Audio Length: 00:47:36

This week, Felix Salmon, Emily Peck and Stacy-Marie Ishmael talk about the precarious position of the huge Chinese real-estate company Evergrande, the debt ceiling and revolving door of tax policies, and the foreign policy dustup over submarines.

In the Plus segment: Corruption in the Treasury Department.

Transcript:

S2: Hello.

S1: Welcome to the too big to disappear episode of Slate Money. Your guide to the business and finance news of the week. I’m Felix Salmon of Axios. I’ve got the whole crew here. I’ve got Stacy-Marie Ishmael of Bloomberg at Bloomberg. In Bloomberg.

S2: All things Bloomberg

S1: here on Slate Money, we have Emily Peck and fundraise. Hello. Hello. We are going to talk about Evergrande. We are going to talk about geopolitics. We are going to talk about submarines. We are going to talk about the corruption of the Treasury Department in Slate Plus. What else are we talking about? We have a jam packed

S3: the debt ceiling Felix.

S1: We are going to talk about the debt ceiling. Of course, we have to talk about the debt ceiling. We’re going to talk about basically everything except for platinum coins. Everything you need to know about anything is coming up on this show. It’s a relatively short but very dense and super meaty and lots of fun show. It’s all coming up on sleep money.

S3: I spent all week trying to figure out Evergrande, and I feel like I understand it a little bit. I’m curious what you think.

S1: Nice. All right. I want you to explain it to me. Emily. What do you think? All right.

S3: I’m cracking my knuckles here. I have listened to OddlotsAxios and read some articles. So here we go. Evergrande is a giant Chinese real estate developer. They build stuff and own stuff. Real estate wise. They also own other weird things like electric vehicles and soccer, a soccer team in China. They’re huge. They borrow lots and lots of money, and it winds up in all kinds of places all over the global economy. And they don’t have enough money anymore to pay their debts. Three hundred billion dollars in debt. And so this week, that all kind of came to a head and people started freaking out and saying, Evergrande is that some people saying, actually, I saw some people apparently were saying, it’s the next Lehman Brothers. But in reality, I saw more takes that were like explaining why Evergrande is actually not the next Lehman Brothers. So I came away thinking, this is a huge crisis on Wednesday. But by the time we’re recording this on Friday, my new thought is this is probably fine.

S1: So to bring us up to about as much speed as I can do, given the recording in this home Friday. This is a fast moving story. But on Thursday there was a big coupon payment due Evergrande had to pay 83 and a half million dollars to its American, well to its international bondholders on a U.S. dollar bond and has a lot of dollar borrowings. And it didn’t. So it is clearly having difficulty paying its debts because it didn’t make that payment. Technically, that doesn’t actually put it in default because it has the 30 day grace period, like bonds always come with 30 day grace periods. But it’s in default, and they have been trying to do like resolutions and work outs with their domestic creditors, who include a bunch of, you know, mom and pop individual retail Chinese investors. And this is why it’s a really big deal in China is there are literally millions of Chinese households who are exposed to this company, either because they lent it money or because they bought a house from it, which they haven’t moved into yet. Like, they like all homebuilders, they sell their apartments before that built and get this. There are 1.6 million Chinese households who have paid for houses in China, which haven’t been finished yet, and that house by Evergrande. So that’s just an insane number of people.

S3: And one interesting thing I learned from OddlotsAxios podcast on Bloomberg is that in China, there are all kinds of limits on what kind of investments individuals can make. So real estate is like this very huge big deal investment that people make homes. There are not just things you live in, but things like you expect to make money off of. And Chinese are very price sensitive if they feel like the value of their apartment or their house is going to go down, or even if they live in an apartment building where they bought at a price, and now they see other homes selling for lower. There’s a freak out.

S1: There’s it’s it’s been this absolutely insane wealth generation machine in China. Basically, I think in late 1998 or thereabouts, China started basically giving away or selling at very low prices. All of the housing in China to the people who lived in that housing. And ever since then, the price of housing in China, the value of apartments has just been steadily going up not just in Beijing and Shanghai, but in second, third, fourth fifth tier cities. Everywhere you look, these apartments are selling for absolutely eye watering amounts of money. You know, 50 times the median salary, that kind of thing, and that has now become the overwhelming majority of most household wealth in China is like the value of the apartment that they live in. And so people are acutely conscious of the value of that apartment and they really see it, you know, as much as like their retirement, their financial security, as much as they do like the place where they need to cover their housing short and just live, right?

S3: So how is this not like the housing bust back in in our country back in 2006? Those elements where people are looking at their homes like investments, piggy banks feel so familiar to me.

S1: It is familiar, I think the one difference is that you you don’t have the crazy subprime mortgage situation in China that you did in the United States. No one’s really worried. I mean, the apartments are very expensive, but like what I haven’t seen as a lot of stuff saying, like Chinese buyers leveraging themselves up to the eyeballs to be able to buy these apartments and then they’re defaulting. And then the people you know who wrote those mortgages, the banks of those mortgages are going to go bust. That’s the one I haven’t seen. The leverage seems to be much more at places like Evergrande, which I mean, it’s insane. They were borrowing money at like 15 percent to build these houses, which, you know, and the only way that would make sense was like if house prices went up by more than 15 percent and it was this crazy ultra levered bet which had to go wrong at some point. It’s had a single S. credit rating for the past three years, like low junk. Everyone knew that it was super risky, and that’s one of the reasons why there haven’t been massive repercussions in terms of contagion and stuff. It’s just because everyone knew is not a risky investment. And you get crises when seemingly safe bonds default. Not when, like ultra risky bonds default.

