Randall Wray: Nola MTM-k mundua salbatu dezakeen

#159 L. Randall Wray: How MMT Can Save The World

(https://www.youtube.com/watch?v=fLI1grA2k0Y&list=UULFEp_nGVTuMfBun2wiG-c0Ew&index=21)

What is money, where does it come from and why is it important?

Patricia & Christian talk to award-winning primary MMT academic Professor L. Randall Wray about his latest book “Making Money Work For Us” and his part in the new academic collaboration “Modern Monetary Theory – Key Insights, Leading Thinkers.”

Also in this episode: What are taxes for? Where do commercial banks fit in? And what is “doing MMT”?

Transkripzioa

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Adam Smith and The Wealth of Nations that there’s this strange thing going on in the colonies they are issuing paper

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money it can circulate and retain its value the colonies knew what they were

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doing they would authorize printing up Virginia notes and at the same time they

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would accept back the notes in payment of taxes and then what did they do with

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the notes they burned them all they were not collecting tax revenue to get money

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to spend tax insured that there would be a demand for the currency so the answer

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to Smith’s puzzle why does it retain its value well people needed to pay the tax

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the U.S can’t run out of dollars now what can we run out of the same thing

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every country can run out of resources could the US produce the real stuff that

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they need and right now the answer is pretty clear that we can and

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[Music] this is the mmt podcast with Patricia

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Pino and Christian Riley

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hi I’m Christian Riley and welcome to the modern monetary Theory podcast you

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you put into understanding mmt let’s dive in welcome one and all to the mmt

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podcast I’m Christian Riley and I’m Patricia Pino and we’re honored to be joined today by Economist primary mmt

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academic and author of many key works including the book that gave modern money Theory its name so we are utterly

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privileged to welcome back to the show Professor L Randall Ray hi Randy hey good to be on so let’s start with your

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recent book which is called making money work for us and congratulations on the

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book it’s such a great read and really accessible but your first chapter heading is one of my favorite questions

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of all time which is what is money now as someone who’s been answering that

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question since the 1980s as I read it what is money well first all money is

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debt so it’s a credit debt relation um this is their approach that I think

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really comes out of history of money the anthropology of money the sociology of

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money so really every field that is studied money I think comes to this

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conclusion it’s just economists who’ve had a very hard time understanding this

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gold is not money Bitcoins are not money it has to be a debt and so we see bank

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money as a debt of the bank currency as a debt of the government reserves as the debt of central banks

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and in the book I say it’s sort of nice to think of this if you’re holding

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currency you are the Creditor and the government is your debtor and in the book you draw a distinction between

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money and money things could you talk about that sure that’s actually from John Maynard Keynes who made this

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distinction so we can think of money as a measuring unit what does it measure

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deaths and credits and so it’s we’re focusing on money as a

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unit of account and so in a way it’s like the inch or centimeter that is a

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measuring unit and money is a measuring unit of debts and credit by money saying

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what Keynes meant was how do we keep a record of that debt or credit we don’t

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want to rely on Memories We want to write it down and so over time we use a

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wide variety of Technologies to record the debts such as clay tablets

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wooden tally sticks metal coins and paper money so a wide variety of ways of

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recording it today it’s mostly electronic entries that is the money thing the way that we keep track well

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the fact that we have a lot of definitions of money and very often across like kind of the economics texts

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they have this quantity of money theory of inflation and they often struggle

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with identifying what the m in that equation is and over time I think it’s got expanded into first it was just the

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most liquid money and then it got expanded into things that could be easily converted into money and recently

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mmt also talks about government bonds as being a type of money how would you go about addressing that it why is it so

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controversial to add the notion of government bonds as money to today’s economic kind of theories okay well

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typically the Orthodox approach begins with the functions of money so money is what money does and the

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things that satisfy those functions have changed over time and they recognize

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that and so that’s what creates a problem for them because they’re

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focusing on the functions of money whereas we are saying that what is most

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important is that money is a record of indebtedness and it doesn’t matter what

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technology we use if it’s a measurement of indebtedness and then it’s money we

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can think of three dimensions of the many things that we’re talking about

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that is the Money Records one is liquidity the second is transferability

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and the third is yield and liquidity means how quickly could you change that

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money record to the government’s currency and if we

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talk about checking deposits which are called demand deposits by economists that word demand tells you something you

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can convert them on demand really really quickly okay today as fast as you can

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get to that ATM machine you can convert it to cash and at least say your own bank in the United States there’s no

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cost to doing this okay so that’s very liquid if we talk about transferability that means can you transfer it to

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someone else and of course that’s very easy to do with cash that can be passed

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hand to hand and you can write checks on your bank account and so we can say that

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bank deposits are easily transferable and then finally there is the yield

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which is the interest you can get you get zero on cash you can get maybe a little bit on your demand deposit a

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little bit more on a safe spot so anyway the things that are the most liquid the

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most transferable and have the lowest yield are the ones that I would want to

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call money and there’s some arbitrariness in this of necessity

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because we’re talking about three different characteristics and we’re talking about the degree of each one of

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those we can think of a money pyramid where at the very top of that pyramid we’ve got the government’s currency and

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we probably also want to put the central bank’s reserves which are just deposits that private Banks hold at the central

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bank that’s at the very top of the pyramid and then a bit below that we’ve got Bank checking deposits a little bit

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further down me about Bank savings deposits and other kinds of time deposits and then we have other kinds of

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financial institutions such as money market mutual funds are probably a bit

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lower in the period and on down until we get to the government bonds lie which

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are easy to sell but you could take a loss a capital loss depending on which

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way interest rates have gone I don’t get too much into Financial Theory but it’s

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possible that you take a bit of a loss when you sell your government bonds and then corporate bonds and so on so it is

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somewhat arbitrary where we draw that dividing line with the government bonds if you called it to maturity you will

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always get face value does that factor into the three dimensions of money I’m talking about if you for some reason you

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needed to sell it you needed some cash then you don’t necessarily get what you

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paid so it’s not that the government’s going to default or anything like that it’s just that interest rates can move

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and depending on the term to maturity that can have a bigger effect on the

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price you could get at a point in time you can always hold it to maturity and get what is promised and get interest in

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the meantime yes okay so anyway it’s somewhat arbitrary I wouldn’t include

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bonds as money because there’s the possibility of capital loss and it takes

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a bit of effort to convert them to cash I was just wondering what implications that had for the notion that that money

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is exogenous or not whether if we say that that we do have control over the quantity of bonds against the quantity

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of ourselves and are we saying that we have some exogenous control over the money supply or not well it depends on

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the central banks goals if the goal of the central bank is to hit interest rate

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targets which they all admit is what they’re trying to do now and if the goal

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of the sen Central Bank is to have the payment system operate very smoothly so that checks

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clear so that Banks can clear accounts with other Banks

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then the central bank is not able to control the quantity of Reserves at all

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even though reserves are their liability and you and in the old days economists used to think that well it’s their

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liability they could choose not to issue a liability but that’s actually not true because

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central banks do care about impacts on interest rates and they do care in fact probably they’re overriding concern is

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always to have a smoothly function payment system where checks don’t bounce

