Warren Mosler: MTM-ren misterioak

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Unraveling the Mysteries of Modern Monetary Theory with Warren Mosler

(https://www.youtube.com/watch?v=C9DJEG4qWKk)

In this in-depth discussion, we welcome Warren Mosler, renowned economist and originator of Modern Monetary Theory (MMT). Mosler offers insights into MMT’s roots, drawing contrasts with classical economics, especially regarding fixed versus floating exchange rates. He elaborates on the implications of MMT for government spending, inflation, and monetary policy. The conversation covers the impact of interest rates on inflation, the role of MMT in framing economic policy debates, and practical applications of MMT concepts. Mosler also addresses misconceptions about QE, the potential for MMT to address economic disparities, and the practical limits of government debt. This episode aims to provide a comprehensive understanding of MMT and its transformative potential in modern economics.

00:00 Introduction to Duration Bids

00:43 Welcoming Warren Mosler

03:00 Understanding Modern Monetary Theory (MMT)

03:35 Fixed vs. Floating Exchange Rates

05:03 Historical Examples of Currency Crises

06:24 The Concept of Neutral Rates

10:00 Government Spending and Taxation

18:36 Impact of Quantitative Easing

34:36 Government Debt and Inflation

47:15 Questioning the Innocence of Financial Misunderstandings

47:38 The Controversial Idea of Reducing Interest Rates to Combat Inflation

48:09 Historical Perspectives on Interest Rates and Inflation

48:35 Debating the Job Guarantee and Deficit Spending

49:19 The Impact of Debt to GDP on Economic Policies

51:50 Inflation Indicators and Their Measurement

53:33 Gold Standard vs. Floating Exchange Rates

56:18 The Role of Interest Rates in Inflation and Economic Stability

01:06:40 Government Spending and Economic Compliance Costs

01:12:24 The Influence of Interest Rates on Real Estate and Wages

01:19:52 Global Perspectives on Economic Policies

01:23:37 Concluding Thoughts and Investment Views

Transkripzioa:

0:00

so the question is what’s the bid for duration out there and the biggest surprise one of my biggest

0:06

surprises that I look at because I never know how large the ratio bid is is how large that bid is over the years I’ve

0:12

seen all these panic situations the fed’s going to do QT sell long bonds is gonna happen that the long Bond sells

0:19

off and that it’s like this is you know we’re GNA get up to 10% they’re not going to be able to sell them they’re gonna have failed auctions and all of a

0:25

sudden it rallies like 100 basis points and it’s like lower than it was before because bid for duration so where is

0:32

that coming

0:37

[Applause] [Music]

0:42

from welcome everyone today I’m thrilled to introduce Warren Mosler an economist

0:49

and financial professional widely recognized as the originator of modern

0:54

monetary theory mmt in 1982 he found the Investment

1:00

Company Illinois income investors which held the top Global ranking through 1997

1:06

for fixed income managers and drawing on Decades of market experience Warren developed MNT

1:12

in the early 1990s offering groundbreaking insights into how modern monetary systems truly function now

1:20

based in St Croy in the US Virgin Islands he runs Valance Company Inc and

1:26

continues to shape Economic Policy debates he’s best known for moser’s law

1:32

which holds that no financial crisis is too deep for a sufficient fiscal response his notable book The Seven

1:40

Deadly innocent frauds of economic policy has been translated into multiple languages and his contributions earned

1:47

him an honorary doctorate from Franklin University Switzerland Warren thank you so much for

1:53

coming on the show Welcome B thank you for that introduction it it’s great actually um I

2:00

was remembering when the idea for having you come on the show first took hold I

2:06

was sitting at a table with PJ Pierre here in kman at an

2:13

event and uh Jason Buck mentioned that PJ had had studied under you for some

2:20

time and um I completely commod dared his evening I think uh just pounding him

2:26

with questions and um so hopefully had he had some we spent quite a bit more

2:32

time together uh after that discussing similar topics but anyways that’s how

2:38

this came about okay very good yeah um I also wanted to say Richard ladderman

2:44

portfolio manager at resolve is uh is also on he requested to be on as he often does with uh with guests who are

2:53

offering insights on policy or economics Etc so um let’s get into it Warren um

3:00

for those who have not been studying the evolution of economics and economic

3:05

policy over the last decade or so maybe can can you provide Ground Zero on what

3:12

modern monetary theory is and maybe how it departs from um what many would think

3:18

of as classical economics okay so what I find is that

3:24

much of classical economics is uh in the context of a gold standard or something

3:29

exchange rate policy which we don’t have today so you might look at it like this

3:35

translation of Economics from fixed exchange rat floating exchange rates or

3:40

from my own point of view a groundup study of floating exchange rate context

3:46

for economics as opposed to fixed exchange

3:51

rates okay so you are all have traded some foreign exchange yeah so you know that if you

