Unpacking Modern Monetary Theory w/ Warren Mosler
(https://www.youtube.com/watch?v=e-VC5Dfd4_A)
How does one of the leading voices of Modern Monetary Theory think about the macro environment today?
Warren Mosler, president of Valance Company and the economist considered the father of Modern Monetary Theory (MMT), joins Maggie Lake to discuss what MMT is, how it relates to inflation, and the ramifications of current Fed policy.
CHAPTERS:
1 The MMT Framework and How It’s Talked About Now 00:31
2 What Are We Getting Wrong About the Relationship Between Policy and Inflation? 0:12:59
3 Do the Fed Rate Hikes Actually Have a Stimulatory Effect? 0:24:09
4 What Causes Recessions If It’s Not Hiking Rates? 0:34:37
5 Why is MMT so Misunderstood? 0:43:25
6 Viewer Questions 0:51:18
7 Final Thoughts 01:01:50
Transkripzioa:
0:00
hit the debt ceiling something very Dynamic happens yes you can now make a payment because
0:06
it would tax revenue hasn’t come in and so you don’t have it so you’re not allowed to increase the debt so you
0:13
can’t make a payment but a lot if not most of the government’s
0:18
revenue is based on transactions like income taxes and that type of thing so if the government doesn’t make a payment
0:24
that immediately reduces revenues which would immediately say okay now you
0:30
can’t make that many payments which immediately reduces more revenues and it spirals down very quickly and it
0:37
spreads as things stop government revenues stop and the deficit the debt can’t go
0:44
up so the spending has to just fall lockstep with the drop in instantaneous
0:49
revenues and so you could see a total collapse of GDP of 10 to 20 or 30 percent in a week
0:57
hi everyone today we are going to take a deep dive into the subject of mmt modern monetary Theory at the in-person meetups
1:04
we had over about around last month a lot of you were asking us to cover this topic so we went right to the source
1:10
with me now is Warren Mosler president of Valance and one of the main proponents of the mmt school of thought
1:17
hi Warren good morning good morning good to be here thanks for thanks for being here with us
1:22
um so let’s start a little Broad and then we’ll work our way down because we have a probably a lot of different
1:27
viewers on uh watching this and who will be watching this so for those who may not be familiar with the concept what is
1:35
modern monetary Theory what is it what does it suggest okay so that was the name given to this
1:42
particular school of thought maybe 10 years ago on one of my colleague Bill Mitchell’s blogs and it’s stuck and we
1:49
talked about it and we didn’t exactly know what it meant but people were using it and spreading it so we said why not
1:55
you know under any publicity is good publicity so now it’s modern monetary Theory uh it’s it started off as well
2:03
yeah it’s it’s an analysis of monetary operations basic uh Central
2:09
back operations right and I think the first thing it did was
2:15
turn over the idea that the federal government needs to get money to be able
2:20
to spend every textbook every Congressman uh every Financial writer
2:26
would talk about how uh in order to spend the government would have to collect taxes and what it wasn’t able to
2:32
collect attacks or didn’t collected tax it would then have to borrow from the likes of China leads a debt to our
2:38
grandchildren all to be able to spend you know however I’ve considered myself
2:43
kind of an Insider in monetary operations I grew up on the money desk at Bankers Trust primary dealer back in
2:50
the 70s was the 1970s and I’ve visited the FED regularly and
2:57
you know everyone inside the FED everybody in monetary operations know that knows that that is absolutely not
3:03
true they all know we all know that the funds to pay taxes the funds to buy bonds
3:09
government bonds government securities come from the government they come from the Fed and the way you they look at inside the
3:17
FED is they have to credit the bank’s account before they debited you can’t
3:22
and they call that a reserve ad so the way they say it is you can’t do a reserved drain which is which means the
3:28
system the banking system can’t make payments to the government without a prior Reserve ad okay so what they’re
3:34
saying is the government has to spend first and it does so by instructing the FED generally or the FED does it on its own
3:40
but uh it it first has to credit uh member bank accounts and then they can
3:46
be debited for payment so it’s kind of like the movie theater nobody uh thinks that the movie theater
3:53
has to collect the tickets first before they can sell them everybody knows the
3:59
movie theater sells the ticket first and then it collects it so it’s the same thing with the US dollars
4:04
the Dos government doesn’t you know the dollars to pay taxes come from the government so it has to spend first
4:10
and then taxes can be paid it has to spend first or in rln but it has to which is a form of spending but it has
4:17
to stand first and then government bonds can be paid for and so the sequence what
4:22
I did was showed the sequence the understanding of the sequence to be completely backwards and all the
4:29
implications of a backwards sequence you know we’re just wrong and they were
4:35
um keeping viable policy options off the table because of this assumption that we have to get the money first so if you
4:41
look back at the uh Obama administration wouldn’t want to do what they call a stimulus package
4:47
for one thing their advisors his advisors said we need two trillion they cut it down to one trillion because it just seemed like a horribly big number
4:54
at one point the president and secretary Clinton flew to China who they thought
4:59
were Bankers so make sure we could borrow the money to pay for deficit spending Paul Ryan was there saying if
5:06
we do this we’re going to be the next Greece we’ll be at the IMF on our knees trying to borrow money and I think it
5:12
was Paul Krugman had a big document on the president’s desk about how interest rates would go up and
5:18
you know we had all these things that follow from an understanding of a government that has to get money to be
5:24
able to spend and not the other way around where it spends first and then now the system has the money to pay
5:30
taxes you know in fact um they operations people the senior people
5:35
