# Inflation, The Deficit & Why the Dollar Stays King with Benn Steil | The Real Eisman Playbook Ep 81

Markdown copy of https://realalpha.app/v/ZR5-znz_WcM/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy.

Benn Steil argues that U.S. debt is on an ugly trajectory, but the dollar has no serious currency rival.

- Show: The Real Eisman Playbook
- Hosts: [Steve Eisman](https://realalpha.app/people/steve-eisman/)
- Guest: [Benn Steil](https://realalpha.app/people/benn-steil/) is a Director of International Economics at the Council on Foreign Relations.
- Published: Oct 26, 2026
- Length: 50 min

## The best minutes

- [20:05](https://realalpha.app/v/ZR5-znz_WcM/?t=1205) [U.S. debt faces a tougher market as rate-sensitive buyers grow](https://realalpha.app/s/u-s-debt-faces-a-tougher-market-as-rate-sensitive-buyers/) (6 min)
- [5:24](https://realalpha.app/v/ZR5-znz_WcM/?t=324) [The Fed’s forecasts make forward guidance less useful](https://realalpha.app/s/the-feds-forecasts-make-forward-guidance-less-useful/) (4 min)
- [8:51](https://realalpha.app/v/ZR5-znz_WcM/?t=531) [A small Treasury operation could not bluff the bond market](https://realalpha.app/s/a-small-treasury-operation-could-not-bluff-the-bond-market/) (4 min)

## Also worth watching

- [14:23](https://realalpha.app/v/ZR5-znz_WcM/?t=863) [Gold is the main reserve alternative to the dollar](https://realalpha.app/s/gold-is-the-main-reserve-alternative-to-the-dollar/) (4 min)

Skip the day-specific inflation and Fed meeting discussion, then the long Henry Wallace, Bretton Woods and Marshall Plan history.

## Full analysis: Benn Steil says $6 billion was about 0.016% of the Treasury market

- Steil put Bessent’s $6 billion operation at about 0.016% of the Treasury market.
- That is an attributed scale estimate, while the episode leaves the longer debt trajectory open.
- Watch the buyer mix, the deficit path and AI capital demand, not the swap as a yield forecast.

Its 6 sections, what it means for you and what to watch are on [the page](https://realalpha.app/v/ZR5-znz_WcM/#analysis), free with an account:

- [2:10](https://realalpha.app/v/ZR5-znz_WcM/?t=130) Persistent inflation weakens the case for looking through oil
- [6:40](https://realalpha.app/v/ZR5-znz_WcM/?t=400) Weak forecasts undermine formal forward guidance
- [10:50](https://realalpha.app/v/ZR5-znz_WcM/?t=650) A $6 billion move could not bluff the Treasury market
- [24:43](https://realalpha.app/v/ZR5-znz_WcM/?t=1483) Rate-insensitive Treasury buyers now hold a smaller share
- [20:32](https://realalpha.app/v/ZR5-znz_WcM/?t=1232) AI demand adds pressure alongside deficits
- [19:59](https://realalpha.app/v/ZR5-znz_WcM/?t=1199) Gold diversifies reserves without creating a currency rival

## Summary

Benn Steil directs international economics at the Council on Foreign Relations. He has written books about Bretton Woods, Henry Wallace—including The World That Wasn't—and the Marshall Plan.

Steil says persistent inflation makes the Fed reluctant to look through an oil shock, while he supports ending formal forward guidance because Fed forecasts have been weak. He argues that Scott Bessent's $6 billion Treasury maneuver could not materially sway the market. Steil sees the U.S. debt trajectory as ugly, with demand for AI-related capital and a shrinking share of rate-insensitive Treasury buyers adding pressure, but says the dollar has no serious currency rival. He also discusses how Henry Wallace, Harry Dexter White, Bretton Woods and the Marshall Plan shaped postwar U.S. policy.

