DTM Warren Mosler-en arabera

How Modern Monetary Theory (MMT) Actually Works (w/ Warren Mosler)

Modern Monetary Theory has become a hot topic of discussion. But is it well understood? In this interview with Real Vision’s Ed Harrison, Warren Mosler, the founder of MMT, describes exactly what Modern Monetary Theory is, and how the framework can be utilized. Particularly interesting is Mosler’s ambivalence about the political furor enveloping MMT. He sees the economic framework as more descriptive of monetary operations than prescriptive of policy. Mosler also outlines why MMT’s operational bent made it attractive to finance professionals long before it became a politically-charged debate among academic economists and politicians. Filmed on May 29, 2019 in New York.

Bideoa: https://www.youtube.com/watch?v=W97s3zbFKvc

mosler.harrison.real.vision

MMT is about modern monetary operations

Mosler: Insider of monetary operations

To understand the monetary operations

Fed and Treasury

Spending first

Govenment: first spends then collects taxes

The currency itself is a simple public monopoly

European situation: States are currency users

ECB and euro (money supply)

The ECB would have to guarantee the member nations (in 2012 with Draghi)

The monetary policy does not work

Positive interests are payments negative interests are taxes

Deficit spending (at the European level)

How to pay for a Green New Deal? Congress appropriates the money, then the Treasury instructs the Fed

Tax creates people looking for pay work (unemployment)

Paying taxes and savings

Zero per cent interest

Transkripzioa:

Transcript:

Theory Vs. Practice: The Father of MMT on Policy, Profits, and Politics

Featuring: Warren Mosler

Published Date:June 14th, 2019

Length: 00:56:48

Synopsis: Modern Monetary Theory has become a hot topic of discussion. But is it well understood? In this interview with Real Vision’s Ed Harrison, Warren Mosler, the founder of MMT, describes exactly what Modern Monetary Theory is, and how the framework can be utilized. Particularly interesting is Mosler’s ambivalence about the political furor enveloping MMT. He sees the economic framework as more descriptive of monetary operations than prescriptive of policy. Mosler also outlines why MMT’s operational bent made it attractive to finance professionals long before it became a politically-charged debate among academic economists and politicians. Filmed on May 29, 2019 in New York.

Video Link: https://www.realvision.com/rv/channel/realvision/videos/18e23e056629402ba10eb093c591d4a4

WARREN MOSLER: I’ve described myself as a long time insider of monetary operations. I was isolated at the time with that opinion, it was entire trading desk. I’d been there a year, everybody else dismissed it. Just a basic understanding of the logic behind the currency was something I was interested in very early.

The currency itself is a simple public monopoly. So, if somebody says to me, how do we pay for the Green New Deal? I said, well, Congress appropriates the money. And then the Treasury instructs the Fed to credit the appropriate accounts. And that’s how it’s paid for. And then the Green New Deal people go, yeah, that.

The cause of unemployment by design is taxation, for the further purpose of the government provisioning itself.

ED HARRISON: I’m really excited for this next interview with Warren Mosler, who I would call the god father of modern monetary theory. He’s really the individual who started the whole movement. The question is, is this economics theory, what is it? I know that Warren Mosler has described it as monetary operations, but what is it really? What can we do with it in terms of policy? What can we do with it in terms of investing? That’s what we hope to get out of this next segment. We hope you’ll like it. Let’s get right to Warren.

Warren Mosler, it’s very good to have you here at our studios in Real Vision, been trying to talk to you about MMT for a very long time, I think we’re going to end up calling you the god father of MMT for this particular video. And I wanted to start with, because MMT is a really hot topic now. And you were the progenitor of MMT? Are you very excited about the fact that it’s been getting a lot of press? Or do you think that it’s been misrepresented in the press, and that’s giving you a difficult time?

WARREN MOSLER: Yeah. Well, I’m very pleased that it’s gotten there at all. And yes, it gets misrepresented around the edges. And that’s always going to happen, I can imagine Marx and Keynes feel much the same way about what’s happened to it. But they’ve said and that’s the way things are, that’s the way the world works. But we’ve got a lot of good MMT proponents, they’re called, people like Stephanie Kelton, Randy Wray, and Bill Mitchell, Carson or probably somebody else I should be naming but who’ve been with me for over 25 years, trying to get the word out, doing the research, writing the papers, and they’re out there doing the best they can to keep the message on message and just very pleased with the way it’s been going.

ED HARRISON: I was telling you before that I wanted to go full circle to where you were before MMT got about because my understanding is that you were a money manager who was looking at making money, doing trades, investing and MMT grew out of your desire to actually understand the mechanics of how the Treasury market work. Can you take us back to your trading days?

WARREN MOSLER: Right, so probably best to start at Bankers Trust in 1976, primary dealer. They brought me in from nowhere to be vice president of Ginnie Maesales and trading or something like that.

So, I was 27 years old. And being there on the money desk there, I was in the middle of all the discussions, the economists were near out and learner. Allen Rogers was the trading manager, Jay Pomerance was my mentor, he brought me in Ginnie Mae trader, and it was the beginning of derivatives. It was the beginning, we were the first to start making markets, forward markets. And we’re Fed watchers, everybody was a Fed watcher, and you watch what they did.

I remember coming in every morning and looking to see how many bonds the Bank of England bought. What if the Bank of England doesn’t buy the debt, what’s ever going to happen to the United States? And then it moved on to- I don’t know, Japan and the Saudis. And now, it’s China, wherever. And of course, it’s never made any difference. And I noticed that pretty quickly.

And so, you start thinking about why would it or would not matter whether the Bank of England bought the debtor whether the Fed came into the repose. What’s that? What are they doing? They’re buying securities. Well, why does that matter? What accounts are they debiting? What are they crediting? What’s going on inside of monetary operations?

So, I’ve described myself as a long time insider of monetary operations themselves. And it’s very revealing those types of things. So, I remember when they raised the reserve requirements back, it must have been 1977 or something, and a trading manager said, I hope the Fed doesn’t just give the banks the money. Because the money is priced too high, they need to bring it down. And I said, well, they have to, because if they don’t- in the first instance, it’s going to be an overdraft if your reserve requirements are raised, I don’t know how I knew that.