at the Fed they’ll tell you their job is to what’s called offset operating factors which is
5:41
to make sure that any technicalities which where the banking system might not have enough dollars to pay government to
5:49
pay the government they do things to make sure they do like repos and that type of thing to add
5:54
reserves to a prior Reserve at so then there can be a reserve train there can be payments to the government so anyway
5:59
now we come to covid about eight years later and
6:04
suddenly there’s like this talk of one trillion two trillion dollars of deficit spending and there’s no mention
6:11
whatsoever of Greece and they’re not talking about the grandchildren and they’re not talking about President
6:16
Biden’s not flying to China to see if we can borrow them like it’s not there at all the only thing they’re talking about is it may be caught it might cause
6:24
inflation and a little of the debate started with President Trump where he said hey the government just prints the
6:30
money and it kind of caught everybody like deer in the headlights it’s like yeah it does and the whole so the whole
6:36
debate shifted uh by the way he had a mmt informed advisor apparently I didn’t
6:44
know about at the time uh the whole debate the dialogue shifted from solvency the
6:50
U.S might go broke to the spending might cause inflation and that’s a very very
6:55
different discussion and it’s all and it’s a different risk you know the risk
7:01
that you might drive up prices is very different than the risk that you’re going to bankrupt the country or anything like that and so I’ll do a
7:07
little Victory lap here until somebody give you give you the better the converter proof saying that that wasn’t
7:13
because of the emergence of modern monetary Theory which been promoting that idea for 30 years uh now uh I have
7:21
to give a lot of uh credit for getting it across a goal line to uh Stephanie Kelton Professor Kelvin my colleague of
7:29
since the 1990s uh who was a
7:36
got an appointment as a head Chief Economist of the Senate
7:41
budget committee under Bernie Sanders which was a breakthrough it was the first time anyone had taken this at all
7:47
seriously and then through her efforts uh the understanding spread and then she
7:53
wrote her wildly successful book uh the deficit myth which has been everywhere and and um
8:00
that got the awareness to the level where it is today right so if it’s not a
8:05
solvent do you think the idea that it’s a solvency issue is now gone now that
8:11
they did it and and they saw what happened is that now out of the
8:16
conversation I I think so you know right now there’s a debate over the debt ceiling yeah where if we don’t pass the
8:23
debt ceiling we might default but nobody’s saying well even if we don’t pass the debt ceiling we can’t pay the
8:28
bills there isn’t they all know you just vote and everything’s okay so I think if
8:33
that solvency was still there one of the objections to the debt ceiling extension would be that work
8:39
you’re pushing the government closer to the fall I haven’t heard that right now yeah what bothers me about the
8:46
debt ceiling let me just toss this yeah is that it’s hitting this debt ceiling
8:52
uh is a lot worse than the media has or any of the financial reporters have
8:58
discussed anywhere I just haven’t seen it when I talked to some of our firms clients and ask them these people get
9:04
Global coverage they haven’t seen it out there either and that is if the government we’ve had shutdowns
9:10
before where the government doesn’t make payments and people don’t get paid and the economy might slow down a little bit but then later they do get paid and it’s
9:16
sort of okay so they they understand it as kind of a delay or A disruption in the normal course of business
9:23
but we’ve never hit the debt ceiling because when you hit the debt ceiling it’s something very Dynamic happens
9:31
yes you can now make a payment because it would tax revenue hasn’t come in and
9:36
so you don’t have it so you’re not allowed to increase the debt so you can’t make a payment but
9:42
a lot if not most of the government’s revenue is based on transactions like income taxes and that type of thing and
9:49
so if the government doesn’t make a payment that immediately reduces revenues
9:54
which would immediately say okay now you can’t make that many payments which immediately reduces more revenues
10:01
and it spirals down very quickly and it spreads as things stop government
10:06
revenues stop and the deficit the debt can’t go up so the spending has to just fall
10:13
lockstep with the drop in instantaneous revenues and so you could see a total
10:18
collapse of GDP of 10 to 20 or 30 percent in a week all right as opposed to a government
10:24
shutdown where if the government doesn’t spend and their revenues don’t come in the deficit just goes higher the debt
10:29
just goes higher it’s not that’s not the limit and so you’ll come out of a government shutdown with a higher public
10:34
debt but you know not this catastrophic drop in debt and government spending not
10:41
this Dynamic I don’t know you might have a better way to explain it than I do I’d like to really get the word out there
10:47
that the the risks of hitting this debt ceiling have not been are not understood
10:52
anywhere uh and by Republicans Democrats or the financial press
10:57
that it’s more than just a stop at spending it’s a dynamic downward spiral
11:03
that’s almost instantaneous uh which is frightening and we yeah we should throw in we we just saw how quickly it sounds
11:10
almost like a version of counterparty risk but not really that’s right right
11:16
when everyone’s so afraid of the next payment that’s not going to be made of Revenue that things just kind of grind
11:22
to a hall because nobody’s sure anymore about things that were always well oh this is by law if the revenue number is
11:29
down the spending goes down well that knocks the revenue down which means the spending’s down and it happens all at
11:34
once it’s not like a two-week delay to discuss anything right and the worry we just saw what happened with the bank
11:39
runs is now in the age of Mobility these things are are very very rapid yeah
11:45
right no one is talking about that why aren’t they talking about that I don’t I don’t know I don’t know you know maybe
11:50
it’s because I’m talking about it I’ll take it first the contrarian would
11:56