3:57

take a currency like the h on dollar which is fixed exchange fixed to the dollar and you sell the forwards in size

4:07

the spot is fixed as the forward drop that’s the 90-day rate it’s the same thing and you’re actually driving up

4:13

interest rates and that was the old trade when I first started um a really

4:18

an equity hedge fund would get short stocks in the H CL market then sell forwards in the currency to to drive up

4:26

interest rates which would spook the stock market it would go down they cover the short make a little money then hope that it was a back covering their

4:32

position in the Hong Kong dollar it worked very successfully it was good leverage you know between those two in

4:38

terms of the percentages they have to move to make it work okay now you’re try

4:43

to do the same thing with the Yen which is FL exchange rate versus the dollar you sell forwards you can drive the

4:49

currency down but the rate is going to stay at zero if that’s where the Japanese is you know rate fixed and the

4:55

spot forward are going to stay the same so there’s something very different going on with those two currencies and

5:01

that’s so we’ve seen like fixed exchange rate currencies blow up all the time I

5:07

remember the Mexican peso 1994 the the rubble in 1998 and the ERM system that

5:15

blew up with the pound you know so but you never see that with floating exchange rates so there’s something very

5:20

different going on you’ll see the currencies go up and down we saw the Euro depreciate 50% and nobody really

5:26

noticed we saw the Australian dollar depreciate 50 % nobody noticed and we’ve seen them go up the same amount sort of

5:33

make second page or third page news so it’s it’s very different and so I think

5:39

that distinction is something that modern monetary theory that I recognized back in the early

5:45

1990s and before it was called modern monetary Theory and it later came to be called modern monetary Theory because

5:52

most of today’s currencies are now floating exchange rates okay so um I actually didn’t know

5:59

that I didn’t realize ized that the root motivation for rethinking economics was

6:07

that it’s sort of implicit in neoclassical theory for example most of neoc classic of neoclassical Theory I’m

6:15

hearing from you um is is generally under the assumption of a fixed exchange

6:20

rate regime yeah yeah I want how bad it is okay you’ve seen all the talk now about the neutral rate the FED just

6:27

trying to figure out where it is and what not where’ they get that idea that there is a neutral rate okay they didn’t

6:33

get it from floating exchange rates that’s an echo from fixed exchange rates under fixed exchange rates like I just

6:39

talked about the Hong Kong dollars for example the forwards are set by the

6:44

market to reflect an interest rate which is the indifference level between where somebody’s willing to hold Hong Kong

6:50

dollars versus cash them in and get US dollars at Monetary Authority right not a you know a simple gold standard where

6:58

you have convertible currency and the government wants to deficit spend it’s adding gold dollars right and

7:07

uh it has to then borrow those right and when it does that uh you know why is it

7:14

doing that okay so what what it doesn’t want is people with the gold certificates to cash into the gold and

7:21

deplete the gold resource and there an interest rate at which the uh investors

7:26

in the or you know whoever’s holding the uh whether they’re convertible Reserve

7:31

balances or actual convertible currency uh is indifferent between holding that currency and cashing it in for gold and

7:39

you get a positive yield curve because the longer the maturity you buy the longer you have to wait before you can

7:45

get your gold and the more odds are something’s going to go wrong so if you looked at the Russian Rubble I don’t

7:51

know if you were around for that crisis in 98 but uh you know Russia that was

7:56

convertible to dollars at 645 to1 and there was some concern as to whether

8:02

if you had rubles you could get dollars it C it was certainly overvalued in terms of any other reason you’d want to

8:08

hold them other than eventually to convert them and so um you saw that risk being expressed as

8:16

interest rates went up the Russian government was selling GK to keep people

8:22

from cashing in their rubles for dollars and you saw the rate go to 5% 10% 20%

8:28

40% and then they borrow few billion from the IMF okay FIFA people felt that they

8:34

had a little bit of a window and go down to 20% and then when the IMF loans were exhausted and cut off it’s okay now it

8:41

goes up to 50% 100% and it was up to 200% and it was still wasn’t enough for

8:47

anybody to hold that thing rather than convert to Dollars and interestingly the uh Central Bank I think they didn’t even

8:54

turn the lights off I think they just all got up in the West Park back to their desk for about three months

9:00

so there was no but uh because they didn’t know what to do they didn’t know how to float the

9:05

currency or they didn’t think to do it or didn’t want to do it or they’re afraid they’re GNA get shot I don’t know different kind of place but any anyway

9:13

so to the point which I’ve sort of skipped my mind of your original question yeah I was just I was just

9:19

saying I didn’t realize that the motivation was fix versus um floating exchange rates yeah yeah so

9:27

um okay so anyway so that that was that was a situation that I I can’t

9:33

remember what I started to say on do you remember maybe we can I’d like to unpack

