This transcript was created using transcription software.
00:00:04:17 – 00:00:11:21
Kassandra
Hey, and welcome to The Dip, your podcast to connect the US to global Money stories and the week’s most important global money stories to the US. I’m Kassandra.
00:00:11:22 – 00:00:24:00
Daniel
And I’m Daniel, and we’re going to be looking at later whether New York’s mayor elect can stick to his promises to make the Big Apple affordable again or affordable for the first time, perhaps.
00:00:24:02 – 00:00:46:01
Kassandra
And today, we’re also going to be looking at money. Now, I know we do that every week, but today we’re actually looking at money itself currency, because there’s another push for so-called dollarization. And before we get too into the weeds, dollarization is essentially when countries move away from holding the greenback in reserve or trading in dollars. So is the fear that dollarization is a thing?
00:00:46:02 – 00:00:52:16
Kassandra
Is that fear overblown? And what’s the advantage for Americans if other countries hold onto or shed their dollars?
00:00:52:18 – 00:01:13:00
Daniel
What? Course we’re not going to do this alone. That’s not really a kind of US thing to do. So we are joined by DW’s own Matt Damon, who’s been looking into dollarization. And also joining us. We are honored that from Syracuse University we have Daniel McDowell. He’s the author of bucking the Buck, which looks at how the US dollar became the world’s indispensable currency.
00:01:13:05 – 00:01:31:02
Kassandra
Daniel, I want to start to you. And it’s easy for us nerds like me and other other Daniel original Daniel to get into the weeds here, but let’s talk about some of these figures, because the reason that we’re talking about it this week is that China’s currency, the renminbi, had a little bit of an uptick, in global trade finance.
00:01:31:02 – 00:01:40:03
Kassandra
But now the dollar does still dominate by like, a lot. So when we’re talking about dollarization, what are we talking about here?
00:01:40:05 – 00:02:08:01
Daniel McDowell
We’re talking about lots of different things that I think are raising, concerns, questions affecting the dollar’s appeal and reputation. This goes back at least a decade. You know, if we were talking about this five years ago, even four years ago, we’d probably mostly be discussing financial sanctions and the weaponization of the dollar, the way the United States can exploit the dollar’s preeminence, in, in the global financial system to impose costs on countries like Russia, on countries like Iran.
00:02:08:06 – 00:02:29:13
Daniel McDowell
Right. Today, I think the conversation has gotten a little more, complicated because you’ve got a lot of economic policies that the Trump administration is pursuing that are raising, another set of questions about the downsides of dollar dependance. There’s questions about the Federal Reserve’s political independence, questions about the use of tariffs, as a as a coercive tool.
00:02:29:17 – 00:02:48:09
Daniel McDowell
Questions about the United States commitment to a strong dollar. All of these are raising even more, questions and concerns around the world about, you know, maybe it would be better if we didn’t have just sort of one dominant currency. Maybe we need some alternative. So I think those are all part of this conversation.
00:02:48:11 – 00:02:57:22
Daniel
Okay. And Mattis, I want to know who is rising. What does it even look like? Can we just talk to you about central banks here or private institutions as well?
00:02:57:24 – 00:03:19:21
Matthis
Yeah. I think, you know, maybe like one way to start at this. You mentioned China, right. And and China sort of is the, the, the big player to talk about because it’s, huge or like the huge economy basically driving the world. And it’s basically in the past couple of years started to embark on a journey to push its, and, its currency globally.
00:03:19:23 – 00:03:53:05
Matthis
So what happens basically a lot of times is that the Chinese actors, that these are usually banks that are loosely attached to the Chinese government in some way they, you know, would go and do trade financing or finance investments in other countries and would sort of give very good terms. If if this is finance and in remnant and that’s sort of a movement where, China is sort of pushing, pushing this is mostly, this, this is a lot of it is connected to Asian countries.
00:03:53:07 – 00:04:21:15
Matthis
At the moment. And then I think the other player to look at, if we talk about dollarization is, Europe. The, the, the euro here is sort of after the dollar, the second biggest currency, way in front of, the renminbi and any, any other currency. And interestingly, in opposition to what the Chinese are doing, Europe isn’t really pursuing an active strategy here, right?
00:04:21:17 – 00:04:36:05
Matthis
They’re the, the the it’s more like market forces, right? Like countries that are close to Europe start trading in euros because it just makes it cheaper for them to go through the euro in their trade. So I think I would sort of juxtapose it that way.
00:04:36:07 – 00:04:47:08
Kassandra
Daniel, the US has been throwing its weight around for a while. You mentioned sanctions earlier. Why is this all dollarization a hot topic at this moment?
00:04:47:10 – 00:05:09:12
Daniel McDowell
Yeah, I mean, I think right now the biggest reason we’re having this conversation today is related to as I as I mentioned earlier, Trump administration policies and in particular this sense that the United States under the Trump administration is kind of turning its back on a lot of traditional, foreign policies, not just economic policy. Right? Security commitments to Europe, to Asian allies.
00:05:09:14 – 00:05:43:13
Daniel McDowell
All of these things are really part of dollar dominance. It’s not just purely an economic story. Yes, the dollar is the most, the most available currency worldwide. It’s the cheapest currency to use because it’s so widely available. It has this sort of, nearly century long reputation, and yet. Right, it’s also central because the United States is such an important security partner, to countries around the world, large economies, developed economies, and that incentivizes them to hold dollars and to really not promote their own currencies, as Mattis was saying in Europe.
00:05:43:13 – 00:06:01:17
Daniel McDowell
Right. The sense that you don’t need to have a globally dominant currency because your your key security partner already has that. And because of that close relationship, there isn’t really need for that, you know, strategic autonomy to use a term that sometimes comes up in Europe more recently, as there have been greater concerns about growing distance between the United States, and the European continent.