say uh it’s because they just don’t think that that they’ll go the route they’ve gone before and just shut down
12:02
the government and drag it on Dragon on and that they just will not hit the debt ceiling is that why people no they just
12:07
haven’t thought about this the nature of the risk it’s like if you have something in the backyard and you’re afraid if you
12:13
might you don’t want to step on it and so you walk around it but you know you think it’s a stick well I don’t want to
12:19
break it or something but then you realize it’s a landline you don’t know it so you’re avoiding it you don’t want
12:24
to do it but you don’t realize how bad it is then you don’t realize it’s a nuclear one of my mind or something like that I think it’s really important you
12:30
say this because everyone I ask about it we get a lot of viewer questions almost everyone I ask about it basically tells
12:35
me it’s nothing Burger because it’s gonna it’s a lot of politics it’s a lot of political theater and it’ll get resolved I think it will I think it will
12:42
right now they’re talking about extending it and rolling it into a shutdown or something but you say
12:47
they’re playing with a bomb that they don’t understand yeah exactly like chicken in an environment they don’t
12:53
understand right right the risk is much higher and I think if they understood the risk if it was publicized they
12:59
wouldn’t even it wouldn’t have gotten this far they’d look for something else to do rather than this this is like a
13:04
very very different uh this is catastrophic instantaneous catastrophic risk and then nobody’s looking for it
13:10
it’s my it’s information that is not being discounted in the market right now
13:19
hi I’m ralphal the CEO and co-founder of realvision the financial world is a complicated world right now it’s a
13:25
really complicated macro picture and there’s a lot of risks real vision and our YouTube channel help you navigate
13:31
those risks so subscribe now to the channel and never miss an update there is simply too much going on so subscribe
13:38
now thank you so you take credit for risk is cheaper
13:44
than it should be wow okay
13:49
derivatives market so I’m gonna I’m gonna I’m gonna pay attention when you tell us that yeah I think the chance is
13:54
near zero but I don’t but it’s but the risk is much higher than anybody realizes well I think when
14:01
anyone looks across the landscape of Washington um yeah it’s hard to assign zero risk to anything anything right now so that
14:08
that’s a that’s a worry well I’m happy you brought that up we’re gonna go ahead we’re gonna chase that down and talk to
14:13
some people about that um so if we so if we go back to mmt if
14:19
this is not a solvency issue now it’s more uh an inflation concern what’s
14:24
going to happen to prices paid CPI PPI however right right measure that in terms of what the markets look at when
14:31
people look at the experiment of mmt in the policy response to covid
14:38
stop right there it’s which is exactly what they say what you said the experiment of mmt mmt is a
14:46
framework for analysis it tells you that you can’t debit an account without crediting an account so how what kind of
14:52
experiment okay so when they did the policy forget that right right when they just did policy but that was a good
14:59
point you made because that’s how it’s being promoted in the Press says oh the failure event of what MMP did or
15:04
something I didn’t do anything just tell you that there’s no there are no spark plugs on the diesel engine so stop
15:10
trying to change them oh well you know okay so go ahead yeah okay so in the
15:15
wake of the policy response to covet yeah yeah then the concern or not the concern everybody you know the response
15:23
seems to be well then you Unleashed this upward uncontrollable upward surge in
15:30
prices and that’s danger of following or that’s the danger of acknowledging that
15:39
mmt so explain that to me and explain we’re getting the wrong it wrong so look yes but
15:45
I’ll give you the short answer by the government can spend as much as it wants in at pay any price it wants to
15:52
and can cause as much inflation as it wants to that’s a policy option and so they exercise their option to
15:59
spend however many trillion dollars realizing that it might cause prices to go up and I think the FED has attributed
16:06
something like a 0.5 of the CPI annual increase to the increase in deficit
16:12
spending they attributed almost four percent I think three to four to the increase in Energy prices around the
16:19
Ukraine war the spike in oil to 120 the spike of natural gas up to nine dollars and the pass-through of all that and
16:26
then they also had Supply constraints and because of covid that caused
16:31
Transportation costs to be higher startup costs and things like that so that’s all in there and it’s all been
16:38
acknowledged and um they made the political decision that
16:43
whether they knew it or not that it was worth it to keep everybody solvent to keep everybody fed to keep things going
16:50
the best we can through covid in exchange for a policy that increased the price level by maybe a half a percent to
16:56
one percent a year the rest of it was going to happen anyway because of other external events and you can debate
17:02
whether that was the right policy or the wrong policy but it’s a one-time event what
17:09
the other uh understanding from Modern monetary theory that comes from what I just told you is that
17:15
the whole idea of inflation is it’s a series of one-time events it’s not you
17:20
do something you make one false move and suddenly you’re Venezuela or suddenly you’re Zimbabwe okay so you do this
17:27
prices go up a certain amount it’s not going to happen again unless you do it again it doesn’t like just trigger this
17:33
runaway thing and and that comes from the understanding that the government the Federal Reserve okay
17:41
has uh I’m gonna say it this way it’s not quite right has the dollars we need
17:47
to pay our taxes all right they all come from the government and so it is the Monopoly
17:53
supplier now it doesn’t what it does to when the when the government pays us they just change the number in our bank
17:58
account the same way uh scorekeeper the card game would change the number in your account so it doesn’t come from
18:03
anywhere so when I say you know they don’t have or not have any dollars but they have the spreadsheet they have