### Minute by minute

- [0:38](https://realalpha.app/v/ZR5-znz_WcM/?t=38) **Inflation keeps the Fed under pressure.** Steil says a 3.7% inflation reading, above the 3.6% market expectation, strengthened the case for a possible rate hike because inflation has persisted despite the oil shock. He says the Fed risks letting expectations become unmoored if it delays, while its larger balance sheet does not prevent it from controlling rates above the zero bound. Steil supports ending formal forward guidance because Fed forecasts have often performed worse than private-sector forecasts.
- [8:39](https://realalpha.app/v/ZR5-znz_WcM/?t=519) **Steil says Bessent's $6 billion move has little force.** Eisman asks why a $6 billion Operation Twist would lower long-term rates against a $40 trillion Treasury market. Steil says Bessent may have meant to signal he could escalate, but the move was too small to affect the market: it amounted to 0.016% of the Treasury market. He notes that the Treasury would borrow short-term to buy long-term debt, echoing a tactic Bessent had criticized under Janet Yellen.
- [13:07](https://realalpha.app/v/ZR5-znz_WcM/?t=787) **The dollar has few alternatives.** Eisman notes that warnings about the deficit have circulated for decades. Steil says currencies are judged against alternatives, and central banks have not broadly sold dollars for other currencies, though they have bought gold; he traces the dollar's postwar role to the U.S. holding about 60% of global monetary gold reserves before Nixon closed the gold window in 1971. Steil says sanctions have encouraged countries to seek alternatives to dollar-based systems, while China's alternative settlement system briefly gained Iran-related payments from SWIFT before they shifted back after Trump announced a ceasefire.
- [19:55](https://realalpha.app/v/ZR5-znz_WcM/?t=1195) **Debt makes governments compete for buyers.** Steil says the U.S. debt trajectory is ugly: AI-related demand for capital competes with Treasuries for global investment, while Congress and the executive branch show little willingness to cut spending. He says rate-insensitive investors fell from 76% of the Treasury market 20 years earlier to 43%, increasing reliance on yield-sensitive buyers. France is more exposed, Steil argues, because virtually all its bond buyers are rate-sensitive and investors treat French government debt more like corporate bonds than risk-free Treasuries.
- [27:23](https://realalpha.app/v/ZR5-znz_WcM/?t=1643) **Corn gains came with costly farm policies.** Steil says Wallace was a pioneering agricultural geneticist whose hybrid-corn work led to a company later sold to DuPont for $1 billion in 1999. As FDR's agriculture secretary, Wallace backed farm programs that included plowing under millions of acres of cotton and killing six million hogs. Steil says FDR chose Wallace as his running mate partly because he was an internationalist, though he was not FDR's first choice.
- [33:42](https://realalpha.app/v/ZR5-znz_WcM/?t=2022) **Steil says Wallace's Soviet views worried Democrats.** Steil says Wallace was no communist but praised Soviet economic planning, which alarmed Democratic leaders. FDR's allies pushed Wallace off the 1944 ticket, and Truman won the nomination after a contested convention. Steil argues that a President Wallace likely would not have pressured the Soviets to leave Manchuria and would have opposed the Truman Doctrine, the Marshall Plan, West Germany and NATO.
- [39:12](https://realalpha.app/v/ZR5-znz_WcM/?t=2352) **Bretton Woods created a dollar-led order.** Steil says Harry Dexter White, a Treasury official and Soviet fellow traveler, shaped the Bretton Woods negotiations. The conference created the U.S.-dominated IMF and World Bank, and White helped establish the dollar-based system. Steil also says White advocated giving the Soviets German occupation-currency plates; the currency they printed was later exchanged in Washington for an amount Steil estimates at about $8 billion in today's dollars.
- [46:19](https://realalpha.app/v/ZR5-znz_WcM/?t=2779) **The Marshall Plan shifted U.S. policy toward Europe.** Steil says the Marshall Plan took on the work of rehabilitating war-torn countries that the IMF and World Bank could not do, as those institutions were largely mothballed in the 1940s and 1950s. The plan aided future U.S. allies, and European demands for security guarantees led NATO to accompany it. Steil says Stalin saw a U.S. withdrawal from Europe as an opportunity to destabilize Western Europe.

## Transcript

The Real Eisman Playbook, hosted by Steve Eisman, with Benn Steil.

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

[0:02](https://realalpha.app/v/ZR5-znz_WcM/?t=2) Hi, this is Steve Eisman, and welcome to another episode of The Real Eisman Playbook. We have a variety of wonderful guests that we've had over the last year and a half. We've had economists, we've had analysts, we've had authors, and once in a while we get someone who's kind of a combination of all of those. Today's guest is Ben Steele, who is the Director of International Economics at the Council of Foreign Relations. And he's also an author of multiple books, three of which I've read, and we're going to talk about that. But Ben, welcome to the show. Thanks for having me, Steve. So let's start with something mundane.

[0:40](https://realalpha.app/v/ZR5-znz_WcM/?t=40) Sure. Like the Fed. Something unimportant. From your seat, what do you think is happening? How much inflation pressure is there? I got a question from a viewer. after the Fed raised rates, which I thought was actually a very interesting comment, where the viewer basically said, isn't the problem just oil prices, and the Fed can't change oil prices, so it feels like the Fed is like that guy who has the hammer and everything is a nail. That's right. So, that's my intro to you. Take it away. Well, indeed, a lot of economists do make that argument. Certainly, Kevin Hassett, who said the numbers were disappointing today, which is a major concession from him.

[1:29](https://realalpha.app/v/ZR5-znz_WcM/?t=89) This day, the recording is October 14th, and there was bad inflation numbers. There were bad inflation numbers, 3.7%, which exceeded market expectations, which were 3.6%. But that's significant when they do come in on the upside. Now, economists would say that if you've got an oil shock that's temporary, you could treat it as a one-off. That would not feed into the wider price level, so you should, quote-unquote, look through it. And indeed, the Fed had considered doing that for quite some time. But inflation's been persistent. It's clear that it's not coming down. Although we haven't seen any significant rise in longer-term inflation expectations, The Fed is genuinely concerned that if they don't move now and make it clear that they are dedicated to the 2% long-run target, that inflation expectations will become unmoored and it will make their job much harder in the future.

[2:39](https://realalpha.app/v/ZR5-znz_WcM/?t=159) So, don't delay, because if you delay, the problem gets worse. That's right. And so, we're in an interesting situation right now, because, as you know, the Fed meets at the end of the month. Yes. Kevin Warsh, no doubt, was praying for— Praying. Praying. Well, it was on— You've got to pray for something. It's on a knife's edge for good inflation numbers today. He didn't get it. And this is going to cause him enormous grief in that meeting. Pause there for a second. Because not everybody understands that the head of the Federal Reserve can't just do whatever he wants. There's a committee. There's a committee.

[3:18](https://realalpha.app/v/ZR5-znz_WcM/?t=198) So, when you say that today's inflation numbers are going to cause grief for him in the meeting, elaborate on that. What do you mean by that? Well, there looks now like there may well be a majority for hiking rates. This month. This month. Which people were not anticipating. Well, that's it. The futures markets have re-evaluated today. And the last figure I saw before I came into the studio showed that expectations had gone over 50%. But clearly, two days ago, they were below 50%. They were down about 36%, I believe. So, that's material. The last thing Kevin Walsh wants is to be a dissenting vote in a committee he supposedly leads as chairman.