And then Cliff Heiner who became our partner later called, he was at Phoenix Mutual, and there was an article by Art Hyman at Morgan Stanley saying the same thing. The Fed shouldn’t give the banks the money this time, we should let the money supply go down and I explainedit to Cliff, and he called them back. And they gave him some double talk. And we discussed that. And he called them back. And he calls me, he says they withdrew their statement, they agree that the Fed will add reserves. Okay. And so, there was no name for that back then, except just understanding monetary operations.

And I was isolated at the time with that opinion, it was the entire trading desk. I’d been there a year, everybody else dismissed it. And so, just the basic understanding of the logic behind the currency was something I was interested in very early.

ED HARRISON: So, how did the whole MMT, the theory come about? How did it start out? Was it something that came from you? Or is it an economist, debt economist or what happened?

WARREN MOSLER: I have a BA in Economics from the University of Connecticut, but I started in Engineering. I was there for two years. Had a 1.8 average, I realized I needed to change course now or else I wasn’t going to make it. So, I switched to economics, which was a whole lot easier for me, and I got out of there with a 2.5 average. So, I never been a student of economics, I never read Keynes, I read his quotes. I had to know anything about the history I thought. So, all I knew were monetary operations as I got started. And it grew over time.

So, came together in the early ’90s when Italian bonds were yielding I’ll say 12% for a given maturity, maybe a two-year. And you could borrow-and they were denominated in lira. And maybe it was ’93, ’92-’93. And you could borrow lira to pay for them from the banking system over there at 10%. So, those 200 basis points spread just for doing nothing, and the profit would be in lira. So, whether the currency went up or down didn’t matter much, it would just affect the size of your profit. You don’t have to put up any capital. But no one would do it because they were all concerned that Italy was going to default.

And so, if you come up with a reason they weren’t going to default, there’s a lot of money in that trade. And so, that’s how we first started looking at that market. And I remember talking to Tom Shockey, my research guy there. And it just dawned on me, Tom, if the Fed sells us securities, or the Treasury sells us securities, it doesn’t matter to us. We own the same thing, the money all goes to the same place. Yeah, they say one is for financing expenditures, the other is supporting rates, just a reserve drain, it’s got to be the same thing. The difference it has can only be accounting on their side of the ledger, it can’t be any actual difference. And then from that, it’s obvious the whole thing is just a big reserve drain. The whole point of rates of Treasury securities is to support interest rates and not to finance expenditures.

ED HARRISON:To help the central bank hit its interest rates target?

WARREN MOSLER: Right, right, right. Because if it doesn’t sell securities, when the government spends, it adds reserve balances. And back then,they didn’t pay interest on reserves. And so, the policy rate would be zero if they didn’t somehow give the holders of those balances an alternative place to put them, an alternative interest bearing account. Well, that was Treasury securities. So, the Treasury would sell securities and some of those funds would shift from reserve accounts to securities accounts and earn the interest rate. And then if there were any left over, the Fed would have to come in and “mops” them up. It was called offsetting operating factors where they would sell securities one form or another, either overnight or for a term. And then that was to support rates.

And so, the whole point of these securities was to support interest rates and not to fund expenditures. Funding came simply from the Treasury instructing the Fed to credit an account. They just changed the number up. And more recently, Bernanke‘s, when he was asked where the money comes from, he said, we just use the computer to mark up the numbers in the accounts. But everybody in monetary operations and the Fed knows that. That’s what they’ve always done. So, that understanding is that comes out that they’re spending first, okay, and then taxes get paid. They spend first and then the funds are there for bonds to be purchased. And again, inside the Fed, they say you can’t do a reserve drain without doing reserve ad, otherwise, you get an overdraft which is a reserve ad. And so, just as a point of logic, when you’re the source of something you spend first and then-

ED HARRISON: So yeah, tell me about that. In terms of being the source, how is it that- I think this is one of the big questions that people have about the operations and about MMT. One of the basic things is, how is it possible that the US government could spend first before it gets the money?

WARREN MOSLER: Right. So, that’s like, if you go to the movie theater or the football stadium, nobody thinks they collect a ticket first before they sell it. Okay. So, it’s the same thing. When you’re the source of the thing, all the dollars to pay taxes can only come from the federal government or its agents, or else they’re called counterfeit, you can’t do that. And so they, as a point of logic, necessarily have to spend first before they can collect, or spend first before payments can be made back to them. And so, inside the Federal Reserve, it means you credit the account first and then you debit the account. Yeah. And it’s that simple.

And the recognition at that time was also that the currency itself is a simple public monopoly that flows from that understanding that the Fed is the monopoly supplier of reserves. Everybody in Wall Street, they know that. That’s why they have to vote on the interest rate. That’s why there’s no market for interest rate, because when you have a monopoly, you don’t have a market. They supply the reserves, they’re not going to earn interest unless they take some kind of action to see that those reserves can earn interest. And today, it’s interest on reserves and securities. Back then it was just securities.

ED HARRISON: So, basically, modern monetary theory, from your view, the way it started was you could’ve called it monetary operation. Right. It’s not like a political economic theory, it’s really a description of how the system works.

WARREN MOSLER : So, once you understand this part, I had a reason to think about it because of the Italian trade. Now, when I see, okay, government bonds are the more public debt’s going to drive up interest rates, it’s like, no, it’s not, because you’re spending first. It’s sitting there. It’s going to earn whatever the Fed’s policy rate decides it’s going to earn. Nothing more than that. It has nothing to do with the process of setting rates. The Fed votes on rates. It’s not market forces. Well, they’re going to crowd out the borrowings taking money from somebody else, not when you’re adding it first, and then you first you added to are serve account then you shift it to a securities account. That’s not taking anything from anybody, it’s adding it first.

Once you’re spending first, once you get the sequence right, all these other things that you hear are obviously wrong. And so back then, it was the Ross Perot phenomena, and with this huge deficit mania about what was the US going to do? We’re going to go broke and the whole thing. We’re looking at it and like this is like nonsense. They’ve got the sequencing backwards. Well, what if we can’t borrow? Well, why is that like any imperative? You’re spending first. If that person doesn’t want to buy the securities, fine. They’re just sitting with reserves. That’s not the government’s problem, that’s their problem.