18:09
they’re the score keeper so they um we need our accounts credited we need
18:14
to get paid at the macro level so that otherwise taxes can’t get paid because that’s the source and so they’re setting
18:20
terms of Exchange uh at the point of spending so they say okay the tax liability is going to be
18:26
five trillion dollars this year and if you well we say well how do we get the money to pay the tax oh well serving the
18:33
Army and we’ll give you fifty thousand dollars a year become a Supreme Court judge and we’ll give you 250 000 sell me
18:38
a airplane and I’ll give you 2 billion whatever so what the government does is it’s in a position of being the single
18:45
supplier of the thing we need to pay taxes and that is the source of the price level and that and that is without
18:52
that there’s no explanation for where the price level comes from the mainstream models do not have a source
18:59
of the price level they don’t even have money in their models they just have relative value stores and what they do is they say well we
19:06
don’t know if the source of the price level so we’ll just start with today at this morning’s prices yesterday’s
19:11
closing price it will tell you what makes them change what’s going on so we have the CPI where
19:17
it is and with today’s policy we think it’s going to go up 0.3 next month so they don’t know why it is where it is
19:23
except it’s because it went up 0.3 from the previous month or 0.2 for whatever and well where’d that come from well I
19:29
came from the previous month so that all they have is an infinite regression because they don’t understand the
19:34
ultimate source of the information for absolute value rather than relative value is the fact that it’s a monopoly
19:43
and everybody if you took microeconomics 101 you learned Monopoly in your first
19:48
15 minutes it’s the easy one then oligopoly took a few hours and then you spend the rest of your life on
19:54
competition asymptotes and calculus but for mouthful he don’t need any of that it’s the easy one well the money is the
20:00
easy one okay and uh they know the monopolist is price Setter if you have the Monopoly
20:06
for all the electricity in New York and nobody else can supply it you set a price 15 cents a kilowatt you don’t go
20:13
to the market and say okay we’ll sell you 2 billion kilowatts all you homeowners we’re going to bid for have a
20:18
continuous bidding process for uh electricity you set a price and what what the quantity adjusts and that’s
20:24
what monopolists dude that’s the pathways resistance well I think the government doesn’t
20:30
understand that and the analysts don’t understand it and The Economist on it they’ve never it’s never dawned in them
20:36
that that’s the case but that’s a very important contribution for modern monetary Theory so we know the source of
20:41
the price level we know that the price of electricity changes only when the electric company changes
20:47
if if their costs go up and they don’t raise price the price doesn’t go up they have to sit down and vote on it we know
20:53
that the FED has to vote on interest rates because they’re the Monopoly supplier the single supplier Bank
20:58
Reserves and if they Supply any extra they have nowhere to go the rate will go to zero unless they pay interest on
21:05
reserve or unless they provide an alternative like treasury Securities but they set that policy rate so they go to
21:12
a meeting and they take a vote it’s not the market determining the rate now you’ll hear uh well you used to hear
21:17
that got put I dismissed a few years ago with my debate with Robert Murphy but the Austrian School of Economics used to
21:24
say we that’s the problem we should let the market set the rate well there is no such thing with the floating exchange
21:29
rate policy which we have today that is the case with fixed exchange rate policy like a gold standard or hard car or
21:36
Bulgaria where they fix your exchange rates where the market consent interest rates but here it’s a Government
21:42
monopoly the FED it’s a supplier of reserves the system needs them they set
21:47
the price and they vote on it so in each meeting they vote up down or unchanged the same with the price level go ahead
21:54
so so if if that’s the case so who so first of all do you feel that inflation
22:01
at these levels is bad for the economy okay should they be doing something to
22:07
address inflation and then yeah how do they do that given what you just said who should be doing so you got three
22:13
things in there house two in reverse order so it’s a political decision and there’s
22:19
been no economic study that’s shown that levels of inflation hurt the real wealth
22:25
of the country or the economic growth they affect distribution who gets the money and who doesn’t and uh but if
22:31
they’re just changing the numerator and you have countries like Argentina now running 100 inflation and uh low
22:38
unemployment and good growth okay so it’s been going on for a long time and so it doesn’t do that but people don’t
22:46
like inflation so it does a lot of political damage okay President Biden is uh taking a lot
22:51
of heat for allowing the CPI to go up so he could lose the election based on that like other presidents have so it’s it’s
22:58
political poison and people I’ve noticed or observed would much rather have unemployment than inflation
23:05
in fact when there’s 10 unemployment which is high 90 percent of the people still have their jobs and they want to
23:11
hire somebody to mow the lawn or fix their Plumbing people are competing to get it they get a good deal they like
23:17
that it’s a little diabolical but that’s the way Human Nature has worked you know the year so when you get to low
23:22
unemployment and suddenly I had to pay 80 an hour to get a plumber it’s like
23:28
could you live on that well no but I shouldn’t have to pay that much so from a personal point of view and
23:34
from a political point of view uh the politicians are better off with
23:40
higher unemployment and lower inflation I think interesting okay that’s my I
23:46
mean it’s not mmt or anything that’s just the way I look at the dynamic now the other thing is we’re using this word inflation
23:52
but there it’s a very casual casual casual word it
23:59
does it’s kind of a potential isn’t it yeah you know if um the price of I don’t
24:04