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I mean I’m talking about as long as they’re good checks they want to make sure that the check’s clear they always

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want to make sure that treasury checks clear that’s the most important one and that means they will have to supply

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reserves as necessary to allow the clearing to take place and that in turn

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means that they actually don’t have control over it the term exogenous has

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several different meanings so one of those meanings is just simply outside

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the private market economy and in that sense yeah we would say that the central

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bank is outside that private market economy and so it’s exogenous in that sense so turning to taxes in taxation in

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the book you write quote keep this in mind taxes are for Redemption not Revenue what does redemption mean in

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this context yeah well Redemption means that you are returning and I owe you to

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the issuer and this I would say is a fundamental law this is what a Mitchell

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Ennis claimed a fundamental law of all debt and that is that the issuer of a

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debt must take a back end payment and if you owe somebody if you can get their

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debt you can get yourself out of debt to them by delivering back to them their

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own IOU and so we’re talking about the government if you have a tax that you

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owe to the government you can get yourself out of tax debt by getting hold

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of the government’s debt namely currency and delivering that back to the

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government if we go back to the American colonies they were the the first big

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issuers of paper money in the west the Chinese had been doing it for hundreds

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of years before but in the west it was a new thing it was even noticed by Adam Smith In The Wealth of Nations in 1776

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he said there’s this strange thing going on in the colonies they are issuing paper money and even if they don’t

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promise to redeem for gold it can circulate and retain its value

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and the colonies knew what they were doing they would authorize printing up

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say ten thousand pounds of Virginia notes in the case of the colony Virginia and at the same time they would pass a

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new tax law that they called Redemption taxes that were expected to raise about

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ten thousand pounds they would accept back the notes in Redemption that is

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payment of taxes and so they got back the paper notes in tax revenue and then

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what did they do with the notes they burned them all which makes it very clear they were not

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collecting tax revenue to give money to spend they were collecting tax revenue

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to get money to burn now why were they doing that tax insured

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that there would be a demand for the currency and taking the currency out of

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the economy ensured that it wouldn’t stay in the economy and possibly cause inflation and

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so that was the answer to Smith’s puzzle why does it retain its value well people

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needed to pay the tax and once they’ve paid the tax they burn it so it can’t

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cause the value of the currency to go down speaking of debts and Redemption also in your book because this is the

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first time I’ve come across this I have to ask what is the Saudi principle okay

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so Saudi was a scientist but he came up with this argument that interest trumps

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growth and so if you think about it debts that promise to pay interest grow

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at the rate of interest so if you borrow a hundred dollars and you promise to pay

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10 interest your debt is going to grow at a rate of 10 percent it’s going to

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get 10 bigger every year now actually more than that if it’s compounded frequently okay and his argument was if

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you look back in time say in Babylonia for example where we have the first

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records of written records of debt and we know a fair amount about their

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monetary system the interest rate was say 20 percent now we know that ancient

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societies grew extremely slowly so slowly that you really wouldn’t notice

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any economic growth over your lifetime it’s only the last few hundred years

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where growth is rapid enough that you actually can see it and notice it and

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that’s basically when the whole field of Economics was founded it was founded

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once economies grew fast enough that you could see it but anyway going back to

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his argument with an a High interest rate and an extremely low growth rate

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it’s very obvious that debts are going to grow much faster than the ability to

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make the payments and that’s exactly what happened and that is why ancient

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societies always had a principle of debt cancellation in the Year of

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Jubilee Michael Hudson has written a lot about this and the purpose of that was

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to essentially restart time cancel the debts to restore they were thinking what

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we’re doing is restoring the natural order of things because we recognize it’s not possible to pay the debts now

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in more recent times when our economy is doing well we probably do grow faster

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than the interest rate but often we don’t and what that means is the debts

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are going to grow faster than GDP which is our measure of economic output but

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even when GDP and the aggregate is growing faster for many people their own

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income is not growing as fast as their debt is growing because of the interest rate and what that means is that they

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become more and more dead burden now up until Roman law that cancellation it

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was the rule now exactly how frequently do you cancel debt varied across

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societies judaic Society the judaic Bible it’s every seven years in

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Babylonia apparently it was either 30 years or who with the death of the

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emperor and the rise of a new emperor you would start all over again so it’d depend on how long their lives were or

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30 years if they did not die sooner but with Roman law we got property law that

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protects the owners who obviously don’t like debt cancellation so ever since

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then we have protected the creditors and we eliminated debt cancellation

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substituting bankruptcy which is not nearly as good as debt forgiveness and

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so we have a problem of debt burdens that tend to grow over time and become

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unpayable debts in fact you’ve just reminded me I will link to our episodes on the organization the debt Collective

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who came out of Occupy Wall Street you may have heard of them Randy they started off as an organization called

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rolling Jubilee and so they were a fund they raised funds and then bought debt

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on the secondary Market student debt and medical debt and just canceled it and I

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thought that was a good teaching tool to show people okay this is what money is money is debt as you say Randy but then

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also great activism that reminds me of David grever’s book and this whole idea

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as well behind the history of money being really about kind of the conflict between debtors and creditors

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and how also much obviously much later than these societies that you’re discussing came this obsession with

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fixing the value of money because any kind of discrepancy in the value of money inflation in particular would be

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immoral in the sense that it would be repaying less to the creditors than you

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initially agreed to and obviously there’s a big theme there’s a word that keeps repeating in your book Randy your

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latest book Hallelujah yeah every time to describe the Redemption of the counseling of debts or the like you said

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the literal redemption in the monetary sense that we were talking about earlier so bringing it back to the here and now

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though the presser reporting this week that the bank of England are about to launch a four-month consultation on a

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digital pound nicknamed britcoin and I was struck by this sentence in your book

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the nature of money doesn’t really change when the Recording Technology changes and you touched on it a few

20:36

beats ago but could you say a little bit more about that yeah today most of our records keeping is digital and so we’re

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not using tally sticks anymore we’re not using clay tablets and the number of transactions in cash is extremely

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infinitesimally small and young people don’t even know how to write a check so they don’t do that and so it’s almost

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all digital already it’s strange to meet the people think that this is a really

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new thing that central banks might decide to have digital coins instead of

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physical coins since again it’s just record keeping I think that moving to a

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system in which everybody has an account at the central bank and the say the

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technology the Privacy questions and just the

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management of in the case of the United States maybe 350 million Accounts at the FED those

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are things that that need to be discussed but digital coins is no big

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deal at all I think what a lot of people pushing this are concerned with is that

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crypto has been sold as a possible replacement money including for cash

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payments and I see crypto as really very

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little more than just fraud a Ponzi scheme a pyramid scheme whatever you

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want to call it I think that is a huge problem in the United States Gary Gensler is cracking down on it and I

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think that’s very important that we need to stop these fraudsters from separating

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people from their wealth it’s just another scam now probably a lot of your

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listeners are not going to like what I just said but that’s the way I see crypto I think we agree don’t we

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Christian absolutely yeah and I feel a lot of our listeners do I know that some listeners all okay central banks get

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things wrong so it would be great if there was no government intervention anywhere in the money system but as I’ve

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said before complaining about money being political it’s like complaining about water being wet

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but anyway so then there’s the Privacy issue and and the good thing about using