9:40

this idea of the departure from classical economics uh that MNT takes and and maybe unpack the this idea a

9:46

little bit further by maybe going into the uh the order of operations right I think uh Stephanie K in her book put it

9:53

as uh stab versus tabs right spend before taxing and borrowing whereas

10:01

let’s started from the beginning so the dollars to pay taxes come from the US government that’s you know that’s not in

10:08

any of your models you have G minus t where you have to collect taxes to be able to spend they don’t put the causation the right way the formula is

10:15

okay but the G has to come first before the dollars are there to pay taxes and

10:20

if you talk to anybody in the FED they go yeah of course we can’t do a reserve ad without a prior Reserve Trin and

10:26

their job is offsetting operating factors to make sure that when treasury Securities settle there’s a uh and they

10:32

see Fed funds going up indicating the reserve balances are short they come in and do repo they add reserves now with

10:38

QE it’s a big Reserve ad in advance so they don’t have to do it every time there’s an auction or whatnot but even

10:45

on fixed exchange rates they’re still spending first before they’re collecting

10:51

taxes so what they do is they buy the gold first uh print you might say gold

10:56

certificates or credit accounts that are convertible accounts that central bank first and then those

11:01

dollars are there to pay taxes so uh it’s it’s simple analogy I mean nobody

11:08

thinks the football stadium has to collect the ticket first and then sell it everybody knows they sell the ticket

11:14

first and then collect it because that’s where it comes from from the stadium now President Obama made a statement once

11:20

that uh you know that the money comes from the government and he got shouted down he said no real wealth comes from

11:25

the private sector so what they did was they confus or conflate or something real wealth with the money the dollars

11:32

to pay taxes right and he agreed that real wealth came from the private sector to government take some of it so he backed off on his State he was correct

11:40

the dollars to pay taxes the nominal the tax credits needed to comply with tax

11:45

liabilities come from the private sector and that’s what Stephanie’s talking about with the sequence and every

11:51

Congressman has that sequence backwards at least I think everyone does they all think they have to get dollars by taxing

11:58

what they don’t get by by taxing if they want to spend more than that they have to borrow it they’re borrowing it from

12:03

China and U worried about uh the grant leaving the debt to the grandchildren

12:08

and all that kind of thing and you saw the Obama Administration they wanted to do that stimulus number one they did

12:14

half what they thought needed because they were afraid of borrowing two trillion dollar instead of one trillion

12:20

uh secretary Clinton flew with Obama I believe to China to talk to our Bankers to make sure they would buy our bonds so

12:26

that we could make sure our health care System put fail or whatever it was and Paul Ryan was there saying we’re going

12:32

to be the next Greece he’s a head head of the Republican Party speaker of the house um if we’d be on our knees at the

12:40

IMF you know if we ever put tried to borrow this much money and

12:45

uh I think Paul Krugman had a big document in front of the president about how interest would go up if it wasn’t

12:51

Paul was somebody else like that another new KY and now we look eight years

12:57

later and and um we have a CO maybe total deficit spending maybe 5 trillion

13:05

I don’t know not a word of Greece nobody was worried about China nobody worried

13:11

about R all they worried about was whether it or not it cause inflation now where did that come from

13:18

what changed those eight years and I think that was uh you know the poster child was Stephanie Kelton when she got

13:23

the job at the U Senate budget committee people started looking into it she started talking about it they started

13:29

reading on it and suddenly they suddenly but over those eight years it became

13:36

understood that government checks weren’t going to bounce they might not have exactly understood the whole thing

13:41

they knew the checks wouldn’t bounce rates would spike unless the Federal Reserve voted higher rates and that

13:48

um uh the issue would be inflation whether they were spending too much and

13:53

driving up prices and they’re still arguing about whether they spent too much and drove up prices or not they’re not no is arguing about whether or not

14:00

the check was going to boun so I’d say mmt changed that you know dialogue for

14:06

the better because the argument is whether what are the ramifications of the spending not are the checks going to

14:12

B the government spends first and then Securities are sold they don’t have to worry about whether or not the Securities will be sold and uh so yeah

14:20

go ahead what do you think causes the consternation and or

14:27

cognitive dissonance that seems to be so prevalent among you know as you mentioned Congressman but

14:34

you also mentioned a variety of Fairly well-known mainstream economists policy makers Etc why do you think this is so

14:41

difficult to comprehend or to internalize you know that’s a good

14:46

question I was hoping you can help me with that I find it painfully simple uh that any 10-year-old can understand it

14:55

uh I’ve talked to people uh inord now in Congress or in Congress like uh Senator blumthal I was

15:02

running for Senate when he was running and I didn’t win I got 1% of the vote but I I met with him for about three

15:08

hours and the friends mine of mine’s house and Daran up there and he he said

15:14

yeah this is how they taught us in Harvard back in the 60s but he wouldn’t go there and then later I met with him

