Why the Price of Money Surged in the Last Six Years

Summary

Odd Lots Podcast Summary
Episode: Why the Price of Money Surged in the Last 6 Years
Release Date: October 9, 2025
Hosts: Tracy Alloway & Joe Weisenthal (Bloomberg)
Guests: Tom Orlik (Chief Economist, Bloomberg Economics), Jamie Rush (Director of Global Economics, Bloomberg Economics)
Topic: The drivers behind the recent surge in the "price of money"—the real, long-term interest rate—and the evolving concept of the neutral rate of interest ("R star", or R*)

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Episode Overview

This episode explores why long-term interest rates have shifted sharply upward over the last six years, unraveling the concept of the “neutral rate of interest” (R*) and its importance for the global economy. Drawing on the new book by the guests, The Price of Money, the hosts and experts discuss what R* really is, how it's calculated, why it's risen, and what it means for central bankers, markets, and policymakers.

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Key Discussion Points & Insights

1. What is the Neutral Rate of Interest (R star / R)?*

[08:14] Jamie Rush:

• “The natural rate of interest is what balances demand for investment and savings in the economy. And when those two things are in balance, the economy is on trend and inflation is roughly at target.”
• R* is the (unobservable) equilibrium real interest rate where economic activity is at potential and inflation at or near target.
• Criticized for being “unobservable” and sometimes treated as a policy justification tool, but remains a central policy concept.

2. Why Care Now? What Changed Since the 2010s?

[07:00] Tom Orlik:

• From the 1980s to mid-2010s: “too much saving and not enough investment,” driving R* lower.
• “What's happened in the last decade? Well, that dynamic has swung into reverse: now we have less saving, more investment, and that means the neutral rate... is going up.” ([07:12])
• Fall and then rise of “the price of money” reflect deep shifts in global savings, investment, government spending, and demographics.

3. How Much Higher Are Interest Rates and Why?

[08:44] Jamie Rush:

• Cites the pandemic period when borrowing was almost free for governments.
• “Interest rates, treasury yields in excess of 4% are much higher, much more burdensome. And now we're seeing the costs of those policies manifest in budgets today.”

4. Why is R Unobservable and Controversial?*

[04:00] Joe Weisenthal:

• Skeptical but intrigued: “I doubt that there is actually some rate that will magically bring the economy into balance if we knew what it was.”
• Conversation productive as a framework for understanding actual economic shifts.

5. How Do Economists Estimate R?*

[16:03] Jamie Rush:

• Standard models (Laubach and Williams): infer R* by seeing how inflation and unemployment react to policy.
• The book’s approach: “We tried to pin the natural rate down by using actual data and some theory… it’s the price of money, determined by supply (savings) and demand (investment).”
  • Inputs: demographic trends, government deficits/surplus, productivity, investment needs, global trade balance.
  • By examining these drivers over decades, their model explains both historical shifts and potential future changes in R*.

6. Key Drivers Behind the Surge in R*

[37:58] Tom Orlik, [39:51] Jamie Rush, [40:27] Joe Weisenthal

• Demographics: Baby boomers’ savings push was a main factor driving rates down; as they retire and dis-save, R* rises.
• Debt: Higher government borrowing post-2008 and especially post-Covid pushes up R*.
• Deglobalization: Reduced global trade and cross-border saving (especially from China and petrostates) puts upward pressure on R*.
• Defense & Data Centers (AI Investment): New global instability increases defense spending; an AI investment boom soaks up capital—both push R* higher.
  • “Now we have the 5Ds: Debt, Demographics, Deglobalization, Data centers (AI), and Defense.” ([40:27])

7. Does Supply-side Fracturing (Reshoring, Friendshoring) Play a Role?

[24:48] Tom Orlik:

• Yes; if every country builds its own supply chain, investment spikes.
• “If everyone wants to make their own stuff at home, then clearly there has to be a massive amount of capital spending so everyone can build their own everything...”

8. De-dollarization and Treasuries

[34:45] Tom Orlik:

• If foreign central banks buy fewer U.S. Treasuries, less global demand means U.S. borrowing costs rise.
• “If the rest of the world is de-dollarizing, that also means they’re buying less US Treasuries... another force pushing US borrowing costs higher.”

9. Competing Interpretations: R as Political Justification?*

[23:30] Jamie Rush:

• Yes; central bankers can justify any stance by asserting a (conveniently unprovable) R* estimate.
• “With R you’re never beholden to a prediction really, are you?... a safe way to express your views if you just have an inner belief that rates need to be lower.”*

10. Can There Be Two R Stars? (Divergence in the Real and Financial Economy)

[33:15] Jamie Rush:

• “Maybe there’s an R star which keeps the economy balanced and maybe there’s an R star which keeps the financial sector and financial markets balanced... implies then that you’ve got this policy trade off.”