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government cash is that there’s a lot of privacy involved that’s also the bad thing about it because it can finance a

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lot of undesired illegal activity and so that’s a tough question Society might be

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better off if we didn’t have a way for people to hide their payments but I

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think that needs to be discussed seriously I know there’s the claim that

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well they can use modern techniques to keep everything Anonymous even if the

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accounts are with the central bank but we do know that the governments are pretty good at getting information that

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they want I think the issue of privacy is quite important particularly here I mean in the UK people rally up against

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the very idea of an ID the existence of one and the belief that there has to be

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a way of making transactions without anonymity is accepted as the right thing

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over here but the issue is that with cash at least and cash would have been the way to do that but with cash it’s

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very difficult to do that on a large scale whereas with a digital pound if it

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was Anonymous then you could potentially open up opportunity for fraud on a large

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scale so would you then say that cash and physical cash should always be

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retained as an option even if it does remain in very little use as a means of allowing those small transactions to be

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carried out as people prefer in an unlimited if they wish yes I definitely lean that way and I think we should keep

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the denominations of cash low because that makes it difficult to do the large

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ones and I think the large ones are the problem the small cash payments there could be under the table work and things

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like that so that you don’t report taxes is it illegal and it’s not desirable but

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the bigger problem is the huge cash payments so keep the denomination small

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and allow people to have some privacy in

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small payments but not allow privacy in the large payments I think that’s really

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the Crux of the issue that we have to look out for why the story is worth paid attention to whether or not the

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government is going to try and ban cash as far as I can see I can’t see the

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circumstances where that will come about now I know we sometimes go to shops where they go hey we’re completely cash

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free you have to tap your card or use your phone that I don’t think that’s the government driving that I just I think the

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government wants to have cash as much as private citizens do I don’t know what anybody else thinks there’s one other

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big issue that does support the use of

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government Central Bank digital money and that is that we have a large part of

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the population in the United States that is unbanked they don’t have bank accounts because of the fees possibly

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because they’re in rural areas in Indian reservations for example where they

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don’t have banks close by so I do think that we need an alternative to the

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private banking system and to cash to allow people to have free banking

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accounts so they can make payments so they can accumulate savings and so on and an alternative to using the central

26:25

banks for this is to go back to the postal savings systems which many

26:30

countries had we had postal saving system in the United States till the mid 60s there are post offices all over the

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place in the United States and Trump tried to close a lot of them down but Americans really like their post offices

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and so we can use those for Banking and they can provide a lot of the services

26:51

that the unbanked part of the population needs and I think that’s probably a

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better alternative to trying to have an account for everybody at the central bank over here at the post office it

27:03

does provide some banking services but not serving the government but serving some smaller kind of commercial banks

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that don’t have offices branches or things that people can visit so they pay a fee to the post office and the post

27:15

office accepts payments or deposits on their behalf but the other thing is during the pandemic we had this kind of

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transfer payments to people and a lot of people were unreachable because of what you were saying Randy that they didn’t

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have bank accounts they certainly would fix that problem wouldn’t it yes so I

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think a free payments system that’s an alternative to the for-profit banking

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payment system is a really good idea and we know how to do it we used to do it and the Japanese postal Savings Bank was

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the biggest bank in the world I’m not sure if that’s still true so the models are out there for us to study and it’s

27:54

easy enough to do that so back to the book and turning the corner in the next chapter of the book which is entitled

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where does money come from you write to put it simply the Central Bank lends government money into

28:06

existence while the treasury spends into existence remember it this way the Central Bank lens the treasury spends

28:13

could you say more about that so a lot of people get confused over what central

28:19

banks and treasuries do and the discussion around the pandemic didn’t

28:25

help because a lot of pundits were saying oh well the central bank is

28:31

flying helicopters and dropping money into the economy and so that just

28:36

confused the issues it’s a treasury’s spent the pandemic relief money into

28:43

existence the central bank is the bank for the treasury so the way the treasury

28:50

spending actually gets paid for is that the central bank will credit the

28:57

reserves of your private bank and your private bank Bank credits your deposit I

29:04

think the majority of the payments in the U.S were electronic so that’s exactly how it occurred

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on the other hand you might have gotten a check in the mail from the treasury so it’s a treasury’s check and you take it

29:17

to your bank you deposit it they credit your demand deposit and they send it on

29:24

to the FED in the case the United States Bank of England and Britain and the

29:29

Central Bank credits the bank’s reserves that’s how the treasury spends now the

29:34

central bank is involved in it but they’re just acting as the bank making

29:40

the payments for the treasury just like your bank will make payments for you you

29:45

could write a check to your landlord and your bank will make the payment for you so there’s nothing strange about this

29:52

the treasury as a bank you have a bank and the FED acts as a bank when it makes

29:58

payments for the treasury the central banks also do what we call monetary policy and that is different from what I

30:05

was just talking about which is called fiscal policy fiscal policy is spending

30:11

and taxing okay the central bank is involved in both of those but that is a

30:17

treasury operation the central banks do what we call monetary policy and in

30:24

monetary policy central banks lend Reserve herbs to the banks that need

30:30

them to make payments basically to each other that is how the Bank of America in

30:37

case your listeners don’t know Bank of America is a private Bank of the United States it has America in the name and

30:42

actually was founded by Italians in California but it is not a natural bank

30:48

it’s a private bank so if Bank of America receives a check drawn on Chase

30:54

Bank Chase Bank will pay Bank of America using its Reserves at the fed the FED

31:03

will debit the Chase bank and credit the Bank of America reserves that’s how

31:09

payments are made between Banks and then finally Banks also use their reserves

31:14

when they make payments to the treasury so when you pay your taxes

31:19

the central bank will reduce your bank’s reserves so that’s what reserves are

31:26

used for the reserves have to get into the banks so that they can use them they can’t

31:32

create those those are only created by the central bank and the central bank can provide reserves to them in one of

31:39

two ways one is they can just lend up they just lend the reserves

31:45

and so a listener might say well where do they get the reserves to land they create them

31:50

they use a keystroke on the computer to credit their deposit account at the

31:58

central bank so it’s just created out of thin air you could say they lend those reserves to the bank that needs them to

32:06

make a payment either to the treasury for taxes or to clear checks with some

32:11

other bank the other way that they can provide Reserves is by buying something because when the

32:20

Central Bank buys something it creates reserves to pay for it the

32:26

main thing that they buy is government bonds so the central bank will buy a

32:33

treasury bond from a bank in order to put reserves

32:38

into that bank’s Reserve account so my guideline was to think of central bank’s

32:44

lending not spending they can lend the reserves directly or they could provide

32:52

reserves by buying bonds this might sound like spending but economists don’t

32:59

count that as spending because it is not a purchase that will go into GDP gross

33:05

domestic product all it is is the purchase of an asset that is just

33:12

exchanging one kind of asset for another kind of asset exchanging reserves for a

33:18

Government Bond we don’t call that spending it’s a monetary policy

33:23

operation so that’s the other way that they can get in to the economy so with that said you also add a caveat in the

33:30

book A minor exception to our rule that central banks lend and treasury spend is That central banks do buy a limited

