Odd Lots Podcast Summary: Jim Milstein on the Massive Risks of Any 'Mar-a-Lago Accord'

Release Date: March 24, 2025

Bloomberg's Odd Lots delves deep into the intricate web of finance, markets, and economics with host Joe Weisenthal and co-host Tracy Alloway. In this episode, they are joined by Jim Milstein, co-chair of Guggenheim Securities, to discuss the precarious state of U.S. debt and the potential ramifications of proposed debt restructuring initiatives, specifically the so-called "Mar-a-Lago Accord."

1. Introduction to Debt and Resource Allocation

The conversation begins with Milstein framing federal spending as a competition for resource allocation. He emphasizes that persistent deficits are largely driven by expansive social safety nets like Social Security, Medicare, and Medicaid. When discussions arise about tackling the debt or deficit, they essentially pertain to reallocating resources—reducing consumption in certain sectors to free up resources elsewhere.

Jim Milstein [03:00]: “Any discussion of federal spending is about a competition for resource allocation.”

Milstein points out that efforts to reduce deficits often aim to curtail consumption in areas deemed less productive to allocate resources to more strategic sectors like reindustrialization.

2. The Mar-a-Lago Accord Proposal

Milstein introduces the concept of the "Mar-a-Lago Accord," a strategy attempting to address U.S. debt by restructuring it. This proposal involves exchanging short-term Treasury bonds for long-term "century bonds" with lower interest rates, thereby reducing the cost of servicing debt.

Milstein [05:37]: “A literal or metonynomic Mar-a-Lago accord… screams default.”

He discusses the underlying intention to weaken the dollar to make U.S. manufacturing more competitive globally, a move intertwined with broader strategies to reshore manufacturing and mitigate the reliance on critical imports from countries like China and Taiwan.

3. Challenges with Debt Restructuring

Despite the theoretical benefits, Milstein highlights significant challenges with the Mar-a-Lago Accord:

• Limited Impact on Foreign Debt Holders: Currently, only about 15% of U.S. debt is held offshore, and much of that is in the hands of foreign private investors rather than governments. This makes the proposed exchange offers less effective in significantly reducing overall debt.

  Tracy Alloway [25:27]: “Not more than 15% of it today is held offshore.”

• Domestically Concentrated Debt: The majority of U.S. debt is held domestically by entities such as government accounts, Social Security, Medicare trust funds, banks, insurance companies, and mutual funds. This concentration limits the efficacy of foreign-focused restructuring efforts.

• Economic Risks: Terming out debt at higher interest rates could exacerbate the annual interest burden, potentially increasing from the current average of 3.3% to over 4.3%, thereby worsening fiscal imbalances.

  Tracy Alloway [25:27]: “The average interest rate on our outstanding $36 trillion of debt is 3.3%. So to term it out in this market would take that $1.1 trillion of annual interest expense up.”

4. Sovereign Wealth Fund as an Alternative

As an alternative to the Mar-a-Lago Accord, Milstein and Alloway discuss the creation of a sovereign wealth fund. This fund would be capitalized by monetizing U.S. government assets, including:

• Natural Resources: A significant portion of land west of the Mississippi, mineral rights, and federal holdings in Alaska.

  Tracy Alloway [40:44]: “We own probably a third of the land west of the Mississippi… mineral rights on these lands…”

• Government Enterprises: Equity in commercial enterprises like the Tennessee Valley Authority (TVA), Fannie Mae, and Freddie Mac.

Milstein suggests that monetizing these assets could generate approximately $2 trillion to interfere in foreign exchange markets to weaken the dollar without relying on aggressive debt exchanges or geopolitical threats.

5. Privatization of Fannie and Freddie

A substantial portion of the discussion centers on the potential privatization of Fannie Mae and Freddie Mac. Milstein outlines the steps and benefits of restructuring these government-sponsored enterprises (GSEs):

• Capitalization: Fannie and Freddie have nearly reached their required capital levels, which could allow for their privatization without compromising their financial stability.

  Tracy Alloway [50:10]: “They have paid the treasury department back now $302 billion on that, characterized as dividends on that $192 billion par investment.”

• Regulatory Oversight: Post-privatization, these GSEs would remain under the stringent supervision of the Federal Housing Finance Agency (FHFA), ensuring adherence to safe business practices and preventing a recurrence of pre-crisis risky behaviors.

• Market Stability: Enhanced capitalization and regulatory oversight would help maintain the credit ratings of mortgage-backed securities (MBS), ensuring their continued status as safe and liquid assets crucial for bank capital requirements.

  Tracy Alloway [57:24]: “They are the big factor in that conventional mortgage market… they buy mortgages…”

6. Implications for Financial Markets and Credit Ratings

The episode delves into the broader implications of debt restructuring strategies on financial markets:

• Credit Rating Stability: Privatizing Fannie and Freddie with robust capital backstops may preserve the high credit ratings of MBS, crucial for maintaining low borrowing costs across the economy.

  Tracy Alloway [59:03]: “That is the big question. Is half a trillion dollars of capital standing behind the guarantees, enough to keep the credit ratings on the MBS stable and in place?”

• Investor Confidence: Maintaining high credit ratings and ensuring the reliability of MBS as safe assets underpin investor confidence in broader financial markets.

7. Conclusion and Final Thoughts

In wrapping up, Weisenthal and Alloway reflect on the interconnectedness of norms, economic growth, and debt management:

• Norms and Confidence: The U.S. has historically not defaulted on its debt, a norm that underpins global confidence in Treasury securities. Altering this norm through restructuring could have profound and possibly destabilizing effects.

  Jim Milstein [63:22]: “There are things in pieces of paper…?”

• Balance Between Private and Public Investment: Success has historically hinged on balancing private sector dynamism with essential public investments in infrastructure, education, and research.

  Tracy Alloway [35:44]: “The success of the United States is a demonstration of the balance between private and public investment.”

Milstein underscores the urgent need for a fiscal consolidation plan to stabilize the growing debt, emphasizing that without curbing deficit growth, the U.S. faces a growing debt overhang that could stifle economic dynamism.

Tracy Alloway [36:51]: “We have to get that fiscal imbalance corrected. We have to balance revenues and spending.”

Notable Quotes:

• Jim Milstein [03:00]: “Any discussion of federal spending is about a competition for resource allocation.”
• Tracy Alloway [25:27]: “Not more than 15% of it today is held offshore.”
• Tracy Alloway [40:44]: “We own probably a third of the land west of the Mississippi… mineral rights on these lands…”
• Tracy Alloway [57:24]: “They are the big factor in that conventional mortgage market…”
• Tracy Alloway [59:03]: “That is the big question. Is half a trillion dollars of capital standing behind the guarantees, enough to keep the credit ratings on the MBS stable and in place?”

This episode of Odd Lots provides a comprehensive analysis of the complexities surrounding U.S. debt and the potential strategies for its management. Milstein's expertise offers listeners a nuanced understanding of the risks and realistic challenges associated with high-level debt restructuring proposals like the Mar-a-Lago Accord.