know cars goes up we have car inflation and uh so it’s like uh the price of food
24:10
goes up we have food inflation it used to be a continuous change in the price level okay well then we had CPI Consumer
24:17
Price Index which is a very uh practically oriented political tool to
24:25
make sure to see what people’s standard of living is and if it goes up we know people are struggling and whatnot and
24:30
that became inflation but that doesn’t fit the academic definition at all so when you say
24:37
inflationness or inflation that if you were asking me for real proposals I’d have to ask okay what specifically
24:42
you’re looking at do we want to alter the Consumer Price Index and if you say yes I say well we can just start
24:47
reducing the tobacco tax and that’ll go down just say yeah but that’s not what I want okay but that’s what my question was about originally what is it we’re
24:54
trying to do and you can’t get a good answer from any of the people in authority to what that is they just kind
25:01
of go along with all everybody knows what it means and it’s too high and we’ve got to bring it down you know so it makes it difficult for you to for me
25:08
to answer a question specifically about what I would do about inflation when you can’t tell me exactly what it
25:15
is I’m what the target is right right and I’m not trying to abduct the question but I’m just no it makes no reality yeah so
25:23
if you have a hard time answering it how is the Fed has been hiking rates saying they’re doing that in order to bring
25:28
down inflation I know so they’re using this casual language to do this and they’re looking at they tell you what
25:35
they mean by inflation it’s the uh Consumer Price Index it’s the
25:40
you know the uh where they come without food ex food and energy the core index it’s a personal consumption expenditures
25:48
that measure of you know price index and they’ve got all these price things that they’re looking at all together to get
25:54
an idea of what’s going on in the economy which then brings me to the next thing that I’ve
26:01
introduced which I hesitate to call it mmt because um
26:07
it’s nothing that isn’t mainstream but it’s also nothing that any of the other mmt proponents are I’m out here alone on
26:14
this okay which I verified at a last talk I had in front of an International Group I said
26:20
is anybody else on this video no I’m sorry all right but um our debt to GDP ratio with covid went up
26:29
dramatically from like 50 or 60 percent to 120. but what went up even faster is
26:34
the debt held by the public because a lot of that debt is Social Security and things like that which doesn’t make any
26:39
difference doesn’t have any effect on the economy but the debt held by the public went up three times from like 35
26:45
percent to 105. okay so now I look operationally back to
26:50
the core understandings of mmt how does how do monetary operations work what does a Fed actually do when they raise
26:57
rates other than tell everybody what things do they do you know do they
27:02
just sit around and rates go up what they do is they start paying more interest
27:09
on the public debt that’s outstanding and on a lot of that now is in the form
27:14
of something like Six Trillion of the 25 23 trillion held by the public is in the form of excess reserves at the FED
27:21
because they bought treasury Securities and what they call RRP which is like just money people have the FED that
27:26
earns interest so they pay more interest on that pool of dollars okay and the
27:32
treasury pays more immediately on their new treasury bills there’s auctions every week There’s new Securities that
27:37
come out every week so the the only thing that changes from the government Side Of The Ledger is deficit spending
27:44
goes up to pay more interest on the 23 trillion of public debt held by the
27:50
public and the impact of that is three times what it was in the last cycle it’s
27:56
always happened but the public debt used to only be you know a third of what it is now and so yes they paid this
28:01
interest and I used to say that had a big effect and it did but now the effect is three
28:08
times it’s been magnified and so now a year ago I said okay with debt to GDP this high
28:14
we are just going on a wild spending spree of deficit spending every time the
28:20
FED raises rates when the FED raises rates that’s what they’re doing they’re causing the public debt to go up the
28:27
causing the deficit to go up right now the deficit spending is something like seven percent of GDP that’s a very high
28:34
deficit it had gotten up to 15 for covid which was like World War II was it you know very high and but then it
28:42
collapsed as soon as people went back to work they stopped collecting unemployment insurance we had all these counter-cyclical reasons why it all came
28:48
down so it was one time things that went away and it had gotten down to three or four percent and the economy was
28:54
collapsing we had two negative quarters you know a year ago and then the FED started raising rates because of the
29:00
inflation and the deficit started going back up right now I think the interest expense is substantially higher than the
29:08
military budget which also went up by the way which is almost 900 billion I think the
29:13
annual rate of deficit spending when on interest when you include the amount the FED spending is up to 1.2 trillion now if we left
29:21
rates at zero it would have been on the way to zero instead it’s 1.2 trillion in climbing and it accounts for something
29:27
like half of the deficit spending and they’re going to be raising rates again and that’s going to add to the deficit
29:33
spending and that adds to demand it adds directly to people’s income to to your
29:39
savings your financial assets and supports the economy deficit spending oh
29:44
they’re raising rates yes juicing the economy right they’re like drilling
29:49
holes in the boat to let the water out something like that I’m trying to come
29:54
up with the right analogy growing kerosene on the fire or something yeah maybe that maybe that’s it so
30:02
in every do you do you think that they know this and they’re just not saying it because
30:07
the entire point of this is to be hitting the brakes right they’ve got the break in the gas mixed up I don’t think
30:15
chairman Powell either knows it or will consider it somebody asked him about the fiscal effect of deficit which is what