33:37

range of financial assets but these purchases are undertaken to implement monetary policy not to move resources to

33:44

the government sector which is what fiscal policy is largely about now that’s what you were just talking about

33:50

as I understand it Randy yeah that’s right so they’re operating policy is to

33:56

bias as to put reserves in this has nothing to do with fiscal policy so following on from that I think it’s in

34:03

the same area but this might just be a UK thing but as part of the bank of England’s quantitative easing program on

34:10

top of buying government bonds with reserves or as we say an mmt swapping interest bearing pounds for non-interest

34:16

bearing pounds the bank of England also bought high quality commercial bonds I

34:22

wondered if you knew what their reasoning was for that because it confused a lot of people how is that

34:28

supposed to work in monetary policy terms they were not alone the ECB did it

34:34

the FED did it and the bank of Japan did it it’s called quantitative easing I would just say whatever they and I mean

34:41

all of those central banks whatever they thought they were doing it was bad policy they’ll say that they needed to

34:49

provide liquidity to the system or some such thing but if the system needed liquidity that

34:57

is more reserves the Central Bank ought to just lend them at the discount window the discount window it’s an old

35:04

it’s a historic term but that’s lending reserves by the central bank to a

35:10

private bank one of the goals of quantitative easing was to get the

35:16

interest rates down okay because we had just gone through the global financial crisis the economies were rotten and the

35:25

idea was if we can get the interest rate down really low people start spending

35:30

and we’ll get out of this recession okay so it’s some kind of logic to that but you don’t have to go out and buy a whole

35:38

bunch of private bonds we’re talking about trillions of dollars yen pounds

35:43

and Euros many many trillions were purchased by central banks they didn’t

35:49

need to do that at all to lower interest rates all they have to do is is say well

35:54

we think the 30-year treasury bond interest rate

36:01

ought to fall to 2.5 percent and what we’re going to do is stand ready to buy

36:08

enough treasury bonds to get that interest rate down to 2.5 percent okay

36:13

now are they gonna have to buy any the answer is no because no Market participant is going

36:21

to doubt that they can do that okay so the price of bonds will move such that

36:26

and again this would have to go deeply into Financial Theory we don’t need to do it the price of 30-year bonds would

36:34

have to move to the price that gives you an interest rate of 2.5 percent it’ll go

36:39

there immediately betting against central banks is the dumbest thing you can do because they have an unlimited

36:47

purchasing power to buy government bonds they will never run out of reserves they can always buy them so they’re going to

36:55

get the interest rate that they want but for some reason they thought they needed to go out and buy bonds okay they also

37:02

started buying private bonds so mortgage-backed Securities for example

37:08

and that was to get private interest rates down really low too again they

37:15

could have done the same thing although I’m not so convinced that this would

37:21

have been a good policy and I also suspect a little bit the bank of England’s claim that they’re buying high

37:28

quality commercial bonds I doubted that the Fed was buying high

37:34

quality mortgage-backed Securities so what if they’re doing is buying low

37:39

quality ones that have some probability of default what they really are doing is

37:47

bailing out parts of the private sector and I think that they probably were

37:52

doing that it’s corporate welfare it’s that and it’s very bad policy okay

37:58

people should have taken lawsuit they took great risks and there was lots of

38:03

fraud involved and they should have lost so they should not have been bailed out so I think the whole thing was misguided

38:11

at least and possibly you know an underhanded way to ensure that people

38:18

who had undertaken great risks didn’t suffer the consequences and now that

38:23

obviously the QE period has ended and I think well the UK certainly but I think

38:29

even the US has started a quantitative tightening can you explain maybe what

38:34

the purpose of quantitative tightening is is there any real point or is it simply sort of them trying to pretend

38:43

that things work in a certain way what’s the logic behind it so I don’t think quantitative easing really eased

38:50

anything and I don’t think quantitative tightening really tightens anything raising interest rates has impacts and

38:58

they are raising interest rates and we are seeing the impacts of that I don’t think that this is a precise tool at all

39:07

it’s like a sledgehammer and you’re not quite sure if you’re doing good or bad

39:12

with the sledgehammer so I don’t think that it’s the right policy to be raising

39:18

rates now but anyway raising rates is one thing and it has impacts but

39:24

quantitative tightening really does it I think there’s just a general belief that

39:30

we don’t want central banks to maintain these huge ballot sheets forever the

39:38

quantity of reserves in the United States used to be some number like 50 million and it went up to trillions okay

39:44

well that is the central bank’s liability they it’s offset on the asset

39:50

Side by trillions of stuff that they bought governments and private bonds and

39:56

so the idea is this just is abnormal for central banks to have such big balance

40:02

sheets and they’ve wanted to try to shrink them and in the United States we’ve had some what are called taper

40:09

Tantrums so taper means reducing the size of the fed’s balance sheet and when

40:14

the FED tried to do it the market reacted and interest rates went up temporarily in sort of a little tantrum

40:22

and I really don’t know why and I don’t think anyone really knows why the

40:28

markets want to keep tremendous amounts of reserves in the banks I don’t know

40:34

the answer to that I know that there is an excellent probably the best financial

40:39

journalist right now writing a book on it the author just asked me what I

40:44

thought and I told him you know boy I hope you can figure this out because I can’t so for most of the first decade or

40:50

so of your work on money it was all about the private money system as I read it in your latest book and how Bank

40:57

credit is created when Banks make loans and for people who come to the banking system through mmt this concept of loans

41:05

created deposits known as the endogenous money view can sometimes be a bit of a stumbling block and I think there’s a

41:12

confusion where some people think that Commercial Bank credit is side by side with Central Bank credit rather than

41:18

Central Bank credit being at the top of a hierarchy of Commercial Bank credit being below it as you talked about

41:24

earlier Randy so if we start with that primary mmt money story with a government needing to provision itself

41:31

and so it imposes tax liabilities on the private sector denominated in its own

41:36

money of account which only it can create and then that leads to people needing to sell goods and services to

41:42

get the government’s money to pay taxes with and that gives us our tax-driven state issue currency what might be a way

41:49

to integrate commercial Banks into that story first there’s the historical question which came first private Banks

41:58

or government and its money and the answer on that is very clear

42:04

authorities governments originally probably religious authorities is where

42:09

money started there are sort of Bank like things that go way back in time

42:15

modern Commercial Banking only goes back a few hundred years so I mean the

42:20

historical story is that definitely government money comes first and that

42:27

bank money comes later our banks at the same level in that pyramid as a central

42:32

bank will clearly know they are not the banks use the central banks liabilities

42:38

to clear with each other so they are below the central bank they need the

42:43

central bank to do the clearing the first two central banks in the world were created in for Sweden and then in

42:50

England and that was at the end of the 17th century in the United States we didn’t get our central bank until 1913.

