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This Is What They Don’t Tell You About Money And Gold | Prof. L. Randall… https://youtu.be/kb_cxeICQKE?si=-guModTritNJLkvW
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This Is What They Don’t Tell You About Money And Gold | Prof. L. Randall Wray
(https://www.youtube.com/watch?v=kb_cxeICQKE)
Gold, Crypto, or Tulips? Which one should you buy to be “save”? Or how about Foreign Currency? Would that help? Well, let’s put it this way: It’s hard to beat the FED.
In today’s episode, we are going to do a deep-dive into monetary theory and the intricate workings of fiscal policy. My guest today is Dr. Randall Wray, a Professor of Economics at Bard College and a Senior Scholar at the Levy Economics Institute. Professor Wray is a great authority on Modern Monetary Theory and the financial system. Which is what we (again) want to talk about today. Professor Wray, welcome.
Professor Wray’s Articles: https://www.levyinstitute.org/publica…
Transkripzioa:
0:01
some of the commentators uh said no no no gold prices only go up it’s been true
0:07
for the last decade or so but if you had bought gold at its previous Peak around
0:14
1980 and you held on to Gold uh today even after this big speculative bubble
0:21
that we’ve had you’re back at the 1980
0:26
price uh inflation adjusted because of course we’ve had inflation over this
0:32
period um but you have just broken even in terms of
0:47
inflation hello everybody this is Pascal from neutrality studies and today I got for the second time Dr Randall Ray with
0:53
me who’s a professor of Economics at Bard College and a senior scholar at the Levi economics Institute
1:00
Professor Ray is a great Authority on Modern monetary Theory and the intricate working of the financial system which is
1:07
what we want to talk about again today so Professor Ray welcome oh good to be back um I was
1:16
recently at a interesting conference uh resource investment conference and there
1:22
I’ve heard again like so many times before people talking about the issue
1:27
that only gold and and and minerals are real uh are real assets are real money
1:34
because printed money that the Central Bank issues that’s that’s just the
1:40
government trying to control us all and I hear that narrative quite a lot um could we maybe talk a little bit about
1:48
gold and um you made an interesting argument why why buying goal might not
1:54
be the best strategy after all but could you maybe um maybe expand on that a bit yeah sure so what I had claimed last
2:02
time I was on is that the price of gold goes up and it goes down and um some of
2:07
the commentators I said no no no gold prices only go up it’s been true for the
2:13
last decade or so but if you had bought gold at its previous Peak around
2:20
1980 and you held on to Gold uh today even after this big speculative bubble
2:28
that we’ve had your back at the 1980
2:33
price uh inflation adjusted because of course we’ve had inflation over this
2:39
period um but you have just broken even in terms of
2:46
inflation and this is sort of funny because people think well gold is a very good inflation hedge you protect
2:54
yourself if you hold gold but if you had hel held gold
3:00
uh you uh only would have uh maintained a constant value relative to
3:08
the dollar inflation adjusted okay what if instead you had done what most
3:14
investment advisors would tell you to do is buy an index of stocks say the Dow um
3:22
if you had bought the Dow approximately at the same time inflation adjusted it
3:28
is worth way over 10 times as much as it was in 1980 you would be more than 10
3:35
times better off if you had bought stocks Now Stocks of course go up and down
3:41
too but uh historically over longer periods of time uh stocks beat inflation
3:50
by quite a bit and over a fairly long period of time 1980 I don’t know how old
3:55
you you are but uh probably many of the people listening to this uh weren’t even
4:00
born their whole life uh gold has only managed to recover its inflation
4:07
adjusted value so uh and another thing that that people say well uh if you’re
4:13
on a gold standard that will keep the value of your currency constant and then maybe if
4:21
they looked on the internet they saw that the um the price level in the
4:26
United States in 1800 was approximately the the same as the price level in 1900
4:32
and they say see we were on a gold standard it kept the value of the dollar constant um but the reality is if you
4:40
look in between the price was going up it was going down it was going up it was
4:45
going down I mean the price level taken as a whole because typically what it would do is go up when we had a
4:53
war and then the price level would go down when we had a depression and we had
4:59
a six depressions in that period And so those depressions uh wipe out um the price
5:08
level and that’s why at the end if you take those two end points you just happen to find that the price level is
5:14
the same if you’re taking different end points you wouldn’t have found that okay so anyway um now I would agree with part