00:06:01:17 – 00:06:10:14
Daniel McDowell
So I think it’s, this general sense that the political order that the dollar system was built on is starting to look a little wobbly.
00:06:10:16 – 00:06:33:12
Kassandra
And we’ll talk some more about President Trump and the Trump administration and their policies, how it affecting that. But I do want to pause for a moment and talk about the sanctions regime, because sanctions have been a tool of the US government, you know, under the Biden administration, administration, the previous Trump administration and the Obama administration. And we were already starting to hear countries complain about the power that the dollar had to basically enforce, these sanctions from the US government.
00:06:33:12 – 00:06:38:11
Kassandra
So is sanctions fatigue part of the story here?
00:06:38:13 – 00:07:00:02
Daniel McDowell
Without question. I mean, this is probably the the shortest, sort of link between dollar dominance and sort of US power is to look at the sanctions role. Right. Because, world trade, largely relies on the dollar to settle cross-border payments because, the dollar’s the most important, currency in debt and securities markets. Right? The the world economy runs on dollars.
00:07:00:02 – 00:07:20:03
Daniel McDowell
And because the world economy runs on dollars, the world economy runs through the U.S financial system, which means the banks that everybody needs to have links to the connective tissue of the global financial system and the global trading system, runs through US banks, and or banks operating in the US that are, that are that have to answer to, right.
00:07:20:07 – 00:07:43:00
Daniel McDowell
Washington and Washington can say, hey, here’s a list of actors, individuals, businesses, governments, that we basically, are not going to allow you to do business with. And what that does is it sends a signal to, to actors that are worried about the United States coercing them in the future, that if you rely on the dollar for your global business activities and your investments, you’re vulnerable to that pressure.
00:07:43:00 – 00:07:49:23
Daniel McDowell
And so that absolutely creates pressures, incentives, to kind of find some insurance against that risk.
00:07:50:00 – 00:08:06:23
Daniel
Dan, I just want to, ask an extra kind of questions to map things out a little bit, which is that when we see areas that are trying to move away from the dollar. So obviously, if you want to trade in finance or commodities or whatever, you’ve got to use the dollar. If you’re in in inside Europe, you’ve got to use the euro.
00:08:07:00 – 00:08:22:18
Daniel
Other places where currencies are carving out more space for themselves away from the dollar, for example, like with the yuan and the Asia Eurasia energy trade or this kind of thing, where are you seeing those areas where other currencies have made some sort of mark for themselves?
00:08:22:20 – 00:08:47:14
Daniel McDowell
Yeah, I mean, I think you touched on, on, on one answer right there, which is that, the renminbi, the Chinese currency is, starting to become more of a regional currency. I believe you all just reported, this week, right, that, China now settles about a third of its trade in its own currency. And so the renminbi is really emerging as, an increasingly important currency with bilateral trade between China and its trading partners.
00:08:47:18 – 00:09:06:23
Daniel McDowell
Right. What we’re not seeing yet is really the use of the renminbi as a, as a third currency, where two countries not involving China are using the currency to settle their own trade, the dollar still dominates there. Similarly, you know, the euro has been and remains an important regional currency within Europe. It’s not just countries in the eurozone that use the euro.
00:09:06:23 – 00:09:20:23
Daniel McDowell
Countries that have close economic ties to the eurozone are settling trade, borrowing in that currency. But the dollar is really the only one that has this global footprint, and we don’t really see any signs yet of either the euro or the renminbi taking on that role.
00:09:21:00 – 00:09:28:05
Daniel
Okay, Mattis, what about Trump’s tariffs? How is that factoring into the thought process here?
00:09:28:07 – 00:09:30:17
Matthis
I mean, the tech side.
00:09:30:19 – 00:09:35:02
Daniel
It sounds like this has been weighing on your mind for quite a while.
00:09:35:04 – 00:10:00:09
Matthis
Yeah. I mean, look, I think that I think there’s a couple of ways to think about this. And, I mean, one story that, sort of was sort of on the top of people’s minds earlier this year was sort of this question is the tariff regime, a new tool to get something out of everybody else, that the U.S. would want that is sort of like a secondary goal.
00:10:00:11 – 00:10:23:14
Matthis
Right? And there was a story floating around, that’s linked to Stephen Miran. It’s it’s this this it’s usually called the Mar a Lago accord, sort of this idea. The US could use tariffs as a course or tool to then get other countries to devalue against, devalue the dollar. So that would mean that other countries would sell their dollar assets massively basically.
00:10:23:14 – 00:10:37:16
Matthis
Right. And and so that was a story that had been going around for a while earlier this year. And we don’t we basically don’t know, where that is headed. And I think we can come back to that, sort of like.
00:10:37:18 – 00:10:45:08
Daniel
The whole thought around that was, was to make us, cheaper to buy products from and therefore boost U.S. manufacturing. Right.
00:10:45:10 – 00:11:23:12
Matthis
Exactly. So, so the idea would be, to say, well, because the dollar is used so much around the world, there’s so much demand for for dollars in the world, what it basically does, it drives up the price of the dollar against other currencies. Right? If you want something a lot, then, you know, the price adjusts and and the thinking then behind that is to say, well, but for for Americans in the United States, sort of it gets more expensive because, importing stuff, for example, like these prices change more than they should be just because there’s such a demand for the dollar.
00:11:23:14 – 00:11:46:12
Matthis
Now, that story is contested, right? Like some people think that’s a big deal. Others aren’t so sure. But yeah, so so that was sort of what was going on there. It’s interestingly, the tariff regime immediately had the effect that there’s so much insecurity around what’s happening in the US right now that people have been selling the dollar anyway.
