Markets Now In Danger Zone? Economist Reveals Next Asset To Break | Steve Hanke
Summary
Click the link http://kalshi.com/r/LIN or download the Kalshi App and use code LIN to sign up and trade today! Steve Hanke …
Transcript
I I think the 4 and a.5% threshold is pretty serious. >> How do we get to this point where at 4.5% on the 10-year is now in the danger zone. >> If we stay up over 4 and a.5% on the 10-year, the bond vigilantes will be have their day in and in in the sun, so to speak. Canada just can't disengage from the United States. Canada is economically part of the United States. I Israel doesn't want does not want the thing to be resolved when it comes to the the United States and Israel. Israel pretty much calls the tune on international policy as it affects the Middle East. >> On Monday, June 1st, Iran halted negotiations with the US and is moving to completely block the straight of Humuz, they said. Meanwhile, in the US, the share of credit card balances 90 days late hit 13.1%, the highest since 2011. And the savings rate has collapsed to 2.6%, the lowest since June 2022. Washington just ran a $955 billion deficit in the last 7 months. And the US 10-year Treasury yield has moved to what HSBC calls the danger zone. So, is this term reflective of the broader economy? Is this it? Are we now in the danger zone? Steve Hanky, professor of applied economics at Johns Hopkins University, is our guest today, and he's here to answer these questions and much more. This video is sponsored by Koshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events from economic data to political outcomes. And the price moves based on a public opinion, not a house. Go to the link in the description down below or scan the QR code here and use my code, Lynn, L I N. New users who use my code will get $10 when they trade $10. Right now, traders on Koshi are predicting that the next jobs numbers will beat the Wall Street consensus. For example, you could put $50 down on the jobs numbers exceeding 90,000 in May. And if you're right, your trade could yield $89. Link down below or scan the QR code here. Professor Hanky, welcome back to the show. Good to see you again. >> Hey, good to be with you, David. >> Uh it looks to me like uh consumer credit is deteriorating in terms of health. We'll talk about that soon. But first, I want to get your opinion on this announcement. Trump claims um well, the uh the Iranians have suspended peace talks and they threatened to permanently close the straight of Hormuz. This according to many news outlets. I have the FT in front of me. Donald Trump said Israel and Hezbollah has agreed that the shooting will stop. But this is after Iran suspended its peace talks with the US in response to the Israeli bombard bombardment of is uh of Lebanon. This came in just earlier today. Uh the oil price hasn't really spiked much on the news. It's still hovering above $91 a barrel. Um but the is this just rhetoric from Iran? You think they're going to permanently block this formoose? So that's it? No, I I think it's very clear from the the Iranians are have basically said they're tired of being jerked around by Trump and and dealing with the the way he negotiates. So that's that's the bottom line. I mean, they they've been getting jerked all over the place. Every day Trump has some new announcement. He's going to do this, that, or the other thing. and and of course in the background you've got Israel uh pulverizing Lebanon and completely breaking any idea of a ceasefire. I mean they're this is this is now the fourth time in the last 44 years that Israel has invaded Lebanon. And of course the first three were huge failures. I think this will be a failure too. But but remember Lebanon and Hezbollah, that's a red line with the Iranians. No, no one's been talking much about that. So I think with that going on in the background and and the Israelis wanting the war to continue clearly and the Israelis whispering in the ear of Trump that they want the war to continue and Trump playing hot and cold with the negotiations. I think the Iranians just finally threw up their hands and said for now let's call it a day. Uh >> so I think where I'm going with this is is it fair to assume that because the straight of Hormuz won't be opened anytime soon given what this announcement indicates we can expect the rest of the world outside the US which depends on the straight of moose particularly Asia for oil imports uh and whatnot to experience some sort of slowdown as prices continues to rise and it's not just oil prices for example you posted on X that the price of rice has now risen to pre2025 five levels and of course a basic commodity like rice which is consumed by billions literally billions of people around the world uh that's not going to be good for consumer spending elsewhere >> all all of this functionally the strait will remain closed and uh the prices of this kind of supercharges what I think is the start of a a super cycle with commodity prices all of them going up it's just not oh you mentioned and rice. I I had an X on aluminum today. Aluminum is but but right down the line all the commodities are are up strongly. Uh and and and remember we have to get the sequence of the thing right. It was the US and is Israel attacked Iran and Iran is counterattacked. The the closing is just a counterattack. They're reacting to the attack that the US and is Israel had on Iran. So the causality, who's causing this? It's clear that the United States and Israel are inflicting a lot of pain on the world as a result of their war of choice against Iran. >> Why aluminum? >> It's a it's a fairly simple thing. It's not reported that way. Of course, in the Western press, they they report it as if all of this is caused because Iran has shut the straight down. Well, Iran has shut the straight down because they were attacked and and the only way they can effectively counterattack or at least one of the ways they can counterattack is to control the straight. >> Okay. I have a few follow-up questions on that later, but why aluminum? You said aluminum may the next commodity squeezed by the Hormuz crisis. Well, uh be because you've got a lot of aluminum production in in in uh the uh in in the Gulf nations. >> Yeah. >> So at at the margin it it makes a big difference. I mean the big so so that that that is in all of this commodity basket of of everything going up whether it's lithium is going up venadium is going up helium is going up rice is going up and and and these food prices by the way will continue to go up because remember we've got a a huge amount of fertilizer is being affected because of the shutdown of the Gulf and the straight. So without fertilizer, you're going to have lower yields on on many agricultural products. And with lower yields, you have lower supply and with lower supply, you're going to get higher prices. >> What can consumers in North America expect for uh higher prices? What in particular will go up? So you mentioned some commodities, rice, but not everybody eats rice. Uh, can we expect general grocery prices to go up? >> Yes. >> Okay. Uh, airline tickets are going up. I know, right? Because fuel prices. tickets are going up because jet fuel prices. Jet fuel is a a big cost factor with airlines and the jet fuel is uh going up in price and and it it looks even though the refineries have have switched and are producing a lot more jet fuel as a proportion of the total production that occurred prior to the shutdown in the Gulf. It still is going to be in short supply. I mean, demand exceeds supply and inventories of jet fuel are going down. So, at some point in the in the middle of the summer, you're going to hit rock bottom with the inventories. When that happens, the price will really shoot up. So, a lot of these prices, by the way, will by the time we get into midsummer or late summer with a closure uh remaining in effect, we'll have some sharp price increases in oil and and and and other other commodities that are affected with a shutdown in the Gulf. >> Well, we've talked about inflation a lot. Let's revisit this. Inflation isn't going up because of the straight moves being closed. It's going up because the money supply has been increasing. Correct. >> That That's correct. And and and the money supply in the United States has been accelerating for the last 18 months. And where where are we? We're consumer price index, the headline number is 3.8% a year. That's, you know, almost double the inflation target of 2%. So it's it that that's why people are complaining so much. They complain when they go to the grocery store because they have to go to the grocery store quite frequently or when they go to the gas pump because they have to fill our cars quite frequently with gas and and and those frequent purchases hit them in the eye. They they get sticker shock. They they see that and they start complaining about these particular prices that are going up. But the overall index, the big basket of over 300 items is going up at at a rate that's virtually double the inflation target. So monetary policy is is in a failure mode in the United States and and I I'm I'm giving it a failure grade simply because they haven't been able to hit the inflation target. We got to we got to go way back before you get get to a 2% level. As I like to say, David, that the inflation genie is out of the bottle in the United States and it's not going to be put back anytime soon. Th this will be with Trump and one of Trump's big Achilles heels throughout uh at least in the foreseeable future. So that means maybe throughout a big chunk of his second term, he he's going to have this inflation problem around his neck. >> But Americans should should understand that this is not Trump's fault per se is what you're saying because yes, Trump started the Iran