5:23
of the statement you started with gold is a real asset the key word there is real it’s
5:31
not a monetary asset it’s a real asset um and uh gold has some nice
5:40
uses uh you know your finger your nose your teeth but it has in industrial uses
5:48
too uh and it’s shiny and people like it and and so it’s a real asset it has a
5:54
real value and I doubt the price will ever go to zero it’s probably always
5:59
going going to be positive um and uh on top of that then we have the speculators
6:06
who are speculating uh that it would go up um that uh other people will buy it
6:13
because they think it’s going to go up including the the gold bugs you say it’s a good inflation hedge we just had some
6:19
inflation price of gold goes up because some of them will buy gold thinking that’s a good hedge um and so you know
6:26
we can jump on that bandwagon and we can help push it up and if governments start buying it which they used to do on gold
6:33
standards that will help to push it up you know the reality is if governments around the world release their Gold
6:40
stock the value of gold would collapse because they’re holding a lot of gold um
6:46
so it’s a real asset uh but it’s not a monetary asset that’s the key
6:54
Point can you explain the difference so a monetary asset what is
7:01
that it it doesn’t have a real form it’s not a real asset it’s a
7:09
monetary asset so there are um several characteristics of them uh the first one
7:16
is that uh we have a money of account and the money assets are
7:23
denominated in that money of account so in the United States our money of account is the dollar
7:30
in Britain the money account is the pound and so on okay every country has a
7:35
money of account and this is interesting because when a new country is formed
7:41
they almost always choose their own money of account and we typically find every
7:48
nation has its own individual money of account now the Euro area today they all
7:54
abandoned their own M’s of account and agreed to all up the Euro we can come
8:00
back to that later if you want very unusual that almost never happens okay
8:06
so there’s a link between the state and its money account and then the second
8:12
thing is that the debts monetary debts
8:17
are denominated in that money of account so in the United States you know all of my
8:22
debts are denominated in US dollars I could get into debt in Euros if I wanted
8:28
to there are opport opportunities for me to do that I don’t do it most people don’t do it so our debts are denominated
8:36
in the National money of account typically okay those are two very
8:43
important characteristics now a lot of uh mainstream economists and just average everyday people will say oh
8:50
money is also a medium of exchange I can use it to buy stuff so we make exchanges
8:56
us using money and um I can also
9:02
hold uh Financial wealth in money
9:07
form I can hold money as a store of
9:12
value okay so it also has that characteristic typically um now when we
9:19
get down to the Brass tax what are we willing to
9:25
call an asset that has at least some of those characteristics to a greater or
9:32
lesser degree okay so I think everyone would
9:37
say cash qualifies for all of those things medium of exchain store of value not a
9:45
great store value because you earn no interest on it but you can hold it um
9:50
and um clearly medium of exchange uh it qualifies uh for all of
9:58
those how about a demand deposit you know your checking account at the bank
10:03
well yeah pretty much qualifies for all of those things what about a savings
10:09
account well there’s a little bit of a problem uh in the old days in the United States you couldn’t write checks against
10:16
your savings account now typically you can uh up to some number per month uh
10:23
but it’s a little bit less convenient as a medium of exchange uh it probably use
10:28
much less than that you can go to certificates of deposit that uh there’s
10:34
a penalty if you try to get your money out of the CD before the 90 days is up
10:40
so what I’m getting to is things uh have different
10:46
liquidities that is how quickly can you get the value out of that financial
10:53
asset and use it as a medium exchange and may I just interject here it’s really important to realize that
10:59
we need to differentiate between between these different ways of holding some form of value right because when you
11:05
talk about cash you literally only mean bills and coins right currency in circulation you you you don’t speak when
11:12
you say cash you don’t mean what’s in your deposit in your account right and these these have because these have
11:18
different functions they work differently in the economy and even I think uh bills and and coins are
11:24
actually under different regulations in the United States right of uh Min
11:30
them all and all of that matters when it comes to the way the system
11:36
interacts so you know we can we can get into the details of all those things and also people who work in financial
11:42
markets will often broaden that definition of cash to liquid assets