[4:09](https://realalpha.app/v/ZR5-znz_WcM/?t=249) But he also doesn't want to infuriate the man who appointed him. Donald Trump. Yes. So he's in an unenviable position. Yes. Yes. So if you were him? You know, Steve— It's a cheap question, but I'll ask it anyway. If you were him, what would you do? You know, Steve, you know the old story about asking the old Irishman for the road to Dublin. I don't know that one. He says, if I were you, I wouldn't start from here. Okay. I wouldn't start from here. You're not starting from there. Okay. Okay, so obviously he's in a hard spot. He's in a very hard spot. Let's go even more big. Sure. He came in and basically said, I can't stand quantitative easing.

[4:58](https://realalpha.app/v/ZR5-znz_WcM/?t=298) Not all of quantitative easing, but I think it was way overdone. The Fed now has a huge balance sheet of $6.5 trillion to $7 trillion. And I don't like this forward guidance stuff. I'm going to keep my mouth shut and let the rest of you ponder. We'll go back to the days of Greenspan where we were looking at his briefcase to see how many papers were in it. What do you think about his philosophy? Forget about whether he should raise rates or not. As an economist, what do you think about his philosophy about quantitative easing and lack of forward guidance? Broadly speaking, I'm not a big fan of his philosophy.

[5:40](https://realalpha.app/v/ZR5-znz_WcM/?t=340) Which part? Well, the conservative portfolio of constantly questioning the Fed's balance sheet and what distortions that could have on the economy, all the evidence we have right now is that the Fed is perfectly capable of controlling interest rates when we're well above the zero bound with, quote-unquote, interest on reserves. the interest that the Fed pays the banks to park money at the Fed. And the fact that the balance sheet is much, much bigger than it was before, say, the great financial crisis, is in no way a problem for the Fed in controlling inflation. Having said that, the one part of his agenda I do agree with is getting rid of, quote-unquote, formal forward guidance.

[6:36](https://realalpha.app/v/ZR5-znz_WcM/?t=396) Okay. Elaborate on that. Why? Okay. A number of reasons. First, the empirical evidence is absolutely overwhelming that the Fed is not good at predicting the future. By the way, nobody is. Thank you. This is a very fair point. I will say that by myself. I am not very good at predicting the future. Neither are you. I go out on a limb and say, neither are you.

[6:59](https://realalpha.app/v/ZR5-znz_WcM/?t=419) **Benn Steil:** Neither am I. But the Fed has been systematically worse than so-called blue-chip private sector forecasters for many, many decades now, according to the findings of Fed studies. So, when people

[7:18](https://realalpha.app/v/ZR5-znz_WcM/?t=438) say that the Fed should provide forward guidance, they should tell us what they're planning to do in the future, that assumes that the Fed has good information about what the future will be, and therefore they are helping us by telling us what they will do. But if their information is not better than what we have, and in fact their forecasting abilities are worse, you can imagine all sorts of problems arising from Fed officials telling us that I expect to vote for X or I expect— I see what you're saying. Because they lock themselves in. They lock themselves in. I see what you're saying. They don't want to be— My attitude about all this is this shouldn't be this complicated.

[8:03](https://realalpha.app/v/ZR5-znz_WcM/?t=483) If the inflation data is bad, they'll raise rates. And if the inflation data gets better, they won't. And so pontificating about it all the time is kind of a waste of time. My personal opinion is that FOMC members love the rock star status. They do. They love to get on TV and talk about what they want. They love to speak at institutions like mine, for example, where they get a big, educated audience who hang on their every word. And particularly when the Fed chairman is being quiet, their views are elevated. So they're very happy with this moment. Very easy to get on the front pages of The Wall Street Journal these days.

[8:47](https://realalpha.app/v/ZR5-znz_WcM/?t=527) All right, let's move on. We've got so much to cover. Let's talk about Scott Bessent. There's another guy with an unenviable portfolio. Yeah, unenviable position. We're going to come to the deficit and interest rates in a bit. But I just want to first focus on, Scott Bessent came out with this plan, which I think it's called Operation Twist, where he goes out and the Treasury Department sells short-term treasuries and buys long-term treasuries to the tune of $6 billion. Which is the sort of thing he criticized his... predecessor, Janet Yellen, for doing fiercely. Yes. Leave that aside. What I don't understand about it, and maybe you do, is the size of the federal deficit is $40 trillion.

[9:45](https://realalpha.app/v/ZR5-znz_WcM/?t=585) So, coming to coming... Going up $7 billion a day. Let's leave that aside. Let's just stick with $40 trillion, okay? That's a big issue. You got $40 trillion, and you're trying to lower long-term rates by buying $6 billion. What am I missing? Because it seems to me that's like bringing to a gun battle a butter knife. Completely agreed. But what Bassent would say, if he could talk to you away from the cameras, is, hey, look, I'm just making a shot across the bow. I want to show the markets that if they mess with me and that long-term rates get too high, I'm going to come out with heavy ammunition, and I'm going to hit them where it really hurts, when they least expect it.

[10:36](https://realalpha.app/v/ZR5-znz_WcM/?t=636) And it did not work. Not even close. Not even close. The first reaction from the market is, oh my gosh, what's up? And we did see a breach. It lasted a day. It lasted less than a day, right. But when the markets realized, hey, this is 0.016% of the- Is that what it is? Yes. I got to use that. It's nothing. It's 0.016% of the deficit. Percent. Percent of the treasury market. The treasury market. Right. So, this is nothing on its own. And when they calculated what sort of ammunition Besant could actually bring to the fight,

[11:17](https://realalpha.app/v/ZR5-znz_WcM/?t=677) **Benn Steil:** They said, $40 trillion is just overwhelming. It's just too big. So, you can't head fake this market.

[11:28](https://realalpha.app/v/ZR5-znz_WcM/?t=688) And remember, Besant is not buying back long-dated treasuries with cash. No, he's issuing debt to buy debt. Exactly. So, he's got to borrow more short-term to buy back long-term. Again, exactly the sort of thing. Operation Twist. He criticized his predecessor for. I don't know if you remember the Japanese operation. He lent them money. So, what? But Besant was very concerned that the Japanese were intervening in the currency markets in order to push up the yen. And he did not want the Japanese to be selling treasuries in order to... So, instead of them selling treasuries, he lent them money to buy the yen.

