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- [00:00]
A
Dan.
- [00:00]
B
I'm Dan Kurtz Phelan, and this is the Foreign affairs interview.
- [00:06]
A
What we're seeing is because the president has used tariffs unconstrained by congressional oversight, every time there is an irritant internationally, whether it is a former leader that is brought before a court case on corruption charges in the case of Brazil, or now the desire to purchase Greenland, the president just uses tariffs in a punitive way. I don't think our allies anticipated that this would be the America that they depended on since the Second World War.
- [00:47]
B
In the past year, Donald Trump has upended the global trading system and used American economic power like no president in recent memory. He's imposed tariffs to force other countries to fall into line on everything from commercial issues to geopolitical disputes, like this week's threats against NATO partners over Greenland. He's called into question the role of the dollar. And at home, he's attacked the independence of the Federal Reserve and intervened in private sector decision making. Lael Brainard served as director of the National Economic Council in the Biden administration and before that as vice chair of the Federal Reserve. I wanted to speak to her not so much about the short term consequences of Trump's policies, but about what they would mean for US Power and prosperity in the long term. She's taken on that question in recent pieces for Foreign affairs, and in our conversation, she stressed not just the risks posed by Trump's economic agenda, but the bigger changes necessary to sustain America's economic success into the future. Lael, thank you for doing this. There's a huge amount I'm eager to get your perspective on, from the state of the global economy to the future of the Federal Reserve and much else. Some of that you've written on in Foreign affairs in recent months, all of it you've written worked on in senior jobs in the US Government in recent years, at treasury, at the White House and at the Fed. So we're thrilled to have you here at this moment in history.
- [02:08]
A
Well, I'm delighted to be here.
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B
We're recording this exactly one year into Trump's second term. And his use of tariffs and aggressive use of American economic power more generally has been one of the most prominent parts of both his economic policy and also his foreign policy in the past year. How do you assess the consequences of Trump's trade policy and especially that use of tariffs for the global and US Economies that you're in?
- [02:31]
A
Well, I think that President Trump's use of tariffs, overuse of tariffs as his first and last tool internationally, really, for every agenda that he has, has been calamitous. Calamitous in the sense that we now have ruptured longstanding relationships of trust with important allies around the world. And it means they will now start to form coalitions to pursue their own interests because they believe they no longer can rely on the US to be a dependable ally. And so I think it's going to be enormously costly in terms of our national security, our ability to rely on alliances which are much lower cost way of guaranteeing American security. But it's also of course been very disruptive on the domestic front. Raising prices on a lot of consumer goods at a time when affordability was already top of mind and raising prices on inputs for American manufacturers so that American manufacturers actually worse off today than they were a year ago as a result of those tariffs on net.
- [03:53]
B
If we focus on the global side of that, I've been surprised by both the submissiveness, you could say a traditional American partners response, especially from allies and partners, and the aggressiveness, the effective aggressiveness frankly from China in particular, starting with the former. Did it strike you that the allies were unprepared for this second term economic policy? Were you surprised by their relative quiescence when it came to trade negotiations and responding to tariffs more generally?
- [04:21]
A
Absolutely. I think our allies were back footed, did not expect this aggressive tariff policy to centrally affect allies. The first Trump term was focused on China. It was a set of tariffs. They were broad brush across many goods in China that are not particularly strategic. But they were broadly in line with strategic goals of American policy at that juncture, which was countering China's mercantilist practices and trying to rebalance and level the playing field so that America's factory towns had a chance. That is not the Trump 2.0 tariff policy. Trump 2.0 tariff policy domestically is first and foremost about raising large amounts of revenue from tariffs. So the administration keeps talking about 300 to $400 billion of tariff revenues to compensate for some of the lost revenues associated with the so called big beautiful bill. The result of that, and in part because China in the intervening period has gotten quite good at wielding retaliatory measures of its own, particularly surrounding rare earths, is that allies, in some cases partners, in others actually have higher tariffs on average than China does. So you look at a case of Switzerland, 39% tariffs, it's really a head scratcher unless you go back to that revenue goal. And now what we're seeing is because the President has used tariffs unconstrained by congressional oversight Every time there is an irritant internationally, whether it is a former leader that is brought before a court case on corruption charges, in the case of Brazil, or now the desire to purchase Greenland, the president just uses tariffs in a punitive way. I don't think our allies anticipated that this would be the America that they've depended on since the Second World War, that it would pursue this kind of feckless international policy.
