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Interview With David Malpass

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Bloomberg Jan 6 21:07 · 1684 Views

David Malpass, former President at The World Bank Liz Young Thomas with SoFi discusses the outlook for equities in 2025

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Transcript

  • 00:00 Welcome to the show, Sir.
  • 00:00 It's always good to catch up with you.
  • 00:02 I just want to address that one line in the op-ed,
  • 00:04 a tailor made
  • 00:05 debt crisis.
  • 00:06 Can you just explain that a little bit more?
  • 00:09 That's right.
  • 00:09 This has been coming on for
  • 00:11 for a year.
  • 00:12 For two years.
  • 00:13 They kind of planned it
  • 00:15 so that the new president, the next president would have the problem.
  • 00:19 So Congress spent all the money.
  • 00:21 And so it's tailor made for a crisis because if you don't raise the debt ceiling,
  • 00:26 you have a default on the national debt.
  • 00:29 What what I've wanted them to consider is rewriting the debt limit so that it actually works.
  • 00:35 You've got to stop the spending before it happens rather than after you've already spent it.
  • 00:41 David, we heard over the weekend from Mike Johnson, House Speaker,
  • 00:44 that there is going to be 1 big, beautiful bill and it's going to probably come in April.
  • 00:49 And it will be put through
  • 00:51 by reconciliation to get all of Donald Trump's agendas in place.
  • 00:55 We're speaking with Henrietta Trays.
  • 00:56 She said this could expand the deficit by some $5 trillion.
  • 01:01 Do you think there is the will to start to revise the debt ceiling debate and some of these other issues to structurally reduce the deficit under the Trump administration?
  • 01:10 I think there's a strong will to reduce spending.
  • 01:14 One of the things going on is Biden is leaving the cupboard bare as he leaves office.
  • 01:19 But that means they've spent up as much as they can on the current fiscal year.
  • 01:25 They've also, they're in the process of obligating every day
  • 01:29 that goes by that they're obligating huge amounts of money that can't be gotten back
  • 01:34 through the rescission process.
  • 01:36 So if you make a grant
  • 01:38 and you obligate the funds, you can't get them back.
  • 01:41 And then
  • 01:42 another way that they've the, the cupboard is bare and it's showing up in the bond market
  • 01:47 is they've kept the,
  • 01:49 the
  • 01:49 issuance of debt short term.
  • 01:52 So one of the biggest decisions facing the new administration will be what maturity to issue at and does the Fed by Federal Reserve buy back all the long term debt?
  • 02:03 You know, the, the Fed is this giant hedge fund.
  • 02:06 It's owning all of the long maturity or a
  • 02:09 big chunk of the long maturity bonds.
  • 02:12 So I think over the last three months they've lost maybe $650 billion
  • 02:18 just on having a bad bond trade.
  • 02:21 You know, yields have gone up.
  • 02:23 So they're the big holder of long term yields.
  • 02:26 So the consumer feels OK,
  • 02:28 but the government itself is losing massive amounts of money until they find a way to slow down the spending machine.
  • 02:37 Do you think just to sort of build on that, David, that the reason why we've seen that rise in longer term yields is because of the deficit?
  • 02:43 Is this truly the bond vigilantes coming back to the table?
  • 02:47 There's some of that.
  • 02:48 The market looks ahead and says, is it?
  • 02:50 Do you have a mechanism to actually control yourself?
  • 02:54 And so the, you know, the, the bond yields are having multiple problems.
  • 02:59 1 is the Fed's models are really broken.
  • 03:02 So the Fed is basically saying if you have more growth in the economy, we assume it will be inflationary and that and so we will have higher interest rates.
  • 03:12 So it's a broken models problem.
  • 03:15 But then second, as I mentioned, the duration of the government was held down,
  • 03:21 the the Fed was buying the
  • 03:23 Treasury, issued some term treasuries, but then the Fed bottom back.
  • 03:28 And so this is a major problem
  • 03:30 because you have to get over the hump.
  • 03:32 You can do that through confidence.
  • 03:34 And that means, yeah, are you able to
  • 03:37 repeatably, you know, over and over again, cut spending?
  • 03:41 Do you have a mechanism to actually control what Washington spends?
  • 03:45 That's yet to be seen, but I think they can do it.
  • 03:49 David.
  • 03:49 I don't really see any restraint right now with the incoming Trump administration.
  • 03:53 President Trump talked about yesterday one powerful bill, border security, energy policies, renewing Trump era tax cuts
  • 04:00 except making them better to include no tax on tips.
  • 04:03 And we're talking about
  • 04:04 a president who spent $8 trillion or added $8 trillion to deficit during Trump.
  • 04:09 One point O So where do you see the
  • 04:12 appetite of Trump to want to cut spending?
  • 04:15 It's going to be a combination of increasing growth and production within the economy and making the existing spending more efficient.
  • 04:24 So if you get more from it and you have
  • 04:27 fewer people but fewer
  • 04:29 obligated funds,
  • 04:31 that's going to be the trick.
  • 04:32 But
  • 04:33 I want to really put emphasis on this idea of markets being forward-looking and looking at the output of the economy.
  • 04:40 If you can change the energy system, that means both the production but also the transmission of energy, that's going to have a big downward effect on inflation.
  • 04:51 the Fed doesn't have that in its models that, you know, each of the Fed's models are broken.
  • 04:57 1 is on how you set interest rates.
  • 04:59 1 is.
  • 05:00 How you use the balance sheet, you know, they've used it very harmfully in terms of the lost money.
  • 05:07 And then third is their regulatory policy.
  • 05:09 The Fed has this massive control over lending to small businesses,
  • 05:14 and that hasn't been going well.
  • 05:16 But that can be repaired and fixed.
  • 05:19 You get more output, less inflation, and you can bring
  • 05:23 interest rates and bond yields down, something you've talked about a few times, David.
  • 05:27 We'll have this conversation again in the near future, I'm sure.
  • 05:29 David Malpaste.