00:11:46:14 – 00:12:01:20
Matthis
So the dollar is massively lost against other currencies this year. So you could, I guess, make the argument that, the goal is achieved, without, you know, sort of telling everybody else you have to sell dollars. They did it anyway.
00:12:01:22 – 00:12:21:03
Daniel
Okay, Daniel, we’ve heard all of this before, haven’t we? So this kind of dollarization talk, also bubbled up as a result of, US actions around the financial crisis, 2008, 2009, and during the first Trump administration. So is there a reason that we should take it seriously this time round?
00:12:21:05 – 00:12:38:00
Daniel McDowell
You see, you’re absolutely right. I mean, this this is one of the oldest debates, right, in sort of the global economy goes back even well before the financial crisis. We go back to the 1970s or even the 1960s. And every time folks have predicted the end of the dollar, right? They’ve they’ve been proven wrong. Eventually they’ll they’ll be right.
00:12:38:00 – 00:13:01:14
Daniel McDowell
Right. But who knows? Who knows how long that will be, I guess if you had to if I had to sum up why I think it, it perhaps is a bit different. It gets to, some of the points that Mattis was making just a moment ago, which is this sort of growing sense that maybe the United States itself, or at least an increasing share of political elites, in particular in the Republican Party, are growing more skeptical about the benefits of dollar dominance.
00:13:01:14 – 00:13:21:21
Daniel McDowell
And I think that is a notable shift that, the traditional view, I would say for the last 30 years among, Washington elites, among economic policy elites, in the United States, was that dollar dominance was really good for the United States, that there were a lot of benefits, most notably lower borrowing costs that allowed the United States to sort of worry less about a growing fiscal deficit.
00:13:21:21 – 00:13:41:23
Daniel McDowell
And that’s obviously a major issue in the United States. And now, you know, the Myron paper, that was just mentioned earlier, you’ve got even the vice president who a couple of years before he was appointed to that role, was asking, Chair Powell at a Senate hearing about, hey, isn’t really bad for the United States. At least some people in the United States that the dollar’s this dominant global currency.
00:13:42:00 – 00:14:02:07
Daniel McDowell
And so you’ve got some real skeptics in the, in the white House. And that is new. And so I think if you have this shift in, belief or ideas about what’s the cost and benefit of having the dominant global currency, then we would expect policy to follow from that. That maybe impacts the dollar’s use or at least the dollar’s appeal.
00:14:02:12 – 00:14:25:18
Daniel McDowell
And so right, if if you think a strong dollar is the consequence of a global dollar, then policies that weaken the dollar that maybe ten years ago would have raised some alarm bells in Washington, maybe this white House says we’re cool with that, right? We’re just going to roll with that. And we might like a little more. But that, of course, then has these knock on effects where you say, hey, if the dollar’s going to get weaker because the United States doesn’t really want a strong dollar, maybe we don’t want to hold so many dollars at least until it hits bottom.
00:14:25:18 – 00:14:27:01
Daniel McDowell
And who knows when that’s going to happen.
00:14:27:03 – 00:14:34:11
Kassandra
Yeah. Mattis if we see the dollar sink, who’s going to rise here?
00:14:34:13 – 00:14:53:24
Matthis
Yeah, that’s a good question. Right. And I think what that I was just saying that’s sort of is the whole point. Eventually it will probably sink, but we really don’t know when that is going to be in a maybe very, very long down the line. So that’s sort of my I don’t think it’s going to sink very soon.
00:14:54:01 – 00:15:15:18
Matthis
It’s just way too dominant for that. So as I said earlier, right. Like there’s these two obvious contenders that would be the euro. And then there’s the remnant, the, I guess, sort of like the other contender. But so there’s if you look at the euro and this comes back again to what we talked about, there isn’t much political consensus on pushing the euro.
00:15:15:18 – 00:15:46:19
Matthis
This comes back to what Daniel was saying. There’s no, significant military force in Europe that would back up, the, the euro itself. And the renminbi. There’s an interesting, I think, paradox, going on right now that was just reported, this morning that, China actually just, took on new debt, right? Like, as any country does to finance itself, it issued bonds and what some countries around the world do to get lower borrowing costs.
00:15:46:19 – 00:16:18:15
Matthis
They will issue bonds denominated in dollars. Right. Because investors like holding the dollar assets. Right. So the Chinese central bank, borrowed more money this yesterday, and issued dollar bonds that go at the same interest rate as Treasury US Treasury bonds. Right. So China can capitalize on low borrowing costs, specifically because the dollar’s dominant. So, you know, you can you can make an argument.
00:16:18:15 – 00:16:46:21
Matthis
It’s unclear whether China has a huge interest in challenging that right now. And at the same time, I think the question will be what market forces do I think China’s doing a lot to to push this top down, but there isn’t significant pickup in in businesses or people and wanting to use that currency. And that’s a very important, part of the part of the game, as long as it’s a market economy in some broad sense.
00:16:46:23 – 00:16:56:10
Kassandra
Matters. You mentioned that the euro doesn’t have the same kind of army support behind it. I didn’t quite catch that. But why is that important? I’m I’m sure listeners would also be wondering.
00:16:56:12 – 00:17:12:14
Matthis
Yeah. So so this is about security guarantees that, you know, are a lot of times discussed or what Daniel’s mentioned earlier, sometimes sort of the simple argument would be to say, well, you can only enforce your currency rules around the world if you have an army to back it.
00:17:12:14 – 00:17:14:23
Kassandra
Up like a carrot stick situation.
00:17:15:00 – 00:17:39:21
Matthis
I guess. Yeah. Interestingly, though, I think and you know, we’re talking about sanctions there, the whole dominance, aspect comes through without anybody firing bullets necessarily, right? Like the US didn’t go to Russia and said, look, this is what we do with with your assets. No, they control the infrastructure. And that’s what stuff is, is at the at that point.