war by bombing Iran and the street of Kamoose was closed subsequently, but the Federal Reserve and the money supply going up, that's not because of the Trump administration's doings. Well, well, it it they're not helping it because we we have a huge fiscal deficit and and the the Federal Reserve has monetized. They've gone in December from quantitative tightening to quantitative easing, meaning that they're buying Treasury bills and monetizing part of the money supply. So, that that is a factor. Another factor is that of course you've got Trump leaning on the Fed to loosen up and the and the Fed has been doing that basically and they they've been loosening up by ch switching from quantitative tightening to quantitative easing. That's one as one reaction that the Fed has had. The other reaction is they have loosened up some of the regulations and the capital requirements on the on the banks and as a result the banks in effect have more firepower and and they're using it to increase loans in the economy. I mean the the the the rate of money supply growth that is contributed by commercial banks which by the way is the most important part of the money supply that's growing now at around 10% peranom and remember 6% peranom is a a rate of growth in the overall money supply Hanky's golden growth rate 6% that's consistent with hitting a 2% inflation target. So the the commercial banks are in a situation where they have been deregulated and and that re redu that reduces the uh capital requirements on the banks gives them some extra running room. They can make loans. In addition, the capital has increased significantly in the banks because has nothing to do with Trump per se, but their profits have been very strong. So, so they're they've had a capital increase because of profit growth. So the deregulation, loosening the monetary policy on the banks, commercial banks, and the the combination of strong profits and increases in capital. Both of those things give the banks potential firepower and and and to firepower to do what? To make more loans. And if they make more loans that puts credit into demand I into into checking accounts and checking accounts are part of the money supply. So the money supply goes up. >> How does the money supply increasing benefit us the consumer? What is the mechanism with which the money supply increasing will make everyone richer? What does it not do that at all? Well, I I mean it it that it it makes you richer if you receive if you receive a loan from from a bank. You're you you you of course you have a liability. You have to pay the bank back. But the immediate effect is that your your assets are increased. That that's your checking account. >> Can we expect businesses money? >> Can we expect businesses to have more liquidity because of this? And then if businesses have more liquidity, we can expect them to hire more, pay people more, etc. >> Yes. >> Okay. So overall then are you are you still bearish on the economy because earlier we had talked about a recession by you know by earlier I mean last year and the year before uh and now and now the money supply is increasing. So >> will that negate any slow down? the money the money supply is increasing and so nominal GDP which includes a real component and an inflation component will go up. It'll it'll continue to be elevated. Now if you look at all the high frequency data uh on financials as well as uh real economic activity so so far so good. They they look pretty positive. It doesn't look like there's a recession in the wings right now. Now, that that doesn't mean that people aren't aggravated. And they're aggravated because the inflation component of nominal GDP has gone up and and real wages are basically flat. They're not they're not going any place. >> By the way, this came in credit cards gone up for the regular American share of balance 90 plus days late hits highest mark since 2011. This comes in as the savings rate has declined to two 2.6%. Which is the lowest it's been since last year. So savings have gone down. Credit card um late balances have gone up. What does that tell you about consumer strength? >> Well, it it tells me con consumers are, you know, getting more leverage all the time. Uh that that's that's one factor. And the lower savings rate plays into something else in the economy wi which is the trade deficit. And and the reason we have a trade deficit that's made in the USA because spending on consumption is is greater than production. We're spending more than we produce in the United States. So we have a trade deficit. and and and if the savings rate goes down, that means what? Well, you're spending more of your income, you're not you're not saving as much. So, that keeps spending elevated. If spending is elevated, that keeps the trade deficit going. So, so, so we can we can see more of what we've been seeing recently, and that is uh elevated trade deficit numbers, which of course will aggravate Trump to to no end and and uh it probably motivate more threats about tariffs and trade policies from the Trump administration. So all all these things tie back one one way or another and and you've got it it ends up tying back to what what's going on in the White House right now because the White House is is a big player in the economy. It's it's intervening in all kinds of areas whether it's government spending, government regulations, insider deals, selfdeing with each other. We if we look under the hood, according to this article, the increase in seriously delinquent balances may not be driven by a new wave of sorry, a wave of new borrowers falling behind. Instead, the New York Fed found that the share of credit card balances that became newly delinquent was little change from a year ago, suggesting the recent trend may reflect deepening strength among borrowers who were already struggling. It it doesn't Yeah. So >> I think I think that's consistent with the fact that you have well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while the economy is humming along pretty well there no recession in the immediate outlook. All the data look okay. The money supply is being gooseed. Everything is being pumped up. But the the consumer the the little the little guy is is doing what? He he's being faced with higher and higher inflation. And if you look at his wages adjusted for inflation, they're going no place. They're probably going south a little bit right now, especially after the the the USIsraeli attack on Iran and the closure or functional closure of the straight of Armuse that that is has caused actually in the last few months real weight just adjusted for inflation have have actually gone negative. They're not flat, they're actually negative, they decreased. How do you what's a recession these days? By the way, let me let me bring our attention to Canada. Canada's economy is struggling. Rio uh sorry uh real GDP numbers were announced last week, dropped 1% in the fourth quarter and um three of the last four quarters in Canada have now posted negative real GDP numbers. Um that's on an annualized basis. So, according to a TD Bank economist, don't get me wrong, the economy has struggled to gain any meaningful traction over the last year, but for now, we wouldn't necessarily call it a technical recession. I'm confused. >> Well, uh there are many definitions of technical recessions. Usually, the one in Canada would be two consecutive quarters of negative growth, which as you indicate, they've had three. So it would it would fall into a mild recession. Uh you can use the R word for Canada, but >> you you've got Canada's been struggling. You know, they've had what over 10 years of the interventionist kind of li Liberal Party pol economic policies which not helped at all. Very low investment rates in Canada. And and and then on top of it, you've had what? You've had Trump bailing, you know, piling on with t threats about tariffs and so forth. The Canadian economy is very tangled up and tied in with the US economy and and and as a result of all this tariff war between the United States and Canada. It it's severely put a dent in Canada. There's no question about it. Another economist, by the way, there's little debate that the economy has struggled to make any headway over the past year amid the ongoing trade conflict. How would you let's say I I know you had previously advised the US government um in your career. If you had to make similar recommendations to the Canadian government, how would you advise them to a grow the economy ultimately, but b I guess be less dependent on the US if they were to expand their trade partnership? Well, I I I' I'd say that the prime minister is doing a pretty good job of walking on the tight rope with regard to Trump and Trump's threats and and and uh he he Carney has pivoted o away as much as he can from the United States pivoting towards China and Europe uh with regard to Canada. But the the fact is that Canada is highly integrated with the United States as is Mexico as is many countries are. So the idea that you can pivot you is true but you can only pivot at kind of at the margin David you you can't escape the whole the whole picture. >> Okay. So, so my my view is that, you know, Carney's, you know, I think he's doing a a a pretty good job given the fact that he's under, you know, severe threats by by the United States, the the Canada's biggest trading partner. It's it's a little bit like the same situation what's going on in Mexico right now. >> Can can the Canadian economy recover while tariffs are still ongoing, you think? Well, I think the only way that Canadian economy can recover is uh by adopting a a whole new game plan, shall we say, and terms of deregulating the economy, lowering the taxes, keeping the Bank of Canada on on the straight and narrow with, you know, inflation hitting