42:57

we had a very backward Financial system of course we had a treasury and we had

43:03

treasury currency of different kinds over the years we did experiment with a

43:10

bank of the U.S twice but it was politically unpopular in certain ways

43:16

but anyway because we didn’t have a central bank like Britain did we had the

43:22

worst Financial history of any of the countries that became developed

43:27

capitalist countries because our banks had nothing to stand

43:33

behind them to ensure that bank money issued by Bank of America would clear at

43:40

par against Chase Bank at par means dollar for dollar a one dollar check for

43:47

makeup America it has the same value as a one dollar check from Chase actually

43:54

until the late 19th century Banks mostly issued notes rather than checking

44:02

accounts so if you took out a loan they actually printed up the note so they would look just like the five pound note

44:10

in written or one dollar note in the United States but instead of saying

44:16

Federal Reserve Note which is what our currency today says it would say Bank of

44:22

America note those notes did not circulate at par and when you started to

44:29

suspect that your bank was in trouble then maybe it had made a lot of bad

44:36

loans and that it couldn’t convert its own notes to U.S treasury notes at par

44:43

we would get a bank run and so every generation we had the equivalent of the

44:50

global financial crisis in the United States but with no Central Bank and so the banks would fail and or shut their

44:56

doors in Britain the bank of England existed again since the late 17th

45:03

century and by the early 19th century well no sorry say more like 1840. in the

45:10

Bank of England had realized what it could do to stop bankrupts and that is

45:15

to lend its own notes to the banks facing runs that would stop the bank run

45:21

and prevent a financial crisis so Britain could stop Bank runs the United

45:27

States could not our Fed was created specifically

45:33

to provide reserves to prevent Bank runs now they didn’t do it in the Great

45:39

Depression we had Bank runs anyway but there the problem was that the FED

45:46

didn’t think it should lend reserves to banks that were insolvent it should only lend reserves to banks that were solved

45:54

at but they were facing an irrational run like the Jimmy Stewart Savings Bank

46:00

in the movie It’s a Wonderful Life so anyway his bank was solvent in other

46:05

words he had the assets but the assets as he he tells the crowd that’s trying

46:10

to get their cash out the assets are the homes that he had financed with

46:16

mortgages and he couldn’t get that money back quickly he would have to foreclose on everybody’s homes so anyway the FED

46:24

didn’t really do the job in the Great Depression but the lender of Last Resort

46:29

is what it’s called principle was understood from the mid-19th century and

46:36

all the developed country central banks act as lenders of Last Resort in order

46:42

to stop Bank runs our financial crises now occur generally outside the banks

46:49

it’s in what we call the shadow banking sector so we still get financial crises and they can be extremely severe like

46:57

they were in the global financial crisis but generally they’re not in the banks

47:02

as a result of the failure of the FED to

47:07

prevent the Deep financial crisis and the Great Depression where half of all

47:12

the banks failed and closed up and depositors lost their money we created Deposit Insurance so this is

47:20

the treasury that promises to make good your deposits even if your bank fails so

47:28

we put that in place and so in the United States we haven’t had any Bank runs on FDIC Federal Deposit Insurance

47:36

Corporation insured Banks since the Great Depression so it works absolutely

47:41

we have had runs on banks that didn’t have FDIC insurance but we don’t have

47:47

any of those anymore in in Britain your listeners will remember you did have a run during the

47:54

global financial crisis that’s because you only had 90 insurance

48:01

and the feeling was well that’ll be good enough to prevent a run but depositors are rational do you want to lose 10

48:08

percent of your deposit the answer is no and so there was a run on on the bank to

48:14

try to get the funds out because nobody wanted to lose 10 percent and after that Britain and several other European

48:21

countries had to do the same thing they had to raise it to 100 percent so as long as you are below the upper

48:29

limit which in the U.S was raised I think to four hundred thousand dollars you can’t lose with an insured deposit

48:36

at all so that Deposit Insurance adds another layer of protection

48:44

so that even if your bank has done the craziest kind of lending and engaged in

48:49

massive fraud which is what they did before the globe financial crisis

48:55

you can’t lose your deposits so that is in addition to the lender of Last Resort

49:00

that makes the banks perfectly safe but I still wouldn’t put them at the top

49:06

of the pyramid because they rely on fed money to clear their own accounts they

49:14

can’t clear accounts using their own money and that puts them below the FED

49:19

in the way that I view things some people might say that sort of decreases

49:24

the incentive for banks to actually be run responsibly would you agree with

49:30

that well that is true but we’ve done several other things that reduce their

49:36

responsibility if you go back to say before the mid 19th century banks in

49:42

England the owners of the banks were liable for double their investment in

49:49

the bank so if you had invested say a hundred thousand pounds in the bank you’re liable for two hundred thousand

49:56

pounds if the bank failed that gave you a pretty good incentive to make sure the

50:02

bank was doing safe things well modern banks are corporations with

50:08

limited liability so the owners have nothing but their investment at risk you

50:15

can’t go after their wealth so we already reduce the incentive when we did

50:21

that when we allowed limited liability the argument was well then you can

50:26

increase your ability to raise Capital because many more people will be willing

50:32

to buy Bank shares if the only thing they can lose is their investment they can’t lose their own wealth all right

50:38

but that reduces the incentive for the banks to keep risk low adding the lender

50:45

of Last Resort reduces the incentive to maintain liquid positions adding the

50:52

deposit Insurance reduces the incentive for the depositors to make sure the

50:59

banks don’t engage in Risky Behavior but the reality is the depositors can’t possibly discipline in the banks anyway

51:05

for two reasons One banking is very complex

51:11

and the typical repositor can’t possibly understand what the banks are doing and

51:18

the second reason is there are privacy considerations so the banks can’t tell them who and how

51:26

much they have Lent so you couldn’t get the information even

51:31

if you had the capacity to evaluate the credit worthiness of the bank you can’t get the data so it’s just not

51:38

conceivable that the owners or the depositors of the bank can properly

51:44

regulate and supervise what the banks do that is why this has to be done by the

51:50

government you have to have the government Regulators in the United States so the FED is a regulator the

51:57

treasury is a regulator through the FDIC so the treasury is the insurer of the

52:03

banks they have the right to regulate them also the office of the Comptroller of the currency regulates the banks and

52:12

then the individual states regulate their Banks so we have a number of

52:18

levels of Regulation and I would say they do a

52:23

pretty good job with the small Banks they do a terrible job with the big

52:29

things and then on top of that if they try to do a good job in regulating a big

52:34

Bank the big bank has donated campaign money to very important senators and

52:42

house members and they will call on them to attack the

52:48

regulators and this is not I’m not saying anything hypothetical this is all

52:53

the way things actually work you can read the book the best way to rob a bank

52:58

is to own one by my UMKC Paulie Bill black laid it all out he was a regulator

53:04

and the owner of one of the banks that he was regulating actually put out a hit

53:10

on him so just getting the Senators to attack him they were called the Keating

53:15

five five senators were bought by this guy to tell The Regulators to leave him

53:22

alone that wasn’t enough they actually put out a hit on it there is a huge

53:27

problem with the big Banks so one is their political power and the other is

53:32

the complexity of what they do they have maybe thousands of offices all over the

53:38

world and they engage in extremely complex Financial transactions

53:44

that are hard to keep track of so they are a huge problem and I think there is

53:50

one obvious answer to that which is we should not have big Banks either limit

53:55

their size or just nationalize them yeah I think that there is a role for

54:01

National Banks public Banks State development Banks so that’s a good

54:06

alternative for some kinds of financial activities and then beyond that yeah break them up have a maximum size but