11:49
including treasury bills I’m not talking about the paper notes I mean Bill 30-day bills they say oh well that’s cash it’s
11:56
as good as cash right uh got to wait 30 days but we can do that so anyway the
12:03
terms are used sort of loosely uh but what I’m getting at is what I think are
12:09
the the two key characteristics for our discussion is
12:14
always denominated in a money of account um and they are always a
12:19
debt right always a debt now this won’t be obvious to all listeners but the the
12:26
little silver is not really made of silver the silver coin is in the United States the debt of
12:33
the treasury so our treasury issues coins and those coins are the treasury’s
12:39
debt our Central Bank issues the paper notes our treasury used to but they
12:45
stopped and I think I’ve seen some but they’re very rare um all of our paper money now
12:54
is issued by the Fed so that is a debt of the FED okay
13:00
um and so for me to consider something as being money it has to have those two
13:07
characteristics it has to be someone’s debt and it has to be denominated in a
13:13
money of account so what about your bank deposit well that’s the debt of the bank
13:19
it’s the liability of the bank your home mortgage loan is your debt denominated
13:26
in the money of account and it’s the the bank assets so uh this is um every financial
13:36
debt is somebody’s financial asset if I’m holding a coin that’s my
13:43
asset it’s the treasury’s debt if I’m holding a bank deposit that’s my asset
13:49
it’s the bank’s debt so then you know we can look at gold
13:56
whose debt is that nobody’s debt and you denominate it in dollars well
14:03
yes I could say gold is worth $32 an ounce which it was for a very long time
14:10
um but it’s denominated in a money of account but
14:15
it’s nobody’s debt the this is where a lot of people
14:22
then um argue that uh gold has intrinsic value and that’s what then what makes it
14:29
well not only a real asset but that’s what makes it so much better than government debt and uh uh bills and ever
14:37
since the gold standard since this hard uh um connection between uh a dollar and
14:43
an ounce of gold was severed uh the the government is basically just playing
14:49
with uh uh with money as a control mechanism but this fundamentally
14:54
misunderstands this issue that money itself in order to be considered money is always basically just a way to name a
15:05
unit in which you count which is inherently uh
15:10
fictional well yeah it it has to be it’s a it’s a measuring unit measuring it’s
15:16
the same saying I know the Europeans don’t use inches but this distance is an
15:22
inch okay it’s a measuring unit can you hold an inch
15:30
no you use it to measure can you hold a dollar no we use it as a measuring unit
15:38
now I know in the United States we colloquially always call our paper notes
15:45
dollars okay um but if you take uh Britain the
15:50
pound uh was never minted or printed on paper until relatively recently it was
15:58
only a meure in unit the Shillings were the coins so the United States we uh we
16:05
we make it confusing because we use this term dollar to indicate two different
16:11
things one is a printed record of a debt that’s the paper note and the other is
16:17
our money of account that’s the measuring unit right because in in this sense the
16:26
the printed the printed record of debt is no difference to a to a a ticket that
16:33
any kind of company could give you and say like oh here hereby give you the value of one of these tickets in order
16:39
to redeem something you you you earn the right to redeem because it’s somebody’s
16:45
debt Pizza free Pizza coupon from your local pizza Ria is their debt and when
16:52
you go submit it uh redeem it for a pizza uh they’re no longer in debt and
17:00
of course they just tear it up and throw it away airline miles um there is a lot of
17:07
this um private money circulating or being being used by companies but the
17:12
point is they’re not allowed to call it money right they’re not allowed to to think of it as um or to advertise it as
17:21
money they can say it has the same value but they need to say it’s something else so they give it different
17:27
names well I’m not I’m not sure about that they couldn’t try to replicate a US
17:35
Paper note that would be called counter F50 um so I I don’t know the law on that
17:41
whether they could call it money but uh it is their debt and they do redeem it
17:47
uh for miles and now you also argue that Bitcoins are not money and in general
17:55
like uh the the not just Bitcoins but all forms of what are they called um
18:01
crypto cryptocurrency it’s called currency but it’s not actually money can you can you explain that one okay so we
18:08
can use Bitcoin as an example because it’s the best know so Bitcoin really is
18:14
a speculative nonmonetary
18:20
asset it’s speculative the main reason people hold it is because they think it
18:25
will go up in value it’s not monetary because it’s nobody’s
18:31
debt um and I there’s very little alternative use for it other than
