Markets Now In Danger Zone? Economist Reveals Next Asset To Break — Steve Hanke

[00:00:00] Speaker 1: i i think the four and a half percent threshold is pretty serious how do we get to this point [00:00:04] Speaker 2: where a 4.5 percent on the 10 year is now in the danger zone if we stay up over four and a half [00:00:10] Speaker 1: percent on the 10 year the bond vigilantes will be have their day and in the sun so to speak canada just can't disengage from the united states canada is economically part of the united states israel doesn't want does not want the thing to be resolved when it comes to the united states and israel israel pretty much calls to tune on international policy as it affects the middle [00:00:39] Speaker 2: east on monday june 1st iran halted negotiations with the u.s and is moving to completely block the strait of hummus they said meanwhile in the u.s the share of credit card balances 90 days late hit 13.1 percent the highest since 2011 and the savings rate has collapsed to 2.6 percent the lowest since june 2022 washington just ran a 955 billion dollar deficit in the last seven months and the u.s 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 hanke 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 cowshi the largest prediction market in the united states unlike a sportsbook 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 lin l-i-n new users who use my code will get ten dollars when they trade ten dollars right now traders on cowshi are predicting that the next jobs numbers will beat the wall street consensus for example you could put fifty dollars down on the jobs numbers exceeding ninety thousand in may and if you're right your trade could yield eighty nine dollars link down below or scan the qr code here professor hanke welcome back to the show good to see you again good to be with you david 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 strait 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 u.s in response to the israeli bombardment of is 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 [00:02:57] Speaker 1: the street from moose 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 of course in the background you've got israel uh pulverizing lebanon and completely breaking any idea of a ceasefire i mean they they're there 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 it fair to assume that [00:04:34] Speaker 2: because the strait of hummus 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 strait of hummus particularly asia for oil imports and whatnot to experience some sort of slowdown as prices continue to rise and it's not just oil prices for example you posted on x that the price of rice has now risen to pre-2025 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 oh all of this [00:05:13] Speaker 1: functionally the strait will remain closed and uh the prices of this kind of supercharges what i think is the start of a super cycle with commodity prices all of them going up it's just not oh you mentioned rice i i had an x of aluminum today aluminum 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 and right it was the us and israel attacked iran and iran is counter-attacked the the closing is just a counter-attack 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 counter-attack or at least one of the ways they can counter-attack is to control the [00:06:44] Speaker 2: straight okay i have a few follow-up questions on that later but why aluminum you said aluminum may [00:06:49] Speaker 1: be the next commodity squeezed by the humus crisis well because you've got a lot of aluminum production in and and uh the uh in the uh in the gulf nations yeah so at at the margin it 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 vanadium 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 strait 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 [00:07:53] Speaker 2: 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 the fuel prices tickets are going up [00:08:16] Speaker 1: 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 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 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 mid-summer or late summer with the closure uh remaining in effect we'll have some sharp price increases in oil and and and and and other other commodities that are affected with a shutdown in [00:09:19] Speaker 2: the gulf well we've talked about inflation a lot let's revisit this inflation isn't going up because the straight-off remove is being closed it's going up because the money supply has been increasing correct [00:09:30] Speaker 1: that that's correct and 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 percent a year that's you know almost double the inflation target of two percent 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 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 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 giving it a failure grade simply because they haven't been able to hit the inflation target we gotta we gotta go way back before you get get to a two percent 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 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 gonna have this inflation problem around his [00:11:20] Speaker 2: 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 state of humus was closed subsequently but the federal reserve and the money supply going up that's not because of the trump administration's [00:11:38] Speaker 1: doings well well it they're they're not helping it because we we have a huge fiscal deficit and and 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 change 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 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 percent per annum and remember six percent per annum is a rate of growth in the overall money supply hanky's golden growth rate six percent that's consistent with hitting a two percent inflation target so the the commercial banks are in a situation where they have been deregulated and and that re redo that reduces the uh capital requirements on the banks gives them some extra running room they can make loans in addition the capital is 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 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 [00:14:30] Speaker 2: the consumer what is the mechanism with which the money supply increasing will make everyone richer [00:14:34] Speaker 1: what does it not do that at all well i mean it it it that it it makes you richer if you receive if you receive a loan from from a bank you're 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 [00:14:57] Speaker 2: account can we expect businesses 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 about earlier i mean last year the year before uh and now and now the money supply [00:15:24] Speaker 1: is increasing so will that negate the slow down the money supply is increasing and so not nominal gdp which includes a real component and an inflation component will go up it'll continue to be elevated now if you look at all the high high frequency data uh on financials and 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 [00:16:15] Speaker 2: 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 2.6 percent 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 [00:16:40] Speaker 1: strength well it it tells me that 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 with which is the trade deficit and 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 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 no end and and uh it probably motivate more threats about tariffs and trade