54:14

also Eric Des Moines uh he had a very good proposal which is regulate them

54:20

like we regulate dangerous drugs now dangerous banks are much more dangerous than dangerous drugs dangerous Banks

54:27

killed far more people than dangerous drugs they’ve ever killed so there’s a legitimate reason to do it but regulate

54:34

them like dangerous drugs you have to get approval before you can do it now that’s not the way that we

54:41

operate now we let them do whatever they want to do and then we decide later well have they killed too many people should

54:48

we Outlaw that problem that’s not the way to do it they force them to get approval first

54:55

and really look into it and then if you find out well that was a mistake we

55:00

shouldn’t allow them to do it then then yes take it away so we tell them what to do as opposed to tell them what they

55:07

cannot do yeah well I mean I’m not against all kinds of Bank Innovations so

55:14

a bank innovates a new product okay just like drug companies come up with a new

55:19

drug okay fine let’s take to the FDA uh in the case of drugs in the United

55:25

States and get approval the FDA does tests and decides whether it’s safe

55:31

enough to release do the same thing with financial products let them innovate all they want but they have to have approval

55:38

before they can use them so this is obviously why understanding the system is important because you’ve got to

55:44

understand it to see these things and so the full title of your book Randy is making money work for us how MMC can

55:51

save America but of course we’d also like to save the world and the good news about that is that your chapter that you

55:57

co-wrote with Yavin assisian in the brand new Gower initiative book mmt key insights leading thinkers that chapter

56:05

pushes back on this well-worn Canard that mmt only applies to the US because

56:10

the U.S issue the world’s Reserve currency and you lay out why that’s wrong and why mmt applies to all

56:17

currency issuing Nations could you talk about that yeah let me first say that this is why the omen is that we want to

56:24

make money work for us okay and so I actually didn’t come up with a subtitle

56:30

Publishers do that of course I don’t want to limit it to America but let me say money gives you power so The

56:40

Sovereign government issues money and issues the money that’s at the very top

56:45

of the pyramid and that gives them the power to do both good and bad they can

56:51

use that money to move resources in their favor hopefully in a democracy

56:57

they’re going to use that power to do good that’s what democratic authorities

57:03

are supposed to do they’re supposed to represent our interests to serve the public purpose now they’ve been failing

57:09

us it’s not all their fault Reagan in the United States Thatcher in Britain

57:16

turned people against the government and we’ve greatly

57:21

weakened their ability to serve us that is a huge problem and so I think it’s

57:28

important to say that we need to turn this around and we need to recognize

57:33

that we can use government to serve the public interest okay now turning to this frequent and false criticism that mmt

57:42

only applies the United States maybe Brit maybe Japan and so on and mmt just

57:48

ignores the developing World well that’s not true it is true that United States

57:56

economists have played a big role in developing mmt and a lot of the work has been focused

58:03

on the United States because we know the United States but obviously Bill Mitchell is not from the United States

58:10

he’s a from a small country now it’s not a developing country it’s a rich country

58:16

but in in many ways it faces some kinds of problems that smaller developing

58:23

countries face it’s an exporter of Commodities like a lot of developing

58:29

countries are so I think it was never a fair criticism anyway and now we have

58:34

more people who are explicitly applying mmt to developing countries so I don’t

58:42

think it ever was a fair crisis but anyway turning to the paper with

58:47

yeva what we argue is all countries face resource constraints so we have that in

58:53

common that’s true of the United States too as long as the government issues its

58:59

own currency and doesn’t issue debt in foreign currency then we would argue

59:05

that The Sovereign government is not financially constrained whether it’s the

59:10

United States or Australia Britain or a developing country it doesn’t face a

59:16

financial constraint it does have self-imployed constraints for example

59:21

typically we all formulate a budget that’s approved by the elected representatives and then in the case the

59:28

United States signed by the president and countries have all adopted operating

59:33

procedures that guide what the central bank and treasury can do or cannot do so

59:42

they have those kinds of constraints the reality is that most Nations don’t live

59:49

up to their resource capacity and I would include the United States plus

59:55

developing countries we’re all in that same boat we Face resource constraints

1:00:00

but we don’t even operate the economy up to those resource constraints in the

1:00:06

case of developing countries what they typically do is mistake balance of

1:00:11

payment constraints for resource constraints and that is why they operate

1:00:17

their economies with substantial slack that is unused resources especially

1:00:23

labor resources because they fear this balance of payment constraint and they

1:00:28

allow the current account position position to constrain their government

1:00:34

balance so they’re very worried about running a current account deficit the

1:00:39

balance of payment deficit is feared and rightly so to have exchange rate effects

1:00:45

so in other words if you persistently import more than you can export that can

1:00:51

have an effect on your exchange rate your currency will depreciate against

1:00:56

the dollar and so to some degree You could argue austerity that is trying to reduce

1:01:03

government spending to slow down economic growth to slow down growth of income so that your population doesn’t

1:01:10

buy as many Imports allowing your trade imbalance trade deficit to decline that

1:01:17

might be a reasonable thing to do but there are alternatives to that you could

1:01:24

instead restrict Imports put a limit on the Imports and prioritize what you

1:01:32

should Import in other words don’t import luxury goods import food for the

1:01:38

population so you could try to reduce your imports not by depressing income

1:01:43

and causing unemployment but by choosing to import what you really need and

1:01:50

restrict Imports that you don’t really need you also can use import

1:01:55

substitution there’s nothing new here this this is in all of the heterodox literature that you try to grow your own

1:02:03

food rather than importing food so Fidel kaboop has been arguing this that that

1:02:09

should be your top priority because typically the poorest countries are importing food so you can greatly reduce

1:02:16

your current account deficit if you can increase the production of food there is

1:02:22

this perception at least in Peru and possibly the rest of Latin America that your development is very much tied in to

1:02:30

your ability to obtain dollars so prioritizing obtaining dollars and

1:02:36

maximizing exports is seen as the key to development and of course that’s been the policy over the last few decades and

1:02:43

if anything our economies have become less varied and more specialized than we

1:02:48

used to be yeah so to a degree the poorer countries have to exchange real

1:02:56

exports for real Imports the reason is because the rest of the world doesn’t

1:03:03

want to hold Assets denominated in their currency for the United States and for

1:03:10

Australia and for Britain this isn’t true all of us can easily run current

1:03:16

account deficits we can import a lot more than we export because the rest of the world wants to hold Assets

1:03:23

denominated in our currencies so we’re not constrained by the amount of real

1:03:29

stuff we can export in a sense what we export is assets we allow the rest of

1:03:34

the world to own Financial assets and pounds or dollars and we can run current account deficits with no predictable

1:03:41

impact on our exchange rate as Alan greensman said we don’t have a model that can tell us what determines the

1:03:48

dollar exchange rate and that’s because the vast majority of transactions I think John Harvey said that it’s 98

1:03:56

percent of all dollar transactions around the world are in assets not in goods and

1:04:03

services so it’s not in traded stuff you might hold a U.S treasury bond because

1:04:10

you know that it’s an extremely safe asset you’re not speculating you’re just

1:04:15

going to have a return that you can count on now there’s lots of speculation there’s lots of hedging