So, once you understand monetary operations, what was going on in the political debate was just an absurdity. And so, I wound up writing this paper called Soft Currency Economics, which still stands. I don’t think there’s been a word refuted, it’s fairly short paper. And since 1993, or whenever I first printed it, self-publishedi t. All of modern monetary theory is there in this short paper. And that’s the source of it. And that’s how it became political because it was pointing out the absurdity of the political debate, which was both sides. It wasn’t just Republicans or just Democrats, it was both sides.

ED HARRISON: One of the questions I have is, how did this help you in terms of your money management in terms of trading? And how can it help other people in terms of understanding? As an example, in terms of QE, we talked about- what did it do for you back in the ’90s? And what could it have done for people over time in Japan, in the United States?

WARREN MOSLER: Well, it certainly eliminated the potential of a lot of losses, okay. A lot of people were getting short Japan, they used to call it the widow maker trade, based on the idea that they’re going to default. The debt’s unsustainable and it’s going to cause interest rates to go up. And we knew that was nonsense. And so, we just stayed away from that, and watch people lose a lot of money over the years on that trade.

So, in terms of the other way around, well we wind up being the largest holder of Italian bonds outside of Italy, ourselves and our clients. And that worked out well over the next couple of years as the spreads went away and narrowed. And we even went to Italy right before we put the trade on, met with a people at the Finance Ministry. We just went there and made sure they understood it, which they did after we discussed it. And so, that gave us the further confidence to know they weren’t going to push the wrong buttons or something like that. Once they were sure they understood their own monetary operations.

And in fact, after we left, within a week, I think an announcement came out, they said all payments would be met, no extraordinary measures would be taken. And so, after that, the spread gradually went away. So, it was helpful in understanding the European situation where the European state nations turned themselves into what were US estates. And so, we understood immediately the difference in the dynamics between what they were and what they’d become, and the ramifications for the banking system deposit insurance.

ED HARRISON: Explain that a little bit. What is the difference? I have a pretty good understanding myself, but viewers might not. How is Europe? How are the European- what do you call it, the eurozone, member nations different from say, Australia or the US, for example?

WARREN MOSLER: Right. So, they were not different before when they had their own currencies. But when they got together and they created the new central bank, the European Central Bank, and their own central banks became branches of the European Central Bank, they were now in a position of US states, or Canadian territories, or somebody other than the issuer of the currency, they became users like you and I, where each member nation, by law, was required to have funds in their account before they could spend. Like you and I, they have to get the money first before they can spend it.

ED HARRISON: And there was no backstop from the monetary authority because that was-

WARREN MOSLER: Yeah. That’s right. Initially, they were supposed to be on their own and independent. And then we looked at the debt ratios and people who are in that position, whether it’s corporations, individuals, foreign countries borrowing in foreign currencies or the US states, once you get up to 15% debt to GDP, that’s when California starts having trouble and can’t fund themselves. Okay. So now, you got these European member nations turning themselves into US states, so to speak. And they’re waltzing in with debt ratios of anywhere from 60 to 130, or 40%, 50% of GDP is like, this is insane. This cannot work. It’ll work fine on the way up.

But as soon as you hit your first crisis, and then it- on top of that, deposit insurance was each country insured its own banks. So, can you imagine California ensuring Bank of America and New York ensuring Citibank and then you have a banking crisis and take the states down with it? They can’t do that, okay, they don’t have the capacity to do that. It’s always going to be the federal government that does the deposit insurance. So, they didn’t have that either. And so, what we did was, by understanding that, we, again, avoided a lot of the problems and also saw opportunities to do things along the way- credit default swaps, things like that. That understanding gave us, promoted, allowed us to do that.

When I ran my fund from 1982 to 1997, before I turned it over to- my control over to Cliffand the other partners, for 15 years, we didn’t have a single losing trade the whole time. It was a zero duration, fixed income market mutual fund, so the returns weren’t extraordinarily high. We had about a 6.5% percent alpha or something like that. So, but they were steady. And so, our risk adjusted returns were better than anyone for that entire period of time. And a lot of it was avoiding mistakes that others made by understanding these types of things.

ED HARRISON: Let’s go back to that, like you were at Bankers Trust, you were at William Blair. So, what made you leave the banking community and go out on your own to your next venture?

WARREN MOSLER: So, when I went to William Blair, it was pretty much going out on my own. I was at Bankers Trust, they were a client, I was talking to Buzz Newton there, who’s head of the corporate bond department. He never did anything of that. That was sales. He never did any of the trades. But at some point, after I’d been there a year, he says, what do you think about coming out to William Blair and doing what you’re doing for us, start a fixed income arbitrage department? So, I said, wellI have a pretty good job. I was vice president of Bankers Trust in Wall Street. He said, well, we don’t have a salary, we’ll just give you a retail payout of 30% of the profits.

And I might be exaggerating. But the story I tell is that was a Wednesday, and I started on Monday. It might have been another week or so in there. And so, that’s what got me out there. And that went very well. And then after a year or two, a couple of years there, we realized it was that the trades we’re doing, the positions we’re putting on were doing very well and the markets were a lot larger, so we could do a lot more than- William Blair only had 7 million in capital when we went there. And so, we started a fund called Illinois Income Investors and raised an additional 10 million in capital. That was 1982. And then because we’re doing- and then ABM was 1983, which was a broker dealer. And William Blair was part of that. We were there at William Blair. And then we left and moved the company to Florida. And a few years later, William Blair took their investment back. And so then,we were on our own after that.

ED HARRISON: Right. So, during that time, that’s exactly the same time that you were moving into the- what you could call academic economics. So, tell me about- you were saying that you had no academic economics except for your undergrad experience. But then you put out this paper Soft CurrencyEconomics

WARREN MOSLER: That was 10 years later.

ED HARRISON: Right. Yeah. In 1993?

WARREN MOSLER: Yeah.

ED HARRISON: So, how did all of these guys you were talking about appear onto the scene? Who were mostly in the academic economy?

WARREN MOSLER: So, I was trying to talk it up with people I knew, and somebody sent me to this organization in the city called Social Policy thing. And I was in my- 1950s- This is ’93. So, this was my 40s. And these people were older, like, as old as I am now, right? And they were discussing it and I wasn’t getting very far. But one of them said I hear you, what you’re saying. I agree with what you’re saying. And he was an economist, I didn’t remember his name. And there’s an active group on the internet discussion group that are called Post Keynesians, and so you should look them up. So, I went and looked them up and started interacting online in this discussion group, and that’s when I ran into Bill Mitchell, Randy Wray, Matt Forstater and that group.