00:17:39:21 – 00:17:50:05
Matthis
So like, I think, you know, military is important, but I think it’s more important as sort of like an approach to how much is something backed up politically.
00:17:50:07 – 00:18:18:07
Daniel
So, Danielle, I want to, dial back a little bit of the internet conspiracy hysteria here because we’ve heard all kinds of, discussion on Twitter about, for example, is BRICs going to bring out their own joint currency and break the back of the dollar once and for all? But it wouldn’t even work like this, right? How much of an erosion of dollar influence a shift away from the dollar is required for it to enter problem territory?
00:18:18:07 – 00:18:28:09
Daniel
Let’s say, at what point do officials in the U.S who are pushing back some of this narrative? When did they start to really sit up and take notice?
00:18:28:11 – 00:18:49:15
Daniel McDowell
That’s a great question. Well, first off, I’m all for dialing back the BRICs, conspiracy. I think that’s one of those, things like it’s way more attention than it deserves. Yeah. You know, look, I mean, I think this is a this is maybe the $64,000 question is sort of when is the tipping point, right? You can get to a place in markets where, you know, there’s sort of typical volatility and movement up and down.
00:18:49:15 – 00:19:09:24
Daniel McDowell
The question is when does it start to move? So far so fast that at that point you get these sort of herd effects and sort of mass movements out of, out of, whatever thing is falling. Right. If you got to a scenario where you saw, you know, something along the lines of the post Liberation Day drop, but it’s a continued that way for a few more weeks, maybe drop 20%, 25% what?
00:19:09:24 – 00:19:29:04
Daniel McDowell
The dollar’s exchange rate in that case, you know, that would be the kind of territory that I absolutely think you would see, you know, Treasury Secretary, even maybe Donald Trump himself sort of standing out, publicly and speaking about the United States commitment to a strong dollar and perhaps, signaling some sort of policy moves to sort of, regain confidence.
00:19:29:04 – 00:19:49:20
Daniel McDowell
That would obviously be, a pretty, a dangerous position to be in. The United States typically doesn’t have to do the kinds of things that we think of as emerging markets doing to encourage, investors to stay in the US economy and in the dollar. So, I don’t think we got anywhere near that. It was a pretty drastic drop, a significant correction.
00:19:49:20 – 00:20:13:02
Daniel McDowell
Some would say the dollar was overvalued before that happened. And so maybe it’s just reverting to where it ought to have been in the first place. But I, you know, but I do think, again, we are in uncharted territory here since we’re in a place where you already had this sort of growing discontent with dollar dominance because of the sanctions, perhaps because of just, growing tensions between us, the US, and the world because of the first Trump administration.
00:20:13:02 – 00:20:32:20
Daniel McDowell
Right. European, American ties were already somewhat strained in that first era. And so, you know, I do think with this big policy shift in tone shift in Washington, it does raise the question about, you know, what is the United States willing to do? What links is it willing to allow the dollar to sort of shift?
00:20:32:20 – 00:20:36:07
Daniel McDowell
We can lose some dominance? We don’t know. You know.
00:20:36:09 – 00:20:51:20
Kassandra
Matters what happens. And Daniel free feel free to jump in on this one as well. But, mantis, we’ll start with you. What happens to ordinary people if the dollar’s dominance weakens? Can Americans expect higher prices, or is this just a case of different winners and losers?
00:20:51:22 – 00:21:20:14
Matthis
That’s a very difficult question, I think, because very much depends on everything else happening around. And I think that’s I think I’ll take that route to answer the question. Right. Because dollar dominance is not just about who holds what and reserves, and what’s the price of dollar versus another currency. It’s much bigger than that. The dollar underpins global finance, right.
00:21:20:16 – 00:21:48:19
Matthis
And I think if we sort of see an unraveling of that, it, it, it changes. I think first of all, like this is so difficult to change. This is not a scenario that would happen overnight. But this is a, you know, like I think probably like a decades and decades long process. So from that point of view, probably a way to answer this, probably not that much changes for ordinary people because it’s like the changes would be incremental in a way.
00:21:48:21 – 00:22:11:02
Matthis
At the same time, you know, like the obvious thing would be you go on vacation and you expect to be able to pay with greenbacks. That will change, right? Once. So this mindset. So I was just in the United States and I had some dollar cash, left in my pocket. I was like, great. You know, that’s fine because I will be able to spend it somewhere else.
00:22:11:04 – 00:22:38:04
Matthis
And I think I feel like, you know, once this sort of this trust in these pieces of paper changes, I think that’s when, when sort of an attitude towards the world will change. That’s not something where prices will necessarily change, because that would be so dependent on domestic production and so many other factors. But I think it’s I think much more, something underlying something on an emotional level that will actually change.
00:22:38:06 – 00:22:59:14
Daniel
Yeah. I think it’s, there’s one way that it could feed into something like, inflation for ordinary Americans. If you have less, more foreign demand for treasuries, that sends yields higher. The government wants to then smack them down again. And then you know, that in general is going to be inflationary, and then it’s going to make, the dollars going to, raise import prices.
00:22:59:14 – 00:23:03:07
Daniel
And that’s going to add to inflation making things worse for people on the ground.
00:23:03:09 – 00:23:28:09
Matthis
That’s true, but but, you know, like the world is so complex, I feel like, you know, it would be tough to make a call on that right now because we don’t know. How borrowing will change. For example, we don’t know how the, the input, channels for the United States would be in that scenario. Would be would there be so much more domestic production that doesn’t even have an inflationary effect, which is basically the argument Steven Miron was making in that paper.