30:22
this is yeah fiscal impact and he said we don’t look at that that’s up to Congress we just look at the
30:27
monetary side now that’s a little bit odd because they’re they’re the ones causing it directly now so the FED just you know at
30:34
their meeting they view no laterally and mostly at the direction of the chairman
30:39
increased deficit spending to something higher than the military budget okay without a vote of Congress or
30:46
anything else and it increases spending to fight inflation all right and and you know what’s worse
30:52
is you know I’m a progressive Economist but uh there this money interest goes
30:58
only to people who already have money and in proportion to how much they already have so it’s the most obscenely
31:04
regressive form of juicing the economy you could possibly imagine it look like
31:11
why is that because those people own treasury bonds because they are they
31:16
have uh you know I wrote I wrote a book a car and I use the word innocent fraud that I
31:22
got from John Kenneth Galbraith which was his previous from his previous book and it’s kind of like more damning to
31:28
call them ignorant than to call them you know I haven’t done it by Design
31:33
and so I’m gonna say they’re doing it out of total ignorance if they want to argue with me and say no I’m not that
31:39
stupid I knew I was doing this by Design fine go to it but I think but you’re
31:44
right that’s the question I from the people I’ve spoken to which has included meetings at the fed you know not not in
31:51
the last few years but before that I think it’s out of ignorance I don’t think it’s out of
31:57
designed to do this I don’t I have never had any sense of this conspiracy theory type of thing where
32:04
they’re trying to help their constituents I’ve met with chairman Bernanke I’ve found them to be entirely
32:10
like honest transparent and you know trying to do the right thing
32:15
but of course incapable because he didn’t by the understanding him even how the Fed works so I wouldn’t call them
32:21
competent in that Source but I would not call I call like a good person maybe like a you know a b student who studied
32:28
real hard good days and is trying to do the right thing serving his country and I went I
32:34
wouldn’t question his I mean his integrity and his it seemed to be outstanding and the same with uh
32:40
chairman Yellen when she was Sarah I’ve met with her and you know very high quality person but
32:47
uh in terms of monetary operations I mean you wouldn’t hire any of them to make coffee in your office type of thing
32:53
they just don’t know right it’s not a world associated with which is kind of
32:58
shocking to even wrap it around I want to ask a question we have a question related to this exact point uh from
33:04
Harry uh yet you point out that each rate hike from the FED will tend to increase the flow of funds from the
33:09
government sector to the private sector through which you just explained so rate hikes might be net stimulative the
33:15
question is there a limit to this process okay so I was in Argentina a year ago at
33:22
the Central Bank we’re invited there to and I walk and he says you know I’ve been following you for 10 years so you don’t have to introduce yourself that
33:28
was kind of nice and I pointed this out in pesos rather than dollars because there are interest
33:33
rates say just raised them to 30 and all these pesos they’re paying it was like 20 of GDP I said that’s they’re going
33:40
straight to the Foreign Exchange Market and taking the currency down and causing your inflation which causes I want you
33:46
to pay more interest you know so you’re in the same kind of spiral I was just talking about he said well yeah you know I know and
33:53
his associate had some paper by mainstream paper by Sergeant Wallace from the 80s it’s said this shows the
33:58
same thing that uh when debt to GDP gets too high then you can’t use it to fight
34:04
inflation because the fiscal impact dominates he said but you know we’re under the IMF
34:10
umbrella we just borrowed money we’ve agreed to keep their interest rate higher than the inflation rate so we have to keep doing this I said okay I
34:18
guess it’s you know it’s your country and so after we left the inflation rate
34:23
went to 40 so interest rates went to they raised rates to 45 and then inflation goes to 50 and they go to 55
34:29
and inflation did it got to like 70 and they were 75 and then I just saw
34:34
inflation was it 100 and they just raised their rates again to 80 or 90. and you say like where does it end yeah
34:41
well you keep doing the same thing and it’s not having an impact then and their
34:46
their unemployment keeps going down so it doesn’t cause a recession flooding the economy with money doesn’t cause
34:51
recession now there wasn’t a single forecast a year ago that didn’t say we’d be in recession today right and yeah you
34:57
had the leading indicators and the uh yield curve and the stock market Peaks
35:03
and all these things that tell you you’re going to have a recession these are all Market forecasts all those prices are different levels of Market
35:09
participants who truly believe that the rate hikes will cause a recession
35:15
otherwise the prices wouldn’t be there when you see interest rates lower as you go forward that’s because these people
35:22
buying and selling rates of money at that price both sides have this belief that these
35:28
rates are going to cause recession and if they don’t the FED will keep raising it until they do cause a recession and
35:34
it’s going to be even worse that’s the path we’ve been on for a year and um
35:39
it just hasn’t happened that it’s happened the other way and it’s I think it’s a huge case of confirmation bias
35:45
and they start looking at things along the way you know you know the ism for manufacturing dropped two tenths or
35:52
something yeah hikes that are causing the recession
35:58
what would cause the recession do you not see one happening and if we do what is the cause of it then well I look at
36:03
the last recession oh wait big one covet was different everybody just stayed home but oh hey
36:08
we had um the deficit had dropped by 2006 to one percent of GDP at which time
36:15
I wrote this deficits too small to support the credit structure and I would expect GDP to start decelerating and
36:22