S3: So why are people saying or even bringing up Lehman Brothers? Like what’s going on there?

S2: Commercial paper, baby.

S1: Well, it’s you know, I mean, I think the main reason is just the sheer size of the debt, right? So Evergrande have $400 $450 billion of debt, something like that. They’ve managed to bring that down to about 305 billion right now. But $305 billion of debt is just completely bizarre because the amount of debt, if you remember, you know, the Argentina default was Stacey, and I remember vividly that was just like earth shattering and that was 93 billion. If you remember the Greece default, which more or less destroyed the planet, you know, that was 200 billion. So Evergrande, in terms of its total liabilities, is bigger than Argentina and Greece combined. Like Lehman Brothers was 600 billion. But with Lehman Brothers, ultimately everyone got paid back. Right? There was a default. But then the recovery post default was actually over 100 cents on the dollar because there was all of this statutory interest of seven percent and all the rest of it. People who bought the defaulted Lehman debt did extremely well for themselves. No one is expecting much recovery from the Evergrande default. If you bought an Evergrande bond at one hundred and you know it defaults and you just keep on holding it until everything is resolved. Who knows how much you might get back? Maybe like 20 cents.

S3: And the Chinese government, though, is not going to just let this company go completely bankrupt, though, right? It’s going to step in. This is clearly it’s too big to fail. I saw something like represents two percent of Chinese GDP or something like that.

S1: It has millions of workers, either directly employed or indirectly employed by it. You know, as I say, I was one and a half million homes to Chinese individuals, so that core part of its business. You know, maybe the football team can disappear, but the core part of its business, the you know, the stuff which isn’t the electric cars has to wind up continuing being operated by someone. And since the chairman of the company is so politically well-connected, it’s probably going to continue to be him. So, yeah, we’re going to see an insanely complex sort of financial restructuring and work out, but I don’t think we’re just going to see the company disappear, like it’s just too big to disappear.

S2: This is the new too big to fail.

S1: Yeah. Like we need to kind of define what does fail mean? Right? When you have an entity of this size, probably it just means, oh, you know, all of the debt needs to get wiped out somehow. And then the company manages to continue going on without the burden of $300 billion of debt. Something like that. That’s really bad. If you are like an employee who was basically arm twisted by your employer into lending the money or any of the smaller individual Chinese creditors. And so I think that’s where the Chinese government comes in, and it’s going to start having to sort of play favorites and say, OK, these local regional banks are going to do OK. These individual lenders are going to do OK. Those, you know, international hedge funds, they can take losses.

S3: Yeah. Do you think the reason people were saying like this could be it, this is Lehman is because there is this like generalized feeling of anxiety right now that things have to explode? Or am I over reading into it? But it just feels like the economy’s doing relatively well. Equities are doing relatively well, something’s got to give. And there’s just the feeling of what’s it going to be kind of.

S1: I think the standard that there’s been a long running China bear case rate going on for years and years where people have said there’s too much debt there, too much non-performing loans, there’s too many badly run companies. The minute these loans are called, they’ll never get paid back. There’s going to be this like chaotic deleveraging in China, and that’s going to be terrible for the Chinese economy, and it’s going to ripple throughout the economy and people have been making that case. Like China, bears have been making that case for years. And I think a lot of them look to Evergrande and said, this is the first domino.

S3: Stacey, what do you think?

S2: I do think the idea of too big to disappear is really interesting because it’s sort of a modern gloss on two Felix is what systemic risk looks like. And Emily, I don’t think one. I think we are in a state of everybody being generalized anxiety over any number of things. So, yeah, I don’t want to. I don’t want to speculate about the underlying psychology of the markets, but I do think there are various questions that folks have about what will the next thing be. And there is absolutely a sense where people are kind of pointing at whatever that thing might be and being like, Ooh, China says it’s banning cryptocurrency transactions. That might be the thing like Evergrande. That might be the thing Biden infrastructure bill. That might be the thing. So far, none of these have been the thing. But I do. I am detecting a kind of a zeal to find it.

S3: Yeah, we’ve got to find the thing. What’s the thing?

S1: This is a Segway Emily is the thing, and a US sovereign default brought on by congressional inability to raise the debt ceiling. How is that going to cause the world to come to an end?

S3: Felix I know because I read his email every week, as everyone should, Felix says. No big deal. Don’t even it’s don’t. Even everyone is freaking out about the debt ceiling and that the U.S. is going to default on its obligations, including Janet Yellen, including all the Democrats, blah blah blah. But Felix Salmon in his newsletter is like, What if it’s fine if we default? What if it’s actually not that? To be clear, no

S2: defaults just fail to raise the debt ceiling.