11. Other Forces for Higher Rates Ahead

[27:39] Tom Orlik:

• Rising supply shocks (climate, geopolitics)
• Political threats to central bank independence raise term premiums and borrowing costs
• Doubts about the Fed’s commitment to a 2% inflation target (growing market skepticism) ([29:26–30:59])

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Notable Quotes & Memorable Moments

On the mysteriousness of R:*

• “I feel, Tracy, like this conversation is really about the magical object that you can't look at, right, because it'll freeze you. Or maybe it's the shining gold in the briefcase in Pulp Fiction, you can't see it.”
  —Joe Weisenthal [15:09]

On generational drivers:

• “From the 1980s onwards, baby boomers started saving a lot. And so the supply of savings went up and the neutral rate went down. That's the reason why I never earned interest on my bank account until two years ago.”
  —Tracy Alloway [19:48]

On politics and the Fed:

• “Having someone from the President’s team serve on the Fed concurrently, that's unprecedented... raises significant questions about Fed independence.”
  —Tom Orlik [28:06]

On modeling and usefulness:

• “What's that line? It's like all models are fake, but some are least useful. It strikes me that it may be a fake concept, but a useful concept.”
  —Joe Weisenthal [42:42]

On asset prices and interest rates:

• “AI can raise equity values because it's a frontier technology... It's also going to suck in a load of capital... which is going to drive up interest rates.”
  —Jamie Rush [31:41]

On the centrality of the 5Ds:

• “We could really market this... Debt, Demographics, Deglobalization, Data centers, and Defense. We've come to something.”
  —Joe Weisenthal [40:27]

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Important Timestamps

• [05:15] Introduction of guests and their book: "The Price of Money"
• [08:14] Simple, working definition of R*
• [08:44] Contrasting pre-Covid and present borrowing costs
• [16:03] How their economic model differs from others
• [20:17] Biggest future driver of R* (government deficits/spending)
• [24:48] Effect of deglobalization and supply chain reshoring
• [27:39] New era of supply shocks, climate, and central bank independence
• [29:26] Is the Fed still targeting 2% inflation?
• [31:41] Impacts on asset prices
• [34:45] De-dollarization and the neutral rate
• [37:58 & 39:51] Top 5 drivers for the new era of higher rates (the "5Ds")
• [42:42] Reflection on the utility of the R* concept

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Tone and Style Notes

True to the Odd Lots style, the conversation is rigorous yet playful, blending skepticism and fascination with core economic concepts. Self-deprecating asides (“I don’t believe in books”), pop culture references (Pulp Fiction suitcase, Ben Strong spanking children) and market-humor ensure accessibility for both finance pros and lay listeners.

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Conclusion:
The surge in the so-called “price of money” can be traced to a reversal of historical savings and investment trends, demographic shifts, government debt and spending, deglobalization, AI investment booms, and defense outlays (the “5Ds”). While the “neutral rate of interest” is impossible to observe directly—and often manipulated for policy debates—the exercise of understanding and modeling it remains highly instructive for anyone seeking to make sense of today’s economic landscape.

Hosts’ Recommended Read:
The Price of Money (Orlik, Rush, Flanders) — a deep dive into R* and why it matters now more than ever.

Transcript

[Jamie Rush]

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[Tracy Alloway]

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[Joe Weisenthal]

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[Tracy Alloway]

Bloomberg Audio Studios podcasts Radio.

[Joe Weisenthal]

News.

[Tracy Alloway]

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

And Joe, yeah, yes, recently. Yes, recently Stephen Myron, who is chair of the Council of Economic Advisors and also the newly confirmed Fed board member. Yeah, he made his first public speech since joining the central bank. And do you know what it was about?

[Joe Weisenthal]

I do, but go on the neutral.

[Tracy Alloway]

Rate, the natural rate of interest. R Star. Yes, basically all about R Star, which is like pretty significant for his first speech.

[Joe Weisenthal]

I mean, to me this has come up on a bunch of episodes lately. To me this is the multi trillion dollar question, which is we're according to September 24, 2025, why are long term rates so much higher? Why does the market perceive that rates will have to be so much higher in order for the Fed to hit its inflation goals than the market perceived in 2019? What changed in the last six years or five years or whatever?

[Tracy Alloway]

Well, also, I mean our star has always Been so something of a controversial idea, and people criticize it for being this unobservable thing. And, you know, it's a hypothetical estimate that's extracted from all this different stuff like savings and spending and productivity and demographics, investment. You can go on and on and on.

[Joe Weisenthal]

Climate, immigration.

[Tracy Alloway]

Yeah, exactly. But I think, you know, our star is probably going to get even more controversial. Or perhaps more under the spotlight, is a way of putting it, given that people like Myron in his speech where he was arguing that the natural rate of interest should be zero right now, which is very, very different than other sort of normal estimates out there, which has the natural rate of interest at like 3.3 or 3.9%, something like that. And so if you think the neutral rate of interest is a lot lower, then you would assume that the Fed should be loosening more. And conversely, if you think R STAR is high, which a lot of people have argued in recent years, then you argue that interest rates don't look that restrictive at the moment.

[Joe Weisenthal]

Totally.

[Tracy Alloway]

So we should clearly talk more about this. And we've actually never done a specific episode just on the neutral rate.

[Joe Weisenthal]

So I'll just say two things. I'm probably something of an R star, truth, or in the specific sense that I doubt, like, okay, everyone agrees it's like, quote unobservable, etc. But I doubt that there is actually some rate that will magically bring the economy into balance if we knew what it was. That doesn't mean. I don't find this to be a conceptually useful conversation.

[Tracy Alloway]

And yet you don't believe in the term premium.

[Joe Weisenthal]

I don't really believe in any. Any of this stuff. No, that's not true. I am very interested in setting aside whether something could theoretically be observed, whether one number could bring everything into balance, all of these things. Setting aside that question, something has changed in the underlying economy. If you want to call that a neutral rate of interest, I guess I'm totally fine with that. But something's changed and I want to know what it is. But more importantly, I want to know why.