[12:16](https://realalpha.app/v/ZR5-znz_WcM/?t=736) He told them to go to the Fed and use a certain Fed facility. And he declared victory because the operation did push up the yen. But, fascinating coda here, a month later, the Japanese released statistics on their foreign securities holdings. And what we learned was that the Japanese Ministry of Finance had intervened in the currency markets to the tune of about $99 billion. And they had sold $88 billion worth of foreign securities, almost all of that, presumably U.S. treasuries, in order to do it. So, Besant's logic did not work. The Japanese did, in the end, clearly sell treasuries in order to buy yen. Let's switch topics. We've only covered small thing so far. Let's talk about, I'm very curious, you're an economist, I am not.

[13:20](https://realalpha.app/v/ZR5-znz_WcM/?t=800) The U.S. federal deficit, and- Currently running about 6% of GDP. 6% of GDP. That's the annual. So my question for you is, first I'm going to ask you what's your position about the threat of the debt and of the U.S. debt to the overall economy and the treasury market. But I want to preface it by saying, you know, people who are, call them doomsdayers about the U.S. federal deficit. And there are many people, and they're very respectable. What I say about them is, I don't have a strong opinion on this topic. All I know is that you guys have been making this argument for 40 years. Because I remember Pete Peterson in the 90s making literally every single sentence that Ray Dalio utters now, Pete Peterson was uttering in the 90s.

[14:16](https://realalpha.app/v/ZR5-znz_WcM/?t=856) And when you make an argument for 40 years and you've been wrong for 40 years, there's got to be a reason why you were wrong for 40 years. So that's how I want to preface. take it away. Yeah. So, you know, the best way I've heard the U.S. dollar described as the winner of an ugly dog contest. Right. You can only compare this particular dog to the rest of the dogs that are out there in the competition. Right. As everybody knows, when you trade currency, you're always trading it relative to other currencies. There it is. That's right. So, it's not clear if you're losing faith in the dollar, whether the United States would, for example, have to inflate away its debt, what you're going to move into.

[15:05](https://realalpha.app/v/ZR5-znz_WcM/?t=905) Right. What's your alternative? Right. So, broadly speaking, major central banks around the world have been answering that question over the past 20 years. They have not, broadly speaking, sold dollars for other currencies, but they have- They've been buying gold. Gold. Yes. Okay. And, you know, historically, gold has been the foundation of global financial markets. It goes back to the late 19th century. And the top currencies, the leading currency is sterling. By the way, just interrupt for a second. There was a movie I saw a long time ago. It was like a Sherlock Holmes movie. And the story basically was that all the gold of all the major countries was in New York, in this huge vault.

[15:56](https://realalpha.app/v/ZR5-znz_WcM/?t=956) Yeah, at the New York Fed. At the New York Fed. And each country had its own storage unit. And so whenever there was trade, they would move it from one locker to another locker. And the great thing about the movie was Sherlock Holmes got called in because they opened the door one day and there was no gold. And they freaked out. And so, I'll just finish the story. What had happened was the bad guys had built an alternative floor just on top of the floor. And so, it looked exactly the same except no gold, which gave them a lot of time to pull the gold out. But I just thought it was fascinating. All the gold was in one spot.

[16:39](https://realalpha.app/v/ZR5-znz_WcM/?t=999) They were just moving the gold from one room, one locker, to another. Right. And historically, that's the way it's been done. That's the way the Bank of England did it in the 19th century. But as I was saying, go back to the late 19th century and the leading currencies in the world of sterling, the Deutsche Mark, the French Frank, the U.S. dollar were all— all more or less credible vouchers for gold. Right. So, fast forward to the end of the Second World War, and now the U.S. dollar was the only credible voucher for gold. Because we were the only country left standing, basically. The only economy left standing.

[17:13](https://realalpha.app/v/ZR5-znz_WcM/?t=1033) We had about 60% of the world's monetary gold reserves. Over time, we cut that link. As you know, Nixon closed the gold window in 1971.

[17:24](https://realalpha.app/v/ZR5-znz_WcM/?t=1044) **Benn Steil:** Having said that, countries have learned that during a crisis, gold is approximately as good, some could argue, better than the U.S. dollar, because gold tends to do well during times of stress.

[17:42](https://realalpha.app/v/ZR5-znz_WcM/?t=1062) And so, the Chinese and the Russians, in particular, have been building up their gold stocks. They've been moving them to safe locations, re-domesticating it. As you know, even the Dutch recently repatriated their gold holdings from the New York Fed. And one of the benefits that that has is that, as you know, the U.S. has been very aggressive in recent years with dollar-based financial sanctions. In other words, if you cross us on a foreign policy initiative, we will cut you off from the dollar-based financial system. Like Iran, for example. Absolutely. So countries are learning that they need alternative vehicles for storing their sovereign.

[18:37](https://realalpha.app/v/ZR5-znz_WcM/?t=1117) Outside of the dollar. Outside of the dollar. But where do you go? Right. So it's only gold. Well, yeah, I mean, we could go through them all. The euro has. Please, please. All we need to say is the euro, we can move on. So going back. The Chinese yuan. RMB. RMB, that's not going to happen. No, we did see a sort of test case earlier in the year. Quite fascinating. The Chinese have been building an alternative international currency settlement system. It's called SIPs, which is trying to compete with the huge international system called SWIFT. Right. What we did see was that early on in the Iran crisis, when Iran closed the strait, that there was a shift in payments from SWIFT to SIPs.