- [06:49]
B
As you look at these escalating tensions over Greenland, which you mentioned, the Europeans seem to be promising a more aggressive response than they had last time around. And after Liberation Day in April, what do you expect that might look like? And do they have, let's put this in Trumpian terms, do they have any cards to play here?
- [07:09]
A
Well, they certainly do have important cards to play. America has incredible business interests in Europe, with American multinationals very prominent in most of the markets that the president is now targeting, including important ally the UK which only a few months ago he was sort of singling out for special treatment. Only a 10% tariff, still very high. But because they have a surplus and we're working so well with the United States. The other thing, of course, is we have massive inward investment by European companies, by European car companies, for instance. They employ a lot of Americans manufacturing, assembling cars. All of those things really are now being questioned. And of course, we also depend on Japan and Europe, foreign allies, to hold a lot of U.S. treasury securities. the same time, the Trump administration has increased the national debt by $4 trillion, which means we need a lot of investors to be willing to hold treasury securities. We are also using tariffs as a punitive mechanism. The president is to advance his goals in a way that will potentially make foreigners a little bit more wary about the value of those treasury securities and the desirability of holding them.
- [08:45]
B
If we go back a year, if we went back to the beginning of the Trump term and knew everything that we were likely to see over the ensuing months, I think most people would have predicted much worse results for both the US Economy and the global economy at this point and would have predicted that some of these warnings that you're issuing now would have already come to pass. Why haven't they? Why has there been less impact in at least the near term economic statistics, again, both domestically and globally, than we would have expected if we'd gone back a year?
- [09:13]
A
Well, I think there has actually been quite a dampening effect on the US Economy. First of all, I mean, we saw that inflation had been coming down. It was, you know, going into the two to two and a half percent range at the end of 2024, before the beginning of the Trump administration. And that turned around, moved up to 3%. And the tariff effect has not peaked. So it essentially meant that interest rates couldn't come down by as much, and that had a slowing effect on, in particular, the housing market. But the other thing is, if you look at growth for a good part of the year, and the OECD has some good numbers, growth would actually have been slightly negative but for the AI boom. And it's really the AI boom that has masked the deleterious effects of the tariffs on aggregate. So we do have very robust growth in the third quarter, but it's jobless growth. That jobless growth, in part, is because manufacturers shed thousands of jobs over the course of the year because their input costs went up and because they were cautious about consumers being willing to pay more. The other thing, of course, that masked the effect of the tariffs is American businesses just got smarter. They had just gone through the pandemic massive supply shock, and they learned that they need to be very quick, agile about shifting around their supply chains, but also brought in a massive amount of imports in anticipation of those Liberation Day tariffs in the first quarter, it actually, you saw this massive run up in the trade deficit in the first quarter, and then over the rest of the year, you saw those inventories and the trade deficit really just moderating. As those inventories of imported products were.
- [11:12]
B
Brought down, you noted the lack of real congressional action on tariffs. We have been waiting for the last several days for a ruling for the Supreme Court on Trump's use of the International Emergency Economic Powers act as a rationale for some of his tariffs. Do you expect ruling against Trump on that and will that have any constraining effect or he'll. He'll merely pick some other tool?
- [11:36]
A
Yeah. So this Supreme Court decision on the President's highly unusual, in fact, unprecedented use of this National Security Law IPA to impose tariffs is enormously important. And the hearing where the Supreme Court justices publicly questioned both the administration and the plaintiffs about the underlying statutory authority did suggest a majority of justices had substantial skepticism about whether, in fact, IEEPA was ever intended to allow for tariffs. Tariffs are a revenue measure. Revenue measures are the purview of Congress. And Congress has delegated substantial tariff authority, substantial revenue tariff authority to the President, but not in that statute. So it did feel that the Supreme Court was skeptical. On the other hand, in case after case, the Supreme Court has given a very expansive interpretation to the executive branch's authority. So I don't know where they're going to end up. It does seem very strongly that they should constrain the President's ability to use ipa. And I think there are a host of important questions there about refunds and how that will affect revenues and companies. But in terms of the President's power, if the Supreme Court narrows or completely constrains the President's ability to impose tariffs on Dryipa, that would be extremely important because that has been his interpretation. That he has complete discretion to impose a tariff on any country for any reason by coming up with some kind of an emergency has been what's allowed him to to wield tariffs with such immediate effect. It is the case. You asked about what alternative authorities are available to the President. The administration could very rapidly put in place a successor set of tariffs that would effectively come close to replicating the revenue effects. So section 122 is authority that when we have an exigency associated with our trade deficit, the president can impose 15% tariffs on countries for a period or 10 to 15% for a period of 150 days. That would allow them to quickly replace a large portion of the revenue that's coming in for the IPO tariffs. Not all of it, because some of those countries, like Switzerland, are subject to 39% tariffs. Or India much higher, Brazil much higher. So the other problem with 122 is that Congress would actually need to. Most people interpret the law as requiring Congress to actively pass legislation after that 150 days is over to renew it. But the President has other authorities. He's already taking a number of sectoral cases under 232 authority, like on steel and autos have already gone through semiconductors, lumber and pharmaceuticals. So a lot of sectors could find themselves with tariffs. And then, of course, Section 301 has already been used for China, both in the first Trump and Biden administrations. So a lot of those Section 301 tariffs will simply replace IPA tariffs to the extent that's necessary. And there's an active ongoing case with Brazil. They can quickly put in place a number of section 301 cases on countries. The only thing there that will require a little bit of time is there's a lot more procedural requirements about making the proposed tariffs publicly available and allowing for comment. So there's some time frame in there that would be necessary for most countries to undergo that 301 process. But of course, with the 15% tariffs in place under Section 122, that gives them the window that they need so.