that’s when housing started decelerating and everything else they just let the deficit get smaller and smaller because when you’re in a growth
36:28
uh um phase revenues go up because people’s
36:34
income goes up and they pay more taxes and transfer payments go down and so uh and at the same time the Saudis decided
36:40
to raise oil prices they set their osps higher and uh it spreads against
36:46
benchmarks higher and oil prices started going off and finally when oil got to 155 and the deficit was down now when
36:52
oil goes up that high and it had gone up from I don’t know 40 or 50. uh it’s like
36:57
a big tax in a consumer that gets sent overseas and it doesn’t get spent it’s a big chunk of unspent income so it’s like
37:04
the government yeah it’s like a tax on the consumer and everything collapsed and then the weakest links are Lehman and bear
37:10
Stearns and leverage real estate it all fell apart and it didn’t turn around again until March of 09 when finally
37:18
there was enough of a stimulus package so the deficit got up to nine percent of GDP which was enormous and at that point
37:24
I said okay just you know go buy stocks and play golf because with a nine percent deficit that’s a huge tail when
37:31
fiscal’s Tailwind you know and it doesn’t matter what they do it’s gonna it’s gonna get better and
37:36
then we had other things you know a few years later changed modify things along the way but so it’s
37:42
been the fiscal cycle so under volcker in 79 the same thing happened he starts raising rates
37:49
and what I’m saying is the rates exacerbated
37:55
the inflation it caused prices to go up more partially for what I told you but also they raised cost of doing business
38:00
which you’re doing today so they it adds to inflation in two ways one of the cost of doing business and the other way
38:06
through just direct spending uh and so um in the cost of doing business is what you call forward prices like on the
38:13
commodity when they raise rates the forward prices of all the Commodities go up it’s a direct price increase they in
38:19
fact they were up continuously at the at the rate at the policy rate which is the
38:24
academic definition of inflation continuous increase in prices that’s what happens in the forward markets
38:29
immediately with rate hikes it’s like it’s like that is inflation under the old but he gets credit for for
38:35
killing inflation so what happened so the um inflation was running like 12 or 14 percent
38:41
and the government budget deficit was only running at six or seven percent today’s level that meant the real value of our savings
38:48
our financial assets the money supply if you want to call it the core net money supply was Contracting at six percent it
38:55
was like running a six percent surplus of the real value of the public debt was
39:00
dropping that’s a huge fiscal Tailwind contraction and the whole thing
39:06
collapsed like we’ve never seen before because that was like a budget surplus like you know larger than
39:11
the ones we had at the end of 2000 at the end of 1999 2000 which caused a major collapse okay that wasn’t even
39:17
larger one and uh and so if you want to say the rates
39:22
caused the recession you’d have to say the rates cause the inflation which took away the real public debt and
39:29
caused the crash now let me give an example for people listening about what I mean by the real money supply so how
39:35
inflation causes a money shortage right if you if you can go shopping with 200
39:40
in your pocket today’s price is fine but then if price is double you have to go shopping with
39:46
400 in your pocket you have a money shortage if Apple computer has 200 billion dollars in cash that they think
39:52
they need for their operations and price is double they need 400 billion in cash right the money supply core needs of the
39:59
economy which isn’t a technical term but go up in proportion to inflation so it creates
40:06
a shortage of transactions money of net Financial assets if you’ve got so much in your savings saved up for retirement
40:13
and price is double now you need that much again now you’re short money you have to go out and work to earn it do
40:19
something for your car dude your money has been taken away from you and you’ve had people say inflation is a tax it
40:25
takes money away which it does it disappears the value disappears and people work because they need to
40:31
accumulate the value behind that money and so it so that inflation in the 70s
40:37
created a collapse in the real public debt public debt adjusted for inflation and just took apart the economy so it
40:45
seems like you’re saying that the business cycle if you want to understand the business cycle we have to pay attention to the fiscal side not the
40:51
monetary side the fiscal side and what what our deficit is or surpluses drives what
40:58
happens in the economy not monetary policy well they both do a little bit I mean to some degree it depends on what
41:04
they are but when you get a budget deficit this high it’s going to dominate any differences in propensity to consume
41:12
between borrowers and Savers that might give the monetary policy some effect if the if the budget deficit was now one or
41:19
two percent I’d say you know we’re in trouble okay it’s not going to cut it so it’s not you know you
41:26
have to look at it in the context of everything else that’s going on if we were in a good economy and suddenly oil
41:31
prices double consumers getting crunched I’d say good chance we’re going to go into recessions from this even though
41:38
yeah so but so you have to look at the magnitudes right right now the magnitude of deficit spending for a non-war
41:45
scenario is unprecedented non-cyclical recovery we’re not
41:50
recovering now from with unemployment at seven or eight percent where we need to run our seven or eight percent deficit
41:56
we’re we’re unemployment’s gone to a 50-year low after a year after they forecast a recession how does their
42:03
narrative explain that yeah my narrative explains it precisely Powell is asking
42:09
mmt Theory says that in case of inflation excess money supply can be removed from the economy by raising
42:15
taxes this doesn’t seem to be politically feasible doesn’t it invalidate the whole mmt approach
42:22
well mmt is not an approach it’s an understanding and what it does is it it’s definitely derivation of the
42:28
understanding that if you think the problem is spending is too high