[19:30](https://realalpha.app/v/ZR5-znz_WcM/?t=1170) why the Iranians were, as you know, tolling the strait. Right. They demanded to be paid in Chinese RMB or cryptocurrency. Right. So these transactions moved out of SWIFT, out of the U.S. dollar, into RMB. But when Donald Trump announced the ceasefire, unfortunately that didn't last terribly long, but when he announced it, you saw... It went back. Exactly. So it's not... So bottom line. Yeah. There's no alternative at this point to the dollar other than gold. Countries have diversified. What is your view of the doomsday Ray Dalio scenario? deficit, and then rates are going to soar because no one's going to want to buy treasuries, etc.

[20:17](https://realalpha.app/v/ZR5-znz_WcM/?t=1217) Well, it is a serious question. If we had Scott Bessent here, what his defense would be is, you know, hold on, stop blaming us for this. We're just, in some ways, a temporary victim of our own success. Meaning? The economy is doing so great here. AI is exploding, and there's a huge demand for capital. That's true. That is true. That is true. That's pushing up treasury rates, which, interestingly enough, feeds through into the entire global economy. So, we are competing with AI infrastructure, and the treasury is competing with governments around the world for global investments. So, rates are being pushed up everywhere, particularly in countries that are in a very poor fiscal situation.

[21:17](https://realalpha.app/v/ZR5-znz_WcM/?t=1277) You and I, before we started the podcast, we're talking briefly about France. We're getting to that. Right. We'll get to that now. All right. So, to finish this, so you don't think— The trajectory is ugly. The trajectory is ugly because there's a crowding out effect because of AI, partially. Well, yeah, and there's no longer any serious willingness in Congress or in the executive branch to address it. To cut anything. I mean, you and I are old enough to remember Obama and the Simpson-Bowles Commission. There was one serious effort to get a bipartisan solution. They didn't quite get the majority they needed, but Obama could have embraced it.

[22:00](https://realalpha.app/v/ZR5-znz_WcM/?t=1320) Instead, he ran away from it. That was the last serious attempt. Now, what do we have? We have the Treasury Secretary telling us not to worry at all, that we're going to, quote-unquote, grow our way out of it. And the numbers don't bear them out. I agree with that. Let's turn to France. So, there are riots going on. That's a political topic. But their problem, it seems to me, is kind of our problem, in that they have very large deficits. They have no political will whatsoever to deal with them. In fact, just as an example, Marie Le Pen, who could be the next president of France, has said she wants— to reduce the retirement age from 62 years to 60 years, which is crazy.

[22:49](https://realalpha.app/v/ZR5-znz_WcM/?t=1369) We have our own crazies here. Granted. We're just talking about France now. The difference is, nobody needs to own French bonds. Exactly right. Nobody does. Right. I mean, if you're a bank anywhere on planet Earth and you're doing overnight repos, you're doing overnight repos with treasuries. There's no alternative. If you're a big, massive institution like the Norway Sovereign Wealth Fund, and you want to own five-year, 10-year debt, you're owning U.S. treasuries. And there is no Eurozone sovereign debt market, right? The German bonds are, in effect, the closest thing we have to European bonds.

[23:38](https://realalpha.app/v/ZR5-znz_WcM/?t=1418) So, like I said, no one on planet Earth wakes up any morning and says, I got to own French sovereign bonds. Exactly. So, what does that mean for France, in your view? Well, they are even more than we, competing for interest rate-sensitive investors around the world. So, for many decades, we were in an extremely privileged situation, what the French called the exorbitant privilege, where our borrowers were mainly sovereign institutions like central banks that bought treasuries on reflex just as part of their normal reserve management. They didn't even think about it. They didn't even think about it.

[24:20](https://realalpha.app/v/ZR5-znz_WcM/?t=1460) Whatever the market rate was, they bought it. So you go back 20 years, and 76% of the market were what we would call rate-insensitive investors. That was a wonderful situation for us. And when you say rate-insensitive investors, meaning they would buy treasuries, whatever the price was that day, they didn't care. That's right. So mostly central banks. Right. That figure is now down to 43%. Okay. So this is a big problem for us.

[24:51](https://realalpha.app/v/ZR5-znz_WcM/?t=1491) **Benn Steil:** Because the more debt we issue, the more interest-rate-sensitive investors we have to attract into the market to buy our debt.

[25:01](https://realalpha.app/v/ZR5-znz_WcM/?t=1501) This is for the U.S. Yes. Yes. So, what happens is, you get an accelerationist effect on the rise in interest rates, because the profile of our investors... is getting worse and worse as the deficit gets worse. So, that's the U.S. What about France? Well, France is in an even uglier position, because virtually all of their investors are interest rate sensitive. Like I said before, nobody wakes up any day and says, I'm just going to buy French bonds. They have to convince us that they're going to compensate us enough. You know, you and I grew up calling the U.S. Treasuries a risk-free asset. Nobody is going to call French government bonds a risk-free asset.

[25:55](https://realalpha.app/v/ZR5-znz_WcM/?t=1555) We look at French government bonds like we would look at corporate bonds, for example. Okay. All right. So before we turn to your books, is there anything on planet Earth that you're very focused on that you'd like to talk about? Well, you know, at the Council on Foreign Relations, the world always gives us good material to work with. I don't think you need to be at the Council of Foreign Relations to get the material. Right. So you and I have talked about the things that I follow on the day-to-day basis. We've talked about inflation and the Fed and monetary policy, the debt. We've talked about the international currency markets and how the RMB compares with the U.S. dollar, what's motivating flows in and out of.