S3: Right?

S1: The fact that without triggering default, that would involve a default. We have already failed to raise the debt ceiling, the debt ceiling. This is I mean, this is the whole thing is profoundly dumb. And this tell us, are you still single most boring? And everyone believes that thing you can say about the debt ceiling is it is profoundly dumb. It is the really dumb thing which should not exist. OK, get that out of the way. We have said that on this show in the past. What’s more interesting right now is like, what happens? If so, OK, let me rewind a bit. In 2019, it was suspended, which is great, and it should always be suspended, but it’s been suspended indefinitely and for all the time, but the suspension came with a. You know, an expiry date basically, and the expiry date was August, the 1st of this year. So on August the 1st of this year, the debt ceiling came back and it was set according to law, according to this law that was passed in 2019. And I cannot emphasize how surprisingly dumb this was, according to the law, which was passed in 2019. The debt ceiling was re-imposed on August the 1st of this year at wherever the debt was. Whatever the debt was on August the 1st of this year, that was the new debt ceiling.

S2: So five seconds later, we see five things.

S1: So basically, what happened is since then we have not been able to increase the debt by one penny. Of course, we have been running a government deficit since then. And the only reason that we’ve been able to do so is because Treasury had some reserves and the Treasury had some money in its bank accounts, and it can spend that money instead of having to borrow the money. But yeah, we have hit the debt ceiling. We’ve we are at the debt ceiling. We’ve been at the debt ceiling since August the 1st, so that’s, you know, getting on for two months now. And it is getting really painful right now, and we are going to start having to effectively default on our obligations if this debt ceiling doesn’t get raised pretty damn quick. Now the question is. Which obligations are we going to default on and how are we going to default on them, right? And so there are some obligations like government salaries, which, you know, it’s bad if you don’t pay your employees the money that they’re owed. But financial markets don’t consider that in the event of default. On the other hand, another obligation is Treasury Bond coupons, and if you fail to make your Treasury Bond coupon, that’s when people start bringing out the parade of horribles. And what Janet Yellen has been saying is she doesn’t distinguish, she doesn’t. She’s not going to play favorites. She’s not going to, you know, stop paying her own salary just so that she can continue to pay bond coupons. And so the Bond coupons might start getting missed at some point. And this is where she writes this. Wall Street Journal op ed. And I’m just going to quote this because this is the classic formulation of the parade of horribles. Doing so would likely precipitate the historic financial crisis that would compound the damage of the continuing public health emergency. Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost. That is basically what everyone believes will happen if the debt ceiling isn’t raised.

S3: That is terrifying and but maybe untrue, says again, Felix Felix.

S1: I’m not convinced that we’ve never really done it, we haven’t tried it. I am pretty convinced that if you did wind up getting into that state of default, it wouldn’t last long. Right? Once you start like not paying congressional salaries, they’ll be like, OK, fine, we’ll raise the debt ceiling.

S3: It seems like when you tell when parents tell their children like horror stories about drugs, like if you try marijuana, you’re going to jump off a building terrible. Your future is imperiled by the prospect of taking illegal drugs. And then the kid obviously eventually tries some kind of illegal drug and everything’s just fine. Is that what we’re looking at here?

S1: I think so, I mean, because this is because late in the bond markets, everyone is terrified of default, because default means you lose your money, except for in this case, it doesn’t mean you lose your money. If you lend money to Evergrande by buying an Evergrande bond and then Evergrande defaults, you lose your money, you take that money is gone. You’re never getting it back. If you lend your money to the US government by buying a US Treasury bond and then the Treasury defaults, you get all of your money back. There is no way that you actually lose any money at all. It’s it seems to be a much less painful default than any other kind of default. A default where you get recovery of 100 cents on the dollar is is kind of weak tea, and I feel like there would be this kind of flight to quality and people would be buying Treasury bonds, especially if they were paying statutory past few interest of seven percent. The Fed would probably be buying as well to make sure that there wasn’t crazy liquidity problems in the Treasury market. I don’t think the prices of bonds would go down a lot. I don’t think there would be a recession, but you know, it would be ridiculously stupid and damaging, and it would damage America’s reputation, and it would make us look like a tin pot stupid country.

S3: I mean, we already do.

S2: OK. Well, indeed. But I do think the point about the reputational element of this is perhaps understated in the context of everything else that we’re talking about. You know, it’s just the idea of the U.S. failing to meet its obligations, even if there are not necessarily any practical consequences does seem to Emily’s point to be like a psychologically challenging thing to overcome.

S3: Yes. But I mean, can our reputation get any worse at this point? Like the U.S., I checked the stats on the Times this morning, and the U.S. is a quarter of all COVID related deaths right now. I mean, it’s just so embarrassing. What have we been doing? We had we already lived through the Trump era, then we kind of screwed up this pandemic thing. And now this, I feel like it’s like, OK, yeah, I’m reading.

S1: I’m already reading op ed in The Washington Post about how the 2024 election is certain to be a constitutional crisis. Oh yeah. A bunch of states refusing to certify their vote.