42:33
you can slow down spending by raising taxes that’s one way to slow down spending so I don’t think anybody today
42:41
thinks the problem is spending is too high they think prices are going up which they call inflation
42:47
which they then subliminally say that’s because spending’s too high
42:53
if we had less spending we wouldn’t have this inflation this thing we call inflation fine if you want to reduce
42:59
spending raise taxes but it’s hard to say that excess spending was causing us particularly with the um
43:05
Supply shocks with the oil price increases with you know what’s going on in housing you have
43:12
um president Trump deciding that Canada’s Bad Country and they need
43:18
to be punished because they’re not charging us enough for lumber it’s like okay I’m not going to send you shopping
43:24
for me anywhere and so he puts a 17 terrified
43:29
blogger and lumber prices go up and so housing prices go up because that’s the cost of building a house
43:35
so then President Biden comes along and says you know what they’re still charging us too much I don’t like it either puts another 17 so now we have 34
43:42
tariff on imported Lumber and so Lumber’s up at whatever it is and they say okay we have inflation now
43:50
and we need to like take money away from people to get the price of lumber down it’s like what are you trying to do here
43:58
then you you under the way you see it we’d still have all of this inflation for other policy reasons if we’re going
44:05
to raise prices through tariffs which we did across the board you know I forgot to mention that
44:11
before part of the inflations from these tariffs and they’re they’re both parties have just been behind this silly thing
44:17
moving manufacturing back that all drives the prices a lot right if we’re gonna respond to that by taking people’s
44:24
money away so they can’t buy these things that we produce domestically to crack crunch our domestic prices
44:30
which is what we were doing with the tariffs with to support domestic prices now we want to bring them down by taking
44:35
away people’s money we have an incoherent policy here we have total contradictive policy and you might be
44:42
getting at the heart one of the questions that comes up all the time is yeah if this isn’t an experiment or an
44:48
approach and it just is the way it is yes why do so many people fight back
44:54
about it and feel so charged up about the issue if this is just the way it is
45:00
and why are we always taught that it’s different because they don’t want to give me the satisfaction of being right
45:05
aside from that they’re waiting for me to die I’m 74. hopefully a couple more
45:10
years and then they’ll then they’ll be okay with it but aside from that why do you think there’s there is no I don’t
45:15
know it’s been a mystery it really is and uh
45:21
it’s it’s I’ve I’ve done a lot of things and when I was a fund manager from 19
45:29
82 to 1997 for 15 years and I’m not promoting my fund or anything I don’t run it I’ve been out of it longer than
45:36
I’ve been in it but we had the highest um risk-adjusted returns of anybody we I
45:43
didn’t have a losing trade for 15 years and the point of saying this is after 14 years I’d come up with an idea and
45:49
nobody liked it nobody liked any of the trades I had for the first 14 even after 14 years of winning trades I still
45:55
didn’t know that’s not going to work I’m not going to do that so it I’m kind of used to the idea that when I point out
46:01
something obvious it just gets denied I just see that who benefits who
46:07
benefits by the current system so if the system is different then everyone thinks it is and you talked before about the
46:13
implications and viable options that are not pursued if you don’t acknowledge
46:18
this so talk to me about that so who benefits from the system now and how would it look different under so if if
46:24
it was acknowledged and understood and people took a clean sheet of paper approach to policy
46:30
I think the real wealth of the nation within a couple of three or four years with double now there’d be a fight for who gets that
46:37
you know if it’s public transportation oh well that’s going to go to lower incomes it’s going to be more Super Yachts because now there’d be maybe some
46:44
struggle but on that you know this Rising tide lifts all books it’s just maybe some would get lifted more than
46:49
others and so people would be unhappy with that but it everybody gains that I know maybe bankruptcy attorneys lose I
46:56
don’t know but it’s not it’s nobody that you would consider uh you know part of this current debate that’s keeping it
47:01
from happening so the pie gets bigger yeah yeah yeah and do you think there’s an assumption
47:08
that a political assumption that it it would redistribute wealth is that
47:15
what the fear is it might be but that can only come from not understanding that it’s it’s growing
47:21
to buy and not we just not cutting what they’re doing is cutting it redistributing we’re doing both I’m just
47:27
growing it and they don’t you know I mean there’s some concern that um the Earth can’t handle it on a
47:33
resource basis but it can all be non um uh uh you know disruptive type of growth in
47:40
terms you know it does none of it has to be uh disrupted to the environment or the air quality or the or the
47:46
temperature or anything it can all be directed to promote you know that look at what happened with covet within
47:52
two weeks you could see China from space for the first time yeah right right a mission is
47:58
true extraordinary yeah 50 all right so like we won the war against global
48:04
warming you know none of this temperatures were reversing and and it was all done by um what they call it
48:11
non-uh non-essentials we gave up non-essentials there was enough food everybody had a place to live you know
48:17
it wasn’t like there were any kind of probation of any particular kind to note of and so it was all like and so what
48:24
did we try to do afterwards did anybody say okay look let’s get let’s bring the economy down except that we’re bored but
48:31
otherwise and people tragedy but anybody was there any discussion about look we’ve won the war
48:37
against climate change and everything else so let’s bring this back in a way that doesn’t get us back to where we
48:42
were no instead we just went Full Speed Ahead