policies from the trump administration so all these things tie back one way or another and and you've got it it it ends up tying back to what what's going on in the white house right now because the white house 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 self-dealing with each other if we look under the hood [00:18:28] Speaker 2: according to this article the increase in seriously delinquent balances may not be driven by a new wave of uh 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 changed from a year ago suggesting the recent trend may reflect deepening strain among borrowers who were already struggling [00:18:50] Speaker 1: it doesn't it yeah so i think i think that's consistent with the fact that you have well well well while the economy is humming along pretty well there's no recession in the immediate outlook all the data look okay the money supply is being goosed everything is being pumped up but the the consumer the the little the little guy is is doing what 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 u.s israeli attack on iran and the closure or functional closure of the strait of our moves that that is is caused actually in the last few months real weight just adjusted for inflation have actually gone negative they're not flat they're [00:19:52] Speaker 2: actually negative they decreased what's a recession these days by the way all right let me let me bring our attention to canada canada's economy is struggling real uh sorry uh real gdp numbers were announced last week dropped one percent of 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 there are many definitions of [00:20:35] Speaker 1: 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've got canada's been struggling you know they've had what over 10 years of the interventionist kind of liberal party paula economic policies which have 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 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's severely put a dent in canada there's no question about it another economist by the way [00:21:40] Speaker 2: 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 u.s government 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'd say that the prime minister is doing a pretty [00:22:13] Speaker 1: good job of walking on the tightrope with regard to trump and trump's threats and and and uh he carney has pivoted away as much as he can from the united states pivoting towards china and europe uh with regard to canada but the fact is that canada is highly integrated with the united states as is as is mexico as is many countries are so the idea that you can pivot is true but you can only pivot it 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 yeah i think he's doing a a pretty good job given the fact that he's under you know severe threats by the 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 the canadian [00:23:22] Speaker 2: economy recover while tariffs are still ongoing you think well i think the only way the canadian economy [00:23:28] Speaker 1: can recover is uh by adopting a whole new game plan shall we say and in 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 is basically they have to turn back the clock and start liberalizing the economy what's 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 but 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 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 to economic policy across the board okay so given let's move back to the u.s and just [00:25:03] Speaker 2: a bit but given what we've discussed so far how would you assess global growth prospects across the world not just in the u.s we talked about canada you mentioned europe you mentioned china are these [00:25:16] Speaker 1: areas set to grow um at a faster pace i think there'll be revisions downward in the growth projections [00:25:25] Speaker 2: 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 [00:25:39] Speaker 1: global growth could be would have a pot receive a positive impact if the uh if if the war on the u.s israeli war on iran was resolved in some way i i don't think that's in the cards quite frankly because you you've got a spoiler in the mix and that's israel israel doesn't want does not want the thing to be resolved and and when it comes to the united states and israel israel pretty much calls to 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 u.s and israel started by the way the u.s and israel started the war and i and i don't think the u.s and israel are going to stop the war and the reason for that is that israel doesn't want it to stop should the u.s stop yes but but they are they aren't in control of the thing they're again you've got three parties involved in it to to stop it and that's iran one israel two and the united states three what happens if the u.s just announces tomorrow we're gonna stop we're gonna pull out our navy and just leave well 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 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 there's not there there there there are just many moving parts in this and i and to just to stop all the parts from moving i think is going to take a 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 u.s 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 [00:28:37] Speaker 2: party does not want to see it stopped i think china also wants to see it stopped there was a basis of the conference of the meeting between she and trump last month right but but but again i think everybody [00:28:50] Speaker 1: would like to see it stop on certain terms the terms of the terms of israel would be to wipe [00:28:58] Speaker 2: 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 u.s economy you have 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 dollars in seven 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 full year deficit on track to exceed 1.9 trillion dollars precisely the cbo's own annual projection this is from cowshi it's a prediction market traders are predicting that there's a 33 chance the u.s 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 op-ed [00:29:43] Speaker 1: about the deficit well i wrote a full op-ed 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 percent of taxpayers money that goes into the federal government is just siphoned off to service debt payments a little over 20 percent it's just good it goes for interest payments on the debt so the the taxpayer gets nothing for that there there are no income transfers to anyone there there are no government services finance with that 20 percent that gets siphoned off it simply goes to bondholders 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 rat hole so that's that's point number one point number two is that deficits are really inherently i i think immoral in the sense that a deficit is just a deferred tax that 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 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 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 get to a constitutional amendment where you put a debt break in the u.s constitution and and and require require that the budget is balanced over the business cycle 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 years in which you have surpluses [00:32:31] Speaker 2: u.s credit downgrade then is that going to happen this year or even next if this isn't if this isn't [00:32:35] Speaker 1: uh fix itself by the way i think that poly poly market thing is probably reasonably accurate there's a you know roughly a 30 chance that there'll be a downgrade that means yields are going up yeah yeah yields are going up yields are going