[Tracy Alloway]

All right, well, we have the perfect guests. We're going to be speaking with Tom Orlich, who is, of course, chief Economist at Bloomberg Economics. He's been on a number of times before. And Jamie Rush, director of Global Economics at Bloomberg Economics, and together with Stephanie Flanders, who is the head of Bloomberg Economics and also the host of the Trumponomics podcast, have written a book all about the neutral rate of interest.

[Joe Weisenthal]

A whole book about it.

[Tracy Alloway]

Yeah. Called the Price of A Guide to the past, present, and future of the natural rate of interest.

[Joe Weisenthal]

Amazing. I'm really excited.

[Tracy Alloway]

So let's get started. Tom and Jamie, thank you so much for coming on Odd lots.

[Tom Orlik]

Great to be here. Thanks, Tracey. Thanks, Jay.

[Jamie Rush]

Thanks for having us.

[Tracy Alloway]

First of all, congratulations on the new book. And I gotta say, it's kind of ballsy to tackle this concept that a lot of people don't believe in, excluding Joe. And, you know, that tends to generate a lot of criticism. And maybe it's even ballsier to publish your own model so that everyone can see what the estimates actually are. I mean that as a genuine compliment, but why a book on the neutral rate? What prompted it?

[Tom Orlik]

So I actually recall a tweet from Joe a while ago where he took aim at books as a concept.

[Tracy Alloway]

Oh, yeah.

[Joe Weisenthal]

So not only do I not believe in R Star or anything, I don't even believe in the premise of books. No, I do believe in the concept.

[Tracy Alloway]

No, Joe believes all books should be a tweet.

[Joe Weisenthal]

That's right. Keep going.

[Tom Orlik]

Exactly. So we've written about a concept Joe doesn't believe in in a format that Joe doesn't support. So we feel incredibly lucky to be on the podcast. So why now? I think there's a couple of ways to answer that question. The first is, I mean, this is really important, right? We talk about the neutral rate of interest, but really a different way of saying it is. It's the cost of borrowing in the economy, right? And the cost of borrowing is incredibly consequential for ministers of finance. It's incredibly consequential for businesses, for households, for investors. So it's always a good time to write about the neutral rate, interest rates, the cost of borrowing. Why specifically now? Well, it's because something really important has changed. From the late 1980s to the mid 2010s, the global economy was characterized by too much saving and not enough investment. And in that state of affairs, the neutral rate of interest, the cost of borrowing, was continually falling. What's happened in the last decade? Well, that dynamic has swung into reverse, and now we have less saving, more investment, and that means the neutral rate of interest, the cost of borrowing for the US treasury and for everyone else is going up.

[Joe Weisenthal]

I like this framing. So it's less about the idea that there is some rate that will bring everything into balance magically, et cetera. Because I think a lot of people intuitively understand why, you know, that's not such a. You know, I think that probably makes a lot of people uncomfortable, but it is seems objectively True or real, that the cost of money or the cost of borrowing has gone up. And so we can talk about that specific. Specifically, let's talk about the cost of borrowing today. Like how much more expensive is it to borrow money today by some measure than it was, say pre Covid.

[Tracy Alloway]

Wait, just before we do this, can we get like a three sentence definition of how you view R star? I feel like we should define our terms before we start.

[Joe Weisenthal]

Excellent idea.

[Jamie Rush]

So R, the natural rate of interest is what balances demand for investment and savings in the economy. And when those two things are imbalanced, the economy is on trend and inflation is roughly at target.

[Tracy Alloway]

All right, that's a simple definition.

[Joe Weisenthal]

Okay, we can use that. All right, so why has it gone up? I mean, this is the big, this is the big question, right? But actually, before we say why has it gone up? How much has it gone up? Or has it in fact gone up versus the pre Covid environment? Let's start with that.

[Jamie Rush]

Well, if we cast our mind back to that Covid experience, there was a period where governments could basically be paid to borrow in real terms. Interest rates were so low for so far across the yield curve that they could borrow without having to worry about whether they'd pay it back. So you can see that the real world implications of that and the behavior that we saw during the pandemic, the borrowing that happened, the interest rate was enormously consequential. And a big part of that. We're not in that world now. Interest rates, treasury yields in excess of 4% are much higher, much more burdensome. And now we're seeing that the costs of those policies manifest in budgets today.

[Tracy Alloway]

So I remember way back in 2016, Goldman Sachs put out this note arguing that the Fed had a big new idea to justify keeping rates low basically. And the argument was that R Star was low. And so, you know, monetary policy wasn't actually that that loose at the time, even though benchmark rates were already pretty low. And the Goldman analysts had this chart in their note where they basically looked at mentions of thematic ideas in Fed speeches and press releases and things like that. And indeed you could see that starting in 2016, mentions of R Star start going up and you know, they basically came off of nothing for like the previous decade. No one was talking about the natural rate of interest. I know R Star at STAR itself is an old idea because I read the book and there's a chunky chapter on the history and development of the entire concept. But am I right in thinking that there has been a Resurgence in interest in R Star over the past decade or so.

[Tom Orlik]

Chunky seems like a neutral adjective. Tracy. How eloquent.

[Tracy Alloway]

An informative chapter, I should say.

