher levels than anything we'd seen in recent times. And because of that, households and businesses came out of the pandemic with stronger balance sheets than they did going in. And that has helped hold up demand also and also has helped, therefore, helps hold up profitability in a lot of businesses because of that strength that came from all that large amount of support. That was one. Second is the AI boom is a big player right now. If we didn't have AI and if we didn't have the increase in demand coming from AI, we would be looking at just much lower growth rates in many parts of the world at this time. And we would also say trade being much weaker. I mean, trade is being held up a lot by AI inputs flowing around. That's also been a big contributor. So we've had these positive offsetting events. The question is, what happens in the next crisis? And the next crisis countries do not have the fiscal space to provide that kind of support. And we mean, seen much less resilience than we've seen the last few years. I mean, I think that's something we should keep in mind. I don't think we should take this resilience as some sort of an absolute structure of shift that keeps economies growing at their long term trends regardless of how big the shop is. That's affecting them. In the case, I think recently for the Financial Times, which you talked about, the bliss trade, I think you do call it. And can you clarify because it sounds like expand on this idea that there is this assumption of state support. There's an assumption of a backstop. Things go bad. The government will be able to do something. And this seems to be the core of your idea that this is mistaken. We have this mindset right now in the policy world, and therefore people who are investing in markets, that the state is there to fix a lot of the problems. And we see it right away. But now what's happening with energy prices going up is that there are many countries that are capping fuel prices, that are cutting energy taxes. The instinctive reaction is to protect households and protect their spending power. And when you do that, that helps corporate profitability. And that is going to be favorable for markets. So we've been in this environment. Now either explicitly or implicitly, there has to be this notion that the economy has been resilient. And it is a reflection of what I call bliss, which is big lasting state support, which has helped economies all over the world, not just in the US, but in many other countries. So the expectation is that that will continue and going back to where we started this conversation, just given how high debt levels are. That's just increasingly questionable, which means that I think governments are going to move towards far more unorthodox approaches, including price controls, financial repression, the kinds of things that we haven't encouraged in a long time. We've talked about some of the big structural phenomenon in the global economy, the AI boom, demographics, certain things with trade. There's one thing we haven't really talked about, which is something I think about, which is that if a country makes something physical, there is a very good chance that either right now or in the future, China will be able to make it cheaper and better. And this is no matter what it is, there are still some things that aren't the case. The most advanced semiconductors aren't manufactured in China, Boeing and Airbus jets and stuff. There's a few examples, but by and large, when you think about the stresses that are being placed on economies all around the world, how much is this particular dimension of factor, the fact that like any, almost any tradable good might at some point be most efficiently originate from China. Yeah, I read a lot of pieces on this that somehow China will continue to run trade subpluses because everything it wants, it wants it produces for itself and produces for the rest of the world. And so that's that. I mean, that makes little sense to me. Firstly, if you just look at China's spending behavior, they run a surplus on their goods trade front, but they run a deficit on their services trade front. So one of the reasons why China's overall deficit, current account deficit or trade deficit is around 3% of GDP as compared to the 10% of GDP before the great financial crisis is because they are big consumers of services around the world. Chinese tourism has been a big contributor to incomes around the world and the service deficit that they run. So just that, right? There's nothing, there's no sense in which China ultimately gets to do everything. Secondly, usually if you get to a point where if you're so good at manufacturing, making everything, you ultimately are going to have very high levels of investment. Given the level of savings in your country, that usually means that you start running trade deficits, right? So it cannot be a story of China being very successful in its investment and being very productive. Because any kind of high productivity investment boom story means the country running deficits. What has happened in China is basically very a lot of consumption suppression because of that you're seeing a surpluses that the country is running. And we're also now seeing all the problems of very high levels of investment that's come from the crash in the property market, which despite the last four years of interventions in government policies is actually looking quite bad. So the weakness in the property market, the weakness in consumption. If China is running surpluses at this point, it is because investment has dropped in China. You have, that's gone both from the property market crash, but also because of all the excess supply and the overcapacity that they've created. You've seen a decline in investment. So 2025 was the first year when the investment in China actually declined. That explains why it's running a big trade surplus. Now yes, there are a lot of exports coming out of China. Forget about the surplus deficit part, but just the fact that they are sending a lot of goods out of their country is a source of competition for manufacturers around the world. I believe that this is not sustainable. I don't think Europe or other Asian economies in East Asia are going to just say, well, that's okay. We