S2: You know, Texas is doing is following in the footsteps of various others and doing audits, even though the Republicans like roundly swept to every possible election. There are many. They’re laying the ground confusing.

S1: This is really worrying to me, right? So there’s a bunch of audits in Texas if the 2020 election results. Clearly, it’s not because the Republicans think that the results were. Long because they won. The reason they’re doing it is to basically put all election results in question so that anywhere that any Republican loses an election, they can just say that was rigged. People are going to believe it. Just a lot of people believe that the 2020 election was rigged. So, yeah, I think Stacey is absolutely right that we are in this state right now that the global standing of America in the sort of minds of the rest of the world was severely damaged by Trump and is not being repaired nearly as much as one might have hoped by. You know, Tony Blinken or Biden or anyone currently in power is also going to talk about submarines.

S3: I was just going to say the brinksmanship with default and the debt ceiling is just as destabilizing as sort of like this auditing of elections. There’s this bedrock thing that we have in the U.S. government and the Treasury in the fact that we’re like this very powerful economy that doesn’t default on debts were not some like when?

S1: Not Argentina.

S3: Yeah, we’re number one, y’all. But like, we’re doing this brinksmanship in Congress that kind of makes everything sort of uncertain around that. And it’s very destabilizing of the most sort of bedrock things about the country, like we have free and fair elections. I mean, sort of we can we don’t want to get into like a whole civil rights discussion, but we have like pretty stable real elections and we have this very strong economy. And yet these political forces are seeking to throw those things in question. And it’s it’s bad for our reps.

S1: It’s such an unforced error. I mean, Mitch McConnell, bless him. It keeps on coming out and saying this thing, which he’s like, we have to raise the debt ceiling. It is vital that we raise the debt ceiling and is what it is 100 percent something that we have to do. We have no choice, but he refuses to vote for it.

S2: Everyone’s taking like a collective deep breath sort of deciding that we should talk about submarines now.

S1: So the submarines thing is interesting. The submarine thing is the way I read it anyway, is an attempt by the United States to really start projecting its power internationally in a way that no country has ever done, ever in the history of the world, which is specifically by exporting their nuclear technology to a second country. Every nuclear submarine in the world is a domestically built nuclear submarine. Right now, the Americans have American submarines, the Brits have British submarines. You know, the French have French submarines and these are the nuclear powers have nuclear subs. What the deal that Australia, the UK and the US came to was basically the. The U.S. and the U.K., both of whom make their own nuclear subs, would for the first time ever, export that technology to Australia, they would allow Australia to have its own nuclear submarines using U.S. and U.K. technology. And that seems, you know, I don’t know if people don’t seem to be particularly shocked by this, but we are explicitly increasing the number of nuclear powers here for the sake of it’s not entirely obvious, but something containing China, something Indo-Pacific, something which, like Stacey, you can tell me, how many times have you heard the word Indo-Pacific in the past few weeks compared to how many times have you ever heard it in your life before that?

S2: I was like, Is it 1992? What’s happening right now?

S1: What is Indo-Pacific? I don’t even understand what Indo-Pacific is.

S2: It does make me think of Indo-China, which you know how to live music.

S1: But it is basically like this idea that, like the new place the American security and the global security needs to care about is this sort of confluence of the Indian and Pacific oceans, which happens to be where Australia is.

S3: My rudimentary understanding is that Australia is closer to China than Europe is. So now we do nuclear stuff and deals with Australia to somehow contain China, which is apparently a military threat, though it is what I don’t. That’s my underst. That’s my tldr.

S2: I think one of the things you know, this sort of continuing the idea of the perception of various countries like one of the things that I have found interesting is kind of the degree of peak in the French commentary around feeling sort of betrayed, but also, you know, the on the record comments about the UK and just like how they perceive things. My my sort of realist. International relations brain is like, who is this a realignment of the global order? What are we seeing here? But I do actually think given the the pandemic induced outbreak of nationalism right where we have seen real tensions about borders, where we have seen real tensions about vaccine production, and now everybody’s trying to figure out how to protect their supply chains because nobody can get anything from anybody else. This, to me, just seems like of a piece in terms of you have a simultaneous doubling down of we need to do what is right for us, and there’s a re a reconsideration of what the coalitions are, who might be on your side.

S1: So, Stacey, can you like rewind a little bit and just explain like, how is France involved in this whole submarine saga and what do they think of what just happened?

S2: Well, from what I’m gathering is that they feel cut out by, you know, their more traditional allies, and I think that probably, you know, I think one of the one of the earliest headlines was that they canceled a gala after the U.S. entered into this agreement and everybody was like, Oh, that’s so French, they’re thinking about parties. But you know, I think in the context of understanding diplomatic relations, it does seem to be interesting to me that Europe, in the aftermath of Brexit, is trying to figure out who they can rely on, having not particularly gotten those signals from the previous administration and appearing to like, really hope that under Biden, some of that reliability around everything from, you know, climate pact to Nieto, et cetera would come back. There’s a sort of a strong sense of disappointment and surprise.