00:23:28:14 – 00:23:28:22
Matthis
Yeah.
00:23:29:01 – 00:23:50:21
Daniel
So it all depends on whether the government actually, well, comes out with open arms or that they decide to be more interventionist in their, in their policy, but matters. I want to end up with you on YouTube. I mean, something that you’ve been looking at as part of your, your, your work here at D.W. is, dollar backed stablecoins as one kind of wrinkle in this story.
00:23:50:23 – 00:23:51:21
Daniel
So.
00:23:51:23 – 00:23:52:17
Matthis
Yeah.
00:23:52:19 – 00:24:00:13
Daniel
Okay. What are we talking about when we talk about these stablecoins and what does it mean for potential dollarization?
00:24:00:15 – 00:24:19:24
Matthis
Yeah, great. I love to talk about this. Because so I just came back from a reporting trip, in the United States, and, and got to talk to a lot of people and, maybe just to sort of start this story, at in sort of in July when the United States brought in a new law, it’s called the Genius Act.
00:24:19:24 – 00:24:43:00
Matthis
And what it basically did was, for the first time, regulate how very specific crypto assets, what the laws are around them. And these crypto assets are called stablecoins. They’re basically a crypto asset that’s not supposed to change in price. So one, for example, Tether’s stablecoin will always be or is supposed to always be worth 1 USD. Right.
00:24:43:02 – 00:25:18:12
Matthis
And that’s different from Bitcoin or Ethereum that you know, fluctuate in price and there’s a couple of reasons why that’s interesting. The interesting thing for me is that this is interesting from a dollarization point of view. Right. Like the the opposite of what we were talking about. You see tons of tons of people in countries like Turkey, in Nigeria, in Argentina, in Brazil right now, buying dollar backed stablecoins because it’s an easy way for them to hold an asset that is kind of like a dollar.
00:25:18:14 – 00:25:40:14
Matthis
It’s just slightly removed and it’s easier to get your hands on. And so I actually, talked to a bunch of people at the fed, in Washington and the interesting thing is there, the sentiment is great. This is great because it allows us to dollar rise internationally. It allows us to strengthen the dollar. And I feel like, you know, it speaks to what we were talking earlier.
00:25:40:14 – 00:26:06:10
Matthis
There seem to be in this administration’s sort of different strands of thinking, whether a strong dollar is good or maybe to counter China, it would be great to have something to offer to the world to make to improve the dollar’s position in the world. And right now, to me, it seems that these dollar backed stablecoins could be a way to strengthen that position for a lot of people around the world.
00:26:06:12 – 00:26:26:10
Daniel
So thank you very much to Mattis and Daniel. 2.0, that’s him, not me. And the original Daniel for that wonderful analysis. That was great, guys. Thanks. But now we’re going to move on to New York where they have a brand new mayor come January the 1st. And he’s set to bring a fresh wind to the big Apple. If that’s a phrase that people use.
00:26:26:10 – 00:26:48:05
Kassandra
Yeah, they definitely still use it well now. So Zoran Mamdani, he’s the mayor elect now. He’s taking office on January the 1st and the central beating heart of his campaign was affordability, right. And so his crowds would have all these, like, call and response phrases, you know, freeze the rent. They always knew what it was. So earlier today I spoke to Cameron Fenton.
00:26:48:05 – 00:26:59:04
Kassandra
He’s an economist and a data scientist with State Street, based out of Boston. And I started off by asking him exactly about freezing the rent and what kind of effect that policy would have.
00:26:59:06 – 00:27:25:07
Cameron Fen
Freezing the rent has multiple, implications. Right? Obviously, the one people that get the rent freeze will pay lower rent. Right. But, from an economic perspective, we know that if you decrease the incentives for people to build houses, less people will build houses, right? So the people that don’t get the rent freeze will probably have to pay higher rents, because there will be fewer houses or condos or, residential buildings being built.
00:27:25:09 – 00:27:42:23
Kassandra
Yeah. You’ve kind of alluded to this, right? That a potential downside and many economists have written about this of rent caps is it helps current tenants, the people who are already kind of like within, within the frozen bubble that future tenants like the kids of those tenants, people who move to New York City, they might be facing fewer houses.
00:27:42:23 – 00:27:53:07
Kassandra
So what kind of policy mishmash can he put together here to maybe prevent that or incentivize, housing that normal people can afford?
00:27:53:09 – 00:28:05:24
Cameron Fen
Right. So in order to decrease the price of housing, you can either decrease demand or increase supply. Right. And decrease demand. Obviously. Sort of sounds bad, like make New York City, where city people want to live. But one thing.
00:28:05:24 – 00:28:07:00
Kassandra
That’s not a winning slogan.
00:28:07:02 – 00:28:29:05
Cameron Fen
Right? Exactly right. One thing you can do, though, is like increase transit, which is that which is one of his other policy planks. Right? Like if you make transit easier to commute to New York City, maybe that lessens the demand for people wanting to live in houses or apartments in Manhattan, for instance. Right? So you can decrease demand in that way, in a non-negative way, or you can increase supply.
00:28:29:07 – 00:28:49:19
Cameron Fen
Again, one of the ways you can increase planning is talked about this briefly, but this isn’t been like a central part of his policy, is to remove some of the regulations. Right. So the California Governor Newsom, right, did a similar thing where he moved a lot of economic regulations, so that houses and apartment buildings got built more efficiently with lower cost.
00:28:49:19 – 00:29:03:21
Cameron Fen
Right. So those are sort of the two ways he can do that without dealing with rent. With rent freezes, rent freezes is obviously another way to help the people that get the rent freeze. But over the long term and for everyone in general, it probably is counterproductive.