up in 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 short-term 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 have to look at what's going on with inflation and inflation expectations and i think the i think they'll remain elevated and that's why you've got the 10-year at uh you know almost four and a half percent i mean it was it was up last week over four and a half percent yeah for a few days it was now the how high does the [00:34:00] Speaker 2: 10-year or 30-year need to go before the bond vigilantes basically force the u.s government to [00:34:05] Speaker 1: somehow address their spending i i think the four and a half percent threshold is pretty serious actually i think i think if we stay up over four and a half percent on the 10-year on a sustained basis the bond vigilantes will be have their day and in the sun so to speak 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 deficits with short-term treasury bills two years in duration or less and as those things have to be re rolled over and if they're rolled over at higher interest rates that 20 percent or a little over 20 percent of taxpayer uh taxes going to service debt will go up you know you're right um uh on on [00:35:06] Speaker 2: this and by the way the uh you're not alone in thinking this is what i'm trying to say u.s treasuries are now firmly in danger zone quote-unquote strategists say from hsbc u.s treasuries are now firmly in the danger zone the level of u.s year u.s 10-year ust 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 10-year is headed if you're into stocks or anything else [00:35:45] Speaker 1: well you mentioned credit cards a little bit earlier yes the credit card interest rates are geared off the 10-year virtually everything is geared off the 10-year mortgage more about mortgages the the housing market is very soft right now and and one one reason for this is are the mortgage rates and if the 10-year 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 it is a a key interest rate to watch because many other interest rates in the market are [00:36:26] Speaker 2: geared off what happens to the 10-year how do we get to this point where a 4.5 percent 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 were very [00:36:51] Speaker 1: concerned but remember when we talk about four and a half percent it's where we were coming from the the 10-year the 10-year uh just a minute let me let me just glance at my iphone right now and the 10-year [00:37:08] Speaker 2: just so i have the numbers right for you yeah i can pull that up for you too i mean we're at 4.5 percent we were at zero uh basically it dropped around 2020 at 0.5 yeah and we were down you know if we were done [00:37:26] Speaker 1: two years ago it was down you know below below 39 i mean at the bottom we were down around 37 36 something like that so so it's 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 web of trading relationships with the united states i mean canada is economically but part of the united states for 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 market i want to finish off by [00:38:54] Speaker 2: talking about taxes you brought up taxes earlier you said deficits are bad and what the government needs to do to address good 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 new york mayor mamdani 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 percent should pay zero taxes let me just start with that and i'll get your reaction to that [00:39:39] Speaker 1: statement well i the the the the ideal tax system in the united states as far as income taxes go as a flat tax the the hall rebushka tax uh my my former colleague and collaborator alvin rebushka and robert hall put this up and that that would be a of tax without any loopholes or anything of around 13 percent for everybody whatever whatever your income is whatever your taxable income is 13 you'd fire 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 so you're effectively making tax lower tax the flat tax let's say 13 to 15 percent i can't remember actually off the top of the original hall rebushka but 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 it depends 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 all all taxable income at the same rate whether you're jeff bezos steve hanky joe six pack 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 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 the tax rate would be 20 percent maybe would there be a tax revolt they say no we don't want you spending that much we want you spending something to dial it back so we pay a tax rate of 15 percent so let's suppose we have it get some honesty in terms of pricing the government and pricing the government services if if you had a flat transparent tax it would do wonders for the supply side of the economy productivity and the economy and fairness in the tax system okay i'll let you explain how that would do that [00:42:18] Speaker 2: 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 percent or we can generate a trillion dollars by having zero percent tax on the bottom 50 percent of earners and then just raising taxes on billionaires [00:42:48] Speaker 1: wouldn't that be the same thing for the government but make most people better off no number number one that 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 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 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 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 view their 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 site economics came out during the reagan years reaganomics 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 for relatively low right are you are you [00:44:20] Speaker 2: 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 would be worse off even if they pay a lower tax rate by they i mean the lower income earners yes okay yeah and it's just because of [00:44:37] Speaker 1: the incentive effects you you start distorting investment decisions savings of decisions location decisions but if you if you have a flat tax it's low you don't it it's not onerous so it doesn't affect much of it 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 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 [00:45:22] Speaker 2: jobs jobs numbers in may 2026 traders on cowshi prediction market indicate that may's jobs numbers will top wall street expectations this is from cnbc dow jones estimates amaze non-pron 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 street traders prediction market traders are signing a 56 probability that the report will beat the wall street forecast you've talked about how prediction markets 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 and drop jobs growth in [00:46:01] Speaker 1: particular 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 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 a seasoned economist would want to be betting on to tell you the truth [00:46:40] Speaker 2: professor hanke thank you so much we'll stop here today uh tell us where we can find your work [00:46:44] Speaker 1: and please uh david on x at steve underscore hanky okay good that's the best place or as i indicated before and a lot of the your listeners have contacted me to send me an email hanky at jhu.edu [00:47:02] Speaker 2: and i'll put you on my weekly distribution list good we'll put that uh down below and oh as well 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 lin when you sign up to kaoshi new users who use my code lin lin will get ten dollars when you trade ten dollars link down below or scan the qr code here