S1: So to be clear, in terms of the news here. Yeah, France recalled its ambassador to the United States because and this is like where I was headed the. French were the people who had the contract to build the in the previous version of the Australian submarine. This is a massive contract. This is like a $50 billion contract, which is just insanely enormous given that the entire population of Australia is like 25 million. Right. So like, it’s a huge amount of money that Australia’s wanting to spend on submarines, and it was going to be spending it all on French submarines, you know, conventionally powered French submarines. The French do make nuclear subs, but this was a contract for diesel subs. And then the Americans and the Australians basically said the problem with diesel subs is they’re too noisy and the Chinese will be able to hear them. And there’s no point in having the submarines, which are, by their nature, meant to be super stealthy things that China knows exactly where they are because they’re so noisy, because the diesel. So we’re going to make nuclear ones instead. And then they did this deal to build nuclear subs, which France didn’t even have the opportunity to pitch for, like, well, we can make you nuclear ones. Instead, it just went straight to the US and the UK.

S3: That kind of goes back to what we were saying before. Like we thought Tony Blinken and Joe Biden were so good at international relations. Yet according to the reporting that I’ve read, like they didn’t even give friends a heads up on this, which seems like an unforced error.

S1: Yeah, I think they I mean, reading between the lines, they basically they were talking to Australia and they’re like Australia. You’re going to tell the French and the Australians are, yeah, we’re going to tell the French and then Australia just never told the French.

S3: That’s like something that’s a mistake that I’ve made, like at a new job where you’re like, Oh, we’re supposed to fill in legal on this and you only figure that out after, but no one’s compliance.

S2: This is like

S3: an 80 year old president who’s been like doing foreign relations for decades and stuff. So it’s quite puzzling to me that this happened. It’s not the usual kind of blunder that you would expect the administration to make, but it

S1: is the kind of move that you would expect from, like global hegemonic that doesn’t really care about relations with Europe, as is the, you know, the decision to pull out of Afghanistan without telling the Brits, you know, but they’ve managed to piss off a bunch of people? Necessarily.

S2: Well, and it’s interesting. So the Brits are pissed, the French rapist. And so of course, now they’re talking to each other because they’re both like, we’re both annoyed with those Americans again. One of the the headlines I saw this morning is that, you know, Johnson and Merkel said they’ve reaffirmed the importance of the UK France relationship.

S3: So the New York Times The Daily podcast had, you know, an episode on the whole incident, and they basically said, what you two have already hinted at on state money here today is that like Europe’s just not that important anymore. Womp, womp. That era is is ending, and these are the signs. I think that’s

S1: true.

S2: OK, well, all right. European listeners of Slate Money, please email us. I mean,

S1: the European Union, you know, has a bigger economy than the United States, has more people in the United States. You know, it’s a very important part of the global economy. And yeah, it does seem that the U.S. administration is totally taking that for granted, which I guess probably they can. What is Europe going to do about it? Right.

S3: Like, they’re not going to do war or anything.

S1: Yeah, exactly. They’re not going to do what they do. Well, Europe is not going to invade the United States.

S2: It’s quite glad that Europe isn’t going to do war. Like I don’t think I can handle waking up and somebody is like, Well, here’s a war. I’m really not suffered enough in 2021.

S3: Are they like, you know, like the retired veterans who are kind of cranky but ultimately not so significant, you know that they’ll just live in life and they want you to give them respect, but they’re kind of just hobbling along.

S1: Stacey, you’re the international markets. What is the like realpolitik geopolitical reason why, you know, Tony Blinken should actually put a bunch of effort into being nice to Europe? What would America get back out of that?

S2: Well, they’ll get the good parties again. There is that, but no. So I think one of one of the things that is I am very interested in the Caribbean and Latin America and over the past, you know, I suppose decades at this point, depending on how you want, you want to look at this like the relationship between LATAM and the U.S. has been, yeah, fraught, adversarial, sort of quasi colonial. And in that space, the you’ve had quite a lot of financial and diplomatic intervention from China, right? You know, there was a period in which everyone was talking about, Hey, you know, China’s funding, really interesting infrastructure projects in various countries in Africa. They’ve been doing the same thing in Lausanne, in the Caribbean for quite a long time. And I think that if either the U.S. or Europe are actually committed to that sense of a realignment of either of those folks perceive other countries to be a threat, I do think they need to be doing a better. Her job of kind of cultivating between themselves, the relationships with other countries who, you know, I think the Caribbean and Latin perspective on Europe is except for the ones where there was a more recent history of colonialism, slightly less tense than it sometimes relates to the U.S. politically. And if I’m thinking about this in terms of like, where do we want to be in 20 or 25 years, which is why I’m not in government. I do think that the U.S. restoring or at least taking Europe seriously has kind of potential knock on effects in other parts of the world,

S1: which I think is a good place to to leave it on that kind of, you know, big picture geopolitical lens on the whole thing. So we have a numbers realm. Sure. Yeah. Or that you support the theory of a No. Of.

S3: Yeah. Yeah, it seems to be a successful feature of slate money.

S1: I will start why New York is this one came out of the Axios Closer newsletter, which is the one that comes out in the afternoons. Written by Courtney Brown, 1.2 trillion is the quarterly increase in dollars in the amount of wealth in America, just from real estate appreciation. This is a record. Americans became one point two trillion dollars richer in the last quarter. Just by the house is going up in value.