[Tom Orlik]

So I think there clearly has. Right. And I think one of the reasons for that is because the state of the world has changed. Right. In the run up to the global financial crisis, didn't feel like there were sort of fundamental issues with how monetary policy was operating. Right. Interest rates moved up, interest rates moved down, the economy responded in the way which the textbooks would suggest. But in the aftermath of the financial crisis, we were in this extended period of economic malaise. And from a monetary policy perspective, it was hard to explain. Interest rates are on the floor, There have been a huge amount of quantitative easing, and yet unemployment rates remain stubbornly high, Growth remains stubbornly low. Why was that? And that's one of the reasons why this neutral rate of interest rose in profile as an explanatory factor. Because if the neutral rate of interest has come down, if it's come down very far, well, that means that central banks have to do a lot to stimulate the economy. And if the neutral rate of interest is close to zero, well, that effectively means that central banks are out of firepower. They can't take interest rates low enough to stimulate growth.

[Joe Weisenthal]

This is a very important point, actually. And again, just let's stay in the 2010s here when interest rates were at zero or near zero for a long time. You probably heard a lot of people in the financial press say, oh, you know, the Fed is super, super loose. Monetary policy, et cetera. How long will the Fed continue to print money or whatever? And yet, looking at the actual results in the real economy, as you've described, unemployment remaining stubbornly high, inflation consistently undershooting, which in retrospect, very nice problem to have. I think we should have appreciated it more at the time. Really not a problem at all, in my opinion. The implication, though, and we could have understood this from Milton Friedman and some of his talk about Japan, which was that actually, implicitly, we were still running tight monetary policy even with nominal rates basically at their physical floor.

[Jamie Rush]

Yeah. So I guess during that period, interest rates were low, the economy was failing to gain traction, and policymakers were puzzling over it. And actually, the puzzle continues, right? Policymakers still don't know how restrictive policy is. They infer what they think the natural rate should be by looking around them, seeing what's happening to unemployment, see what's happening to inflation, but they don't know. And so one of the things that we did and we tried to achieve in our book is to rather than inferring the natural rate of interest, we looked over a broader sweep of history and tried to pin down the explanatory drivers of the rate of interest to try and shed some light on why these things are as they are, why interest rates fell so much, why there was an inflection point around the pandemic, and why we think interest rates may therefore go upwards in the future. So it was for, for us, the exercise, the book was really about trying to pin down the drivers and then tell a story about those drivers so we can think about it in the future. Your best restaurant location gets five star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. There are two kinds of people in the world.

[Tom Orlik]

People who think about climate change and.

[Tracy Alloway]

People who are doing something about it.

[Tom Orlik]

On the Zero podcast, we talk to both kinds of people. People you've heard of, like Bill Gates.

[Joe Weisenthal]

I'm looking at what the world has to do to get to zero, not using climate as a moral crusade.

[Tom Orlik]

And the creative minds you haven't heard of yet. It is serious stuff, but never doom and gloom.

[Tracy Alloway]

I am Akshat Rati.

[Jamie Rush]

Listen to Zero every Thursday from Bloomberg.

[Tracy Alloway]

Podcasts on Apple, Spotify or anywhere else.

[Jamie Rush]

You get your podcasts.

[Joe Weisenthal]

I feel, Tracy, like this conversation is really about, like, the magical object that you can't look at, right, because it'll freeze you. Or maybe it's the shining gold in the briefcase in Pulp Fiction, you can't see it. So all we've done historically mostly is we've attempted to figure out what it is by observing its reflection onto the world, which we observe that reflection, the unemployment. And now this is an attempt to see the unseeable and to actually stare into the abyss at this crucial number and find out what it truly is.

[Tracy Alloway]

Everyone's been wondering what's in the suitcase of Pulp Fiction. It was our star.

[Joe Weisenthal]

It was our star all along.

[Tracy Alloway]

Okay, well, on that note, I mean, I take the point that most of the book is about the specific drivers of our star, but you do come up with a model and you do come up with an estimate for the sort of long run trajectory of R star. Can you walk us through how your model actually did differs from some of the other models out there, because I think that might help us to understand, you know, when people say this is unobservable, or we're sort of staring at the reflection of the economy trying to come up with this hypothetical number, what we're actually doing or what economists are actually doing.

[Jamie Rush]

Yeah, of course. So the conventional way, or at least the way that's been gained a lot of popularity over the past couple of decades, has been the Laubach and Williams model of the natural rate of interest on neutral rate of interest. And what they do is they look at what's going on with inflation, what's going on with unemployment, and they try to judge from that how far current interest rates must be away from the neutral rate. So if interest rates are very restrictive, very far away from the neutral rate, inflation is going to be very low and unemployment is going to be very high, and vice versa. And this has the benefit of giving you a feel for what's going on right now based on observable data, but it doesn't tell you anything about why the interest rate is what it is, or therefore, where it may go. And so what we tried to do was pin the natural rate down by using some actual data and some theory. So if we think about what the natural rate is and what it is, that determines, well, it's the price of money. And that's determined by, in the same way as anything else is determined by the supply and the demand. So on the one hand, you've got investment demand, and then you've got the supply of savings. And when these two things move, it shifts to the rate of interest. And because of that fundamental theoretical understanding, you're able to think about, well, what is it that determines investment? Why do people want to invest? Why do people want to save? What is it about them, or different types of people or different age people that affects their saving behavior? And so you go from that theory to these drivers, these theoretical drivers of behavior, and then you can try and pin it down empirically. And that's exactly what we did. So we fed into this model what economists generally think are the main drivers of these investment and saving decisions. So there are quite a few of them. And then we estimate their relationship with the interest rates over the sweep of, say, 50 years. And that really was what supported our results. And it allows us, of course, then, to think about how those drivers may change.