18:39
holding it now in the beginning Bitcoin was sold as an alternative you could use to go
18:46
shopping and that uh unlike the dollar it wouldn’t go down in value uh when
18:53
there’s inflation so again it was an inflation hedge that was the idea in the beginning reality is it’s not being used
19:00
in transactions very frequently and the reason is because look so right now
19:06
Bitcoin is going up thanks to our new president so the the value of Bitcoin
19:12
relative to the dollar and and all the other currencies uh is going up okay who’s GNA go to the grocery
19:19
store now and spend their Bitcoins only an insane person because
19:27
you believe it’s going to go up in value you’re going to hold on to it uh what if it’s going down in
19:33
value no sane person is going to accept it for payment because it’s going down in value
19:41
and so the problem is that uh it is highly volatile and when it’s going up
19:48
nobody wants to spend it when it’s going down nobody wants to accept it now I’m exaggerating slightly because it could
19:55
be going down and you say I believe it’s going to turn around okay so you as a
20:03
speculative position you start buying something that’s going down because you think it’s reached the bottom you don’t
20:10
know for sure you’re taking a speculative position you could turn out to be right very lucky make a lot of
20:15
money but the point is uh again that you’re going to be holding it you’re not
20:22
taking it because you want to spend it you’re taking it because you want to hold it because you think it’s going to
20:27
turn around and go up so it’s a speculative asset that’s what it is and and and as all assets it
20:34
depends on how many people want it and how many people want to get rid of it um just because somebody calls it a coin
20:40
doesn’t necessarily me make it money but the this this this trust toward um
20:48
government controlled um stores of value or government controlled money uh that that
20:56
at a will you know can be increased so that’s what the the FED does right that’s what any Central Bank around the
21:02
world does it it um it controls the money supply um or can you correct me on that
21:10
okay yeah no central banks Milton fredman beginning the late
21:17
50s uh managed to convince a lot of the E economic profession and then all the
21:22
people out there who read his books he was a a bestselling author um that uh
21:29
central banks can and do control the money supply and that it is the money
21:35
supply that determines the inflation rate so if the money supply is growing
21:41
you’re going to get inflation so inflation is always and everywhere a monetary phenomenon and it’s always the
21:48
central bank’s fault you can call you can call this the standard consensus among almost everybody who ever went
21:54
into an economics class or even didn’t it’s like the a at Amen in church this is Dogma okay
22:01
yeah from if he pretty much I would say won
22:07
by the early 70s okay um but his his winning was very
22:13
shortlived because in 1979 in the United States we had high inflation we actually had what was
22:20
called stagflation High inflation high unemployment at the same time President Carter uh was in office didn’t know what
22:27
to do and so he brought in vulker vulker said I’m going to adopt
22:33
reedman’s policy which is we’re going to control the rate of growth of the money supply it have been growing fairly
22:40
rapidly we’re going to bring it down like Freeman says to 4% and that is
22:45
going to eliminate inflation the so the FED had its targets it was never able to hit them the rate
22:52
of growth of money supply went up to 16% per year and inflation came down
22:59
so it moved the opposite direction and uh by the late 80s the FED gave up
23:05
monetary targets uh they still had to report them because Congress required it
23:10
in the 90s they gave it up and I can tell you no Central Banker in any of the
23:16
major uh developed economies believes this anymore at all none of them Target
23:22
the money supply none of them believe they can affect the money supply none of them believe that the money supply
23:29
is related uh closely to inflation they’ve all given it up but but but but
23:36
uh Randy like the I I just want to challenge you so that you explain it
23:42
here because the FED prints money right so it can increase the money supply at
23:47
will right it presses on a button and creates a lot can you explain why that’s not the case why do they not control the
23:52
money supply yeah the FED does not do that so uh first the fed certainly does
24:00
not just print up notes and put them into the economy the way it actually works is you go to your ATM machine and
24:09
you we say you withdraw out of your uh deposit account and the Machine spits
24:15
out the dollar bills the um uh the bank
24:20
contracts with some company and they call them up we need more and they come and they and they fill it up uh what the
24:28
Fed does is it debits your bank’s
24:33
reserves dollar for dollar for every dollar that is spit out of the ATM
24:38