Well, it turns out later, the person who I had met, I met a guy at a conference. I’m telling the story. And he says, that was me. It was Bill Vickrey who later won a Nobel Prize. So, he turned out to have been the one who sent me to that discussion group. So, then I started working on that discussion group, and there are quite a few of them. And I made progress with Bill Mitchell, I went down to Australia to see him to try and make some progress.

ED HARRISON: He’s an Australian economist?

WARREN MOSLER: Australian. Yeah. And then Randy Wray, who was at Denver University there, and Matt Forstater was at Gettysburg. He had undergrad, Pavlina Tcherneva who needed a summer job. So, she came down and wrote two papers in my- I worked with her to write two papers that summer in my office and those are on my website, and they’re still key MMT papers. One of them on monopoly pricing and how the price system works and where the price level comes about in our economy. Nobody else had any idea where the price level was. But once you understand that currency is a monopoly, the monopoly set prices, then now, it’s perfectly clear where the price level comes from continuously. And the other one was a history of that paper.

And then, so it was still small group, four or five, half a dozen. And this was ’96or ’97. But it grew and the financial sector was growing faster than- our clients all understood it. And so, our business was good, because we had clients who would listen to us and they did very well for their investors. And so, I’m up to about 2000 now I guess.

ED HARRISON: Right. Yeah. And so, in 2000, that’s when the Euro was formed.

WARREN MOSLER: Yeah, or actually earlier. So, 1996, the Euro was pretty much formed. So, we had to put together a conference at Bretton Woods, New Hampshire in1996. And we had a lot of people from the street, some central bankers there, Charles Goodhart was there. And that’s where we outlined everything we thought would unfold with the Euro if it went through as it was on paper at the time, which it did. And in 19- maybe 98, they irrevocably locked the currency which is the actual, which I call the start date, then the actual euros came.

And if you think about the concept of spending first, nobody can pay taxes until after the funds are out there. If you think about how the Euro started, on the last day of the old currencies, you got lira of marks and pesetas. And then the next day, everybody has euro. So, how did that happen? Well, the European Central Bank bought the money supply, right? If you have a bank account with pesetas, the next day, you had a bank account with euro. They bought it, took euros. The reason that currency has value is because oft he tax credit, the thing needed to pay taxes. And so, the Euro was now the new tax credit, they were all taxing in euro, and the old currencies were worth nothing except for what the European Central Bank bought them for on day one.

But after that they’re not worth anything because they’re no longer needed to pay taxes. And so, there’s a giant case of spending first before anybody could pay taxes or buy bonds, right? And so, it was interesting to be there at the time, watching it all happen was certainly interesting times to live it. Yeah.

ED HARRISON: That’s when you startedto get into the political realm of things. I think that if you fast forward to today, where I think a lot of the ideas that you’re talking about with regard to Europe, about the monetary monopoly of the central bank, are accepted, then comes the ideas on top of the monetary operations ideas. And I think this is where we get into the MMT of today and where a lot of the debate comes in. Is this, okay, so you’re describing the operations, what about policy issues?

WARREN MOSLER: Yeah. So, with the European situation. So, we foresaw back in the ’90s that at some point, the European Central Bank would have to guarantee the member nations. And that happened in 2012 when Mario Draghi said, we’ll do what it takes to prevent default. And that also helped with the banking crisis, because now, the deposit insurance was more credible, because at least it came from governments that were guaranteed by the Central Bank. One of the things that happened that we didn’t see happening is that the central bank at the same time took control over fiscal policy. Okay.

Because now, they had guarantee that they could use as a threat. If you don’t behave, we’re going to remove the guarantee. And so, when Greece was threatening not to behave, they could remove the guarantee and Greek spreads would go out, Greek rates would go up, and they couldn’t fund themselves. Italy, earlier this year, there’s just some rumblings of not obeying rules for deficit rules, and all of a sudden, the spreads go out, because now, the markets are worried the central bank’s going to pull the guarantee. So, they’ve used that as a lever to enforce it. It was never meant to do that. They had other ways to do it. But no one else at the finance ministers or probably nobody’s complained.

So, I guess they’re happy to have the ECB being a disciplinarian. And the next thing we saw happening after that is that monetary policy would not work, which they’ve been saying for a long time, lowering rates. I remember 2012, speaking of Rimini, and they asked what would happen? Would they do what it takes? Italian rates are going to come down, but the economy is going to get worse, because it’s always going to be paying less interest to the economy removing income, it’s not going to approve.

ED HARRISON: Talk to me about that. And that’s interesting concept. So, we know that the government pays interest on their debt. And most of it goes to the private sector. And so, the private sectors are net receiver of interest. So, most people think when you lower interest rates, that spurs the economy, but you’re actually robbing people of interest incomeat the same time?

WARREN MOSLER: Yeah. I call it basic income for people who already have money. So, I’ve heard basic income proposals. So, I’ve never heard anyone proposing right or left, that we should do that for people who already have money. But that’s what you’re doing. You raise rates, you’re paying out more net payments from government to people who already have money. And it’s always been presumed why you do it, to prevent inflation or to slow the economy down. But my experience with the way I’ve read the data is, I’ve never seen it that way. I’ve always seen it the opposite way. Raising rates has supported inflation, it’s caused it to be prolonged, it’s caused growth to be stronger and prolonged. And it’s always something else that’s cause the end of the cycle. Even though it’s coincident with rates going up because the Fed is doing it in response to other things, but I don’t see that as the causation.

ED HARRISON: So, what about the negative interest rates then?

WARREN MOSLER: Yeah, so positive interest rates are payment, negative interest rates are tax. So, we’ve seen- was it Elizabeth Warren who proposed a wealth tax? The more subtle way to do that would have been to propose negative interest rates. Because if rates are minus 1%, you’ve got $100 in the bank, a year later, you’ve got 99. If you’ve got $100 in the bank, and there’s a 1% wealth tax, a year later, you have 99. It’s the same thing. Right? But when you say negative rates, it’s not like, oh, you’re taking money from people and taxing them, you’re actually trying to help the economy.

