00:08:07 · Thomas Philippon, Erika Beras, Jeff Guo
[00:08:07] S6: Yeah. Potentially, it could be. [00:08:09] S1: By the way, we know that this is not an entirely accurate description of how penguins behave in the wild, but we did not call up Thomas because he studies penguins. Called him up because he is one of the world's leading experts on macroeconomics and also a longtime adviser to the French government. He serves on this fancy French council of economists. Over the past twenty years, he has been watching France's debt climb higher and then higher and then higher. [00:08:36] S2: He says the story goes like this. Back in the two thousands, France's national debt was hovering around that upper limit of 60% of GDP. That was the rule if you wanted to join the euro because Europe only wanted economically healthy countries to share their currency. [00:08:51] S1: But then in 2008, there was the global financial crisis, and France had to borrow a ton of money to fund its economic stimulus just like a lot of other countries did. And after the crisis, France did not pay down its debt. It just kept borrowing, just like a lot of other countries did. [00:09:13] S2: By 2020, France's debt had reached more than 100% of GDP. [00:09:18] S6: And then COVID comes. And boom. [00:09:21] S2: When COVID hit, France then had to borrow a ton more money, just like a lot of other countries, to pay for the pandemic response. [00:09:29] S6: That's how you end up with, one hundred and twenty percent of debt to GDP today. [00:09:34] S2: And a 120%, that's like... I feel like a decade, two decades ago, those were unthinkable numbers.
00:09:34 · Jeff Guo, Thomas Philippon, Erika Beras, S7
[00:09:34] S2: And a 120%, that's like... I feel like a decade, two decades ago, those were unthinkable numbers. [00:09:40] S6: Yeah. But the new normal is, you know, above above 100 is a new normal. [00:09:46] S1: Now to be fair, one reason why so many countries have been borrowing so much is because for a long time, investors kept giving these countries really cheap loans. You know, it's like that song. It takes two to make a staggering amount of sovereign debt. I don't know. Something like that. [00:10:05] S2: Yeah. These cheap loans, they are the other side of the story. So rewind Hurry up. Back to the financial crisis. That is when interest rates in The US and Europe went to basically zero, and they basically stayed that way for years. Many governments were able to borrow essentially for free. So a lot of them were like, why not keep borrowing? [00:10:26] S1: Interest rates stayed so low for so long that eventually you started to hear very important mainstream economists talking about how they learned to stop worrying and maybe even love the debt. [00:10:39] S2: Yeah. In 2019, there was this iconic speech by the president of the American Economic Association at the time, one of the titans of macroeconomics. [00:10:48] S7: Without further ado, and with great pleasure, I introduce Olivier [00:10:51] S2: Blanchard. Olivier Blanchard walks up to the lectern. He's in this crisp navy suit, dark red tie, looks more like a banker than an academic, and he starts talking about the problem of government debt.
00:10:51 · Jeff Guo, Olivier Blanchard, Erika Beras, Thomas Philippon
[00:10:51] S2: Blanchard. Olivier Blanchard walks up to the lectern. He's in this crisp navy suit, dark red tie, looks more like a banker than an academic, and he starts talking about the problem of government debt. [00:11:04] S5: There is a sense that public debt is incredibly costly, and you hear calls for dramatic decreases in public debt. [00:11:13] S1: But then he started saying something that sounded kind of radical. He was like, look at how low the interest rates are right now. If countries can borrow this cheaply, then maybe they won't ever need to pay off their debts. [00:11:25] S5: If this is going to be the case for the future, you can do what's known as a debt rollover. You just issue debt, and then you never repay. I remember that moment very well. [00:11:35] S2: This week, with everything that's going on in France, we went back to Olivier Blanchard, and he told us the point of that speech was to get people to reconsider what he thought were some of the old superstitions about debt. [00:11:46] S5: You know, when it comes to debt, people have very, very strong priors. [00:11:52] S6: Yeah. [00:11:53] S5: They... Basically, as you know, in German, debt is synonym with sin. And [00:11:59] S2: Is it really? [00:12:00] S5: Yeah. It is. [00:12:02] S2: Yeah. Apparently, the German word for debt is, which is also a word the Germans use for guilt and fault, as in your debt, your fault. In French, for what it's worth, the word for debt is just [00:12:13] S5: la debt.