are okay with China dumping all these goods and ask. They're going to put tariffs on China. China is aware of that, which is also partly why they are trying to see how they can manage their own exports to some extent. They will move in that direction. But I'm not a buyer of the whole China produces everything and does everything on its own. And somehow we still continue buying from China. That makes little sense to me. Just going back to the beginning of this conversation, I mentioned a bit of a deja vu feeling because we do have these bond cell offs from time to time and we often record podcast episodes on them. The idea of a debt crisis has also been a popular theme on many podcasts, not just ours. Do you have any sense of what a catalyst for this actually exploding into a real life debt crisis could be or are there certain levels or numbers or behaviors that you kind of watch out for from here? I think it's very important what's going to happen with AI and the productivity boom that we are hoping for. That is going to be very important. If it turns out that there is very little showing up in productivity from AI or we have a setback that comes from just discovering that there is so much of hallucination that it's just you can't really use it for anything very important. If that's the case, then I could see a situation where the pricing of debt drops even more. It's a lot more concerned about what's going to happen in terms of government's ability to repay all the debt they have and not just now but that's expected to come into the future. So for me that's one thing. It is important that there is growth in the economy and that that growth is coming from good places. At this point it seems like the growth is coming from AI investment and the hope that it's going to generate all that productivity growth. If that story goes away, we have a problem in terms of the concerns around fiscal positions around the world. Alright, Geeta, thank you so much for coming on all plots truly. The perfect guest for this moment in time. We really appreciate it. Thank you. We was a lot of fun. - Joe, here is my overwhelming takeaway from that discussion. There is so much writing on AI. - Yeah. - Right? Like, honestly, like-- - Yeah, yeah, yeah, yeah, yeah. - The last answer is like, whoa, it kind of all depends on economic growth and whether we get that productivity boost via AI. - Yeah. - Like the idea that the entire sort of Western economic model and I guess social compact with governments is now dependent on whether AI actually does what it says on the label. - On the 10 is nuts. - Yeah, I mean, the numbers are obviously just extraordinarily big and they're affecting everything. And they're obviously shows up in financial markets but also shows up in the real economy. It is a major force of sustained upward pressure. Yeah, I think there's no disputing that. It's like we're all watching along sort of like eating popcorn and knowing that our fates will somehow-- And I'm serious, you know. - So Gita said it really well, which is like we're all basically in the AI trade together whether you wanna be or not. - No, I know and it's like, you know, I look at my like very passively diversified retirement money and I'm like, I'm such a genius these days, you know? 'Cause it's like, 'cause you don't even have to be in AI stuff. - Conversely though, do you feel pressured to keep spending on tokens in order to support equity market valuations? - Yes, that's right. I keep like thinking of more tests that I could do with AI because like, oh, I need to make sure the tokens are boosted. No, it's really wild. It really is everything. And then you, the whole conversation is like, man, the last six years have been crazy. - Crazy. - Like seriously, no, seriously. - I have a voice memo for producers, which is we need to clip that quote of Joe going crazy. - No, seriously, you just think of all the things that have happened in the last six years. And so I guess I'm not surprised. - Well, that also-- - The market is a regime shift during that time. - I mean, that also gets to Gita's response about this idea that like there is this assumption in markets that what we got through the last like 18, once in a lifetime, just fine. And so we'll manage to get through the next one, but then the question is fiscal capacity and I guess political will. - It's both of those. And it's like, you know, the way I think about it in Japan, I think is an instructive example here, which is that like when I think of fiscal capacity, I don't think of like a sort of like, if you have 80% debt to GDP level, you have fiscal capacity. If you have 120% you don't, because we don't know where, if there is that number. But what you do know, and what we can say, is that in a period of high inflation, and in a period where resources are already constrained, and governments have made a commitment, say, to seniors that they're, you know, that their standard of living will be axed, and governments have made a commitment to so-and-so, the defense that it's not gonna drop below X, that once a lot of these certain sort of commitments have been made, if you get another shock, in which you say, okay, let's just, God forbid, let's just say there were another pandemic, in which a bunch of people, temperate, we tried to do the same playbook again, and it's like, okay, we're gonna replace your loss, didn't come for a few months. Well, at a time in which we're already very like, resource constrained, you see how that just becomes, you know, there's a lag grave, or like, instantly inflationary, because we're already sort of, that's the difference in 2020 and late 2019, we were not pushing against our real resource limits in the way that we appear to be right now. - Yeah, I think that's right. Okay, well, on that happy note, so we leave it there. - Yeah, let's leave it there. - This has been another episode of the Out Thoughts podcast. I'm Tracy Alley, you can follow me at Tracy Alley. - And I'm Joe Weiss, and though you could follow me at the stalwart, follow our guest, Gita Gopinath, she's @GitaGopinath, follow our producers, Carmen Rodriguez, @CormanArmenda, she'll be in it at Dashbot, Kale Brooks, and Kevon Luzano at Kevin Lloyd Luzano. 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