ED HARRISON: Right. Well, the reason you get into this bind is because basically, what the political ideology is that you can’t have fiscal, activist fiscal policy. So, you can have an active fiscal policy you need the monetary authority to raise rates up and down with the cycle, because that’s how you’re going to get things to happen. So, that’s where you get into policy issues right there.

WARREN MOSLER: And I agree. But the problem is, the monetary theory is- and the analogy I’m using, it’s like the child in the car seat with the steering wheel. He’s not driving the car. Everybody thinks he’s driving the car. And the car is moving and it’s turning and two or three years later, the economy turns, and they say, oh, there’s a lag or something. But it’s always moving because of the automatic state fiscal stabilizers or some other event that I’ve seen. It’s never been the driving by the central banks. So, they’ve never been in control. It’s always been the automatic fiscal stabilizers, or the Obama stimulus, or the Trump tax cut or something like that.

That’s been the mover behind these things, or changes in private sector lending. You might have changes in down payments on homes, or the ability of some new derivative to fund oil exploration or something like that. So, it’s always been deficit spending, either public or private, and is probably a lot of it is private sector, which, unfortunately, turns out to be procyclical, right, because of the way up to the credit, that’s why we get into boom bust because of the procyclical private sector. But it’s a fact, it’s a major factor is what I’m saying, and not so much the Fed.

So, I can remember, maybe in the ’80s or something, I was on the phone to somebody from Australia. I say, how’s the mortgage market? And he said, well, it’s pretty good right now. said, but mortgage rates are 17.5%, but I think if they put them up to 18, it’s going to kill it. I go, okay. Thank you. And I talked to somebody in Japan, how’s the mortgage market? How’s housing doing? Said well, it’s pretty weak right now. Rates are three and a half. But I think if they put it down to three, it’s going to get going. So, I’m thinking like, how important are the rates?

And if you look, now, we’ve got, oh, rates just went up. So, mortgages went from four to four and a half. So, the housing market slowed down. Look at the last cycle, where were mortgages when we had over 2 million housing starts, where now, we have half that right? Okay. So, they were- what, 7%? Okay, and where were they in the late ’70s, they were 15%. And we had more housing starts than we have today. And we had half like half as many people, okay. So, on for capita basis, we’ve had our strongest housing starts with the high work, because it’s always something else.

So, looking at that, I’m not saying it won’t matter for the next week or two weeks, you’ll have people accelerating their borrowingor they’re going to rush it and try and get a mortgage now instead of next month, because rates are down or something like that. So, you’re going to get some noise short term and you’ll have traders moving portfolios back and forth short term. But over time, when I look back now, 30 years of zero rates in Japan and they say we just need a little more time, okay. Mario Draghi with six or eight years of zero rates, and now, negative rates and we just need a little more time. They can’t be working, or else they wouldn’t be negative now.

ED HARRISON: Well, tell me about what’s the outcome then for- let’s say- for Europe?

WARREN MOSLER: So, I say monetary policy doesn’t work. So, now Europe’s going into recession if the charts keep going the way they’re going. I just saw one of the charts today going straight down and right at the bottom, there’s this little leg sideways. And they say, oh, it’s improving. It’s like, okay, we’ve had a global collapse because of the tariffs man, what I call Agent Orange when it comes to trade. Just throwing a monkey wrench into the whole global supply line thing. And so, it’s a tax, right? $70 billion1 a year. That’s not huge, that was a substantial tax, and it’s all very high multiple taxes on people right there at the consumer level. And all the charts are going down.

Okay. And so now, what’s Europe going to do if they- and unemployment today went up in Germany for the first time. And it went up a lot like 60,000. And it could just be a blip. It’s only one. You can’t go by one number. But what are they going to do? They know interest rates, they know monetary policy doesn’t work. They can’t use fiscal policy. They have lots of guys, so they just were badgering Italy yesterday about you don’t dare to exceed your- you’ve got to pay down your debt, reduce your debt during a recession. And so, what’s the open channel? Well, the only open channel is new bonds at the Euro level, deficit spending at the European level, which will be the European Investment Bank or some other agency or something and get the deficit spending from there, and they’re going to need 500 billion euro, maybe 600 billion euro, maybe 5% of GDP annuallyto fill the hole in the-

ED HARRISON: But that’s only- because we started on this with Italy, I think because I can’t see that that would happen, per se unless Italy or a country like that’s on the brink. Right now, German autopilot, Germany has the laws against deficit spending.

WARREN MOSLER: Right. But not at the European Union level. They can do investment bonds and distribute them on a per capita basis or something like that to all the member nations.

ED HARRISON: And you think that could happen before we have another crisis in Europe?

WARREN MOSLER: No, it’ll happen sometime after. But I think that’ll be the response to the crisis, because I don’t see any other response.

ED HARRISON: You don’t think that perhaps Europe would break up, that the Euro would actually collapse entirely because of this nationalism taking over in Europe right now?

WARREN MOSLER: Yeah, I think that will happen if they don’t come up with this. And so, you’ve heard the noises getting louder for Euro bonds, for so as the [inaudible] bonds a few years ago and it never went anywhere. And then more recently, [inaudible] with Greece said we need national investment policies. And then a couple of the Italian the league, I think, is proposing national investment policies. And so, they’re all looking towards investment, and everybody’s infrastructure is crumbling over there. And so, the noises are getting louder, and they take, that’s how it works over there, and then eventually comes out. Because then it’s an old idea. And they’ve been looking at it and look, nobody ever thought European Central Bank would guarantee all the members’ debt, but they did, because there was no other choice.

Okay. And that’s what’s happening here. They’re going to have no other choice than these massive investment plans. So, that’s my forecast. Okay. I could be wrong. But to the data, the like you said, it all falls apart.