[Joe Weisenthal]

Just keeping in mind Tracy's mention in the beginning of defining terms investment, just so we're clear, this is like real investment. Right. So this is hiring impulse capital expense. Like what does investment mean in your terms?

[Jamie Rush]

Yeah, so we're thinking specifically actually the capital expenditure. Okay, so let's take an example, like AI. So AI is great. I can't do it on a Casio calculator. I have to buy something to make it work. I have to spend money, I have to invest in chips, in fabs to reap the benefits of those frontier technologies. So as AI lifts the growth rate of the economy, it also raises the investment needs. And so this is the. One of the linkages that we kind of explore is like, what is the relationship between overall growth in the economy and productivity growth, the investment need that creates and then therefore the knock on consequence for interest rates. So whether it's ICT revolution in the 90s, railroads or anything else, these things all have impacts on investment and therefore the natural rate of interest.

[Joe Weisenthal]

And just to define the other term, when you talk about savings, because in a sense, a savings loan to a bank, et cetera, but this is the impulse to have sort of liquidity, right? Or at any given moment, the various actors that desire to hold essentially dollar or euro or whatever. Liquidity.

[Jamie Rush]

Yeah, that's right. I mean, I guess you can think about it on the. The individual level. So I want to save right now. As I get older, I'll want to spend those savings in my retirement. So that's one of the key drivers of saving behavior. China used to save a lot, now, now it saves a little. But state actors also matter to the global supply of saving and investment. So, yes, it's everybody and it touches on everything. Yeah.

[Tracy Alloway]

One of the light bulb moments for me reading this book was kind of touching. The idea of generational warfare and the idea that from the 1980s onwards, baby boomers started saving a lot. And so the supply of savings went up and the neutral rate went down. And that's the reason why I never earned interest on my bank account until two years ago. Okay, serious question. In your model, what's the biggest driver of the neutral rate actually going up in the future?

[Jamie Rush]

Well, in our model, the main driver really is this saving by governments or spending by governments. So there are a number of. I mean, if you look at the recent past, the experience of the pandemic, if you look at the path of the deficit in the US and other countries since then, what we've learned is that governments like to spend and they've continued to do so even though it's become more costly. And a lot of that reflects politics. Politics are Fragmented, it's hard to get support around closing budget deficits. And so governments just continue to spend, which is tilting the balance between investment and saving in the global economy. And of course, they have big outlays coming up. Defence spending is going up in much of the advanced world. The need to green the energy infrastructure again in some parts of the world is also crimping saving. And they're just that fundamental point that you've got aging populations increasing outlays for dealing with that on health, for dealing with that on benefits and pensions. All of this is just making it very difficult to keep spending down.

[Tom Orlik]

It also intersects with the argument which you kicked off with Joe and Tracey from Stephen Myron. So Stephen Myron, the new Fed governor, has made the case that the policies from the Trump administration are going to have a big negative impact on the neutral rate of interest. And that's why he's advocating for very aggressive rate cuts to keep policy accommodative. Now, the argument we make in our book actually points in the opposite direction. Right. If you think about the policies of the Trump administration, well, firstly, we've got the one big beautiful bill which adds trillions and trillions of dollars to government borrowing over the next decade that significantly pushes up the neutral rate of interest. And if you think more broadly about Trump policies, well, it's kind of the end of the grand bargain which America has struck with the world. Right. One way of thinking about the last few decades is America said to the world, we will buy your stuff and we will defend you, but you have to finance us. You have to send your saving to the United States by U.S. treasuries. Well, what the Trump administration now is saying is, well, we're not going to buy your stuff and we're not going to defend you. Right. So it wouldn't be that surprising if the rest of the world said, well, if you're not going to buy our stuff and you're not going to defend us, we're not going to finance you anymore. Right. So Stephen Myron, who's a super smart, super articulate guy, and if you've not had him on odd lots already, you should.

[Joe Weisenthal]

We have the fan favorite episode makes.

[Tom Orlik]

The case that the Trump administration has significantly lowered the neutral rate of interest and that's why the Fed needs to cut aggressively. The model which Jamie developed, the argument we make in our book actually points in the opposite direction.

[Jamie Rush]

Yeah.

[Tracy Alloway]

On this note, do you get the sense that central bankers, policymakers, economists, sometimes use R as a crutch to justify whatever they're doing. Like if you think rates should be lower, then you can just argue that R is in fact low and R is this unobservable thing that's based on your own estimates. So you can argue about it, but no one's ever going to prove what R actually is. And if you think that rates should be higher, then you just argue that, well, actually something has structurally changed and the natural rate of interest is in fact quite high. Do people use it in that way? It feels like it.

[Jamie Rush]

Well, I mean, one thing I suppose is that with R you're never beholden to a prediction really, are you? So if you say I think interest rates should be lower because the economy's going to tank and then the economy doesn't tank, you just look like a bit of an idiot. But if you say I think rates should be lower because R is actually lower, then no one's ever going to come along and say, oh, actually you are completely wrong because I've got irrefutable proof that our star was actually in fact higher. So I think it's probably a safe way to express your views if you just have a belief, an inner belief that rates need to be lower. But it is perhaps one that's less easy to hold to account when we.

[Joe Weisenthal]

Talk about Trump policies and their effect on our star. Another thing that I think about a lot is you talk about this grand bargain falling apart, the trade and every country wanting to be increasingly more self sufficient in various goods, which strikes me as something that once again adds to the investment impulse. The US is worried that maybe one day we won't be able to rely on Taiwan for chips. Europe might be worried that the US may not be a great supplier for whatever the US supplies to Europe, etc. Does a sort of fracturing of global trade, which may or may not be happening, contribute to a positive investment impulse in a sense, and therefore raise our star?