00:29:03:23 – 00:29:16:14
Kassandra
Yeah. So that kind of alludes to something that I’ve been wondering about, which is only about 1 million apartments in New York City are rent stabilized, which means that their rent could be frozen. What would this plan mean for all the other housing? Is it just going to get more expensive?
00:29:16:16 – 00:29:37:06
Cameron Fen
Yeah. I mean, generally that’s what traditional economic theory suggests. Sometimes these things don’t work as well as economists like to predict. But yeah, I mean, so if you have more people, if you have more or if you have more, if you have houses that more rent stabilized housing, that means that people that construct buildings get less profit, right?
00:29:37:06 – 00:29:56:19
Cameron Fen
They make less money. And of course, they make less money. People are less likely to build new buildings because people only build buildings if they think they can generate a profit. Right. And this leads to a downstream effect where the people that don’t get the rent stabilized housing, they lose out because housing is more expensive because less of it is being built right now.
00:29:56:23 – 00:30:04:23
Kassandra
Mayor elect Mamdani has also called for a massive public housing build out. But I’ve seen various figures about this. What’s it really going to cost?
00:30:05:00 – 00:30:24:00
Cameron Fen
Yeah, I think it’s going to be a significant cost. Right. One of those planks is he’s using union, like he’s using union workers to build these houses. The estimate is that’s going to cost 23% more than housing without union workers. I mean, like, land is very scarce in Manhattan, right? And so it’s going to be expensive.
00:30:24:00 – 00:30:42:22
Cameron Fen
I honestly, I don’t have a exact figure, but it’s going to be if he does what? Union housing, looking for affordable housing, it’s going to be quite, probably unprofitable and require a lot of investment from the city government to make these houses, both built and and having renters rent in one.
00:30:42:24 – 00:30:59:14
Kassandra
And the other big policy there were there were many affordability policies that mom Dani was talking about during the campaign. That was, again, the beating heart of his, of his campaign. And I know, I know, the commenters are going to be saying, you know, why are you talking about, child care? Why aren’t you talking about these other policies?
00:30:59:14 – 00:31:17:08
Kassandra
But we can only have time to talk about two. Today is the second one I want to bring up is transportation. Because Free Busses was also a really big proposal from the Mom Danny campaign. Fast and free city busses. There’s already a pilot program. There was already a pilot program for this kind of thing. And the Staten Island Ferry, which I’ve ridden on, is free.
00:31:17:08 – 00:31:28:17
Kassandra
So I’m wondering, is this something that New York City can afford? And what does it tell us? What is other cities who you know, a lot of cities in the US have busses. What does it say to those cities about their future programs?
00:31:28:19 – 00:31:41:14
Cameron Fen
Yeah. So, regarding this topic, I’m going to do a lot of on the one hand. On the other hand. Right. So, so Harry Truman’s famous saying he wants a one handed economist, not a two handed economist, because economists are always bouncing back and forth.
00:31:41:14 – 00:31:43:10
Kassandra
I’ll take two hands, Cameron. Let’s hear it.
00:31:43:15 – 00:32:07:21
Cameron Fen
All right. So so the first thing is like, if you charge for transit, right? What the argument is you get a lot of money that comes in that allows you to upgrade the transit, you know, because of fees. However, on the other hand, right. Being able to charge transit fees requires more investment, right? You need to build stations for, like, let’s say, the metro that prevents people from sneaking in.
00:32:07:23 – 00:32:21:09
Cameron Fen
Here in Boston, we have in every station a person that makes sure that people don’t like skip the transit line. These people are hired every single hour that the trains doesn’t operation. And, you know, at every single station. Right? So it’s not.
00:32:21:09 – 00:32:22:20
Kassandra
At multiple entrances as well.
00:32:22:20 – 00:32:47:03
Cameron Fen
Exactly. Right. So it’s not cheap to ensure that everyone’s paying their fares. Right. So you don’t get all the money that the fares charge, goes into sort of, helping rebuild the Metro or the Metro Transit. Right. On the other hand, though, you kind of if you have free transit, one of the issues is you probably incentivize people to use transit that shouldn’t be using it.
00:32:47:03 – 00:33:09:01
Cameron Fen
Right. So, for example, maybe this is sort of negative, but like homeless people, you could incentivize homeless people, for instance, to use the chairs on the, you know, subway, as, as sleeping as essentially a, homeless shelter. Right. And that’s a sort of negative implication that happens because you don’t charge some, money. I do think generally, though, I think, but.
00:33:09:01 – 00:33:12:18
Kassandra
Here we’re talking about busses. That’s not going to be the same as a as a subway station, right?
00:33:12:20 – 00:33:32:19
Cameron Fen
Sure, sure, sure. But I mean, even on the subway, right. Like you can have homeless people or other people using transit in ways that it’s not intended to be used because it’s free. Right. But I mean, so I think generally that free transit is probably, a good idea. And even if it’s not a good idea, we haven’t really tried it that much in the United States.
00:33:32:19 – 00:33:50:11
Cameron Fen
And so it deserves being we deserve experimenting with things like that. And so I would hope that, you know, Mamdani tries it, and if it doesn’t work, I hope he’s pragmatic enough to pull back and, you know, reassess. Right. But I think one of the good benefits of the US system is essentially we’re governing by capitalism, right?
00:33:50:11 – 00:34:11:11
Cameron Fen
So you have essentially 50 different states. They can try their own policies, policies that work other states can adopt policies that don’t work. They can’t. And so it’s helpful, I think, for the general functioning of the US government that we have people trying different things, including things that are fairly socialist, not not communist or socialist, as Republicans say, but sort of like European socialist and see how they work.
00:34:11:11 – 00:34:12:07
Cameron Fen
Right.