the inflation target, which by the way, they're they're they're doing now. Um so >> okay >> so it's basically they have to turn back the clock and start liberalizing the economy. What what slow they they have to stop doing what they've been doing for the last 10 years to make a long story short. But this is this is going to be very difficult to do because uh of the you know the the liberals are in power. So they're they're playing a defensive game right now. They are trying to liberalize one thing and that's trade. It's interesting. Their defense so far has been on the pretty good on the trade front. And what has that been? That's been to liberalize trade and move towards a more open and free market approach. And and who are they doing that with? They're doing it with China and Europe. They they should adopt a more liberal approach that to economic policy across the board. >> Okay. So given let's move back to the US in just a bit, but given what we discussed so far, how would you assess global growth prospects across the world, not just in the US? We talked about Canada, you mentioned Europe, you mentioned China. Um, are these areas set to grow um at a faster pace this year than last year? >> I think there'll be revisions downward in the growth projections >> because of Iran or something else? >> Yes. >> Okay. So, is it safe to say that the Iran war needs to be resolved for global growth to happen or can global growth happen independently due to other stimuli? >> Well, it it global growth could be W would have a po receive a positive impact if the uh if if the war on on the USIsraeli war on Iran was resolved in some way. I I don't think that's in the cards quite frankly because you you've you've got a a spoiler in the mix and that's Israel. Israel doesn't want does not want the thing to be resolved. A and when it comes to the the United States and Israel, Israel pretty much calls the tune on international policy as it affects the Middle East. So So that's why I'm quite skeptical that there'll be any uh reasonable resolution to the to the war that the US and Israel started. By the way, the US and Israel started the war. And I and I don't think the US and Israel are going to stop the war. And the reason for that is that Israel doesn't want it to stop. >> Should the US stop? >> Yes. But but they are they aren't in control of the thing there. Again, you've got three parties involved in in the to to to stop it. And that's Iran one, Israel two, and the United States three. What happens if the US just announces tomorrow we're going to stop? We're going to pull out our navy and just leave. Well, it we we we we don't know exactly what the Iranian reaction to that would be because the Iranians have certain demands for stopping and and and one of those directly affects by the way Israel because Israel is engaged in a war against Hezbollah and Lebanon and part of the demands that have been ma been made by the Iranians is that that should stop the the the the occupation of Lebanon and and the war Israel is waging with Hezbollah should stop. >> Yeah. Okay. So, so there's not there there there just many moving parts in this and and to to to stop all the parts from moving, I think, is going to take a a great deal of effort that I I don't see on the horizon right now. And and again, one of the main reasons is that you've got one of one of the three parties clearly does not want the war to stop. I think that I think the Trump administration would like to have it stopped. By the way, the US would like to have it stopped. I think I think Iran would like to have it stopped. They have both sides have different demands and conditions. Uh and the third party does not want to see it stopped. >> I think China also wants to see it stopped. There was a basis of the conver of the meeting between she and Trump last month. >> Right. But but but again, I think everybody would like to see it stop on certain terms. The terms the terms of Israel would be to wipe Iran off the face of the earth. >> Well, that that that that hopefully that doesn't escalate any further. Let's go back to the US economy. You written an article for Fortune. Let me just pull this up on the screen. Uh talking about or warning us about the deficit growing. So the deficit grew by $955 billion in 7 months. It's time for a constitutional fix to control the budget, you wrote. Uh, this is expected to, uh, grow, by the way. That pace puts the fullear deficit on track to exceed $1.9 trillion, precisely the CBO's own annual projection. This is from Koshi. It's a prediction. Market traders are predicting that there's a 33% chance the US credit rating gets downgraded this year. It's not high, but it's not zero. Uh, what's your assessment? And why are we why why did you write a full oped about the deficit? Well, I wrote a full oped about the deficit because deficits are bad. If if if the government wants to spend money, they have to tax. That's the that's the bottom line. And and the reason for that is that over 20% of taxpayers money that goes into the federal government is just siphoned off to service debt payments. little over 20%. It's just go go goes for interest payments on the debt. So the the taxpayer gets nothing for that. There there no income transfers to anyone there. There are no government services finance with that 20% that gets siphoned off. it it simply goes to bond holders that that have bought bonds that have been used to finance the deficits in the first place. So it's it's literally like money down the rabbit hole. So that's that's point number one. Point number two is that deficits are really in inherently I I think immoral in the sense that a deficit is just a deferred tax. A deficit will have to be paid eventually and and and it will be paid by some future taxpayer. That future taxpayer might might be somebody who isn't even born yet. >> Yeah. >> It it could be somebody who hasn't even voted yet, >> right? >> Uh and and we know it's going to be paid by older people. So, so for all of those reasons, I I'm a a classical economist that doesn't like deficits. They're they're bad news. They're bad economic policy if you run them on a sustained basis. Now, over the business cycle, yes, there might there might be years in which you run a deficit, but there might be years in which you run a surplus. and over the business cycle from the start to the finish the thing should be more or less balanced. That's a classical view and that's my view. So, so how do you solve this? The you get you you get to a constitutional amendment where you put a debt break in the US constitution and and and require require that the budget is balanced over the business cycle. You you can't run these sustained deficits over and over and over again. You you have to balance out any deficits that you have during the business cycle with the years in which you have surpluses. >> US credit downgrade then is that going to happen this year or even next if this doesn't if this isn't uh fix itself. By the way, >> I think that poly market thing is probably re reasonably accurate. There's a, you know, roughly a 30% chance that there'll be a downgrade. >> That means yields are going up. >> Y, yeah, yields are going up. Yields are going up anyway because the interest rate is a function of the inflation rate. So yields on bonds with with the exception of the federal funds rate and very shortterm interest rates that are controlled directly by the government. the longer term picture is is controlled by in part inflation and and and the risk appetite of obviously people who buy bonds. So if the if the risk appetite goes down because they think there's more risk inherent in what the government policies are that that could increase interest rates but the main driver is is inflation. So, like the 10-year bond, you you have to look at what's going on with inflation and inflation expectations. And I think that I think they'll remain elevated. And that's why you've got the 10year at uh you know, almost 4 and a.5%. I mean, it was it was up last week over 4 and a.5%. Yeah. for a few days >> it was now the how how high does a 10year or 30-year need to go before the bond vigilantes basically force the US government to somehow address their spending >> I I think the 4.5% threshold is pretty serious actually I I think if we stay up over 4 and a.5% on the 10-year on a sustained basis the bond vigilantes will be have their day in in in the sun so to I I I and the reason for that, you see the negative feedback loop comes into this thing, David, if the interest rate goes up, we've been financing a lot of our uh uh deficits with short-term Treasury bills, two years in duration or less. And as th those things have to be re rolled over. And if they're rolled over at higher interest rates, that 20% or a little over 20% of taxpayer uh uh taxes going to service debt will go up. >> You know, you're right um uh on on this. And by the way, the uh you're not alone in thinking this is what I'm trying to say. US treasuries are now firmly in danger zone. quote unquote strategists say from HSBC. US treasuries are now firmly in the danger zone, the level of US year US 10ear US that tends to put pressure on virtually all asset classes, says a USB strategist. Uh even further into the danger zone, likely leading risky assets temporarily lower. Can you just explain how that works? Uh you know, for the layman investor out there, why why do we care about where the 10ear is headed? If you're into stocks or anything else, >> well, you mentioned credit cards a little bit earlier. Credit card interest rates are geared off the 10-year ver virtually everything is geared off the 10-year mortgage. How about mortgages? >> The the the housing market is very soft right now. And and one one reason for this is are the mortgage rates. And if the 10year