- [15:59]
B
If I understand you correctly, it does. Even if there is a ruling against the administration, it wouldn't massively change the tariff regime and the tools that Trump has at his disposal.
- [16:07]
A
It would change the tools in a material way and it would slightly constrain the tariffs. But through a patchwork of other authorities, they can come close to replicating the revenue effects. The reason I say the tools do matter here, though, is the president's ability to simply say, you know, I'm peeved about your response on Greenland, so I'm just going to start imposing a 10% tariff and then it's going to escalate to 25% on you, you know, 10, eight countries. If the Supreme Court narrows or eliminates the ability to use tariffs under ipa, that discretion could be massively constrained.
- [16:51]
B
I've been surprised in talking to people who were in senior policy making jobs and previous administrations, including some of your colleagues in Biden administrations, that they've watched Trump over the last year and said, well, we disagree with ends. I wish we'd been a little more creative about the use of some of these tools, and we're willing to use kind of power in ways and develop leverage in ways that we weren't. I think about a conversation we had on this podcast with Juan Gonzalez, who was running Latin America policy at the nsc, and the Biden administration who said, I wonder if we should have thought about stationing warships off the coast of Venezuela during the the election in 2024, just to cite one example, can you imagine using tariffs perhaps more aggressively or more agilely than has traditionally been the case in American foreign policy? Perhaps for different ends, but, you know, learning a little bit from Trump about how to use some of these tools. Is there any, any positive lesson here?
- [17:42]
A
So I think there are some positive lessons on the domestic front about expediting process. Let me just say, though, I think under the Biden administration, tariffs were used pretty aggressively with China and I think used more intelligently with China because they were coupled with domestic incentives. So it's not enough to simply put in place, which the Biden administration did, 100% tariffs on cars. They have to be coupled with incentives, for instance, to the extent that new assembly plants are needed for EV manufacturing or for battery manufacturer, that the playing field with China is so unlevel because of the very distorted statist model they have, that you, in order to have smart policy, you need to have the combination of much more targeted tariffs. Like why high tariffs on baby clothes. That's not a strategic industry. We want cheap affordable baby clothes for American parents who are struggling with affordability. So it's gotta be targeted on strategic industries like batteries, like semiconductors. And then it needs to be coupled with domestic incentives in those same areas as well as with really tough and smart tech controls. So tariffs, I think the Biden administration was really developing, with a bipartisan support, a kind of smart approach there. Where I do think this administration has been able to push aggressively much more rapidly is in areas like permitting, where it just took too long to get some of these infrastructure projects and investments up and running, and in calling out some of the areas where the affordability challenges are greatest, getting the private sector to kind of come to the table. So I don't think this administration is, is ultimately going to be putting in place a 10% cap on credit card fees because that does have massive disruption effects on the industry. But I think getting the industry to the table to talk about how is it possible that at a time when interest rates are down below 4% that you're charging 22% on credit cards, that's not acceptable. So I do think a tougher approach. On the other hand, running roughshod over Congress, no, I don't think that's the right way to go.