ED HARRISON: Going to the US then, in terms of the political debate and especially where MMT is involved in the political debate. Let’s look at Alexandria Ocasio-Cortez and the Green New Deal. Now, a lot of people are saying that is the epitome of MMT, but you were just telling me that MMT is about operations, monetary operations. How do you make the jump from this is the monetary operations that MMT says and this is a policy that we would recommend given the constraints imposed by-

WARREN MOSLER: Yeah. So, if somebody says to me, how do we pay for the Green New Deal? I say, well, Congress appropriates the money. And then the Treasury instructs the Fed to credit the appropriate accounts. And that’s how it’s paid for. And then the Green New Deal people go, yeah, that. Okay. And there’s no disputing that. You can ask anybody in the Fed. Sure. Yeah. That’s how it works. That’s how we pay for things. We change the number in the account. Well, Bernanke said that, we have the quote, Greenspan said that. We have these quotes from Fed chairmen. That’s how it works. [Inaudible] Fed and look at it. Okay, so now, you’ve asked somebody how you going to pay for it and they give you that answer. Now, what do you say? You’re the interviewer. They say, well, it’s not going to- isn’t that like Zimbabwe or something like that? And so, that’s how everything’s been paid for it. The Treasury has been instructing the Fed to credit accounts for the last 200 years, has since 1913or whatever, since we’ve had a Federal Reserve, and it hasn’t created Zimbabwe yet. And if you want to know why, we can explain that to you. But just doing that is not what creates Venezuela or Zimbabwe or Weimar. It’s something else.

ED HARRISON: What is that something else?

WARREN MOSLER: Anyway, so that’s why MMT has the answer to their question of how are you going to pay for it. Nobody’s had that answer before.

ED HARRISON: So, I have two questions in that. Okay. Obviously, I was already saying, what is that something else? But I understand, I may not- when I was doing a little research about some of the things that you’ve said, we can talk about this thing called the public purpose? My understanding is, is you say, there’s no reason that we should have unemployed people, crumbling infrastructure, we’re the richest country in the world. That’s just ridiculous. And we can pay for that with keystrokes, essentially.

WARREN MOSLER: So now, you have to go back to the money story. We start the money story differently than other schools of thought. They all start with people doing bartering or using sea shells or something. And we’re not saying that’s wrong. But this the money story for the modern state begins with a state that wants to provision itself. You’ve got a country that wants infrastructure, they want military to defend themselves, they want a legal system, they want public education and public health, whatever they feel is appropriate collective action should be taken. And there’s some political consensus that agrees that that’s what they’d like to have happen.

Well, how do you do that? Just ask for volunteers out of the private sector? It doesn’t work. Okay. So, you need some coercive measure, way to provision the state. And so, the way we do it is we begin with a tax liability. We don’t begin with the state collecting money and spending it because there isn’t any. We start with a tax liability that describes the currency. You’ve got in- let’s say, a real estate tax just for simplicity. On everybody’s house, you’ve got to pay $100 a month. What’s a dollar? The dollar is the thing you need to pay your taxes. What is it? Well, if you serve in the army, we’ll pay you $30,000 a month or whatever.

So, the tax creates people looking for paid work in the government’s currency, which you couldn’t otherwise- okay, and now because there are people looking to earn that currency, the government can now spend this otherwise worthless currency is how I say it, to provision itself. So, you put a tax liability on, people show up looking for work, because they don’t want to lose their house at the macro level. And you hire them to be in the army. Now, you’ve got your military, you hire judges, you hire public health workers. And so, you create the tax liability and now you can hire people.

So, the tax liability functions to create unemployment as we define it. Can we define unemployment as people looking for paid work? It’s not about like people, unemployment is now people looking to volunteer for the American Heart Association, it’s people looking for paid work in that currency. Right. So, what we say, which nobody else has pointed out, not Marx or anybody else, but the cause of unemployment by design is taxation. For the further purpose of the government provisioning itself. And so, a tax creates a certain number of unemployed. The economy needs the government’s money for two reasons- both to pay the tax and if it wants to save anything, if it wants any equity, if it wants any net financial assets, if it has any use to have money in your pocket, or money in the cash register or reserves against the future or anything else. If there’s any savings desire, that’s a reason to work for the money.

So, when the government spends a dollar, only one of two things can happen. It could be used to pay taxes or cannot be used to pay taxes and remains as savings. Okay, so you create a tax liability, people show up for work, the American tax liability creates 10 million unemployed looking for work. Now, the government only wants to hire 3 million of them. Lots made a mistake. Okay, he created, the tax liability was too strong, created more unemployed you don’t want to hire. So, what do you do about it? Right. So, either you hire them, if you got some use for additional people, maybe actually wanted more, but you’re afraid to because you thought you needed a balanced budget or something, or you lower the taxand they’ll go away.

And so, it demands like a fiscal adjustmentjust to correct your mistake. If you lower the tax, the private sector will be able to have the demand and sales to hire those people away. Well, it’s not quite that simple. Because once you’ve created unemployment, those people from a private sector employment point of view are damaged goods. The private sector doesn’t like to hire people who’ve been unemployed. Okay, well, we made a mistake, we hired 7 million, we cost 7 million people, our tax was too large, we have 7 million more unemployed than we wanted to hire. How do we get these people back into the private sector?

So, that’s when I came in. This was 1993. What you do is you offer a job to anybody willing and able to work. To promote the transition from unemployment, which is public sector, the taxes pulled them out of the private sector and caused them to be unemployed, okay. And to promote to transition back into the private sector. And so, people come to this job, they work and now, the private sector will have them back because they know they take a bath every day and they don’t get in fights and have a supervisor and have a good attitude or something. The private sector doesn’t need a lot. They’ll train them if it’s a good economy, but they want to at least know that you’ve got somebody serious about going to work every day. And it works. And there’s lots of data, experiments that are showing this works. And so, that’s where the today’s job guarantee comes in.

ED HARRISON: And how critical is that to modern monetary theory? Like when we go from the operations to-

WARREN MOSLER: Well, it’s important. It’s important because today, we use unemployment as a buffer stock against inflation.

ED HARRISON: Nehru, that’s not accelerating interest rate of unemployment.

WARREN MOSLER: Right, if it gets too low, you get unemployment because there’s nobody for the private sector to hire, so it drives up wages. If it gets too high, it’s deflationary. So, policy is actually aimed at maintaining a certain level of unemployment in order to not be inflationary.

ED HARRISON: A buffer stock of unemployed people.

WARREN MOSLER: Right. Well, the problem is, if they’re not liquid, if they can’t be hired by the private sector, because they’re damaged goods, are unemployed, it doesn’t work as a break against inflation when the economy picks up. You just get more and more unemployed or participation goes down or something with every cycle. And particularly in Europe, you see that happening. But if they’re employed, now, they’re much more liquid. Now, they’ve hired them right away because they’re already working. And so, it’s a much more effective buffer stock than unemployment. Okay.