goes up, mortgage rates are going up. If the 10-year goes up, credit card interest rates are going to go up. So it it it is a a key interest rate to watch because many other interest rates in the market are geared off what happens to the 10-year. >> How do we get to this point where a 4.5% on the 10 year is now in the danger zone? remember in the late 80s or early 80s when it was double digits and then you know high single digits early uh later on in the 80s and 90s I don't I I wasn't born in the 80s but can you just jot our memory here were people concerned about a 10% interest rate back then >> yes they they were very concerned but re remember when we talk about 4 and a.5% it's where we were coming from that the 10year the 10year uh just a minute let me let me Just glance at my iPhone right now and the 10year just so I have the numbers right for you. >> Yeah, it was I can pull up for you, too. I mean, we're at 4.5%, we were at zero. Uh, basically it dropped around 2020 at 0.5. >> Yeah. And we were down, you know, if we were down two years ago, it was down, you know, below >> below 39. I mean at the at the bottom we were down around 37 36 something like that. So >> so it's it's it's always things at the margin. This this is basic economics and that is all the action everything that's important is at the margin. what's going on at the margin and at the margin the interest rates have gone up significantly and and it's it's biting and and if you look we were talking about Canada earlier I said well Canada just can't disengage from the United States they're all tangled up with a a web of trading relationships with the United States I mean Canada is economically part of the United States de facto. So what what can they do? They can at the margin, you see what Canada is doing. Carney goes to China and cuts some deals. So at the margin, they're pivoting a little away from the United States towards China. They they've cut some deals with the European Union. So at the at the margin, Canada pivots a little way away from the United States towards the European Union. But those are all marginal things. But but that's where the action is at the margin. >> I want to finish off by talking about taxes. You brought up taxes earlier. You said deficits are bad and what the government needs to do to address deficits. Either spend less or tax higher. This is Jeff Bezos, by the way, Amazon CEO. He said, "Look, you're focusing the wrong thing. Raising taxes on the billionaires aren't going to help the teacher in Queens. You could double the taxes I pay. It's not going to help that teacher in Queens." He said, uh, New York Mayor Mandani later responded to this assessment, I know a few teachers in Queens who would beg to differ. Now, then Bezos made the point, uh, which is what I'm getting to. He said, well, it's not that we should tax the billionaires. We should reduce the taxes on the middle class. So, the bottom 50% should pay zero taxes. Let me just start with that. I'll get your reaction to that statement. Well, I the the the the ideal tax system in the United States as far as income taxes go is a flat tax. The the Hall Rabushka tax, uh my my former colleague and collaborator Alvin Rabushka and Robert Hall put this up and that that would be a a tax without any loopholes or anything of around 13% for everybody. what whatever your income is, whatever your taxable income is, 13%. You you'd file your taxes as they say on a postcard. Get get rid of the get rid of the, you know, book after book of tax code. It would be a very simple thing. Just a straightforward tax on everybody. 13% of taxable income. >> Okay? Okay. So, you're effectively making tax lower >> tax, the flat tax, >> let's say 13 to 15%. I can't remember actually off the top of my head the original Paul Rabushka, but what what whatever the flat tax rate would that would allow the budget to be balanced. If the government wants to spend, they have to tax to finance it, >> right? So how >> so it depend it depends on how much they want to spend and and and if everyone knew by the way they were going to be taxed at at all all taxable income at the same rate whether you're Jeff Bezos Steve Hanky Joe Sixpack you name it everybody has the same rate then the question would be well what's that rate going to be to allow for a balanced budget. And pe people would have an honest price of what the government expenditures should be priced at. And and if the government wanted to spend a lot more and and the tax rate would be 20%, maybe would there'd be a tax revolt, they'd say, "No, we don't want you spending that much. We want you spending something to dial it back." So we we pay a tax rate of 15%. So let's suppose we have >> get some honesty in terms of pricing the government and pricing the government services. If if if you had a flat transparent tax, it it would do wonders for the supply side of the economy, productivity in the economy, and fairness in the tax system. >> Okay, I'll I'll let you explain how that would do that. Um to Basil's point, why shouldn't we have a tiered system that's more extreme? Let's suppose we take your system, the flat tax system, whatever that number is, let's say 15%. And just for the sake of argument, that generates a trillion dollars in tax revenue. Just to make it a round easy number for the argument. Now, we can generate a trillion dollars with a flat 15% or we can generate a trillion dollars by having 0% tax on the bottom 50% of earners and then just raising taxes on billionaires. Wouldn't that be the same thing for the government but make most people better off? >> No. Num number number one, you you would you would put a a huge dent in the savings investment activity in the in the United States if that was a kind of progressive system that you had. You you you get the same kind of effect that you have in places like California and New York where they do have very high taxes. Also in in Maryland, Maryland has very high state tax that's added to the federal tax. And as a result, all three of these states are losing population. Why? Be- because people don't want to be taxed that much. They they they go to Florida or Texas or some other state where they have lower tax rates. So nobody there their incentive effects economics is remember all about incentives and their incentive effects associated with tax system. So that that was the idea behind the flat tax in the first place. It was a it was a hallmark of supply side economics came out during the Reagan years. Reganomics and the idea would be that you'd have a flat low tax on on everybody that that that wouldn't affect savings and investment work or too much because it would be relatively low, >> right? Are you are you saying we shouldn't tax the corporations and billionaires more because if we do they will move away and then the jobs in those areas would disappear even if and so everyone will be worse off even if they pay a lower tax rate by they I mean the lower income earners >> yes you >> okay >> and and it's just because of the incentive effects you you start distorting investment decisions savings decisions location decisions but if you if you have a flat tax that's low you don't it it's not ownorous so it doesn't affect much of in terms of the incentive effect is is mitigated shall we say if you have a low flat tax so the supply side distortions that you get in the economy David are are are mitigated they're they're you you basically don't screw around with the economy because you're screwing around and distorting incentives. >> Finally, let's just talk about um jobs numbers in May 2026. Traders on Kowi prediction market indicate that May's jobs numbers will top Wall Street expectations. This is from CNBC. Dow Jones estimates that May's non-parm favor uh non-farm payrolls reports uh will gain 90,000 jobs. The consensus reflects an anticipated decline from April's 115,000. However, cow traders, prediction market traders are citing a 56% probability that the report will beat the Wall Street forecast. You've talked about how prediction markets um have been accurate in the past. I don't know why traders are so positive on the economy or at least on on job growth, drop jobs growth in particular. >> I I I I wouldn't place too much money on these numbers because remember the numbers are very fuzzy. They're they're revised all the time. >> Yeah. and and and and the revisions, by the way, the revisions are supposed to correct errors in the first estimate that comes out, but the revisions themselves sometimes have re have errors that are even bigger than the errors that they were trying to correct in the first place. So, all of these numbers are are just all over the place. It's it's not the kind of thing that that that a seasoned economist would want to be betting on to tell you the truth. Professor Hanky, thank you so much. We'll stop here today. Uh tell us where we can find your work and please uh >> David onx steve_hanky. >> That's the best place. Or as I indicated before and a lot of your listeners have contacted me, just send me an email hankyjhu.edu and I'll I'll put you on my weekly distribution list. >> Good. We'll put that uh down below. And as as well, feel free to send Professor Hanky an email or myself if you have questions for Professor Hanky. He's a regular on the show. We covered a lot of topics today, but we're always welcome to your own ideas as well. Thank you so much, Professor Hanky. We'll speak soon. >> Well, thank you, David. Great to be with you. Have a great evening. >> Thanks for watching. Don't forget to like and subscribe. And don't forget to follow Professor Hanky in the links down below. And finally, don't forget to use my code lin when you sign up to Koshi. New users who use my code lin l i n will get $10 when you trade $10. Link down below or scan the QR code here.