- [20:13]
B
I want to come back to some of these affordability questions later in our conversations, but I also want to focus on China a bit. In contrast to the response from allies and partners in response to Trump's tariffs and other trade actions in recent months, China has been quite aggressive, especially in its use of its control of the critical mineral supply chain. Have you been surprised by China's response? Have you been surprised by both the effectiveness and the assertiveness of it?
- [20:37]
A
I have not been surprised. I think anybody watching China closely, and we both know a number of really impressive people who watch this space very closely and are quite good at charting just how effectively Xi has built out a regime of countervailing pressures and over the years, how single mindedly they have focused on dominating strategic industries in a variety of areas. But in particular, rare earths. And just that stranglehold on rare earths and rare earths, processing rare earths magnets is something that I think people have been watching over a period of time. And so in that sense, no, it should not have been a surprise. What is disappointing is that as a country, we have been slow to put in place really effective responses. We do have a handful of private sector companies, both in the US and abroad, who have tried to make a go of first rare earths mining and processing, and they have a very difficult time sustaining themselves through market financing because China's producers regularly dump product in such a way that it makes it it unprofitable on a pure market basis to continue developing rare earth processing at scale. And so that's where we need to use the Defense Production Act. We need to actually subsidize as well as we really should be talking about long term demand contracts to make those businesses sustainable. And we should be talking about allies and partners. This is not a go it alone space. Our allies and partners have suffered the same kinds of coercion. We talked about it a huge amount in the previous administration. China's use of economic coercion. That's an area where working with allies and partners is paramount.
- [22:49]
B
I think I was in the State Department a decade and a half ago when China first used its control over rare earths against Japan in response to disputes over unrelated issues. This has been a big topic of conversation since then through the first Trump and Biden administrations. It's striking how little progress we seem to have made, as you note in and really doing anything to counter it. If you could go back to administrations which you've served, if you could account for that failure, what have we gotten wrong? What explains it and what would we need to do fundamentally differently to be in a better position the next time we're in one of these exchanges?
- [23:23]
A
Yeah. So I think first of all, we need bipartisan continuity between administrations. We can't rediscover this national security imperative every time there's a new administration, Rip up the old playbook and start again. We need to build on a consistent policy. That is one of China's greatest strengths is the continuity that they have over much longer periods of time. The absolutely clear lesson from, you know, the past two decades, I agree with you. I was in the international part of the Treasury Department during that time on the economic side. But we had many conversations about this area. So I think what we started to develop was the ability, more recently is the ability to provide tax credits that are provided a more profitable prospect for private companies that want to make long term investments in rare earths mining as well, importantly in processing. So you need investment tax credits, you need production tax credits. In some cases loan guarantees can be helpful or grants in some cases. And then that use of defense production authority to provide that financing is a very powerful tool. And on top of that, these companies in order to withstand the vagaries of Chinese dumping, which means that prices go through these massive cycles and that is very hard to sustain when you have high fixed costs. So it's really important to have long term guaranteed demand. And of course the Defense Department can provide some of that potentially not at scale. And so you kind of need to sit down with the industry, with the automakers, and you need to get them to augment that long term dedicated demand. No, we're not going to switch to Chinese producers the minute their price becomes more attractive. We're really going to stick with this. And you know, I think, I think at least one of our auto companies actually did make some far sighted co investments in some rare earth capacity. But I don't think we supported them as much as we needed to at the time.
- [25:40]
B
In a few months, Trump is supposed to travel to China, I believe in April for a summit with Xi Jinping. A big economic deal is supposed to be the centerpiece of that visit. What would a good deal look like to your mind?
- [25:52]
A
Well, I think we already have given up a bit of leverage in terms of our technology export controls. So one of the most important strategic areas where the US has some advantage, but it won't last unless we really work hard to preserve and protect it, is in the area of generative AI frontier models. And in looking at the relative strengths of the two countries, China and the US who are really driving forward the AI frontier, our relative strength really has to do with those LLMs and with very advanced semiconductors of the sort that have gotten caught up in technology export controls. China has massive scale advantages. It has the ability to use its scale and sort of intense competition among various big players in the Chinese market to drive diffusion and to get models that are usable out and test them and augment them. And its other really big advantage is massive advantage on electricity costs. So we have to husband our advantage very carefully. And what happened when the two leaders met in Seoul, unfortunately, is that the President found, you know, himself countered on our technology export controls with the rare earths controls that the Chinese had put in place. Really again, seeding ground showed a willingness to relax those potential export controls and more recently has offered a more advanced chip with upside sharing on the part of the US Government, which is the last thing in the world we should be doing. What we should be doing is focusing on controlling those very advanced semiconductors in order to sustain that advantage, the revenues to the US Government. It just seems like a kind of very odd diversion away from our traditional approach.