1:04:22

exchange rate risk interest rate risk those are two of the biggest kinds of

1:04:28

derivatives out there but even those you wouldn’t necessarily have to say that

1:04:34

it’s speculation you may want to protect yourself from exchange rate movements and so you

1:04:40

can buy various kinds of financial products but yes there’s a lot of speculation it’s not all speculation but

1:04:46

there’s a lot of it so anyway the developing World generally there isn’t a

1:04:52

big demand for financial Assets denominated in their currency and so for them they do need to export

1:05:00

real stuff and they need to develop the capacity to export now International

1:05:06

charity should play a much bigger role the typical problem for a developing country is foreigners don’t want assets

1:05:14

denominating their currencies so they really can’t borrow in their own currency they got to get hold of dollars

1:05:19

to buy the Imports they need to try to develop their economy and I think that’s what you were saying about Ecuador and

1:05:26

the problem is that the interest rate is likely going to be above their growth rate and what that means is their debt

1:05:33

is going to grow faster than their capacity to pay their debt burden is going to increase over time they are

1:05:39

going to get into what Hyman Minsky called a Ponzi position where they’re going to have to borrow to pay the

1:05:45

interest the dollar interest that they owe which means their debt is going to grow even faster okay

1:05:51

it’s very hard to develop this way very difficult and of course the creditors

1:05:57

like that just fine because the real stuff is Flowing to them yes the Creditor Nation so they probably don’t

1:06:04

see it as like oh something’s going really wrong in this system right and at least on paper the debt is growing and

1:06:10

so the asset they’re holding is growing over time now of course we know what

1:06:16

happens we get defaults we get serial defaults among the highly indebted

1:06:22

developing world and as I said from Roman times on WE

1:06:28

generally don’t cancel the debts and so they default and unlike in the case of

1:06:35

say a business default you know Trump can go bankrupt many times and he walks

1:06:41

away from it and he’s perfectly fine we don’t have international bankruptcy laws that apply to Nations

1:06:47

and so Argentina defaults and one of its naval ships is seized right we don’t

1:06:54

have a way to deal with those defaults sometimes there’s some kind of debt relief but it’s on a one by one case and

1:07:02

it’s a haphazard thing and it keeps poor nations in poverty so we need an

1:07:08

alternative borrowing dollars to develop is it for most countries is not a path

1:07:14

to success instead we should have international charity we not lending but

1:07:20

support for developing nations so making money work for us how can mmt save the

1:07:27

world a big agenda but the point is the U.S can’t run out of dollars we can ship

1:07:36

an unlimited supply of dollars to any country in the world that needs dollars for development unfortunately our

1:07:43

leaders don’t see it that way so we have international agreements on how much Aid

1:07:50

each country should give relative to his GDP right to the developing world the

1:07:56

U.S consistently doesn’t live up to its promises why well we’re running out of money President Obama told us that he

1:08:03

said you know we would love to spend more but we ran out of money well this

1:08:09

is false we cannot run out if Ecuador needs dollars in order to develop its

1:08:15

economy we can’t run out of dollars to give that now what can we run out of the

1:08:21

same thing every country can run out of resources the real stuff we can’t run

1:08:26

out of dollars but we can run out of the real stuff so the question is if we sent

1:08:33

the dollars to Ecuador and Ecuador wanted to buy Machinery or whatever it

1:08:39

is to develop their capacity to take care of their own population the

1:08:44

question is could the U.S produce the real stuff stuff that they need and

1:08:50

right now the answer is pretty clear that we can in spite of all this worry about inflation and all the labor market

1:08:56

is too hot and so on WE remain on a downward Trend in terms of capacity

1:09:01

utilization when the economy did well in the past we would be up in the 80

1:09:06

percents above 80 say 85 percent of capacity over the past 30 years or so

1:09:13

our Peaks have declined to now we’re in the mid 70s that means we have 25 unused

1:09:20

capacity and the growth of capacity has been depressed because we have excess

1:09:27

capacity when firms already have more capacity than they can use they’re not

1:09:32

really inclined to produce more capacity so what I’m saying is that we have

1:09:38

excess capacity now already and we could ramp up investment which is part of

1:09:45

Biden’s buildback better plan which got translated into the inflation reduction

1:09:50

act you couldn’t sell it right yeah if you don’t want to build back better what a bad idea that want to reduce inflation

1:09:57

but fighting inflation okay yeah we want to do but anyway so there is some money there for infrastructure development and

1:10:04

for investment and so my point is that we can grow our capacity and I think we

1:10:11

can meet the demand of developing nations and so there is no reason not to ship them the dollars that they need and

1:10:18

it should be charity not loans so I think that understanding how money were Works does help us to resolve those

1:10:24

problems they do face real resource constraints and they face constraints in

1:10:32

terms of the external demand for their currency what they don’t face is a

1:10:38

constraint in the internal demand for their currency okay so at the same time

1:10:44

that the United States and other rich countries are helping them to develop

1:10:49

they need to utilize all of their domestic resources and they don’t need our currency for that they’ve got their

1:10:56

own currency so they should be using their own currency to mobilize all of

1:11:01

their domestic resources and they have the capacity to do that they can’t run out of their own currency I don’t know

1:11:08

if you travel to Latin American countries I’ve gone to a number of them and the first thing that is obvious is

1:11:15

that the reported unemployment rates mean nothing the actual unemployment rate is usually well above of 50 percent

1:11:23

okay people are working washing windshields at the stop lights and so on and five people helping you park your

1:11:30

car okay those people could all be put to work doing useful things and so I I

1:11:36

don’t want to completely let them off the hook either so we should do our part which is providing the dollars they need

1:11:42

and they should be doing their part which is employing all of their population and trying to develop their

1:11:48

economy I think that’s much preferable to the two kinds of strategies that

1:11:53

they’ve been forced to adopt right now which is either you borrow dollars and

1:11:59

you get an unpayable debt or you sell off your natural resources and devastate

1:12:06

your environment those are the two things that a lot of the developing world are doing now and that’s not in

1:12:12

their long-term interest it doesn’t increase their capacity to take care of their own people so I think both of

1:12:18

those strategies are failures I think part of the reason why employment rates

1:12:23

are quite meaningless is because of the degree of informality usually in these economies makes it really difficult to

1:12:30

monitor what the economy is actually doing yes and there’s no reason to have this huge informal sector because they

1:12:36

have their own currency they can mobilize them and formalize all of the work with a job guarantee which is a

1:12:44

whole other episode so moving into the home straight at the end of one of your

1:12:49

lectures from a few years ago that’s out there online which I really liked you rounded it off by saying let me tell you

1:12:56

what I didn’t say in this talk and then you list and correct a lot of the common

1:13:01

misconceptions about mmt which I thought was a great way to drive your actual points home and if you were to do that

1:13:09

now what would you say is the biggest misconception about mmt right now yeah

1:13:14

it’s really funny how after I give a talk people have heard things I never

1:13:21

said and so they well you said well no actually I never said anything like that anyway the biggest one now after the

1:13:30

pandemic and after global financial crisis when governments ramped up their spending at central banks really ramped