Markets Now In Danger Zone? Economist Reveals Next Asset To Break | Steve Hanke
Summary
Click the link http://kalshi.com/r/LIN or download the Kalshi App and use code LIN to sign up and trade today! Steve Hanke …Transcript
I I think the 4 and a.5% threshold is pretty serious. >> How do we get to this point where at 4.5% on the 10-year is now in the danger zone. >> If we stay up over 4 and a.5% on the 10-year, the bond vigilantes will be have their day in and in in the sun, so to speak. Canada just can't disengage from the United States. Canada is economically part of the United States. I Israel doesn't want does not want the thing to be resolved when it comes to the the United States and Israel. Israel pretty much calls the tune on international policy as it affects the Middle East. >> On Monday, June 1st, Iran halted negotiations with the US and is moving to completely block the straight of Humuz, they said. Meanwhile, in the US, the share of credit card balances 90 days late hit 13.1%, the highest since 2011. And the savings rate has collapsed to 2.6%, the lowest since June 2022. Washington just ran a $955 billion deficit in the last 7 months. And the US 10-year Treasury yield has moved to what HSBC calls the danger zone. So, is this term reflective of the broader economy? Is this it? Are we now in the danger zone? Steve Hanky, professor of applied economics at Johns Hopkins University, is our guest today, and he's here to answer these questions and much more. This video is sponsored by Koshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events from economic data to political outcomes. And the price moves based on a public opinion, not a house. Go to the link in the description down below or scan the QR code here and use my code, Lynn, L I N. New users who use my code will get $10 when they trade $10. Right now, traders on Koshi are predicting that the next jobs numbers will beat the Wall Street consensus. For example, you could put $50 down on the jobs numbers exceeding 90,000 in May. And if you're right, your trade could yield $89. Link down below or scan the QR code here. Professor Hanky, welcome back to the show. Good to see you again. >> Hey, good to be with you, David. >> Uh it looks to me like uh consumer credit is deteriorating in terms of health. We'll talk about that soon. But first, I want to get your opinion on this announcement. Trump claims um well, the uh the Iranians have suspended peace talks and they threatened to permanently close the straight of Hormuz. This according to many news outlets. I have the FT in front of me. Donald Trump said Israel and Hezbollah has agreed that the shooting will stop. But this is after Iran suspended its peace talks with the US in response to the Israeli bombard bombardment of is uh of Lebanon. This came in just earlier today. Uh the oil price hasn't really spiked much on the news. It's still hovering above $91 a barrel. Um but the is this just rhetoric from Iran? You think they're going to permanently block this formoose? So that's it? No, I I think it's very clear from the the Iranians are have basically said they're tired of being jerked around by Trump and and dealing with the the way he negotiates. So that's that's the bottom line. I mean, they they've been getting jerked all over the place. Every day Trump has some new announcement. He's going to do this, that, or the other thing. and and of course in the background you've got Israel uh pulverizing Lebanon and completely breaking any idea of a ceasefire. I mean they're this is this is now the fourth time in the last 44 years that Israel has invaded Lebanon. And of course the first three were huge failures. I think this will be a failure too. But but remember Lebanon and Hezbollah, that's a red line with the Iranians. No, no one's been talking much about that. So I think with that going on in the background and and the Israelis wanting the war to continue clearly and the Israelis whispering in the ear of Trump that they want the war to continue and Trump playing hot and cold with the negotiations. I think the Iranians just finally threw up their hands and said for now let's call it a day. Uh >> so I think where I'm going with this is is it fair to assume that because the straight of Hormuz won't be opened anytime soon given what this announcement indicates we can expect the rest of the world outside the US which depends on the straight of moose particularly Asia for oil imports uh and whatnot to experience some sort of slowdown as prices continues to rise and it's not just oil prices for example you posted on X that the price of rice has now risen to pre2025 five levels and of course a basic commodity like rice which is consumed by billions literally billions of people around the world uh that's not going to be good for consumer spending elsewhere >> all all of this functionally the strait will remain closed and uh the prices of this kind of supercharges what I think is the start of a a super cycle with commodity prices all of them going up it's just not oh you mentioned and rice. I I had an X on aluminum today. Aluminum is but but right down the line all the commodities are are up strongly. Uh and and and remember we have to get the sequence of the thing right. It was the US and is Israel attacked Iran and Iran is counterattacked. The the closing is just a counterattack. They're reacting to the attack that the US and is Israel had on Iran. So the causality, who's causing this? It's clear that the United States and Israel are inflicting a lot of pain on the world as a result of their war of choice against Iran. >> Why aluminum? >> It's a it's a fairly simple thing. It's not reported that way. Of course, in the Western press, they they report it as if all of this is caused because Iran has shut the straight down. Well, Iran has shut the straight down because they were attacked and and the only way they can effectively counterattack or at least one of the ways they can counterattack is to control the straight. >> Okay. I have a few follow-up questions on that later, but why aluminum? You said aluminum may the next commodity squeezed by the Hormuz crisis. Well, uh be because you've got a lot of aluminum production in in in uh the uh in in the Gulf nations. >> Yeah. >> So at at the margin it it makes a big difference. I mean the big so so that that that is in all of this commodity basket of of everything going up whether it's lithium is going up venadium is going up helium is going up rice is going up and and and these food prices by the way will continue to go up because remember we've got a a huge amount of fertilizer is being affected because of the shutdown of the Gulf and the straight. So without fertilizer, you're going to have lower yields on on many agricultural products. And with lower yields, you have lower supply and with lower supply, you're going to get higher prices. >> What can consumers in North America expect for uh higher prices? What in particular will go up? So you mentioned some commodities, rice, but not everybody eats rice. Uh, can we expect general grocery prices to go up? >> Yes. >> Okay. Uh, airline tickets are going up. I know, right? Because fuel prices. tickets are going up because jet fuel prices. Jet fuel is a a big cost factor with airlines and the jet fuel is uh going up in price and and it it looks even though the refineries have have switched and are producing a lot more jet fuel as a proportion of the total production that occurred prior to the shutdown in the Gulf. It still is going to be in short supply. I mean, demand exceeds supply and inventories of jet fuel are going down. So, at some point in the in the middle of the summer, you're going to hit rock bottom with the inventories. When that happens, the price will really shoot up. So, a lot of these prices, by the way, will by the time we get into midsummer or late summer with a closure uh remaining in effect, we'll have some sharp price increases in oil and and and and other other commodities that are affected with a shutdown in the Gulf. >> Well, we've talked about inflation a lot. Let's revisit this. Inflation isn't going up because of the straight moves being closed. It's going up because the money supply has been increasing. Correct. >> That That's correct. And and and the money supply in the United States has been accelerating for the last 18 months. And where where are we? We're consumer price index, the headline number is 3.8% a year. That's, you know, almost double the inflation target of 2%. So it's it that that's why people are complaining so much. They complain when they go to the grocery store because they have to go to the grocery store quite frequently or when they go to the gas pump because they have to fill our cars quite frequently with gas and and and those frequent purchases hit them in the eye. They they get sticker shock. They they see that and they start complaining about these particular prices that are going up. But the overall index, the big basket of over 300 items is going up at at a rate that's virtually double the inflation target. So monetary policy is is in a failure mode in the United States and and I I'm I'm giving it a failure grade simply because they haven't been able to hit the inflation target. We got to we got to go way back before you get get to a 2% level. As I like to say, David, that the inflation genie is out of the bottle in the United States and it's not going to be put back anytime soon. Th this will be with Trump and one of Trump's big Achilles heels throughout uh at least in the foreseeable future. So that means maybe throughout a big chunk of his second term, he he's going to have this inflation problem around his neck. >> But Americans should should understand that this is not Trump's fault per se is what you're saying because yes, Trump started the Iran war