- [28:10]
B
We'll be back after a short break. What if you could explore places in the news like a reporter does? I'm Nicholas Wood, a former journalist with the New York Times and BBC. And 15 years ago, I created the travel company Political Tours after small group trips led by top correspondents around the globe. Taiwan, Turkey, NATO's front line with Russia are just some of the issues we're exploring next year. We'd like you to come and join us. To find out more, go to politicaltours.com that's politicaltours.com.
- [28:49]
A
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- [29:35]
B
And now back to my conversation with Lael Brainard. Let me make a brief political detour accepting the kind of competitive case for the continued progress of American AI companies and models. The politics of this seem very hard for any candidate running in the years ahead, especially for Democrats. When you look at the concern about jobs, the concern about data centers and electricity prices, plenty of other more sort of abstract concerns, it seems like the competitive pressures and the political imperatives might cut against each other. How would you advise leaders or aspiring leaders to handle that tension from a political economy perspective?
- [30:15]
A
Yeah, look, I think that anybody who wants to be a really constructive force in this space, from a public perspective, from a political perspective, should be talking about these issues head on. The United States needs to lead on AI for national security purposes, also for the long term health and growth prospects of our economy. But transitions with new general purpose technologies are really hard. And we've seen historical episodes where this has taken place. We know there will be displacement. We know that if this follows the course of previous massive technological innovations, we're going to be growing over a decade or more at a faster pace. Higher productivity, that means a bigger pie. It means more demand, ultimately means more jobs, but different jobs. But managing the transition, where people in some job areas are going to find themselves squeezed by AI, but other areas they're going to find new opportunities. That means intensive engagement on the part of politicians with the private sector, with the educational institutions and the community institutions that are helping local communities and workers make that change. And then safety and security. It is important to have a rogue, robust discussion about safety and security in the previous administration, the AI companies were very willing to come to the table. They themselves, because they understand this technology, were able to articulate what those risks are and they are substantial risks and develop some guidelines, a safety institute at nist. And for some reason this administration has been entirely focused on just pursuing AI without those kinds of guardrails. And you also mentioned data centers. Frontier models right now are very compute intensive. That may change over time with new chip designs, with new business models. But right now they're very compute intensive. And for the first time in decades, we have rapid growth in demand for electricity in the United States. This is a big change and it is leading to some real tensions in some areas where the existing grid is being taxed by these new data centers. Rates are going up for consumers. And the, the long term planning of that area really hasn't taken into account the competing needs in a way that has protected consumers. So we've seen this really massive increase in electricity. I don't think that's necessary. I think there are parts of the country where there is excess built capacity and consumers are actually paying too much because those fixed costs are large relative to their needs. There are things that a administration, a President White House that actually cared about some of those spillovers would be more engaged in trying to solve some of those problems.
- [33:46]
B
Before we were all focused on an escalating tariff war between the US and Europe over Greenland, the biggest story in economic world was the attacks on Jay Powell, the chairman of the Fed and the independence of the Federal Reserve. You were vice chair of the Fed and before you took over as head of the national economic council in 2023, how do you rate risks to Fed independents right now? When you, when you look at what the Trump administration is doing and what that might mean for both the short term and long term health of the Fed, where's your level of concern?
- [34:16]
A
Yeah, so I would say the risk to Fed independence from this White House is higher than any risk we've seen since Nixon convinced Arthur Burns to run the economy hot during the period before his reelection. We saw what happened in the 1970s. Basically that short period of rapid growth right before the reelection was followed by a decade of very high inflation, double digit and ultimately interest rates, mortgage rates went up to 18%, unemployment went to 11% before the advent of Paul Volcker who really put the economy into recession in order to get inflation down. Since that time, I think there's been on the part of presidents of both parties recognition that the Fed, you can job on the Fed, but that is about as much as is wise because the kinds of tactics that this president is using, if they succeed, will lead to higher inflation over many years and reduced credibility of the Federal Reserve. When the Federal Reserve's inflation fighting credibility is damaged, it takes higher unemployment to get inflation back down. So very high risk.
- [35:44]
B
Right now, just looking at the mechanics of how the Fed sets interest rates, to what extent does the chair influence that process on, on his or her own? Is that political influence undercut to some degree by other members of the, the Open Markets Committee who can counteract it? I mean, just give us some sense of how that process works and how much of a, of a real change that would be.