[26:47](https://realalpha.app/v/ZR5-znz_WcM/?t=1607) And so, my more popular recent books, before that I used to write more academic books, but starting with Bretton Woods, was looking historically about how these markets that we talk about today developed. But over the course of writing these books, I became more fascinated with the history itself. Yes. The whole idea. It became very clear as I started to read your books. Okay, so let's talk about your last book, because your last book, in some ways, this is going to be a very funny thing to say, is a horror story in a way. So you wrote a book about Henry Wallace. Called The World That Wasn't. The World That Wasn't, who was the vice president of the United States in the third term of Franklin Delano Roosevelt.

[27:42](https://realalpha.app/v/ZR5-znz_WcM/?t=1662) and FDR basically woke up one morning—I'm exaggerating—and decided that he did not want Henry Wallace—we'll talk about why—to be his vice president anymore. And so he looked around, and he made Harry Truman his vice president. And because of that, Harry Truman became president of the United States and not Henry Wallace. And the rest is history. And the rest is history, as we always like to say. And the horror novel part of the story, which is the one I want to talk about, is that if that had not happened, Henry Wallace would have become president of the United States. Right. And so let's talk about why that would have been a horror story.

[28:19](https://realalpha.app/v/ZR5-znz_WcM/?t=1699) Well, Oliver Stone, as you may remember, argued the opposite. Yes, Oliver Stone could rot in hell, as far as I'm concerned. Okay. So, you know, I looked it up. I asked AI something. I said, how many people died under communist regimes in the 20th century? And the answer was 100 million. And I'm thinking to myself, when 100 million people die, that kind of tells you that maybe the ideology behind those deaths is not so good. Right. So that's why I say to hell with Oliver Stone. But Henry Wallace didn't quite grasp that. Yeah. So, let's back. Who was Henry Wallace? So, Henry Wallace was a great agricultural geneticist.

[29:16](https://realalpha.app/v/ZR5-znz_WcM/?t=1756) Yes. He loved corn. He loved corn. And the corn you and I eat today. He was from Iowa. Right. Sort of from Iowa farm. You know, modest nobility, we would say. His family was very well-known in Iowa because his grandfather created an agricultural journal called Wallace's Farmer. Almost like a Farmer's Almanac type thing. Yeah, but I was- It was the Wallace Almanac. Right. But remember, in the late 19th century, about 40% of Americans worked- On farms. On farms. Right. And so, that publication, Wallace's Farmer, was like Barron's was to the financial markets in the 80s. Every farmer read this book.

[30:00](https://realalpha.app/v/ZR5-znz_WcM/?t=1800) Right, just like every banker or red barons, yeah. And Wallace started doing sophisticated experiments on hybridization of corn. In the 1920s. He made corn better. He made corn much better. The corn we eat today derives from his experiments. He created a company that was eventually sold to DuPont. To DuPont for a billion dollars. Yeah, in 1999. After he died. Well, after he died. But he died a wealthy man from the company. But FDR decided to make him his first term agriculture. Secretary of Agriculture. And there was certainly a plausible argument there where Wallace was- He's Mr. Corn. He's Mr. Corn.

[30:45](https://realalpha.app/v/ZR5-znz_WcM/?t=1845) He certainly revolutionized agricultural policy in the United States. The massive farm subsidies we paid today, that began in the 1930s under Henry Wall. You could live without it, but OK. Well, a lot of his policies in the 30s were a lot wackier than farm subsidies. For example, paying farmers not just to stop growing in order to boost prices, but to rip up millions of acres of planted cotton, and to prematurely kill six million hogs. Again, under the logic- Just kill the hogs. Yeah, just kill them now. He killed Wilbur. So, the logic was that if we have less supply, the price goes up. In his defense, economics was still kind of in its infancy, so people didn't really understand completely how prices work.

[31:36](https://realalpha.app/v/ZR5-znz_WcM/?t=1896) But this is pretty simple. Well, if you're running a firm, you know that when you calculate what your profit's going to be, you multiply the price of your product and the number of products you're going to sell. Right. If you smash your product so you can't sell them, obviously you make no revenue whatsoever. Got it. But at the end of FDR's second term, he's looking for a new vice president. Why was he looking? John Nance Garner. What was the matter with him? Well, the Democratic Party at the time was a very uncomfortable coalition between northern liberals and southern conservatives. So, Garner was a southern conservative.

[32:20](https://realalpha.app/v/ZR5-znz_WcM/?t=1940) FDR wasn't chomping at the bit to run again. And he made very clear, this is not going to be like 32, where the party's going to force a vice president on me. I'm going to say who the vice president is. So, he chose Wallace. He chose Wallace. As I discuss in the book, the evidence is pretty clear that Wallace was not his first choice. He was his third choice. But he did like... Nick Wallace, personally, even though, as you know, Wallace did some pretty wacky things in the 30s as agriculture secretary, appointing a Russian mystic, Nicholas Rarek, to lead a seed foraging expedition in Central- Sounds like he found the reincarnation of Rasputin.

[33:03](https://realalpha.app/v/ZR5-znz_WcM/?t=1983) Absolutely. Wallace actually wanted to recreate the legendary Shambhala in Central Asia. I mean, he had all sorts of wacky ambitions. But Roosevelt really thought he could control Wallace. And the important thing to Roosevelt about Wallace was that he was, quote, unquote, an internationalist. OK. And at the time when we were preparing for the possibility— Preparing for the war. Exactly. Right. He wanted international—he didn't want an isolationist. And Wallace was certainly a committed internationalist. OK. And he was defending the left flank in the party. Roosevelt was no longer Mr. New Deal.

[33:41](https://realalpha.app/v/ZR5-znz_WcM/?t=2021) He was running the war—going to run the war. Okay, so now he's vice president. That's right. And this is where things start to get a little fellow—Russian fellow traveler situation. He wasn't a spy. No, he was not a spy. He was not a spy. But he was—elaborate on, like, what your concerns in the book were about Wallace. Not just my concerns. There were huge concerns within the DNC. But you're sitting here and all those people in the book are dead, so I'm going to ask you. I'm their backup. Yes, you're the backup plan. So, Wallace was no communist. He was no ideological communist, that's for sure.