S2: Americans, so Americans own homes.

S1: Wow. Yes. Which is what is it? I think it’s about 60 percent of Americans own her.

S2: Congratulations to homeowners.

S1: Congratulations all you homeowners. You are now multi-trillion heirs. Wow. That’s a record which I just want to mention, like home wealth has never increased that fast in the history of America, not even during what we think of as the housing bubble in the mid-2000s.

S3: Let’s make sure to include that in the show notes, because I want to read the whole thing from Courtney Axiom, OK? My home has increased in value and I’m like, OK, well, so what? I still have to live here.

S1: Right? It feels like a liability rather than an asset when you’re in it, right? Because you have to pay to fix it, you have to pay your mortgage. Yeah. Just like the thing about living in the house is that it doesn’t feel like you’re wealthy. It feels like you’re having to keep on shelling out cash.

S3: Oh yeah, I mean, right now I’m like, Where is the dryer guy? Our dryer has been broken for weeks and we can’t get the part. We need to fix it because of Hurricane Ike and climate because of supply chains. Apparently, the warehouse fell down in the flooding or something. And yeah, I don’t feel I don’t feel any richer. Your house poor.

S2: I guess as a renter, I have no comment.

S3: I could segue into my number. I think, Yeah, do.

S1: What’s your number?

S3: My number is $400000.

S1: That is how how much the value of your house is going up.

S3: No, honey. That’s how much Congress says you have to make to be a rich person

S2: in any state.

S3: In the United States. The proposed tax changes basically say a wealthy individual is someone who earns $400000 a year or a couple with four hundred and fifty thousand a year an annual income.

S1: This is a Biden thing, right? Biden made the promise on the campaign trail that he wouldn’t raise taxes on anyone earning less than $400000 a year. So the pay falls when people are trying to work out how to come up with three and a half trillion dollars to pay for the infrastructure bill. Everyone’s contorting themselves to try and make sure that no one earning less than 400000 gets their taxes increased.

S3: So I wanted to ask our listeners because there’s this piece in the Times talking about this from last week in which a financial psychologist is quoted as saying that the definition of rich is subjective and that $400000 is super arbitrary and might make you rich and middle America, but won’t make you, you know, rich on the coasts. And then, of course,

S1: you rich on that.

S2: Come on.

S1: Mean, what does he say? Erika, there’s no way in America that four hundred thousand four hundred thousand is actually the new 250000. Right? Yes. It used to be that two hundred and fifty thousand was like the like if there was any broadly agreed upon. No, no. The point at which, OK, you are now rich. It was 250000. And now some point there has been sort of rich inflation and now it’s gone up to 400000. But yeah, like if someone wants to try and write in and say, Look, I’m earning 400000 and I write us and sending my kids to private school and I have a second right, I say, take vacations and I’m maxing out my four one guy and I have all of this wealth. But I can tell you it doesn’t feel like I’m rich, you know? Fuck off, of course.

S2: These are problems I wouldn’t mind having, frankly.

S3: What is the email address? Late money like I. I want to hear from you. Are you struggling to get by on 400000 subject line?

S2: I’m rich, but

S1: Stacy, what’s your number?

S2: Four thousand six hundred seventy six. That is. The number of non-fungible tokens, or NFTs, oh, called timepieces that Time magazine attempted to sell recently, but you know, the hook obviously was that, yes, an NFT, you can get in on this and of course, you also get a subscription to Time magazine. But they got booted, so they they had tried to implement some protections in place so that during the sale, you know, they wouldn’t suddenly just get bots. And for those of you who are not deeply in the weeds of NFT, you can think about this like in terms of eBay, like when you get sniped at the last second, you think you have an auction, you’re there and somebody like five cents higher than you. It’s a very similar thing. So everybody who thought they were going to be able to buy an NFT of the original price of $310 did not, and there was a point in the secondary market when these things were trading. I think as much as ninety nine thousand five hundred dollars because of all of the sniping activity against Time magazine.

S1: Does that mean that Time magazine made even more money from selling these things than anticipated?

S2: This is actually a great question. So one of the things I’m trying to figure out is whether time was at all participating in the secondary markets. This is kind of like an IPO question or if they really only made money on the initial sales.

S1: But with the initial sales all done it like a set $310 price or with it was that an auction.

S2: The initial sales were their goal was for them to beat us at $300000 prize. All of those got swipes up in minutes and then they were trading on the secondary market at up to ninety five bucks. Shortly after,

S3: Kevin Roose managed to make a lot of money off his the Danny do an NFT or something, it

S1: was sold for half a million or something.

S3: Yes, they donated to charity. I’m telling you this time I’m going to do money tide.

S1: No time is pocketing it. I mean,

S2: yeah, well, I mean, one

S3: of the way to fund the journalism these days, I guess

S2: one of the interesting things about the way that sniping works is in order to jump the queue as it were, you have to be like transaction fees. And I think Business Insider had a line that one of the folks who did buy 10 timepieces, the original ish price ended up paying $60000 in line cutting and transaction fees associated with that acquisition.