machine so it’s not increasing the money playay at all it is changing the form
24:44
from Bank Reserves to paper notes now let’s go back to the global
24:52
financial crisis when central banks uh adopted what uh Uncle Ben Bern
24:59
who became the head of the FED uh called quantitative easing and so many people got the idea
25:06
that what the central banks were doing was were was increasing the money supply um that isn’t true what they did was
25:15
they went to Banks and they bought government bonds and mortgage back
25:21
Securities from the banks and they hold the the FED then
25:26
holds those as assets which which are the debt of these Banks the no no no government bonds and
25:35
Mortgage Bank Securities which are like my debt my my mortgage has been packaged
25:41
into a security um so uh mortgage back Securities course are a private debt
25:48
government uh bonds are the government’s debt so that’s what the Fed was buying
25:54
and ECB did the same thing Japanese did the same thing so they’re all doing quantitative easing all it did was
26:01
change Bank portfolios instead of holding a Government Bond they’re holding a
26:08
deposit at the FED one is the treasury’s debt the other is the fed’s debt that’s
26:15
all that happened they’re holding fed debt instead of treasury debt okay and
26:20
the FED pays interest on the debt so they still earn a bit of interest but they’re earning less than they were when
26:27
they were holding Treasury bonds those reserves cannot get into the
26:33
economy they never got into the economy they cannot they’re on the bank’s
26:39
balance sheet as an asset and it is the fed’s liability but it cannot leave the
26:45
bank there is no way the bank can give that to you there’s no
26:50
mechanism yeah you don’t have an account at the FED only banks have Accounts at
26:56
the FED not just American Banks uh foreign Banks foreign central banks can too but
27:03
the public can’t get those firms cannot get those none of that money got into
27:09
the economy okay can’t be done now uh how
27:15
can money get into the economy well uh in the covid
27:20
crisis uh first president T Trump and then President Biden both engaged in
27:28
fiscal relief what did they do they sent checks to everybody if you could fog a mirror
27:36
you got a check okay and what did you do with the check you deposited at your
27:42
bank your deposit went up that’s treasury spending treasury
27:49
spending puts money into the economy okay central banks can’t do
27:55
it the treasury can do it and it’s called fiscal policy and
28:02
uh it’s the closest thing to what fredman imagined a helicopter drop
28:10
helicopter money yeah so he had said this is what central banks do and say really never seen one of those
28:17
helicopters okay they do not do that now the in this sense like what the central
28:23
banks what the central banks do is they they offer assets to the to the real
28:29
economy for for businesses to store to store and keep and maybe increase a bit
28:34
their um their assets right but they no the the the the central banks deal with
28:42
banks they are the the banker to the banks they lend reserves to
28:50
Banks uh or they can buy assets from Banks like buying government bonds and
28:57
that will increase Bank Reserves so they can increase and lower uh Bank
29:04
Reserves um but normally they only do it because the banks want
29:10
it so because there’s a demand for money there’s a demand for an exchangeable
29:15
good to deal with others only to deal with other Banks
29:21
yeah other Banks among each other reserves can only move between Banks so if my and why do Bank need reserves it’s
29:29
because if um you write me a check and I take it to my bank and deposit it my
29:37
bank wants to get paid by your bank and the way your bank pays is by
29:43
transferring Reserves at the fed from their account to my bank’s account so
29:48
that’s what reserves are used for if a bank is short first they try to borrow in the
29:54
overnight Market uh in the US this is called the funds Market where Banks lend
30:00
reserves to each other but if there’s not enough uh extra reserves in the
30:05
system they go to the fed and borrow the reserves from the fed or the FED buys a
30:11
bond and credits their account now how
30:17
do you explain to yourself that there’s so much um that there’s so much worry in
30:23
in among the the general public and among a lot of the um
30:29
the the media as well about government debt and you know you see these these counters right that count how many
30:36
trillions the government owes and say like this is unsustainable this will collapse I mean it must collapse because
30:42
we will never be able to repay the debt um could you speak to
30:48
that well uh first governments do not and do not need to ever repay the debt
30:56
they do not repay the debt this is counterintuitive if they don’t repay the debt then somebody’s going to go broke
31:01
because they don’t get the money back no no no no no what what they do is they
31:07
pay interest okay so I the other day I I bought some GMA bonds uh we can do it on
31:15