[34:22](https://realalpha.app/v/ZR5-znz_WcM/?t=2062) But he had great regard for Soviet economic planning. And during the early 1940s, he started making public speeches praising Soviet, quote-unquote, economic democracy. Now, as you can imagine, this really scared off the DNC leadership, which was mostly on the conservative wing of the party. Right. Now, so, fast forward to late 1943, they expect FDR to run again, because the war is obviously still going on. And he's very sickly. And he's very sickly. He had his heart issue, massive heart failure. Right. Apparently, people said that those people who hadn't seen him in a few years and then saw him at that time were in shock.

[35:11](https://realalpha.app/v/ZR5-znz_WcM/?t=2111) They were. they were shocked. But none of them could look FDR in the face and say, look, you got to get rid of Wallace because you're not going to survive a fourth term and we can't have that nutcase as president. But they did convince him that Wallace was an electoral liability and could cost him millions of votes in key electoral districts. FDR still liked Wallace personally very much. And he could just not bring himself to look Wallace in the eye and say, you're gone. But he let other people do it. He let other people do it. Emissaries went to Wallace and made it clear, look, you're off the ticket. That's the end of it. The boss wants you out.

[35:57](https://realalpha.app/v/ZR5-znz_WcM/?t=2157) Wallace refused to go unless FDR told him to his face that he had to go. So long story short, We had a wild, open convention for vice president, Democratic convention, in summer of 1944. And Wallace was leading after the first ballot. Truman was not widely known within the party. No, it was very unknown. Right. FDR didn't know him well. Right. FDR just— FDR met him like once before that. He considered him broadly inoffensive, but FDR wound up endorsing four separate candidates in four separate ways. It was just one. So let me ask. this, because you talk about this in the book. What would have happened? Because the way, I mean, you describe it, you also describe it in your book about the Marshall Plan. Truman becomes president, the war ends, the Cold War starts, and Truman basically leads us into the Cold War. Let's do a counterfactual. Wallace wins the vice president's nomination for the fourth term. FDR dies. And Henry Wallace becomes president of the United States. How is American history different? So, I mean, go back to the various crises we were dealing with in late 45, 1946.

[37:19](https://realalpha.app/v/ZR5-znz_WcM/?t=2239) The Soviets invade Manchuria in August of 44. They rape and pillage for months and months and months until the Truman administration convinced them to get out. So, there was significant pressure from the Truman administration. Of course, we did still have significant forces. By the way, my favorite quote during the whole Cold War is when Molotov is in the White House talking to Truman, and Truman's yelling at him. And Molotov— You don't like to be spoken to. Molotov says, basically, no one's ever spoken to me that way, which was a huge lie, because Stalin ripped him a new one every time, and sent his wife to Siberia.

[38:03](https://realalpha.app/v/ZR5-znz_WcM/?t=2283) How much worse can you get? So, I just always thought that was funny, that Molotov said to Truman, I've never been spoken to that way. At least by a foreigner. Yeah, by an American. Right. So, if Wallace had been president, it's counterfactual, of course, we can't prove, but we know from the sort of things that he was saying at the time that there had been no pressure on the Soviets to get out of Manchuria. No pressure. We probably would have given away South Korea, Hokkaido, the Dardanelles, the Turkish Straits, Greece. He was basically a friend of Stalin until years later, where he started to realize that maybe he wasn't right.

[38:47](https://realalpha.app/v/ZR5-znz_WcM/?t=2327) Yes, that's a long fast forward, which we can get into if we have the time. But we know that the key events in the early Cold War, the Truman Doctrine, for example, Wallace opposed the Marshall Plan. Wallace opposed the creation of West Germany. Wallace opposed NATO. I could go on and on and on. It would have been bad. It would have been bad. All right, let's move to your book about Bretton Woods. You like Soviet books about Soviet fellow travelers. So, the dark hero of that book is Harry Dexter White, the U.S. Treasury official, who, interestingly enough, would have become Treasury Secretary if Wallace had become president.

[39:31](https://realalpha.app/v/ZR5-znz_WcM/?t=2371) And Harry Dexter White was a major Soviet asset. So, let's talk about, what was Bretton Woods? Why is it, as a historic event, it's a very important event? What was that all about? And then just tell us a little bit about this. The point person from the Treasury Department was this guy, Harry Dexter White, who was a Soviet fellow traveler. Tell us about Bretton Woods. So, Harry Dexter White was basically a bureaucratic temp at Treasury in the early 1930s. He first came into the Treasury on a temporary appointment, a research appointment in 1933. But when Henry Morgenthau became Treasury Secretary in 1934, he quickly realized that Harry Dexter White was terribly useful to him.

[40:18](https://realalpha.app/v/ZR5-znz_WcM/?t=2418) The guy was a font of ideas on everything from international economic policy to foreign policy, but nobody knew who he was. Right. He's the guy in the stacks who you found out actually is really smart. Exactly. And Henry Wallace was just a gentleman apple farmer, a neighbor of FDRs from Hyde Park, knew nothing about economics. But Harry Dexter White did know about money. And going through his archives at Princeton, I found fascinating documents. For example, one in 1936, where he lays out the idea of an international conference where he, Harry Dexter White, that nobody— Ever heard of. —bests the British Empire.