- [36:05]
A
Yeah, so interest rates are set by a committee. It is a majority vote of a committee, the Federal Open Markets Committee, that is the seven members of the board, as well as at any given time, five of the 12 Reserve bank presidents. The chair, though, is first like way first among equals in that process. So it is the chair along with the vice chair of the FOMC and the vice chair of the board. But it's the, the chair who decides what to propose to the committee in terms of the statement they're voting on, and in terms of whether that statement includes a rate cut or a rate hike or holding steady, as well as, of course, on whether or not to use asset purchases or to shrink the balance sheet. So is the chair that really proposes and all members of the committee tend to give deference to the chair's views because they know how important it is for the public to understand what monetary policy is, for the chair to be able to lead that and articulate it. Of course, it's also the chair that communicates most effectively with the public market watchers who are, you know, trading treasury securities and other dollar assets. They will put much greater weight on the chair's words than anybody else's words. So the chair matters in terms of, of internal dynamics as well as in terms of communicating to the public and to financial market participants.
- [37:51]
B
If you had an openly political chair simply there to do Trump's bidding, do you think that credibility would change? Would the other members of the committee react differently to the give less deference on some levels of the chair. And when market watchers and the public react differently, I mean, can you kind of imagine this becoming more chaotic rather than the kind of, you know, straightforwardly political scenario? I think people have been concerned about?
- [38:13]
A
I think that is exactly what you already hearing a lot of concerns about among people whose jobs are really affected by the Federal Reserve because They're trying to understand the future course of interest rates, but it's that that is true in ways that most people, you know, are touched by but may not be aware of. So home builders, they, they're not thinking about interest rates just today. They really need to think about interest rates and inflation five or ten years from now, depending on how long their projects are. That's certainly true for factory construction, any kind of big investment decision. Then for families, you know, they're buying homes and cars with long term loans and so they're paying long term interest rates. So everybody is affected by that perception of whether the chair is credible and making policy the way Congress told the Fed to make policy. So Congress delegated the power to issue currency to the Federal Reserve as an independent agency. It really is a congressional power. And they told them focus on two things, keeping inflation low and stable and keeping the labor market at maximum employment. And that is the only two things the Congress told the Federal Reserve to focus on. If a chair is appointed by a president who insists that that person is implementing the policies of the White House, then other considerations we have seen historically can creep in. Whether it is the cost of financing that large and ballooning debt, the beautiful bill really augmented by $4 trillion, or whether it is juicing the economy ahead of an election, which is a very common pattern. And we've seen in places like Turkey where the head of state has repeatedly fired central bank heads for not sufficiently stimulating the economy at times that are politically important, that essentially inflation has soared, reaching very high double digits and interest rates have gone very high. And it's been really bad for the economy. And that's the kind of thing that people worry about here.
- [40:36]
B
You warned in a piece last year about the, the prospects of the dollar. I'll quote you here, the dollar is not invulnerable. And now is not the time to make bad choices and count on good luck alone. If their currency falls from its pedestal, Americans will pay the price. What would a fall from that pedestal look like if we, we started to see signs that that was happening? What would we be seeing?
- [40:55]
A
Well, you know, it is not the case that the dollar can easily be replaced or is likely to be replaced by another currency. So that kind of scenario is not really what I worry about or other people worry about. What one worries about is just the more rapid erosion of the primacy of the dollar. And what would that look like? Well, already seen some signs. The dollar weakened by nine and a half percentage points last year on a trade weighted basis. But in the wake of Liberation Day and the threats on the Federal Reserve chair, it actually at one juncture was down by 15%. And we've seen renewed pressure on the dollar as politics has once again become more fraught with these threats around Greenland. So weakening dollar. On the one hand, we've seen that in central bank reserves, gold has now risen to the same level of reserve holdings as Treasuries. That's partly due to valuation effects because there's been so much demand for gold that we've seen valuation of gold go up. But it's partly because foreign central banks are hedging their bets a little bit. And we've also seen it in terms of more hedging of dollar exposure. So that when foreign investors want to be part of big AI boom, they also want to be a little cautious and they want to hedge the dollar because they now have more concern that the dollar, the value is not going to hold. So I think you see it in terms of the erosion of how much dollar reserves kind of dominate central bank holdings, how much hedging activity there goes on. Ultimately, you see it also in pricing. Right now the dollar is the currency that Trade is about 95% of transactions in our hemisphere and about 75% of transactions in Asia. But China is chipping away at that and they have an active de dollarization campaign where they are using their considerable economic weight bilaterally to get countries to invoice in RMB to hold more RMB to move away from the dollar.