[Tom Orlik]

Yeah, I think there's a couple of dynamics at work there, Joe. So the first one is the one you mentioned. If everyone wants to make their own stuff at home, then clearly there has to be a massive amount of capital spending so everyone can build their own everything, right? We can't just have semiconductor fabs in Taiwan, we need semiconductor fabs in Germany and Japan and the United States. And that means there needs to be much more investment spending. The second dynamic, and this is something which one of our co authors, Dan Hansen, gets into in the book, is around globalization and the cost of investment goods, Right? Think about how much more computing power you get for your money today than you did in 1980. Right. There's just been a massive increase in productivity, a massive increase in the amount of computing power you get for a certain amount of money. And that means you don't have to spend as much in order to buy investment goods. Well, if globalization now breaks down and we come to the end of that kind of productivity miracle in technology, well, that means that the cost of investment goods is going to stop falling. You're going to need to pay more to buy a certain amount of technology, a certain amount of investment goods, and that is also going to be a factor pushing up the natural rate.

[Tracy Alloway]

So, on a related note, we have had a number of supply shocks in recent years during the pandemic, during the Russian invasion of Ukraine, all that stuff which has led a lot of governments to start thinking about how to solve these sort of choke points or shortages in the system. What does that actually mean for central bank policy? If perhaps the neutral rate of interest is going up because of these supply shocks, because you need more investment, but at the same time, the central bank raising rates doesn't necessarily produce more wheat or more shipping capacity and things like that? How should central banks respond?

[Jamie Rush]

There are obviously going to be periods where inflation just moves higher because of the supply shocks you mentioned, I think, and we should expect those to happen with increasing frequency. Right. So climate change is going to make it harder to produce stuff. It's going to make food price shocks more common. It's going to create other distortions which hit production. So central banks of the future will perhaps have to keep interest rates higher anyway, just to kind of prevent those shocks from feeding through to inflation expectations and therefore keeping inflation away from targets. Because supply shocks really are very different from demand shocks, as you guys know, I'm sure. And history was dominated, at least in the last couple of decades by demand shocks. And now we're seeing a world which is dominated increasingly by supply shocks. And actually it's just a different playbook for central banks.

[Tom Orlik]

I agree with all of that. I think there's also another dynamic for central banks which is also going to be a force for higher interest rates going forwards. And that's the challenge to central bank independence. We've talked about Stephen Myron coming onto the Board of Governors at the Fed. Well, guess what? He's still holding onto his position as the chair of the Council of Economic Advisers, senior member of Donald Trump's economic policy team, having someone from the President's team serve on the Fed concurrently, that's unprecedented. Going back to 1936 and raises significant questions about Fed independence. And so the Fed's credibility as an inflation fighter. Right now, we've not really seen this in markets so far. Markets have been paying surprisingly little attention to this dynamic. But if the Fed does lose its independence, if the Fed does lose its credibility as an inflation fighter, then markets are going to start demanding an additional premium to hold long term U.S. treasury debt. So you're going to have all of these structural forces, less saving, more investment, you're going to have the greater preponderance of supply shocks, which Jamie spoke about as an additional driver of higher inflation, and you're going to have risks to Fed independence. And all of these are forces which are going to be pushing up long term borrowing costs for the U.S. treasury and because the treasury rate is the anchor for global markets, also pushing up borrowing costs for everybody else.

[Joe Weisenthal]

Even setting aside the sort of formal risks to Fed independence, there are others who question the degree to which the Fed still takes its own 2% inflation targeting target seriously, including our own colleague here, Anna Wong, who says implicitly, if you look at what's going on, it looks like they're no longer targeting 2%, they're targeting 2.8%. Tim Dewey, an economist we've had, says, you know what, as long as inflation is below 3%, we think the Fed is mostly concerned about the labor side of the mandate. So setting aside Myron's role or Trump's truth social posts, when you look at markets, is there this sort of growing belief that the Fed just does not take 2% as seriously as once it did?

[Tom Orlik]

Yeah. So it's a powerful argument which Anna, our chief US Economist makes. And part of that argument is that this divergence between what the Fed should be doing if they take 2% inflation seriously and what they're actually doing didn't start under Trump, it started under Biden. And actually it was those rate cuts in the run up to the 2024 election, which were the beginning of the Fed diverging from a kind of pure apolitical Taylor rule path. Right. So as I'm sure you've seen, Joe and Tracey, there's not much which Republicans and Democrats agree on in America right now. One point of bipartisan consensus, unfortunately, is that there's too much politics in the Fed.

[Joe Weisenthal]

Tracy, someone once told me that the two things that everyone agrees on, by the way, in America are that Dolly Parton is good and that Epstein didn't kill himself. We can add a third that there is too much politics in monetary policy policymaking. To the three points of bipartisan agreement.

[Tracy Alloway]

That'S going to be my new conversation starter at dinner is for everyone, just ask them if they think there's too much politics in Fed policy. Okay. Joe mentioned markets just then. So I think when people think of the era of low interest rates and low natural rates, people think about high asset prices, right? There tends to be a correlation there. If the price of money is going up, up, what does that actually mean for asset prices?