S1: Wait for 10 NFTs. There are six thousand per NFT.

S2: Right? So they ended up paying $63000 for 10 NFTs that were originally valued in total of $3000.

S1: Holy crap. OK. All right. The world now makes no sense. And just in case you were wondering, it is possible to get a time subscription for much less.

S2: They found sixty three thousand dollars. Yeah.

S3: Read all the articles in incognito mode.

S2: Wow. On that note, we do not yet have a slate money NFT, but who knows?

S1: We do have a Slate Plus segment. That’s the way that Slate tries to make money from subscriptions. So, yeah, do subscribe to Slate Plus, where you will hear me being rude about Larry Summers because I’m probably you’ve never heard me being rude about Larry Summers on the show, ever. But you get to hear me being rude about Larry Summers because we’re going to talk about the Treasury Department and the revolving door and how people when they leave Treasury make lots of money, including Larry Summers. That’s coming up on Slate Plus. But other than that, thank you for listening to Slate Money. It’s been a pleasure and thank you. Thank you. Thank you. Massive, enormous thanks to Jessamine Molli, a seaplane amada in Brooklyn. We love you Jessamine for producing this here show. Keep the emails coming on Sleep Money at Slate.com and we’ll be back next week with even more sleep. Money safe? Can you whisper sleep? But you’re going to like it?

S2: No.

S1: So, Stacey, you read this piece in the New York Times, right, about how these accountants come into Treasury, they work there a couple of years and then they interpret laws in various sort of big, business friendly ways, and then they go straight back to the accountant, the companies that they came from. But they, like, doubled their salaries and become partners and make loads of money. And it’s just

S2: like, make at least $400000.

S1: Yeah, exactly. And they basically get rewarded for doing business friendly things while they were Treasury seems deeply corrupt.

S2: I don’t know, man. Here’s how I woke up in a very cynical side of the bed this morning.

S1: It’s Stacy-Marie like, is this cynical, Stacey?

S2: The the notion of regulatory capture by any other name seems like well established in financial markets, right? You run into this problem where the argument is, well, the only people who are who have the appropriate experience to figure out how we should make the rules are people who were previously on the other side of rules. That’s like a good and healthy thing. They their smarts, they you know, they’ve done this for a long time. They understand what we’re talking about. Let’s hire them. Then, of course, the people who are on the other side of rules tended to specialize in getting around the rules. And so when you put them in the situation where now they’re like, OK, we’ve spent our entire careers being useful to large corporations by knowing how to avoid stipulation x y z. We’re going to go into a situation where we then design stipulation ABC and then we’re going to get immediately hired again after where we tell those corporations. And by the way, this is how you avoid stipulation. ABC and I know because I wrote it. And that just seems I don’t know if it’s necessarily corrupt, but it feels very broken.

S3: It definitely feels corrupt. I mean, you. What’s interesting about this pieces? I feel like I hear people complaining about the revolving door all the time. But what’s good about this piece by Jesse Drucker and Danny Hakim is this the specificity with which they explain how it works? It’s like you work at TWC or Ernst and Young for a number of years trying to, you know, lobby the government to relax various tax rules, et cetera. Then you go into Treasury and work on those rules and talk to your old friends at the firm about how to relax them. And then it’s understood that you’re going back to P C, R E Y after you do your little stint. It’s like study abroad, but for accounting. And then when you go back, you know you’re a partner and congrats everyone. It’s so it’s I guess I had thought a little bit like the revolving door was more like you work in the private sector and then you go into government as like a service. I feel like I hear

S1: the Goldman Sachs thing right when everyone leaves behind like like Hank Paulson or Bob Rubin or, you know, Neel Kashkari or someone would leave Goldman Sachs and become a public servant and you’re like, Yes, OK, but they don’t get straight back to Goldman Sachs. Those people went back to Goldman afterwards, although no, this is the go to Citigroup, I suppose. I mean, he’s

S2: partly the

S3: understanding of the accounting firms. It’s like you do your little stint and you help the firm out and then we’ll reward you. I mean, it’s truly seems corrupt, you know, it’s different than public service.

S2: The were the eves there a service, right? And I think part of the reason the ideas of service is so interesting is because these government salaries do not allow you to kind of maintain your other house in the Hamptons and your multiple private schools. And I hear that a lot from, you know, friends I have who go into government who come from the private sector, they’re like, Yeah, I’ll do this for two years because the money that I was making a large tech company. Well, and you know, I can survive on my options and my equity stuff for a while, and then I’ll go back and continue making money again, and I’ll like feel good about my contribution to the world, etc., etc.. That is not. I don’t know if that’s solvable, right? As long as government salaries are what they are, the idea of it appeals to your inner good. One has the effect of leaving people out who can’t actually afford to survive on a government salary and to definitely rewards the people who can and then can go back and get an even cushy job after.

S1: Well, I mean, let’s be clear about this. Anyone can afford to live on a government salary. It’s just you can’t afford to have the

S2: lifestyle that they want.