So, what I say, which is now modern monetary theory, is that you always have a base case of analysis, how do you start your model? Okay, so we’re using a buffer stock for price stability, start with a buffer stock that makes the most sense from a liquidity point of view and negative externalities. An employed buffer stock makes a whole lot more sense than unemployed. You’ve got to have one or the other. So, we can start- I say, the job guarantee is one of the assumptions in the base case for now, since you start by saying tax liability, provisioning the government, we have a job guarantee. So, if we’ve taxes created more unemployment than we want, they can transition most efficiently back into the private sector.

Now, you can change the base case, you can say, you know what? I don’t like the job guarantee for whatever reason, so let’s change unemployment. Okay, fine. But the best case is this. Because if you use unemployment, you’re going to have, you should expect a lower degree of price stability, more negative externalities, but maybe that’s what you want, maybe trying to create a mob of angry people. So, they something- I don’t know, who knows what politics is trying to create nowadays, maybe a lot of people throwing rocks at each other. So, we start with the base case.

The base case is also a zero percent interest rate, like Japan’s at, and again, for all the reasons we spoke, it’s not inflationary. The currency doesn’t go down, we would have seen that after 30 years of follows sky as foreign fears were actually real. And we don’t. And you’re not like providing basic income for people who already have money in your base case. Now, you can start with a base case, and you say, okay, now, I want to write- Now, I’ve got a model now with zero rate policy, no government securities, just leave reserves, you don’t have to offer interest rate support if your interest rates at zero. And someone says, well, I’d like to have a higher interest rate for whatever reason. I’m trying to create more inflation, I want to pay people with money, more money, with no supply side. So, I’d like to see inflation. You say, fine, you can take this model and we increase rates. And now we have to-

How do you do that? Well, you can see. You have to either pay interest on reserves or offer securities. And now, we’re paying more income to people. So, you can do that. And I don’t want a job guarantee. So, I want to change the wage of the job guarantees. So, how does that numerator- that’s the numerator for the economy, right? As a monopolist, you set one price, and let everything else reflect market value along with the institutional structure. And so, rather than using unemployment as, whatever compensation you’re painting on employed as a numerator, use the wage from the job guarantee as a numerator, makes infinitely more sense. And so, that’s just a base case, then you can show how changing that, you can meet your inflation targets whatever they are, or you could make sure productivity, labor, real compensation increases with productivity or whatever else, whatever other political decisions you’ve made.

ED HARRISON: So, let me see if I can get this straight. Basically, MMT is about the monetary operations. But basic economics and understanding how the system works says that certain actions are going to lead to certain outcomes. And you can have a base case of this is the base of-

WARREN MOSLER: Let me quickly answer that. If you don’t understand that the government spends first and then collect since it’s a public monopoly, you can’t have a job guarantee because the debt could go up. And you might turn into Greece or something, right? Okay, you got to understand monetary operations first, and then these policy options become obvious or they become viable, which they’re not under the current paradigm of the government has to get money through taxes to be able to spend. Any congressman will tell you, we’ve got a tax to spend, when we don’t tax, we have to borrow from China and leave the debt to our children. Under that paradigm, these options I’m talking about are not viable. Yet, when you understand monetary operations, they’re entirely viable. And in fact, they become the base case for analysis

ED HARRISON: I was reading something from Martin Wolf, who was talking about inflation and things like the Green New Deal, what if everyone and his brother comes in and says we want the Green New Deal. We want the New Deal for pipelines of liquefied natural gas, et cetera, et cetera? Doesn’t there come a point where all of that is inflationary and it spirals out of control?

WARREN MOSLER: Yeah, well, not spiral out of control. Because once you understand that currency is a monopoly, inflation- what we call inflation, it’s just a series of one-time events. Anytime you stopped doing it, it stops. It’s not like if you make one false step, you turn into Zimbabwe or something like that. It’s one-time events. But yes, if you have a tax in place, tax liability and it creates a 10 million unemployed and you try and hire 11 million, you’re just going to drag, you’re not going to get 11, you’re only going to get 10, you’re just going to keep driving up prices as you pay more and more. And the price level is a function of the prices paid by the government when it spends as a monopolist.

And so, if you’re paying $50,000 a year, you get your 10 million people and it won’t be this clean cut. And now,myou try to hire more and now, you’re paying 60t housand or 70 thousand and you’re not going to get any more, okay, you’re just creating inflation, you’re just redefining your currency downward without changing the tax liability.

The model I’d like to usemso people can understand the pricing and how it works is my wife and I were in Pompei a few years ago. And the guide showed us the coins that they use. And he said what happened in Pompei- it was a nice place to live because they would collect these coins for tax. And then they would pay people to do public service- police and public safety and the aqueducts and allthis sanitation. And I said you know what actually happened was you pay the people first and then you collect the coins. He was no, no, no, you collect tax and then you pay the people. So, where do coins come from? He says, well, the government made them.

So, how did anybody get the coins to pay the tax? And he goes, so they spent in person and collected them. And I said, how was that going to work? And he grabbed his head, he goes, no, no, no, and he walked away. He won’t talk to me anymore. Okay, so but everybody in Pompei knew how it worked. They put a tax on everybody’s house, people would show up for work, they’d pay them these coins out of the coin. But they were valuable coins, and they get things done. Well, they found like 20,000 coins in the street. Well, how did they get there? Okay, so the government must have spent more than they collected. Okay, that’s what we call deficit spending.

And because people were coming to earn the coins for two reasons, number one to pay the tax. And number two, they needed some to be out in the street. That’s the net money supply in the economy. Okay, the coins in the street or the public debt, they’re the net money supply in the economy, they’re the equity that supports the entire credit structure. That’s what they’re doing here. That’s why people are coming to earn the equity they need to support their whole credit structure.

Now, what was the coin worth? So, let’s say they decided to pay one coin a day for a police officer. But somebody else didn’t want to be a police officer because it’s too dangerous. And he’d rather just grow tomatoes, because that’s what he always did. And even though I know there were no tomatoes in Rome back then- but he came from South America, just a story. So, he wanted to grow those tomatoes and to make pizzas. And the police officer didn’t want to get his hands dirty. So, he’d go work extra and make enough coins so he could pay his taxes and buy his tomatoes, and maybe one coin was worth a day’s work. And those two- the double coins, whatever the economists call it. And so, it was like one coin would buy 10 tomatoes, it was the market that day.