00:12:13 · Olivier Blanchard, Erika Beras, Jeff Guo, Thomas Philippon
[00:12:13] S5: la debt. [00:12:14] S1: La debt. Anyway, Olivier was basically pointing out that if a country is growing fast enough, it doesn't have to pay off its debt. It can essentially outgrow its debt. We actually did a whole episode on this idea. [00:12:27] S2: The key thing here is the interest rate on your debt. That's the rate at which your debt is growing and compounding. You just need your economy to grow faster than that. That's why Olivier is always telling people there is no magic number for too much debt. [00:12:42] S5: You can live with debt at 200%. It may not be great. [00:12:45] S6: Mhmm. [00:12:46] S5: But you can do it as long as you can stabilize it. You know, you wish you didn't have it? Yes. No problem. But it's not the end of the world. [00:12:54] S1: Back when Olivier was giving his speech in 2019, it seemed to him and many people that interest rates would continue to be low for the foreseeable future so countries could keep on borrowing for the foreseeable future. [00:13:08] S5: So that turned out to be a mistake. I had not anticipated COVID. I had not anticipated Ukraine. I had not anticipated Iran. I had not anticipated AI. I do apologize for all that. As a result to [00:13:23] S2: tell the future? Uh-huh. [00:13:24] S5: Yeah. Exactly. The future is really hard to You you know?
00:13:24 · Olivier Blanchard, Jeff Guo, Erika Beras, Thomas Philippon
[00:13:24] S5: Yeah. Exactly. The future is really hard to You you know? [00:13:28] S2: Yeah. In recent years, that weird zero interest rate world we were all living in, we have snapped out of it. Inflation is back. There have been crises and wars, so interest rates are on the rise all around the world, meaning that it's getting more and more expensive for everyone to borrow money, including governments. [00:13:47] S1: So starting the past couple years, many economists have been wondering, is it time for this international borrowing spree that countries have been on to finally come to an end. Everyone has been waiting to see which country is showing signs of trouble. [00:14:03] S2: Or like our other economist, Thomas Philippon, put it, who will be the first penguin to get eaten by an orca? [00:14:08] S6: You know, who's gonna be the first to jump in the water? [00:14:11] S2: In 2024, Thomas and a couple of other economists on that fancy French council published a big report with a big warning to the French government. [00:14:20] S6: I saw the situation as going as going in the wrong direction, and I thought that we could try to convince people that the time to act was now. [00:14:29] S1: Basically, they said, we're not in a crisis right now. Up until this point, France has been growing fast enough to keep all this debt under control. But if we keep piling on more and more debt, pretty soon, we could be in trouble.
00:14:29 · Erika Beras, Jeff Guo, Thomas Philippon
[00:14:29] S1: Basically, they said, we're not in a crisis right now. Up until this point, France has been growing fast enough to keep all this debt under control. But if we keep piling on more and more debt, pretty soon, we could be in trouble. [00:14:43] S2: And look, Thomas is not one of those fiscal conservative types who thinks that governments must borrow less and spend less. Used to work as a top adviser to members of the center left French Socialist Party. [00:14:55] S6: I thought if somebody like me says, well, maybe it is time to actually, you know, do something, perhaps he would add a tiny bit more credibility. [00:15:04] S1: In this report, The Economist offered what Thomas thought was a fairly mild proposal. They weren't saying that France needed to reduce its debt. They just wanted the government to stop adding to the debt. In other words, to start balancing the budget finally, and not even right away, gradually over the next seven years. [00:15:24] S6: The point was, look, we have time. If we act now, we don't have to do something crazy, but we need to start now. And I hope that, you know, people would understand that indeed that was the right thing to do. [00:15:37] S2: But instead, Thomas says he may have misunderestimated the nature of modern French politics, because the French government did not follow his advice. [00:15:48] S6: Of course. No. They didn't do anything. But, you know, I tried anyway.