by bombing Iran and the street of Kamoose was closed subsequently, but the Federal Reserve and the money supply going up, that's not because of the Trump administration's doings. Well, well, it it they're not helping it because we we have a huge fiscal deficit and and the the Federal Reserve has monetized. They've gone in December from quantitative tightening to quantitative easing, meaning that they're buying Treasury bills and monetizing part of the money supply. So, that that is a factor. Another factor is that of course you've got Trump leaning on the Fed to loosen up and the and the Fed has been doing that basically and they they've been loosening up by ch switching from quantitative tightening to quantitative easing. That's one as one reaction that the Fed has had. The other reaction is they have loosened up some of the regulations and the capital requirements on the on the banks and as a result the banks in effect have more firepower and and they're using it to increase loans in the economy. I mean the the the the rate of money supply growth that is contributed by commercial banks which by the way is the most important part of the money supply that's growing now at around 10% peranom and remember 6% peranom is a a rate of growth in the overall money supply Hanky's golden growth rate 6% that's consistent with hitting a 2% inflation target. So the the commercial banks are in a situation where they have been deregulated and and that re redu that reduces the uh capital requirements on the banks gives them some extra running room. They can make loans. In addition, the capital has increased significantly in the banks because has nothing to do with Trump per se, but their profits have been very strong. So, so they're they've had a capital increase because of profit growth. So the deregulation, loosening the monetary policy on the banks, commercial banks, and the the combination of strong profits and increases in capital. Both of those things give the banks potential firepower and and and to firepower to do what? To make more loans. And if they make more loans that puts credit into demand I into into checking accounts and checking accounts are part of the money supply. So the money supply goes up. >> How does the money supply increasing benefit us the consumer? What is the mechanism with which the money supply increasing will make everyone richer? What does it not do that at all? Well, I I mean it it that it it makes you richer if you receive if you receive a loan from from a bank. You're you you you of course you have a liability. You have to pay the bank back. But the immediate effect is that your your assets are increased. That that's your checking account. >> Can we expect businesses money? >> Can we expect businesses to have more liquidity because of this? And then if businesses have more liquidity, we can expect them to hire more, pay people more, etc. >> Yes. >> Okay. So overall then are you are you still bearish on the economy because earlier we had talked about a recession by you know by earlier I mean last year and the year before uh and now and now the money supply is increasing. So >> will that negate any slow down? the money the money supply is increasing and so nominal GDP which includes a real component and an inflation component will go up. It'll it'll continue to be elevated. Now if you look at all the high frequency data uh on financials as well as uh real economic activity so so far so good. They they look pretty positive. It doesn't look like there's a recession in the wings right now. Now, that that doesn't mean that people aren't aggravated. And they're aggravated because the inflation component of nominal GDP has gone up and and real wages are basically flat. They're not they're not going any place. >> By the way, this came in credit cards gone up for the regular American share of balance 90 plus days late hits highest mark since 2011. This comes in as the savings rate has declined to two 2.6%. Which is the lowest it's been since last year. So savings have gone down. Credit card um late balances have gone up. What does that tell you about consumer strength? >> Well, it it tells me con consumers are, you know, getting more leverage all the time. Uh that that's that's one factor. And the lower savings rate plays into something else in the economy wi which is the trade deficit. And and the reason we have a trade deficit that's made in the USA because spending on consumption is is greater than production. We're spending more than we produce in the United States. So we have a trade deficit. and and and if the savings rate goes down, that means what? Well, you're spending more of your income, you're not you're not saving as much. So, that keeps spending elevated. If spending is elevated, that keeps the trade deficit going. So, so, so we can we can see more of what we've been seeing recently, and that is uh elevated trade deficit numbers, which of course will aggravate Trump to to no end and and uh it probably motivate more threats about tariffs and trade policies from the Trump administration. So all all these things tie back one one way or another and and you've got it it ends up tying back to what what's going on in the White House right now because the White House is is a big player in the economy. It's it's intervening in all kinds of areas whether it's government spending, government regulations, insider deals, selfdeing with each other. We if we look under the hood, according to this article, the increase in seriously delinquent balances may not be driven by a new wave of sorry, a wave of new borrowers falling behind. Instead, the New York Fed found that the share of credit card balances that became newly delinquent was little change from a year ago, suggesting the recent trend may reflect deepening strength among borrowers who were already struggling. It it doesn't Yeah. So >> I think I think that's consistent with the fact that you have well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while well while the economy is humming along pretty well there no recession in the immediate outlook. All the data look okay. The money supply is being gooseed. Everything is being pumped up. But the the consumer the the little the little guy is is doing what? He he's being faced with higher and higher inflation. And if you look at his wages adjusted for inflation, they're going no place. They're probably going south a little bit right now, especially after the the the USIsraeli attack on Iran and the closure or functional closure of the straight of Armuse that that is has caused actually in the last few months real weight just adjusted for inflation have have actually gone negative. They're not flat, they're actually negative, they decreased. How do you what's a recession these days? By the way, let me let me bring our attention to Canada. Canada's economy is struggling. Rio uh sorry uh real GDP numbers were announced last week, dropped 1% in the fourth quarter and um three of the last four quarters in Canada have now posted negative real GDP numbers. Um that's on an annualized basis. So, according to a TD Bank economist, don't get me wrong, the economy has struggled to gain any meaningful traction over the last year, but for now, we wouldn't necessarily call it a technical recession. I'm confused. >> Well, uh there are many definitions of technical recessions. Usually, the one in Canada would be two consecutive quarters of negative growth, which as you indicate, they've had three. So it would it would fall into a mild recession. Uh you can use the R word for Canada, but >> you you've got Canada's been struggling. You know, they've had what over 10 years of the interventionist kind of li Liberal Party pol economic policies which not helped at all. Very low investment rates in Canada. And and and then on top of it, you've had what? You've had Trump bailing, you know, piling on with t threats about tariffs and so forth. The Canadian economy is very tangled up and tied in with the US economy and and and as a result of all this tariff war between the United States and Canada. It it's severely put a dent in Canada. There's no question about it. Another economist, by the way, there's little debate that the economy has struggled to make any headway over the past year amid the ongoing trade conflict. How would you let's say I I know you had previously advised the US government um in your career. If you had to make similar recommendations to the Canadian government, how would you advise them to a grow the economy ultimately, but b I guess be less dependent on the US if they were to expand their trade partnership? Well, I I I' I'd say that the prime minister is doing a pretty good job of walking on the tight rope with regard to Trump and Trump's threats and and and uh he he Carney has pivoted o away as much as he can from the United States pivoting towards China and Europe uh with regard to Canada. But the the fact is that Canada is highly integrated with the United States as is Mexico as is many countries are. So the idea that you can pivot you is true but you can only pivot at kind of at the margin David you you can't escape the whole the whole picture. >> Okay. So, so my my view is that, you know, Carney's, you know, I think he's doing a a a pretty good job given the fact that he's under, you know, severe threats by by the United States, the the Canada's biggest trading partner. It's it's a little bit like the same situation what's going on in Mexico right now. >> Can can the Canadian economy recover while tariffs are still ongoing, you think? Well, I think the only way that Canadian economy can recover is uh by adopting a a whole new game plan, shall we say, and terms of deregulating the economy, lowering the taxes, keeping the Bank of Canada on on the straight and narrow with, you know, inflation