- [43:22]
B
And do you see with all the disadvantages of the RMB as a, as a reserve currency for lots of reasons, do you see that taking a big chunk of the dollar's place or are there kind of hard limits on, on what China's able to do here?
- [43:35]
A
Yeah, so I think both the two main alternative currencies, if you will, are the Euro and the rmb. And you already alluded to the reality that, that RMB markets are simply not as liquid, as deep as treasury markets. So investors are not going to feel as comfortable in general being as heavily weighted towards RMB securities because they don't have as much confidence that if there's a shock and they want to have that liquidity right away. They have seen that China is got more capital controls and you know, is more inclined to put impediments in the way than certainly the U.S. i mean, you remember during the pandemic. I certainly do, we purchased trillions of dollars of Treasuries in order to provide liquid cash to investors all over the world. And that reassures that those are liquid instruments. Similarly with the euro area, because there's very little jointly issued debt, there's very little euro area debt that really has the full faith and credit of the entire euro area behind it. And so that is also a more limited market for now. Now. But I think it is pretty unwise to essentially undertake a bunch of policies that raise huge concerns on the part of investors all around the world about the value of the dollar, the institutional underpinnings, the low inflation that is anchored by the independent Fed, the rule of law, the respect for rule of law, all those things to simply count on the fact that there's no single alternative to the dollar, that you can flout all of those things all at once and see no negative effects in terms of interest rates here in the US.
- [45:35]
B
And what would it mean for both American power and for the prospects of the American economy if we did see the shift, the most pessimistic version of that shift that you're warning of?
- [45:43]
A
Yeah, so I think over time it's really that erosion, that increasing holding of, of other assets and currencies, but inclusive of gold, it means that we pay more in terms of interest on our debt. We're already paying a trillion dollars a year. It rivals the defense budget, how much we pay in interest on our debt. And so we've got a massive increase in our debt that has built in as a result of the loss of tax revenues from the big beautiful bill. And it means that we'll be paying more and more every year just in interest costs on that growing debt. And you know, in the extreme, it means we're more vulnerable to those kinds of market moments where we see investors suddenly demanding a lot more to hold those securities or wanting to sell them because they have suddenly new stuff, sets of concerns. We saw a little bit in the Liberation Day period, that combination of the high tariff announcements, plus threats to Fed independence. And of course, what people like to talk about as a more extreme version of that is the Liz Truss moment in the U.K. i don't think we are there in the U.S. being that vulnerable, but we certainly should be at least aware that right now Americans are benefiting from interest rates that are lower on things like cars and houses because people like to hold dollars all around the world, that convenience yield that saves Americans money actually on their loan payments every year.
- [47:25]
B
I think it's hard for most of us to process just how big a change it would be for American policy, American economic policy and the tools that are available to leaders and Policymakers, if we did enter such a world, it's just, I think there's a kind of lack of imagination when it comes to.
- [47:39]
A
Imagining that, well, I think we have been in such a strong position and there's been such solid institutional foundations for decades now that we haven't had to think about it. But people who have assessed, well, what is, what is the benefit? Can we actually see in dollars and cents how much, much better off we are as a country? They assess that, you know, 150 billion, give or take, every year we pay less in interest servicing just on the national debt as a result of the fact that people are willing to invest in treasury securities and get a lower yield than they might otherwise. And of course, you can take that same benefit of having lower rates and then simply translate that in terms of lower mortgage costs, lower car loans. Those are the kinds of concrete things that could give people a better sense of this is valuable, this is worth preserving.
- [48:40]
B
I want to, before we close, return to an issue that you brought up earlier. And that has really been one of the central challenges for both the Biden and Trump administrations and that's affordability. This is complaint of publics and lots of other economies as well. But certainly I think the kind of central complaint you would hear from most Americans at this point. I know you can cite lots of evidence about the progress that the Biden administration made on bringing inflation down and bringing prices down over the course of your time in the White House. Over the last couple of years, the administration. But politically, something there didn't quite translate. I think it's fair to say as you reflect on the lessons of this, both again for Biden and for Trump, what would you do differently? How do you think about the affordability question as a central one in American politics?