[Jamie Rush]

Well, it kind of depends on the reason. And as we sort of talked about earlier about the kind of role of AI, well, AI can raise equity values because it's a frontier technology that's going to potentially transform the way the economy operates and create lots of profits along the way. It's also going to suck in a load of capital and make it less available for others, which is going to drive up interest rates. So if that's the source, you can see this world continuing, you can see that interest rates will continue to rise as investments sucked into the AI nexus. But if as long as the actual promise is realized, you see equity values going up as well, which is kind of a slightly unusual arrangement, but then we don't have technological revolutions every day.

[Joe Weisenthal]

Yeah, I'm glad you brought up AI because I wanted to go there. You know, I've seen Jason Furman. He has characterized AI spending as being almost quasi fiscal in nature because it has this, we haven't got the productivity payoff yet, but there is this incredible flood of money coming in. So it sort of has this perhaps crowding out effect. Neel Kashkari gave a interesting posted. I guess it was a blog post called Three Questions. I think he posted it last week. But he talks about R star, about how this higher neutral rate of interest may be appropriate given the intense pace of AI investment that's going on. But also it may not be appropriate, you know, for the housing sector. That's not what's bringing to balance. And we see this decline. Could there be two R stars? Could there be this R star that's sort of the high tech economy booming, but it's not the R star that brings the rest of the economy into balance?

[Jamie Rush]

It's a good question, Joe. And I think people do think about this concept quite a lot in the sense that maybe there's an R star which keeps the economy balanced and maybe there's an R star which keeps the financial sector and financial markets balanced and not getting carried away with themselves. And there's no guarantee or any particular reason to think that they should be the same. Which implies then that you've got this policy trade off, you've got what's good for the economy may not be good for financial stability. And so that's another thing for central banks to be grappling with in the years to come.

[Tom Orlik]

So I was trying to remember, I was grasping for that famous quote from, I think, is it Benjamin Strong, the head of the Fed in the late 1920s, and he said something like, must the Fed be responsible for all the problems in the economy? If I have to set an interest rate for all the different sectors separately, it's like spanking all of my children individually or something like that.

[Tracy Alloway]

Oh dear. When it comes to the composition of investment, one topic that gets a lot of attention nowadays is the idea of de dollarization and perhaps people buying fewer U.S. assets, perhaps people choosing to hedge those U.S. assets. And we have seen some very big buyers of securities like foreign central banks actually slow down their purchases of U.S. treasuries or U.S. mortgage bonds and things like that. How would that affect the neutral rate of interest if there's less money flowing into dollars specifically or dollar assets?

[Tom Orlik]

So I think there's a number of reasons why we would expect less money flowing into dollars. Right? So one really big reason is that China has changed its FX policy. For more than a decade. China was pegging the yuan to the dollar and that meant the pbock needed to hoover up the whole trade surplus and park that in Treasuries to stop the yuan appreciating. Second big important reason is that shift in the Grand Bargain between the US and the rest of the world. Think about how the US and Europe acted to freeze Russia's FX reserves following Putin's full scale invasion of Ukraine. That's a kind of shift in the Grand Bargain and it tells Russia, but also everybody else. Guess what? There's geopolitics in the dollar, right? And if you put your assets in the United States, there's a risk you might lose them. And of course, the tariffs themselves are a factor. That huge hike in tariffs that we saw on Liberation Day, well, that's the US saying we're going to play a smaller part in the global trade system in the future. And if the US is going to play a smaller part in the global trade system, well, the utility of holding dollars as a way of settling import and export transactions goes down. So there's a lot of reasons to be concerned about this de dollarization trend. And Jamie may have a more sophisticated way of thinking about this than me, but basically I think about buying dollars and buying Treasuries is pretty strongly correlated in this context. So if the rest of the world is de dollarizing that also means they're buying less US Treasuries. That means less demand for US Treasuries, and so it's another force pushing US borrowing costs higher.

[Jamie Rush]

I think all that is all entirely true. And I guess one thing when you're trying to think next to the linkage with global borrowing costs is what happens to those savings instead. Now, if you can't find anywhere else any other to buy in place of US Treasuries, what are you going to do? Well, quite possibly you'll end up spending them. And particularly if you think about the geopolitical context, you think about the impact of tariffs on China, for example. Well, now there's actually an extra incentive to spend more. And if you think about it in those terms, then actually that policy itself is going to shift the international balance of investment and saving again away from saving, partly because it's just too hard to save them anywhere safe.

[Joe Weisenthal]

My computer just did a forced reboot. I had a great chart on my screen, but now I can't look at it. But December 27th or whatever the last day of trading was in 2019. The US 10 year was about 1.8 and today it's probably like 4.12% maybe. Both of you list your five reasons in order. I know the tenure is not the R star, but for our purposes for podcast talk, we can just sort of.

[Tracy Alloway]

Our star is everywhere.

[Joe Weisenthal]

Yeah, like rank the five for both of you. In order, rank the five major things, or however many you want to, that have contributed most significantly to this regime change or price change.

[Tom Orlik]

Maybe I'll take the easy ones and force Jamie to take the hard ones. So here's my three so firstly, it's demographics. For decades we had the baby boomers in prime working age saving money for retirement. That pushed the neutral rate down. Now they're retiring, spending down their savings. That's a powerful force pushing the neutral rate up. Second is debt. For decades, from the 1980s to the global financial crisis, borrowing from the US and from other major advanced economies. Leaving aside, Japan was low and stable since the global financial crisis. And again since the COVID pandemic, there's been a massive increase in government borrowing. And when there's more government borrowing, that pushes the natural rate of interest higher. And then the third deglobalization. So one of the factors driving neutral rates lower was that Ben Bernanke savings glut Hypothesis, Chinese saving, Petra, state saving from Saudi and others heading into the United States. The forces of de globalization have now brought that to an end. So conveniently, 3Ds, demographics, debt, deglobalization, all pushing neutral rates higher.