00:34:12:09 – 00:34:31:24
Kassandra
I wanted to talk more about what Mamdani, as the leader of a city, could actually get done. When we’re talking about, a, you know, a federalist system with states that can all try things. But but I want to take what, transit for just a second, because a big part of this bus program, freeing up the busses or making the busses free, is going to be, where do you get the money for this?
00:34:31:24 – 00:34:40:23
Kassandra
Right. And Romney has said he wants to tax the city’s richest to make it happen. But basically, is there enough money in the pot to make that happen, in your opinion?
00:34:41:00 – 00:34:58:01
Cameron Fen
I mean, with all his policies, I’m a little bit skeptical. I think New York, New York in general, and New York City is the highest tax state, in, in the country, right? The tax rate federal, state, municipal, especially if you live in New York City and not like in Albany, is the highest in anywhere in the United States.
00:34:58:01 – 00:35:22:13
Cameron Fen
Right. That being said, it’s probably not as high as some places in Scandinavia, but there you are, sort of getting into the area of essentially, taxing people as much as they can bear. Right? And so and so that is an issue, I think that Mamdani has to, you know, resolve and figure out. That being said, though, again, I’m going to do the other on the other hand, think there is little evidence that when you tax the rich, they actually move.
00:35:22:13 – 00:35:44:13
Cameron Fen
I mean, obviously some move, but the number is fairly small. And generally if you tax the rich more, you generally increase your revenue. Unless you really like taxing them from like 99% to 100% or something ridiculous like that, right, of their income. But generally the rich don’t move. And I mean, it makes sense, right? New York is probably if you ask 100 people with $100 million or more, what does the city do like to live?
00:35:44:13 – 00:36:01:24
Cameron Fen
I bet the plurality would say New York City, right? And so even if you’re increasing taxes by 1 or 2% more on these rich people, New York is the greatest city to live for the rich. And I don’t I don’t think they’re going to move because you raise taxes by a slight amount. That being said, all his policies may require more than a 1 or 2% tax on the rich.
00:36:01:24 – 00:36:05:01
Cameron Fen
Right. I think it’s likely going to be more than that.
00:36:05:03 – 00:36:28:15
Kassandra
Yeah. Let’s talk about this 2% tax that he wants to put on New Yorkers making more than $1 million New York City. You know, for folks who, don’t necessarily follow the intricacies of the sometimes very unique American system, New York City is within New York State, but it’s not even the capital. Albany is, and you do need support from state lawmakers in order to pass taxes.
00:36:28:17 – 00:36:34:24
Kassandra
So can he do this unilaterally or does this require state support, this 2% tax on millionaires?
00:36:35:01 – 00:36:43:00
Cameron Fen
I am not a political scientist, unfortunately, so I do not know exactly how that, politically what should get done.
00:36:43:02 – 00:36:47:23
Kassandra
But but can he pass taxes other New York City exclusive taxes that he can pass?
00:36:47:23 – 00:37:01:00
Cameron Fen
I do believe that. I do believe there are municipal taxes. I don’t know if he can tax it, pass it unilaterally. I think maybe, probably. But again, I’m not a political scientist. I’m not a specialist in the governing system of New York right now.
00:37:01:00 – 00:37:15:07
Kassandra
And and you’ve woken up early to chat with me, so I do appreciate it. Okay, so just a couple of closing questions before we let you go. You know, Mamdani, when he won the Democratic nomination this year, we already heard whisperings in the winds that New York City’s richest would flee the city. You mentioned this earlier.
00:37:15:07 – 00:37:41:12
Kassandra
I think many people have seen the memes about, you know, rich people potentially fleeing New York and, a lot of average New Yorkers saying, you know, good returns, for lack of a better term. But is this something to be scared of? Like who loses when these succession level, you know, private jet, helicopter taxi type rich people, when those people kind of leave the city like are one who’s who’s actually going to leave and two, what’s going to leave with them.
00:37:41:14 – 00:38:08:22
Cameron Fen
Yeah. I mean, so the evidence people have written papers on this economy. When you increase the taxes on the rich, how many leave. There’s an elasticity. Right. So the percent increase, how much does that leave? 2% leaving. The answer is not zero but not that high either. Right. So for sure, if you increase taxes on the rich, at the current tax rate of New York State, New York City, you’re going to earn more money, even if some, some, some people leave.
00:38:08:22 – 00:38:24:14
Cameron Fen
Right? The cities just come out that way. You’re going to earn significantly more money when you raise taxes on the rich based on how much they’re paying right now. And again, not that many I believe will leave. I think the evidence suggests, you know, when you raise taxes, very few some do, but very few really leave the city.
00:38:24:18 – 00:38:53:08
Cameron Fen
And again, as I pointed out earlier, the rationale is New York is the best city in the world for someone who is making, you know, someone who has $100 million or more. Right? And and if you pay an extra $1 million even and they get 1 or 2%, it would be much less than that. I don’t think they’re going to leave because, you know, you want to live in the best city in the world for, you know, going out to eat or seeing shows or, you know, the weather is maybe the only issue, but everything else, new York City is the best city in the world for, you know, someone who is, very
00:38:53:08 – 00:38:54:07
Cameron Fen
rich.
00:38:54:09 – 00:39:07:18
Kassandra
Now, you’ve written a lot about modern economic policies. Looking into your crystal ball. What do you see as the biggest hurdles for him when we’re talking about his economic platform? In the first weeks and months after he’s sworn in as mayor?
00:39:07:20 – 00:39:25:22
Cameron Fen
Yeah. I don’t know about the first weeks or months. I mean, maybe it’s getting the rest of the, city on board, you know, the rest of the governing structure. But I think even longer term, I hope he’s pragmatic, right? I did talk about how the federal system allows people to experiment, and he’s, you know, he’s a new experiment.