our computer buy them directly from the treasury I don’t have to go through a middleman you just go to
31:20
treasurydirect.gov so you buy some government bonds okay and uh they debit
31:26
your bank account and they debit your bank’s reserves and now I own a bond
31:31
okay why do I do that interest so I’m earning interest and it’s the safest
31:38
asset there is okay there’s no chance uh let’s put a little star there
31:44
we can come back to the the possible chance uh that the government’s going to default on this so why am I holding the
31:51
bond because I want them to pay me back no because I want to earn interest now I I I’ve been buying four
31:59
week bonds so at the end of four weeks they do credit back my account uh
32:08
plus the interest I I buy them at a discount and then they give me the full price but it’s same thing so anyway what
32:16
do they do then they just sell another one okay so the bonds are never really
32:23
repaid they’re rolled into another Bond if you don’t want it your neighbor wants
32:29
it okay so they’re continually just rolling over the debt and that’s why the
32:37
debt goes up if you watch the debt it’s been rising since
32:42
1789 in the United States and there was no default
32:48
yeah they they’ve never defaulted uh and we only repay the debt
32:55
one time 1837 president Jackson and we got our
33:00
first depression after that and we never paid down the debt again I mean we never
33:05
retired all the debt again do we ever retire any debt uh I mean don’t just
33:12
roll it into new debt but actually pay some of it off yes we do but only when
33:18
there’s a budget surplus the only significant budget surplus we’ve had since the Great
33:24
Depression was two and a half years under President Clinton that’s the only significant Surplus we
33:30
had and in those two and a half years they did reduce the debt they paid some
33:37
back but otherwise the debt is always growing it’s been growing at about a
33:44
2% Pace faster than GDP grew since
33:51
1789 so what that means is it’s not just the debt is going up the debt ratio the
33:58
ratio of government debt to the size of our economy has been going up at a 2%
34:04
Pace since 1789 that’s almost 250 years the debt
34:11
ratio has been rising is it sustainable I would say if something has
34:18
been going on for 250 years it can go on okay and I believe it will go on it’s
34:26
going to continue Rising yeah but the common sense reply to that
34:31
is any anything that go that goes up must come down why is it not the case in
34:37
this in this sense for money because there’s no reason I mean it’s not it’s not physical it’s not it’s not a real
34:43
height it there’s no gravity pulling it down you know does can GDP rise
34:51
forever can the our measure of the money supply so we have particular measure we
34:58
let’s count all the paper notes all the coins all the demand deposits and most
35:03
of the savings deposits we’ll call that money supply that goes up too all the
35:09
time does a private debt rise all the time yes it does it’s
35:16
always growing too okay does that mean your debt can increase forever no you’re
35:23
going to die somebody’s going to want get want going to want to get paid maybe on your
35:29
deathbed going to take everything you got okay uh if uh the um if your
35:38
government disappears The Debt will disappear right
35:43
probably a default okay uh but as long as the United States exists as a nation
35:50
I believe the debt ratio will go up the outstanding debt will increase
35:58
forever if the country survived forever yeah and it is in theory it doesn’t it
36:05
doesn’t even matter how high the how high the debt is especially debt to GDP that’s a measure that we often use but
36:11
that’s a purely it’s just something in made up in order to wrap our heads
36:16
around the that debt issue which itself is also a um a a mental construct but um
36:24
do you think that population size of the population has something to do with it because by the current estimates we will
36:31
reach Peak global population somewhere in this century and from their
36:36
population might go down for the first time like in a very very long time could
36:41
that be something that that caps both GDP growth and and and um debt
36:47
growth well it could but it need not we we will make
36:54
choices uh we could choose to continue to grow um and I mean that’s a great topic
37:03
we could do an hour on aging and the CH so-called challenges of aging and all
37:09
that stuff later look put it this way so the the US has reached the US Government
37:15
Federal Government has reached a debt ratio of 100% of GDP oh boy that’s scary uh Japan
37:23
250% of GDP even scarier think about this my debt
37:30
ratio is probably 300% of my income are you worried about me I’m not
37:38
worried okay when you have debt what do you have to do you actually don’t ever
37:44
have to repay it and your bank will be happy if you don’t on your deathbed yes or maybe your children will pay it but
37:53
as long as you can pay the interest that’s the only thing that matters to the bank and it’s the only thing that