S1: Yeah, exactly. You’re your former lifestyle or like, exactly. You can’t have a $400000 a year lifestyle on a $100000 a year salary. Like, that’s obvious. But yeah, if it fits well, I feel like the really interesting test case here is going to be Angela Merkel, right? She’s never operated in the private sector. She’s always had a very modest lifestyle.

S2: She does her own laundry

S1: room, laundry in supermarket shopping. And if she was a UK or US politician, you know, given the amount of power she’s had. For so long, she was basically like, you know, the leader of the world for so many years, there’s no it’s almost obvious that she would start signing multi-million dollar contracts of some description. You know, there’s going to be a lot of people coming up to her throat, you know, offering absolutely enormous amounts of money to do various different things and. American politicians have no compunction taking those deals, and especially Treasury. Former Treasury secretaries have no compunction taking those deals. So, you know, Larry Summers goes off and makes $5 million a year, working one day a week at the seashore. Or Tim Geithner goes off and works like Carlyle Group or Bob Rubin goes off and takes a $10 million a year job at Citigroup or the most recent example, Steve Mnuchin. Goes off and raises two and a half billion dollars from his friends in Saudi Arabia for a new fund, which, you know, for those who say, I’ll save you the mathematics, just the management fee on that is going to be $50 million a year. So it’s standard. We saw during the Greensill implosion, the David Cameron was being paid $10 million. David Cameron is the most useless world leader that the world has ever seen. He is a complete disaster. He has no skills at all. And he got 10 million dollars from Greensill just for being a former world leader. So just imagine how much Merkel could get. I feel like the norms are different in Germany, and there’s a good chance you might not actually accept any of those deals. You’ll be just like, Oh no, I’ve retired now. I’m going to keep on living in my house and doing my laundry, and I don’t need that lifestyle.

S3: Yeah, she’s like the exception that kind of proves the rule. But I think there is something to what Stacey was saying about the quality of the government jobs I read like Michael Lewis’s fifth risk book, I think last year sometime and what it means to be a bureaucrat in America these days. It’s not. It could be better. The pay could be better. The fights in Congress kind of trickled down to these workers. Like we were saying in the main segment, they might not get paid, you know, if we default on debt, like that’s a go to place. When there’s a government shutdown, there’s furloughs. They get no respect. I feel like those jobs could be a little bit better. That’s not going to affect like the Larry Summers and Steve Minchin’s kind of thing. But like, maybe it could affect the revolving door for these like accountants, you know, at P C and E Y, et cetera, right? Like these jobs could be better.

S2: The great crisis of bureaucratic management,

S3: they get no respect over there. I don’t know.

S1: Well, one of the things that the World Bank has been doing for a long time right has been like asking for governments to raise public sector salaries so that the perceived need to be corrupt. The financial need to be corrupt goes away, which it’s not obvious that works, but it’s certainly not obvious it doesn’t work like that at the margin. There are places where it seems that if you start paying back, then there’s less corruption. And when we had onion on talking about China, she was definitely saying, like, if you look at the official public sector salaries in China, it forces you to be corrupt because there’s no other way that you can live is $40 a month or something.

S3: And then maybe on the flip side, these finance jobs just pay too much. Maybe the government jobs pay too little and the finance jobs pay too much. The inequality is too wide, and that leads also to the corruption.

S1: Yeah. Like why should I? In what sane world, as Steve mentioned, actually earn $50 million a year by throwing Saudi money at various investments?

S3: No, I only need thousand to be wealthy. First of all.

S1: So, yeah, but he has a very high making ex-wife.

S2: This is like the very strong opinions episode. Like, I just feel like it. Just tell us how you really feel about genuinely everything we do.

S1: He’s like I would never. I would never have an opinion about Bloomberg.

S2: I am. I have never had an opinion in my life.

S3: Did they make you sign away your opinion, Stacy? Silence.

S1: OK, you see, this is why you subscribe to Slate, plus you get to find out Stacy’s true opinions

S2: well on nothing. I do have very strong opinions about independent bookstores, so I’m willing to share those at any time.

S3: What’s going on with that is this is the strand still around. I haven’t been there in two years. I worry about.

S2: Yeah, they talk of the world’s largest PBB, and it was quite interesting. No, it’s just previous guest and friend of the show. Cardiff Garcia is a very enthusiastic corporate bookstores in the form of Barnes & Noble. And I am very enthusiastic in the forms of not Barnes and Noble.

S3: So I kind of feel sad for Barnes and Noble a little bit. I recently watched You’ve Got Mail was kind of just thinking about how it used to be the big bad and now is just sort of like a shell of its former self.

S2: Well, since you seem to be very aligned with Cardiff, Garcia’s perspective on this, folks should tune in to that episode in which we argued about the merits of Barnes and Noble versus independent bookstores.

Mentioned In the show:

“Understanding Evergrande, the Chinese Real Estate Conglomerate That’s Nearing Collapse,” by Joe Weisenthal and Tracy Alloway for Bloomberg’s Oddlots

Axios Capital Newsletter, by Felix Salmon

Axios Closer Newsletter, by Courtenay Brown

“How Accounting Giants Craft Favorable Tax Rules From Inside Government,” by Jesse Drucker and Danny Hakim for the New York Times