- [49:23]
A
Yeah, I think it was evident to me. I was in the Biden administration for the last two years and it was very clear even then the top line numbers for the economy were really good. Right. 3% growth, unemployment that stayed just around or below 4% for the entire two years. The inflation, which is the rate of increase of prices, came down all the way close to actually it was between 2 and 2 and a half percent. So if you just looked at those things, you could sort of see, well, the economy's doing well and a ton of investment in areas like semiconductors. Right. But if you listen to consumers, they were so worried about their ability to afford just the, the, you know, the basics. And this is particularly true of middle income households and lower income households, housing, extremely expensive Rents had gone up a lot. We simply don't have enough housing supply in America for the sort of workforce housing for first time home buyers, for young families. There simply needs to be a more, some people say between 3 and 4 million additional units of housing. The second thing is, of course, health care. Healthcare is perpetual affordability challenge for Americans. And this administration just made it much worse because they essentially cut Medicaid for, you know, 11 to 13 million Americans. So they're, they're going to find it more expensive and much more difficult to be able to get access to Medicaid. And then, of course, they're not renewing the tax credits that make health insurance for 21 million people through the ACA Marketplace affordable. Some of those premiums are going up a hundred percent. So that's a second area, pharmaceutical costs, where the Biden administration really did make some progress, and the Trump administration is trying to make some progress, but we still pay way more than other countries. And then food and grocery, Food and grocery were badly affected by supply chain disruptions and then the avian flu. And then this year they've been badly disrupted by tariffs on things like coffee, chocolate, bananas, things that we don't grow very much of in the United States. And there's really no benefit to tariffs. There's only the cost to consumers. Now electricity is much higher on the radar screen, in part because we need to build our grid and we just haven't seen the level of investment that's necessary. Certainly now with the AI boom, all of those things, you add them together and it really feels bad to a lot of American consumers. And you can see that in the consumer sentiment. Consumer sentiment has really plunged over the course of the last year. And the driver of that is really affordability concerns.
- [52:42]
B
Given the likelihood that this will be the central question and in American politics and American economic policy in the years ahead, do you see the beginnings of a new strategy for really addressing it in ways we failed to over the last several decades?
- [52:56]
A
Absolutely. I think it is vital that politicians show this is their central focus. And a lot of people already in the 24 election talked about prices being too high as kind of their primary voting concern. And now it seems like affordability has only gotten worse. So I think it is incumbent on anybody who's running for office to have answers. How are we going to get health care costs for American families down? How are we going to build more houses in a way that is accessible and affordable for most Americans, not just really high value homes that are only accessible to the top 10%. But for most Americans that are really hurting, how are we going to expand electricity availability in an affordable way for Americans? And one that is really top of mind for young families is child care can absorb a very high share of income for a young family and is a real deterrent to growing families and having more children. And we, we, we really don't have good solutions there. During the Biden administration, because the pandemic was ongoing, they had a number of pretty expansive policies on child tax credits as well as child care stabilization. Those made a material difference in terms of allowing more American parents to go to work. So it's a plus. Plus. It's, it allows parents to feel confident that they can afford quality child care. It also allows them to be productive in the workforce and it's good for overall growth. But we need to have politicians actually delivering results there. What was surprising, I think certainly to me and to many other observers was that this president came in saying he was going to lower prices on day one and then went ahead and put in place very high tariffs that actually raised prices, took away health care affordability policies and has done really very little other than, you know, we have seen gas prices coming down, but that's the only area. Everything else, affordability has actually gotten much worse. And at a time when, you know, you're getting that message in some of these out of cycle elections instead of really materially directly addressing that, we have a administration that's talking about buying Greenland at another huge price tag for the American people and threatening even higher tariffs on some of our main trade partners which will come back around and hit American consumers with higher prices.
- [55:56]
B
As the parent of a two month old, I feel like we should close on that plea for affordable childcare. So thank you, thank you for that. And Lael, thank you so much for this wide ranging conversation and the great pieces you've done for Foreign affairs in the last few months.
- [56:08]
A
Well, thank you very much.
- [56:15]
B
Thank you for listening. You can find the articles that we discussed on today's show@foreign affairs.com this episode of the Foreign Affairs Interview was produced by Mary Kate Godfrey and Kanish Tharoor. Our audio engineer is Todd Yeager. Original music is by Robin Hilton. Special thanks as well to Arina Hogan. Make sure you subscribe to the show wherever you listen to podcasts and if you like what you heard, please take a minute to rate and review it. We release a new show every Thursday. Thanks again for tuning.
- [56:46]
A
In. It.