hitting the inflation target, which by the way, they're they're they're doing now. Um so >> okay >> so it's basically they have to turn back the clock and start liberalizing the economy. What what slow they they have to stop doing what they've been doing for the last 10 years to make a long story short. But this is this is going to be very difficult to do because uh of the you know the the liberals are in power. So they're they're playing a defensive game right now. They are trying to liberalize one thing and that's trade. It's interesting. Their defense so far has been on the pretty good on the trade front. And what has that been? That's been to liberalize trade and move towards a more open and free market approach. And and who are they doing that with? They're doing it with China and Europe. They they should adopt a more liberal approach that to economic policy across the board. >> Okay. So given let's move back to the US in just a bit, but given what we discussed so far, how would you assess global growth prospects across the world, not just in the US? We talked about Canada, you mentioned Europe, you mentioned China. Um, are these areas set to grow um at a faster pace this year than last year? >> I think there'll be revisions downward in the growth projections >> because of Iran or something else? >> Yes. >> Okay. So, is it safe to say that the Iran war needs to be resolved for global growth to happen or can global growth happen independently due to other stimuli? >> Well, it it global growth could be W would have a po receive a positive impact if the uh if if the war on on the USIsraeli war on Iran was resolved in some way. I I don't think that's in the cards quite frankly because you you've you've got a a spoiler in the mix and that's Israel. Israel doesn't want does not want the thing to be resolved. A and when it comes to the the United States and Israel, Israel pretty much calls the tune on international policy as it affects the Middle East. So So that's why I'm quite skeptical that there'll be any uh reasonable resolution to the to the war that the US and Israel started. By the way, the US and Israel started the war. And I and I don't think the US and Israel are going to stop the war. And the reason for that is that Israel doesn't want it to stop. >> Should the US stop? >> Yes. But but they are they aren't in control of the thing there. Again, you've got three parties involved in in the to to to stop it. And that's Iran one, Israel two, and the United States three. What happens if the US just announces tomorrow we're going to stop? We're going to pull out our navy and just leave. Well, it we we we we don't know exactly what the Iranian reaction to that would be because the Iranians have certain demands for stopping and and and one of those directly affects by the way Israel because Israel is engaged in a war against Hezbollah and Lebanon and part of the demands that have been ma been made by the Iranians is that that should stop the the the the occupation of Lebanon and and the war Israel is waging with Hezbollah should stop. >> Yeah. Okay. So, so there's not there there there just many moving parts in this and and to to to stop all the parts from moving, I think, is going to take a a great deal of effort that I I don't see on the horizon right now. And and again, one of the main reasons is that you've got one of one of the three parties clearly does not want the war to stop. I think that I think the Trump administration would like to have it stopped. By the way, the US would like to have it stopped. I think I think Iran would like to have it stopped. They have both sides have different demands and conditions. Uh and the third party does not want to see it stopped. >> I think China also wants to see it stopped. There was a basis of the conver of the meeting between she and Trump last month. >> Right. But but but again, I think everybody would like to see it stop on certain terms. The terms the terms of Israel would be to wipe Iran off the face of the earth. >> Well, that that that that hopefully that doesn't escalate any further. Let's go back to the US economy. You written an article for Fortune. Let me just pull this up on the screen. Uh talking about or warning us about the deficit growing. So the deficit grew by $955 billion in 7 months. It's time for a constitutional fix to control the budget, you wrote. Uh, this is expected to, uh, grow, by the way. That pace puts the fullear deficit on track to exceed $1.9 trillion, precisely the CBO's own annual projection. This is from Koshi. It's a prediction. Market traders are predicting that there's a 33% chance the US credit rating gets downgraded this year. It's not high, but it's not zero. Uh, what's your assessment? And why are we why why did you write a full oped about the deficit? Well, I wrote a full oped about the deficit because deficits are bad. If if if the government wants to spend money, they have to tax. That's the that's the bottom line. And and the reason for that is that over 20% of taxpayers money that goes into the federal government is just siphoned off to service debt payments. little over 20%. It's just go go goes for interest payments on the debt. So the the taxpayer gets nothing for that. There there no income transfers to anyone there. There are no government services finance with that 20% that gets siphoned off. it it simply goes to bond holders that that have bought bonds that have been used to finance the deficits in the first place. So it's it's literally like money down the rabbit hole. So that's that's point number one. Point number two is that deficits are really in inherently I I think immoral in the sense that a deficit is just a deferred tax. A deficit will have to be paid eventually and and and it will be paid by some future taxpayer. That future taxpayer might might be somebody who isn't even born yet. >> Yeah. >> It it could be somebody who hasn't even voted yet, >> right? >> Uh and and we know it's going to be paid by older people. So, so for all of those reasons, I I'm a a classical economist that doesn't like deficits. They're they're bad news. They're bad economic policy if you run them on a sustained basis. Now, over the business cycle, yes, there might there might be years in which you run a deficit, but there might be years in which you run a surplus. and over the business cycle from the start to the finish the thing should be more or less balanced. That's a classical view and that's my view. So, so how do you solve this? The you get you you get to a constitutional amendment where you put a debt break in the US constitution and and and require require that the budget is balanced over the business cycle. You you can't run these sustained deficits over and over and over again. You you have to balance out any deficits that you have during the business cycle with the years in which you have surpluses. >> US credit downgrade then is that going to happen this year or even next if this doesn't if this isn't uh fix itself. By the way, >> I think that poly market thing is probably re reasonably accurate. There's a, you know, roughly a 30% chance that there'll be a downgrade. >> That means yields are going up. >> Y, yeah, yields are going up. Yields are going up anyway because the interest rate is a function of the inflation rate. So yields on bonds with with the exception of the federal funds rate and very shortterm interest rates that are controlled directly by the government. the longer term picture is is controlled by in part inflation and and and the risk appetite of obviously people who buy bonds. So if the if the risk appetite goes down because they think there's more risk inherent in what the government policies are that that could increase interest rates but the main driver is is inflation. So, like the 10-year bond, you you have to look at what's going on with inflation and inflation expectations. And I think that I think they'll remain elevated. And that's why you've got the 10year at uh you know, almost 4 and a.5%. I mean, it was it was up last week over 4 and a.5%. Yeah. for a few days >> it was now the how how high does a 10year or 30-year need to go before the bond vigilantes basically force the US government to somehow address their spending >> I I think the 4.5% threshold is pretty serious actually I I think if we stay up over 4 and a.5% on the 10-year on a sustained basis the bond vigilantes will be have their day in in in the sun so to I I I and the reason for that, you see the negative feedback loop comes into this thing, David, if the interest rate goes up, we've been financing a lot of our uh uh deficits with short-term Treasury bills, two years in duration or less. And as th those things have to be re rolled over. And if they're rolled over at higher interest rates, that 20% or a little over 20% of taxpayer uh uh taxes going to service debt will go up. >> You know, you're right um uh on on this. And by the way, the uh you're not alone in thinking this is what I'm trying to say. US treasuries are now firmly in danger zone. quote unquote strategists say from HSBC. US treasuries are now firmly in the danger zone, the level of US year US 10ear US that tends to put pressure on virtually all asset classes, says a USB strategist. Uh even further into the danger zone, likely leading risky assets temporarily lower. Can you just explain how that works? Uh you know, for the layman investor out there, why why do we care about where the 10ear is headed? If you're into stocks or anything else, >> well, you mentioned credit cards a little bit earlier. Credit card interest rates are geared off the 10-year ver virtually everything is geared off the 10-year mortgage. How about mortgages? >> The the the housing market is very soft right now. And and one one reason for this is are the mortgage rates. And if the 