37:58
should matter to us about the federal government now I I could take on so much
38:06
debt that I couldn’t service the debt and pay the interest in that case I’m bankrupt that’s a problem I’m want to
38:13
default what about the federal government cannot happen the federal
38:19
government can always make the payments as they come do because they are the
38:25
issuer of the dollar the US Constitution says Congress alone can issue the dollar
38:32
they can always issue the dollar okay and they do it through keystrokes
38:38
so as long as they can pay interest and I’m telling you they always can pay interest so we know that that’s not a
38:45
problem but could paying a lot of interest be a problem yes it
38:50
could not that they won’t be able to do it but that there could be very bad
38:56
consequences of it and I would I would argue right now we’re seeing
39:02
that and the reason is because not only uh do we have a high 100% debt ratio and
39:10
the debt is growing we have very high interest rates too uh because of the fed’s monetary
39:18
policy they decided to fight inflation by going from you know almost
39:23
zero to uh four and a half percent and so government interest pays now are a
39:30
trillion a year can the government afford to do that yes what’s the problem
39:36
with it it’s increasing inequality because who holds bonds who
39:42
holds Financial wealth who holds real wealth uh the top
39:48
1% the top one tenth of 1% so government spending on interest um
39:57
could increase inequality it could increase the
40:03
spending by the recipients of the interest income who tend to be uh higher
40:10
income of course uh and so prices of luxury goods could be going up prices of
40:17
luxury housing yachts and so on vacations could be going up so inflation
40:23
could be a problem too not just inequality inflation could be a problem and in the case of the United States the
40:31
amount of our debt federal government debt that’s held abroad fluctuates depending on how the dollar
40:38
is doing and other factors so right now it’s relatively low but sometimes it’s
40:44
40% of all federal government debt is held outside the US we’re paying
40:50
interest to foreigners so it’s worsening our balance of payments okay dollars are
40:55
flowing out to the rest of the world which may not be desirable so I’m not saying we should ju run up the debt and
41:03
run up the interest payments I’m not saying that at all I’m just saying I’m not worried about
41:09
solvency but there could be other things I am worried about maybe impacts on the exchange rate maybe impacts on inflation
41:17
maybe impacts on inequality those are all problems Japan is an is this interesting
41:24
example in which this quantitative easing took place and actually the monetary base of Japan if you look it up
41:30
like quadrupled between 2011 and like a year or two ago like really like four
41:36
times up really fantastic and during that time the central bank over here had a inflation Target of 2% and barely
41:43
managed to reach it and then something happened about two or three years ago which is suddenly the Yen started
41:48
started going down and actually also inflation picked up although I do think they are not necessarily cor uh uh
41:54
connected to the same phenomenon but um the Yen now is really tanking it’s going it’s going far down and people are
42:01
saying ha finally we told you it just took a little bit longer more time but in fact what’s what was explained to me
42:08
this have more to do with the fact that you earn more interest on money in the US than you earn over here so a lot of
42:13
companies which hold these um government debt are exchanging it on the money
42:19
market in order to invest abroad which then pushes down the prices do you agree with that analysis it’s hard to fight the Fed
42:28
if if the FED raises interest rates and and your country is committed to keeping
42:33
your rates down then yes this is the kind of problem you have this is another reason I don’t think the FED should have
42:39
raised rates even for the US economy to benefit us but it’s a disaster
42:46
abroad uh because if we go to four Latin American countries have to go to 15 to
42:54
keep yeah so it and you know uh the the dollar is is the
43:02
the main International uh Reserve currency other there are competitors and the the dollar
43:09
is declining uh in terms of global use
43:14
um so it’s gradually being uh somewhat replaced but anyway uh because we issue
43:22
that we need to consider the impacts on other countries uh and uh raising rates uh has
43:29
been very bad for developing countries because they have to compete with that with much higher because they are
43:36
riskier than we are yeah and the and the the incentive then for the for the private economy in those foreign
43:43
countries is to get rid of the local currency and buy US Dollars and to invest into into US denominated debt
43:50
right and then that that does harm to these local currencies yes yeah I
43:58
another thing that has gone on for the past a transition the past 40 50 years