1:13:37

up their quantitative easing buying assets people said oh well now they’re

1:13:44

doing mmt it’s helicopter money the central bank is printing up money and

1:13:51

sending out relief checks to everybody in the case of the pandemic and flying helicopters around that’s mmt but that’s

1:13:58

not nmt at all so they saw mmt I think

1:14:04

so I’m trying to interpret what they meant they saw mmt as arguing that we

1:14:09

should change the way the government spends rather than having the treasury

1:14:15

spend we should have the Central Bank do the spending and so the treasury wouldn’t need tax revenue and wouldn’t

1:14:22

need to borrow dollars the central bank would just print up the dollars and spend them for the trade that’s mmt well

1:14:29

no part of that is mmt so first we’ve actually for the most part we don’t

1:14:35

recommend changing any of the procedures what we do is we describe the way things

1:14:40

work right now and we say and it’s perfectly adequate the procedures we

1:14:46

already had are perfectly adequate to allow the

1:14:52

government to spend more on things like the green New Deal on pandemic relief on

1:14:57

a job guarantee we can do all of those things with the current operating procedures no changes required

1:15:04

whatsoever all we need is for congress in the case of the United States to

1:15:09

approve more spending that’s all it takes once it’s approved the treasury and fed know how to do it they don’t

1:15:16

need to change any part of their procedure okay now it’s true some mmt people have recommended getting rid of

1:15:25

Treasury bonds okay that doesn’t really significantly change

1:15:31

the procedures so right now when the FED makes a payment for the treasury

1:15:38

it credits A bank’s reserves and the bank credits the deposit account of the

1:15:43

recipient we generally then sell a bond to train those reserves out of the banks

1:15:52

before 2009 the FED had to do that because otherwise the overnight interest

1:16:00

rate which in the United States called the FED funds rate most countries call it the bank rate that will drop to zero if

1:16:08

there are excess reserves in the banking system because you’ll have Banks wanting to lend reserves but no Bank wants to

1:16:16

borrow reserves because they’re all in the same situation they’ve all got more reserves than they need so the bid will

1:16:23

drop to a zero and the interest rate will be zero and in normal times fed doesn’t want a zero interest rate so it

1:16:30

will sell bonds to take the excess reserves out beginning in 2009 the Fed

1:16:35

was allowed to pay interest on reserves so now the interest rate can only go down to the interest rate the FED is

1:16:42

paying on reserves that becomes the floor rate so all the FED has to do is raise that flow rate to whatever it

1:16:48

wants the interest rate to be and it will never drop below that we don’t need the bond sales anymore so eliminating

1:16:55

the bond sales would have no impact on the fed’s ability to make interest payments it has no impact on the

1:17:04

treasury’s ability to continue to spend because the FED can continue to credit

1:17:09

Bank Reserves okay so it doesn’t really change anything that’s very important

1:17:15

the only question is whether you think that there’s a role for bonds to play in

1:17:20

the economy other than keeping the interest rate above zero maybe there is I think that there could be do we want

1:17:29

at least some entities in the private sector to be able to hold a perfectly

1:17:36

safe Government Bond and earned interest but wouldn’t that role be filled by

1:17:41

reserves now no because only banks can hold reserves okay so if you’re a

1:17:46

pension fund Pension funds like to hold some government bonds as their safe

1:17:52

asset and then they can buy some risky bonds to get a higher return okay so to

1:17:58

raise their average return above what government bonds can make household Savers generally don’t like a lot of

1:18:04

risk but they want to get some interest and so should we allow Savers to hold

1:18:12

some U.S savings bonds when I was a kid we would take a quarter to school

1:18:18

and they had this little envelope with slots you put the quarter in and when

1:18:23

you got 1875 uh you could exchange that for a U.S Saving Bond Worth 25 dollars seven

1:18:32

years later and so we saved that way do we want to allow that to promote private

1:18:37

saving in a perfectly safe asset and importantly at an interest rate the

1:18:44

public policy chooses I think the answer is yes rather than forcing people to take risks

1:18:51

with Wall Street let’s give them a safe alternative let them save and we give them a good interest rate why well

1:18:57

because Uncle Sam can afford it he’s not going to run out of money let’s give him a good interest rate let him save in U.S

1:19:05

savings bonds so I still see a role for government bonds to play in the economy maybe it’s a much reduced role compared

1:19:12

to what it is now maybe it would be we put an income limit so you can’t buy these things if your income is above

1:19:18

fifty thousand dollars or something like that and only Pension funds not other kind of Shadow banking entities would be

1:19:26

allowed to buy them so I would leave that open and obviously it’s a democracy so Congress would decide who would be

1:19:32

allowed to purchase these things and what the interest rate would be but anyway getting back to the main topic

1:19:38

the other thing I don’t like is saying that the pandemic relief was mmt policy

1:19:44

and that is just false even I very explicitly I think it was in March the

1:19:50

pandemic had just hit we laid out a strategy an MMP strategy for dealing

1:19:56

with a crisis and there were no helicopters in that strategy there were no relief checks to be mailed to

1:20:04

everybody in that strategy that was not mmt strategy we warned that mailing

1:20:10

checks to everyone was a bad idea and could be inflationary it was being sold

1:20:15

as a stimulus we said we don’t need a stimulus the supply side has collapsed

1:20:21

the last thing on earth we need is to stimulate demand when there’s no Supply

1:20:27

so it was not an mmt policy we wanted targeted spending and in fact mmt has

1:20:34

always argued for targeted spending has never argued for was called pump priming

1:20:40

just indiscriminate pumping up agrid men we have never advocated that that could

1:20:46

easily be inflationary even if you’re not at full employment because you’re not targeting the spending where it’s

1:20:53

needed so you will get bottlenecks you will get demand exceeding Supply

1:21:00

in parts of your economy so that’s a very bad policy it’s not an mmt policy

1:21:06

and of course the mmt policy prescription being the job guarantee and I’ll link to our episodes about that and

1:21:12

just share notes for this episode and there’s so much more to talk about from your book Randy and speaking for me and

1:21:18

Patricia we would love to talk for hours but we know that time is finite so we’ll

1:21:23

have to leave it there for now so we’ve been speaking with Professor L Randall Ray principal architect of literally mmt

1:21:30

itself and now author of a fantastic new general audience book making money work

1:21:35

for us how mmt could save America and co-author of the more in-depth academic

1:21:41

collaboration modern monetary Theory key insights leading thinkers both of those

1:21:47

books are essential reading so we’ll link to where you can get hold of them in the show notes for this episode but

1:21:53

for now thanks so much for joining us today on the mmt podcast Professor L

1:21:58

Randall Ray thanks a lot it was fun on

1:22:04

[Applause] [Music]

1:22:10

that was the mmt podcast with Patricia Pino and Christian Riley

1:22:15

don’t forget you can support the show through patreon starting at a dollar a month and get access to Patron only

1:22:22

episodes you can do that by going to patreon.com mmt podcast you can also

1:22:28

find me on Twitter at mmt podcast and you can find Patricia on Twitter at

1:22:34

Patricia npino and you can email us at mmtpodcast outlook.com thanks for listening and we

1:22:42

hope to hear from you [Music]

1:22:54

thank you

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