00:39:25:24 – 00:39:42:22
Cameron Fen
But I hope that if you know, some of his policies may work better than we anticipated. Right. Like maybe having, you know, free grocery stores will help. And food deserts in areas of Manhattan and the rest of New York City. Right, right. And so I hope you implement some of these things. And as the federal system, we can experiment.
00:39:42:22 – 00:40:00:18
Cameron Fen
We can afford to experiment. And if it works, I hope other people adopt it. But I think the biggest challenges I think some of his policies don’t really fit traditional economic, you know, dogma. Right. And if they don’t work, I hope he’s pragmatic enough to pivot to something that, you know, has been tried and true and has has worked in the past.
00:40:00:18 – 00:40:18:24
Cameron Fen
So that’s what I hope a long term, short term and medium term, I guess, you know, you have to make sure everyone’s on board in the, in the city government. Right. But long term, I hope he’s pragmatic and is able to pivot to with things that don’t work and things that do work. I hope other people are pragmatic enough to take from someone who’s an avowed socialist, right.
00:40:19:01 – 00:40:21:00
Cameron Fen
00:40:21:02 – 00:40:39:05
Kassandra
Thanks again to Kamran for those insights. Now, Daniel, it’s interesting, right? Because I’ve got I’m of two minds when we’re thinking about this. On the one hand, New York is the biggest city in the United States. If New York City had it was its own state, or if there was a state the size of New York City would actually be the 13th most populous state in the Union.
00:40:39:05 – 00:41:00:11
Kassandra
So on the one hand, New York City big, on the other hand, it’s still just a city. It’s not even the capital of New York State and New York State, for folks who don’t quite realize is massive, you have to drive a really long distance to get across it. Right? So it’s one of these things where Mamdani, even though he’s now the mayor of the biggest city in the United States, he’s still just a city.
00:41:00:11 – 00:41:02:05
Kassandra
And so he has to play nice with Albany.
00:41:02:07 – 00:41:32:07
Daniel
That’s right. So he can tax and plan and sort out the police and do all of this stuff as much as he wants. But he’s still kind of underneath the, Albany auspices, you could say a third of New York City’s $110 billion budget comes from things like state and federal transfers. And so all of these policies around things like rent freezes or the public bank initiative or municipal broadband has to be done either working with or working around this kind of structure.
00:41:32:13 – 00:41:39:09
Daniel
Yet at the same time, the people of New York, when they voted for him, they wanted someone who would maybe tear up the system.
00:41:39:10 – 00:41:39:20
Kassandra
Or.
00:41:39:22 – 00:41:58:23
Daniel
Cut through all of the bureaucracy. But that’s going to be hard to do. There are a whole bunch of stakeholders when it comes to, let’s say, building cheaper housing. Yeah, right. You’ve got the developers, who are going to actually build it. You’ve got the bondholders who might invest in it, and then you’ve got the other stakeholders. Even the governor will have a say at some point.
00:41:58:23 – 00:42:21:11
Daniel
And so he has to convince them to work with him. And if he decides to go to war with them instead, then he’s going to find his job a lot more difficult. And of course, as with all, mayors, he’s going to be judged on the results, not just the rhetoric. And we kind of got to this point of having a clash, because the City of Wall Street has voted essentially for its antithesis.
00:42:21:11 – 00:42:42:15
Daniel
Yeah, the opposite of what it really is in its in its terms of what’s generating the power and the money that is at the heart of, certainly at least Manhattan. Perhaps it was inevitable due to, as you were talking about earlier, the cost of housing, because you’ve got to the point where housing costs have risen nearly 40% since 2019.
00:42:42:15 – 00:42:47:01
Daniel
In New York. And so now the middle class feel like they are the underdogs, right?
00:42:47:03 – 00:42:47:09
Kassandra
Yeah.
00:42:47:09 – 00:43:15:12
Daniel
And so that’s why Mamdani has been able to appeal to them so much. And, you know, his election win is nothing to be sniffed at. But if he fails to deliver on his promises, especially on lowering the cost of rent, then we could see a return to the old guard, to all of these people who are part of that hierarchy and infrastructure that we talked about, and they’re going to come back with their rule that, you know what, you’ve got to work in the system because ideals don’t balanced budgets.
00:43:15:13 – 00:43:48:09
Kassandra
It’s going to be interesting because New York City obviously a very blue city in a blue state. The governor of New York is also a Democrat. But Governor Hochul, has already paused congestion pricing under a what is seen as a much more centrist mayor, the current mayor of New York City, Eric Adams. So it’s going to be interesting under this new, much more left leaning mayor, this social Democrat, if there is, going to war, as you say, or if the temperature comes down a little bit and these two sides of really the same party are able to work together.
00:43:48:09 – 00:44:04:10
Kassandra
So that’s what I’m going to be looking for in the weeks ahead, but also in the weeks ahead. Of course, there going to be more dip episodes. And if you like what you’ve heard today, please leave us a comment. If you have questions about anything that we’ve brought up so far, also leave us a comment because we will be back with a question and answer episode on Tuesday.
00:44:04:16 – 00:44:15:21
Daniel
And of course you can. Like you can subscribe and even better, send an episode to a friend. It will be a fantastic, Black Friday Thanksgiving kind of gift.
00:44:15:21 – 00:44:16:12
Kassandra
What a deal.
00:44:16:12 – 00:44:27:21
Daniel
Yeah, what a great, amazing deal. I’m sure they all very much appreciate for you. And they will not say, why didn’t you just give me cash? So until next time, thank you very much for watching us here on the deck.
00:44:27:23 – 00:44:29:23
Kassandra
See ya. Right. Okay.