44:04
is to open up your capital accounts and so it becomes easy to get uh out of your
44:11
own currency and into dollars so it compounds the problem um something that
44:18
we’ve seen in these in the way that the monetary systems also internationally
44:23
work and I I know you told me you’re not you’re not working on that on that mainly but um I still I still need to
44:29
ask this like one of the fundaments was basically that debt held by Foreign
44:36
governments at least in the US was more or less safe but that that consensus seems to have eroded quite a lot I mean
44:43
the US um the the the US government uh um seized uh Afghan uh assets of of
44:51
Afghanistan it now recently seized at least froze assets from the uh from
44:57
Russia and the European Union is doing the same so that now we are not in in a world anymore where governments can hold
45:03
each other’s debt and be reasonably sure that they will that will that will continue through good and bad how do you
45:10
think that will impact the way that um the International System
45:15
Works um one of the reasons that the US dollar um was accepted as the main
45:23
International Reserve currency is is because there was Trust uh in the court systems and in fair
45:30
treatment and that I if there was a global financial crisis like we had in
45:38
um 2007 through 9 10 depending on whether we’re talking about Europe or
45:44
United States that the the FED would step in well the FED did step in uh we
45:50
did the right thing that time I the FED lint dollars
45:57
about 40% of all of the fed’s response to the global financial crisis was to
46:04
save the rest of the world about 60% was to save uh US Financial system so that
46:12
was the right Behavior but if you start interfering in the pay International payment system the way the US has been
46:19
doing that uh is a a crack in the trust
46:27
of the US dollar and so rival uh currencies can come about since the uh
46:36
Britain and the US usually work together um and ECB maybe more or
46:43
less um then the alternative will be
46:48
bricks uh and increasingly we see that the Chinese
46:55
R&B uh can be a reserve currency for some of the developing countries so I
47:02
think that that that could be the response that um some some group of
47:09
Nations maybe uh under brick uh will um replace
47:16
the dollar for those countries is there is there something
47:22
that like Donald Trump already announced that he wants to fight this um is there
47:27
a way to fight this other than create or other than trying to reestablish trust um are there heavy-handed methods that
47:34
you can imagine that could um could compel other states to continue using
47:41
the US dollar as a as a as the universal res currency like let’s say something
47:47
like the um the pet the Petro dollar um the the the denominating forcing the Saudis to continue denominating oil in
47:54
US Dollars like things like that yeah well you know we can choose what
48:01
currency we will trade in and the US is the biggest economy in the world so um
48:07
yes I think that that uh is a way to
48:13
protect at least a large part of uh the globe in terms of dollars but it if
48:21
you’re not trading with the US you’re not trying to sell to the US or buy from the US um then I think you’re much Freer
48:28
to say we’re not going to use it right you know
48:35
the it’s not easy to replace the dominant currency remember the the
48:42
pound remained uh the international Reserve currency until the end of World War II the US economy was already bigger
48:51
than the British economy by about the Civil War so it took a long time for the
48:57
dollar to displace the pound pound’s still important but we became the
49:02
dominant one only at the end of World War II and I suspect the dollar will
49:07
hang in there uh for a long time uh at current rates of growth uh I know
49:15
China’s been in sort of a slump but I think they’re going to restore growth at current rates of
49:21
growth CH the Chinese econom is going to be much much bigger than the United States um but do I believe the R&B will
49:29
displace the dollar as the dominant currency not for a long time uh you need to build up those
49:36
relations other countries have to have trust in your court system your laws and
49:42
in your central bank will their Central Bank come to your rescue when there’s a
49:48
global financial crisis I think we’re a long way off from that and that might then also be the
49:55
test like the next fin fincial crisis um how how these aspiring Nations will
50:01
react um we are nearing the one hour mark so
50:06
um instead of going into another subject which will blow us way out of that I would like to um thank you Professor Ray
50:15
um people who want to read about from you they should go to the Levi Institute right yeah
50:21
www.le y.org and I should have
50:27
a couple of new things up soon everybody check out Professor Ray writings on lev.
50:34
org um Professor Randall Ray thank you very much for your time today okay thanks
50:40
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