[Tracy Alloway]

Very good, Jamie. You have to beat that now.

[Jamie Rush]

I mean, I think I'd only add one extra, to be honest, and that's AI. So when we were putting pen to paper for the book, ChatGPT wasn't really a thing. That's when we started out. By the time we published the book, it's very much a thing. And we can already see that the transformational impact that's having on the investment landscape, whether that has a transformational impact on the economic landscape remains to be seen. But I think that is now playing out faster than we thought. We had a scenario in our book about what that could do to the natural rate. No surprise, it pushes it up. And I think we're actually in a world now where that scenario is basically coming to pass.

[Joe Weisenthal]

I'm going to help everyone out here with a little bit of marketing. So Tom, you mentioned the 3Ds, debt, demographics, deglobalization, AI we can rebrand as data centers. So that's a fourth D and then the fifth one, which you guys talked about but you didn't hit your list, and that is defense spending. So really we can talk about the 5D's. 5D's debt, demographics, deglobalization, data centers and defense. We've come to something. We could really market this. I think the four of us together, the five Ds that have caused the price of money to get so much higher in the last six years.

[Tracy Alloway]

Well, that can be the next book.

[Jamie Rush]

Yeah.

[Tracy Alloway]

Although the current one talks a lot about all of these, obviously.

[Joe Weisenthal]

I think that could be the. The title of this episode.

[Tracy Alloway]

The five Ds.

[Joe Weisenthal]

The five Ds that.

[Tracy Alloway]

Pushing up the price of money. Yeah, yeah, that would work. Okay, well, on that note, Tom and Jamie, thank you so much for joining Odd Lots. Really appreciate it.

[Joe Weisenthal]

Thank you so much. That was great.

[Tom Orlik]

Thank you so much for having us. Jamie, Tracy, always a blast.

[Jamie Rush]

Pleasure.

[Joe Weisenthal]

Thanks, guys.

[Tracy Alloway]

Joe, that was very fun. Always a fun time having our Bloomberg Economics colleagues on the podcast.

[Joe Weisenthal]

I think I'm our star pilled. I believe in it now. I believe that there is some number that if only we could stare at it directly, we could kind of bring things into balance.

[Tracy Alloway]

I think it's a useful concept for sure, and it's something to aim for and it's kind of a framework under which, like an umbrella under which you can put all your thoughts about the economy. Basically. That said, I mean, Tom and Jamie and Stephanie lay out a very convincing argument for why they think our star is going to be higher in the future. Meanwhile, you have people like Myron.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

Arguing the exact opposite. We can debate whether it's convincing or not, but it does feel like R star is not a method of achieving consensus. Let's just put it that way.

[Joe Weisenthal]

No, it's not. But. And to your point, if you can't make an argument for either R star going higher or lower in the future, it's like an intelligence test. Any intelligent person should be able to argue both sides of the answer.

[Tracy Alloway]

Exactly. Exactly.

[Joe Weisenthal]

Right. You can always come up with an eloquent, nice sounding argument for any direction. This is true. The one thing I'll say is that while our star may not truly be observable, etc. And maybe there isn't one number that satisfies the whole economy. What's that line? It's like all models are fake, but some are least useful. It strikes me that it may be a fake concept, but a useful concept. And that plugging some of these factors in, what can we anticipate about where defense spending is going to go? What can we anticipate about the nature of savings or spending decisions among an aging population? These are useful things to try to wrap our head around. And maybe this could be a useful exercise even if the underlying concept is still like a little, you know.

[Tracy Alloway]

Yeah, except that a lot of people argue that the models are garbage too. No, of course, except for this one, obviously. Of course, for everything.

[Joe Weisenthal]

But I'm just saying, like, I mean, you just go total nihilist and think that the profession of economics is nonsense. But, but, but it does strike me as useful to say there is going to be a lot more spending here because real reasons that are happening. What is that going to do to the availability of money or capital or whatever?

[Tracy Alloway]

I think that makes sense. Although one thing I would like to see more study of is like maybe not necessarily R star and whether it's too high or too low, but like the actual impact of interest rates on economic growth, like the sensitivity of growth to rates.

[Joe Weisenthal]

It's a great question. And that's, I think, one of the other big sort of mysteries of the last several years, which is how do you get the biggest interest rate hike in decades and the growth trajectory barely budges and the employment trajectory barely budgets? These are like things, you know, I think a lot of people would have thought in retrospect, oh, we're definitely going to go to recession. With this rapid pace of rate hikes, the degree to which policy actually affects the real economy in predictable ways. Highly, highly contested.

[Tracy Alloway]

Yeah, well, maybe that can be Tom and Jamie's next.

[Jamie Rush]

Yeah.

[Tracy Alloway]

All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Wiesenthal. You can follow me at the Stalwart. Check out the book the Price of Money from our colleagues Jamie Rush, Tom Orlich and Stephanie Flanders. Follow our producers, Carmen Rodriguez, Armenarman Dashiell Bennett at dashbot and Cale Brooks Alebrooks. For more Odd Lots content, go to bloomberg.com oddlot we have a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord GG oddlots.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we talk about what our star actually is, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple plus Podcast and follow the instructions there. Thanks for listening.

[Tom Orlik]

Sam.