[41:04](https://realalpha.app/v/ZR5-znz_WcM/?t=2464) Right. And manages to create a new world order. So before you get to what Bretton Woods was, I just want everybody to know that the U.S. was represented at the Bretton Woods negotiations, which you're going to talk about by Harry Dexter White. But the UK- Very unofficial, yes. But he did the work. Oh, absolutely. He scripted it like a kabuki play. But the UK was led by, no slouch, John Maynard Keynes. John Maynard Keynes, yes. Maybe the greatest economist ever. Absolutely. So, what was Bretton Woods about? What was the problem, and what were they- So, at least according to Harry Dexter White, who was the brainchild behind this, as I said, going back into the 30s, the argument was that the Axis powers had been involved in economic aggression. And the currency wars of the early 1930s, the trade wars that developed, were what ultimately led to the Second World War.

[42:12](https://realalpha.app/v/ZR5-znz_WcM/?t=2532) So the argument was— I don't know about that, but okay. Exactly. This was their argument for relevance. This was his argument. That was his argument, which Morgenthau was happy to champion because it made him, Henry Morgenthau, more important. So the argument was that after the war, we need to rebuild the international economic system such that economic aggression could no longer take place. So, during the war, the Treasury planned for this international conference. The British were naturally very suspicious of it. And Harry Dexter White and John Maynard Keynes spent two years in very tense, often quite violent negotiations about what this new financial order would be.

[43:06](https://realalpha.app/v/ZR5-znz_WcM/?t=2586) And what was the final result? Well, so we created the IMF, which was a U.S.-dominated institution, the World Bank as well. The United States was the only country that had veto power in both. But most importantly, the dollar-based international financial system that we know and love today... Know and love! It was pretty much created by Harry Dexter White, who snuck these provisions into the agreement. This man, Harry Dexter White, was a Soviet fellow traveler. He was not, again, like Wallace, not an ideological communist, certainly not an agent. He didn't take direct orders from Moscow, but he was absolutely working in their interest.

[43:58](https://realalpha.app/v/ZR5-znz_WcM/?t=2638) But what interests ... Here's my question. You're talking about creating a global economic system that's mostly really a Western system. Why do the Soviets care about Harry Dexter White? Because Harry Dexter White was very influential within the government. He was pursuing policies which were very much to their advantage. I can go through. Well, for example, Henry Morgenthau put Harry Dexter White in charge of creating the occupation currency for Germany at the end of the war. Obviously, this was a sensitive issue. You know, we made plates, currency plates. We had to keep them under very high security.

[44:42](https://realalpha.app/v/ZR5-znz_WcM/?t=2682) The Soviets said, great, give us the plates, and we'll mint our own currency. Obviously, U.S. officials were appalled at that idea and said, of course, that's ridiculous. Give the plates away. But, again, to make a long story short, Harry Dexter White argued against them. He wanted to give the plates. Lied to push General Marshall out of this debate. we did give the Soviets the plights. Really? Yes, they printed up enormous numbers of occupation marks. These were eventually cashed in in Washington at the exchange rate established by Harry Dexter White, effectively raiding the Treasury for, in today's dollars, about $8 billion.

[45:31](https://realalpha.app/v/ZR5-znz_WcM/?t=2731) Which basically went to the Soviet Union. Exactly. So, that's the sort of stuff he was doing. But much more importantly, there were a lot of officials in the Treasury and the Commerce Department who were either Soviet assets or active Soviet agents. Harry Dexter White protected them. Did he know that they were agents? Almost certainly, yes. In many cases, we know that he knew. Right. Because under the Freedom of Information Act request I made to the FBI, they gave me 13,000 pages on White, among which I found 18 Soviet intelligence cables that were intercepted and decrypted by U.S. military intelligence, identifying White under his various code names and describing his activities on their behalf.

[46:22](https://realalpha.app/v/ZR5-znz_WcM/?t=2782) Okay. All right. Let's go to the third book, last book that I read, which is about the Marshall Plan. Marshall Plan. So, I'm embarrassed to say, I think there are probably viewers who don't even know what the Marshall Plan is. It was once one of the most important things that ever happened on planet Earth. Yes. So, tell us... Everybody, like, what was the Marshall Plan? So the reason I wrote that book is when I was writing up the epilogue material for Bretton Woods, you know, what actually happened after the war, I naturally covered the Marshall Plan. Right. Because it basically took over the responsibilities that the IMF and the World Bank were supposed to have for rehabilitating the war-torn countries, particularly— But basically could not.

[47:08](https://realalpha.app/v/ZR5-znz_WcM/?t=2828) They could not. Most people don't realize that the IMF and the World Bank were largely mothballed in not just the 40s, but throughout the 50s. And that role was played instead by the Marshall Plan. So, this was really a shift in American strategy towards the post-war era. And the FDR was the so-called one-world vision, that we were going to continue cooperating with the Soviets in the post-war world. This is where people like Harry Dexter White and Henry Wallace become important. By the time we get into 1947 and the Marshall Plan under Harry Truman, we have the so-called two-world vision, in which there is the free world, led by the United States, and the Soviet bloc.

[47:54](https://realalpha.app/v/ZR5-znz_WcM/?t=2874) Right. So, the Marshall Plan was meant to rehabilitate the countries that we've become our future alliance allies as quickly as possible. interestingly enough, not to lock ourselves into Europe, but so we could extricate ourselves. But it didn't turn out that way. No, it did not. The Europeans insisted on security guarantees, so NATO went hand in hand with the Marshall. I think most people don't realize, I mean, they probably don't even think about it anymore. I mean, after World War II, most of Europe was just devastated, just completely devastated. So, if there had been no Marshall Plan, God knows what would have happened to Europe.

[48:37](https://realalpha.app/v/ZR5-znz_WcM/?t=2917) Well, and this is the thing that Stalin realized, that the United States disengaging from Europe was the perfect opportunity for him to promote chaos, anarchy, complete dissolution of society in Western Europe, so that he could expand... The Iron Bloc, into Western Europe. Exactly. Okay. This was great. Thank you. Great to talk to you, Steve. And I very much enjoyed your books. Thank you. Thank you for having me.