But a coin as one day’s labor as defined by the state will pay one per day and one day’s labor translates into 10 tomatoes through market forces. If the state says, well, we’re going to pay two coins a day. Well, now, the coin will only buy five tomatoes, right? Okay, it’s a monopolist setting price. And if the tax was 100 coins and they were paying one a day, they know they’re going to get 100 days labor. They pay two coins, they’re only going to get 50 days labor. So, just by paying more for the same tax liability, you get fewer people, you’re just creating inflation.

And so, that’s the dynamic. And the nice thing is, monopoly is the easy one. When you take microeconomics, the first day, they teach you monopoly, it takes about 20 minutes, and everybody gets it. And then because there’s one guy, there’s no competition or anything, he sets a price. People need what he has. Then the next day, they go on to oligopoly with this three or four. And then that’s a little harder, takes a couple days. Then after that, they go on the competition. That takes the rest of your life, the asymptotes and mass and all this stuff. And so, the good news about the currency is it’s the easy one. It’s just a simple monopoly. And so, once you understand that, then the rest follows.

ED HARRISON: So, Warren, we have a good five or 10 minutes, I wanted to go into some of the things that you’re doing in your private life. I heard that you have a whole race car thing. Tell me a little bit about that, like you built race cars?

WARREN MOSLER: I built cars. They were road cars, sports cars. I did sell the company for scrap value in 2013. Sorry, I know how hard it is to make profit in a car company. But yeah, it’s a top performance car in the world. And I think it’s still is. A couple of people had some that they race last year in the Spanish GT and the car is 18 years old and it won the series. And they’re still adding weight and putting restrictor on the engine. So, it was called the Mosler MT900. So, I had a car disease. Okay. I think I’ve thrown it but I’m not sure. And if you want to talk about suspension design or anything else, I got it.

ED HARRISON: How did you get into that? How did you-

WARREN MOSLER: As a kid, I would take apart lawn mowers and build motor bikes and things like that. I just was always interested in mechanical things like that.

ED HARRISON:And then you got into- I understand that you created a ferry because the waters were really choppy going from St. Croix to another island-

WARREN MOSLER: St. Thomas.

ED HARRISON: To St. Thomas. Tell me about that, because that’s a similar thing.

WARREN MOSLER: Yes. And they had a ferry going, it made everybody sick, and then they crashed it. So, we didn’t have one for four or five years. And I had never had a boat till I moved down there. So, I got in a boat catamaran, which I thought would be- do the trick. And it was a lot better than any of the monohull boats in terms of ride and whatnot, but it’s still a boat. It would still get people seasick. I just started thinking about the ride motions and recognize the parallels with the car where a long wheelbase rides better than a short wheelbase car. And a boat’s a zero wheelbase, the whole thing gets lifted up and over alike a toboggan or skis, as opposed to a bicycle, which was longer wheelbase which will step over bombs and things.

So, it dawned on me what you needed on a boat is the equivalent of a long wheelbase, which is hulls way out front and hulls way in the back and a big space in between. So, when you went over a wave, the front would go up and down and then the whole boat will go over the wave, you wait and then the back would go over. And I built it. They wouldn’t build it, they didn’t think it would work. So, sounds familiar. And they felt that I had to build a prototype for 23. We went and still have to work, it works beautifully. And then the boat builders took it out. And they suddenly understood that did work. And so, they went and built it. And it’s about 100 feet long and holds 56 people. And it was built similar to how the cars were built with carbon fiber and foam core. So, it weighs only 30,000 pounds, 400 foot boat. So, it’s great fuel efficiency.

And it’s been going back and forth for two years now. People like it, it’s got a reasonable return on equity, I charge $60 for the flights, which is less than the other boats and the flights were- because it doesn’t burn any fuel. And flights are $150 or something like that. So, it’s been good and spinning. During the hurricanes, Hurricane Maria, it was the only communications betweenthe three islands, all the other boats got knocked out. And this thing’s going back and forth. No other boats has been able to make that route for more than a year. That was a record. And this one’s been going two years now. And there’s not a crack or a stress, any stress on the frame that anybody’s been able to detect because like a car, if you have tires at either end, you’re lifting them up at either end, you’re not stressing the frame.

Nobody ever breaks a frame on a car, or their bicycle, because you’re lifting at either end, but you can break skis or a toboggan where you’re lifting the whole thing over the middle. Boats break in half all the time because they go over a wave, at one point, the wave’s in the middle and the boat is trying to break itself in half. Well, this one only gets handled at the ends, the middle never gets wet, doesn’t get touched. So, occupy my time doing that type of thing.

ED HARRISON: That’s great. The first thing that comes to mind for me is that you are an engineer at like going full circle to what we were talking about when you started. Clearly, you have the engineering mind, and you’ve taken it to boats, to cars, to economics.

WARREN MOSLER: Financial engineering. So, our firm, we did a lot of those so-called derivatives in the ’80s. Okay, that was right in the middle of that. And so, that’s just something that comes easy to me to understand how these types of things work out.

ED HARRISON: Well, I really appreciate your taking the time to talk to us. And I hope that we can talk again about these kinds of things. Maybe where you see the economy going forward. But I think that viewers really like hearing from the godfather of MMT.

WARREN MOSLER: Okay, at your convenience, I’m available. Thanks, Ed.

ED HARRISON: Thank you. So, that was a very good discussion about modern monetary theory. I think that what we learned is that MMT really is at its core, about the monetary operations and a lot of the policy, things that come out of this are not necessarily indicative of what we should think of as MMT. You can use MMTin a lot of different ways. We saw it with the European debt crisis, with regard to the widow maker trade in Japan and a lot of other things. So, I found it a very informative discussion and I’m glad that we were able to speak to Warren and I hope that you enjoyed it as well. Thanks very much.


1 Amerikar bilioi bat = mila milioi europar.

Iruzkinak (2)

Utzi erantzuna

Zure e-posta helbidea ez da argitaratuko. Beharrezko eremuak * markatuta daude