10year goes up, mortgage rates are going up. If the 10-year goes up, credit card interest rates are going to go up. So it it it is a a key interest rate to watch because many other interest rates in the market are geared off what happens to the 10-year. >> How do we get to this point where a 4.5% on the 10 year is now in the danger zone? remember in the late 80s or early 80s when it was double digits and then you know high single digits early uh later on in the 80s and 90s I don't I I wasn't born in the 80s but can you just jot our memory here were people concerned about a 10% interest rate back then >> yes they they were very concerned but re remember when we talk about 4 and a.5% it's where we were coming from that the 10year the 10year uh just a minute let me let me Just glance at my iPhone right now and the 10year just so I have the numbers right for you. >> Yeah, it was I can pull up for you, too. I mean, we're at 4.5%, we were at zero. Uh, basically it dropped around 2020 at 0.5. >> Yeah. And we were down, you know, if we were down two years ago, it was down, you know, below >> below 39. I mean at the at the bottom we were down around 37 36 something like that. So >> so it's it's it's always things at the margin. This this is basic economics and that is all the action everything that's important is at the margin. what's going on at the margin and at the margin the interest rates have gone up significantly and and it's it's biting and and if you look we were talking about Canada earlier I said well Canada just can't disengage from the United States they're all tangled up with a a web of trading relationships with the United States I mean Canada is economically part of the United States de facto. So what what can they do? They can at the margin, you see what Canada is doing. Carney goes to China and cuts some deals. So at the margin, they're pivoting a little away from the United States towards China. They they've cut some deals with the European Union. So at the at the margin, Canada pivots a little way away from the United States towards the European Union. But those are all marginal things. But but that's where the action is at the margin. >> I want to finish off by talking about taxes. You brought up taxes earlier. You said deficits are bad and what the government needs to do to address deficits. Either spend less or tax higher. This is Jeff Bezos, by the way, Amazon CEO. He said, "Look, you're focusing the wrong thing. Raising taxes on the billionaires aren't going to help the teacher in Queens. You could double the taxes I pay. It's not going to help that teacher in Queens." He said, uh, New York Mayor Mandani later responded to this assessment, I know a few teachers in Queens who would beg to differ. Now, then Bezos made the point, uh, which is what I'm getting to. He said, well, it's not that we should tax the billionaires. We should reduce the taxes on the middle class. So, the bottom 50% should pay zero taxes. Let me just start with that. I'll get your reaction to that statement. Well, I the the the the ideal tax system in the United States as far as income taxes go is a flat tax. The the Hall Rabushka tax, uh my my former colleague and collaborator Alvin Rabushka and Robert Hall put this up and that that would be a a tax without any loopholes or anything of around 13% for everybody. what whatever your income is, whatever your taxable income is, 13%. You you'd file your taxes as they say on a postcard. Get get rid of the get rid of the, you know, book after book of tax code. It would be a very simple thing. Just a straightforward tax on everybody. 13% of taxable income. >> Okay? Okay. So, you're effectively making tax lower >> tax, the flat tax, >> let's say 13 to 15%. I can't remember actually off the top of my head the original Paul Rabushka, but what what whatever the flat tax rate would that would allow the budget to be balanced. If the government wants to spend, they have to tax to finance it, >> right? So how >> so it depend it depends on how much they want to spend and and and if everyone knew by the way they were going to be taxed at at all all taxable income at the same rate whether you're Jeff Bezos Steve Hanky Joe Sixpack you name it everybody has the same rate then the question would be well what's that rate going to be to allow for a balanced budget. And pe people would have an honest price of what the government expenditures should be priced at. And and if the government wanted to spend a lot more and and the tax rate would be 20%, maybe would there'd be a tax revolt, they'd say, "No, we don't want you spending that much. We want you spending something to dial it back." So we we pay a tax rate of 15%. So let's suppose we have >> get some honesty in terms of pricing the government and pricing the government services. If if if you had a flat transparent tax, it it would do wonders for the supply side of the economy, productivity in the economy, and fairness in the tax system. >> Okay, I'll I'll let you explain how that would do that. Um to Basil's point, why shouldn't we have a tiered system that's more extreme? Let's suppose we take your system, the flat tax system, whatever that number is, let's say 15%. And just for the sake of argument, that generates a trillion dollars in tax revenue. Just to make it a round easy number for the argument. Now, we can generate a trillion dollars with a flat 15% or we can generate a trillion dollars by having 0% tax on the bottom 50% of earners and then just raising taxes on billionaires. Wouldn't that be the same thing for the government but make most people better off? >> No. Num number number one, you you would you would put a a huge dent in the savings investment activity in the in the United States if that was a kind of progressive system that you had. You you you get the same kind of effect that you have in places like California and New York where they do have very high taxes. Also in in Maryland, Maryland has very high state tax that's added to the federal tax. And as a result, all three of these states are losing population. Why? Be- because people don't want to be taxed that much. They they they go to Florida or Texas or some other state where they have lower tax rates. So nobody there their incentive effects economics is remember all about incentives and their incentive effects associated with tax system. So that that was the idea behind the flat tax in the first place. It was a it was a hallmark of supply side economics came out during the Reagan years. Reganomics and the idea would be that you'd have a flat low tax on on everybody that that that wouldn't affect savings and investment work or too much because it would be relatively low, >> right? Are you are you saying we shouldn't tax the corporations and billionaires more because if we do they will move away and then the jobs in those areas would disappear even if and so everyone will be worse off even if they pay a lower tax rate by they I mean the lower income earners >> yes you >> okay >> and and it's just because of the incentive effects you you start distorting investment decisions savings decisions location decisions but if you if you have a flat tax that's low you don't it it's not ownorous so it doesn't affect much of in terms of the incentive effect is is mitigated shall we say if you have a low flat tax so the supply side distortions that you get in the economy David are are are mitigated they're they're you you basically don't screw around with the economy because you're screwing around and distorting incentives. >> Finally, let's just talk about um jobs numbers in May 2026. Traders on Kowi prediction market indicate that May's jobs numbers will top Wall Street expectations. This is from CNBC. Dow Jones estimates that May's non-parm favor uh non-farm payrolls reports uh will gain 90,000 jobs. The consensus reflects an anticipated decline from April's 115,000. However, cow traders, prediction market traders are citing a 56% probability that the report will beat the Wall Street forecast. You've talked about how prediction markets um have been accurate in the past. I don't know why traders are so positive on the economy or at least on on job growth, drop jobs growth in particular. >> I I I I wouldn't place too much money on these numbers because remember the numbers are very fuzzy. They're they're revised all the time. >> Yeah. and and and and the revisions, by the way, the revisions are supposed to correct errors in the first estimate that comes out, but the revisions themselves sometimes have re have errors that are even bigger than the errors that they were trying to correct in the first place. So, all of these numbers are are just all over the place. It's it's not the kind of thing that that that a seasoned economist would want to be betting on to tell you the truth. Professor Hanky, thank you so much. We'll stop here today. Uh tell us where we can find your work and please uh >> David onx steve_hanky. >> That's the best place. Or as I indicated before and a lot of your listeners have contacted me, just send me an email hankyjhu.edu and I'll I'll put you on my weekly distribution list. >> Good. We'll put that uh down below. And as as well, feel free to send Professor Hanky an email or myself if you have questions for Professor Hanky. He's a regular on the show. We covered a lot of topics today, but we're always welcome to your own ideas as well. Thank you so much, Professor Hanky. We'll speak soon. >> Well, thank you, David. Great to be with you. Have a great evening. >> Thanks for watching. Don't forget to like and subscribe. And don't forget to follow Professor Hanky in the links down below. And finally, don't forget to use my code lin when you sign up to Koshi. New users who use my code lin l i n will get $10 when you trade $10. Link down below or scan the QR code here.