15:21

once after he got in and said well is there anybody else in Congress understands this I said don’t know he says well if there is let me know and

15:26

then you know I’ll start talking about it too so I know him he personally just didn’t want to take the first step uh I

15:33

can’t say too much about the others because I don’t have the personal

15:39

contact there’s uh van hings is that his name in h Virginia Congressman he understood I was

15:47

up there with a friend of mine and had my book he read it went

15:53

through it and same thing he was waiting for somebody else so I guess it’s that I guess it’s a level of ual dishonesty at

16:00

that point but at the same time it’s a lack of you know political will to to go

16:07

there and path of least resistance is to get reelected to get funded is to keep saying what they’re saying um so it’s

16:15

just tough for me to give you a definitive answer for that question you think that it’s um do you think

16:23

that once you open the door on a conversation about about the fact that

16:30

government spending is not constrained by by income taxes or by the ability of

16:35

the government to to Exogen fund itself right that it that people fear that it

16:43

will um remove the scarcity constraint or the scarcity mindset um yes like yes yeah

16:53

definitely and uh there’s couple of things on that you know and

16:59

I say look either you believe in an informed electorate or you don’t and they don’t they think that if people

17:05

knew this they’d go crazy and spend and my thoughts are the evidence tells me exactly the opposite that people would

17:12

rather have 10% unemployment than 3% inflation okay and they go overboard the

17:18

other way and I think there’s a tendency to people to like having elevated rates

17:25

of unemployment five six 7% 93% who are employed can hire a plumber who come

17:32

running out to do things because it’s tough out there you know they can get some all the law they can oh yeah I got

17:37

here and I got my lawn mode for $20 oh really I paid 30 what’d you get it from you so I think that and there’s a lot of

17:44

people who are very secure in their incomes and in their nominal wealth and they don’t like to see inflation and

17:50

they do like to see people coming to them for money puts them in a position of power and it’s you know it’s 5% infl

17:59

that’s I mean unemployment that’s 95% of the people are on the other side of that trade and it’s human nature for them to

18:06

like it so you look at now where you know the president get presidency gets

18:11

turned over over 3% inflation where’d that come about had nothing to do with

18:16

uh people not wanting stuff for free or whatever not wanting more government sending or Services they’d rather have

18:23

you know the inflation is what turned it over even with a strong economy and low record low unemployment we turnover

18:29

Administration so I think that tells us something that might not always be that way but it sure is there right

18:35

now but the the I want to try to understand how mmt distinguishes between

18:42

uh different kinds of government spending because I think one of the things that made nmt prominent over the

18:48

last several years and correct me if I’m wrong is that uh people were afraid that quantitative easing uh that began in

18:54

2009 right would create inflation and uh I think it was Milton Freeman that

19:00

coined uh the the difference here between High powerered money which is money in our pockets and it’s it’s

19:06

actual money that fiscal spending would would spend into the economy versus Financial money which is the money that

19:13

quantitative easing uh spent quote unquote into the system to to to salvage

19:18

the uh the health of the bank so how does mmt account between the two and and

19:24

and do you see the high powerered money the the more fiscal uh aspects

19:29

of of of money being the uh the drivers of inflation versus uh monetary policy

19:35

operations like quantitative easy let me first say high powerered money is a throwback to a fixed exchange rate that

19:41

was dollars that were convertible to Gold that was the convertible currency was the high powered Stone and Banks

19:47

needed it they couldn’t uh because if people took their money out they had to give them convertible currency so the

19:53

whole system was constrained by the quantity of convertible currency which came from the gold reserves and you know

20:01

and doing that so um so in that light look at quantitative

20:07

easing it’s the government’s buying government securities and government securities are

20:13

just dollars in safe but are functionally savings accounts of the Federal Reserve Bank so that’s like if

20:18

Bank of America or JP Morgan went to all their savings depositors and said look we’d rather have you in checking

20:24

accounts and savings accounts we’re going to give you a premium of half a percent or something to if you’ll you

20:31

know we I want to go in and buy your savings account will you sell me your savings account I’ll credit your checking account with the money will

20:37

shift it from savings and check you have certain number of people with maybe a billion dollars who said okay yeah I’ll

20:42

do that and so they had savings checking account instead of savings accounts would anybody have gotone around saying

20:48

oh that’s inflationary no okay so you know the treasury security are just 36

20:54

trillion in what amount to savings accounts at the Federal Reserve Bank it’s a bank just like any other bank

21:00

it’s a ledger when the government spends they instruct their Bank to credit the

21:05

account of your bank okay at at their bank so the Federal Reserve credits JP

21:11

Morgan’s account at the FED it’s called Reserve account it’s a Federal Reserve Bank a checking account a transaction

21:17

account it’s overnight and those funds are there and they can’t go anywhere except to somebody else’s Reserve

21:23

account and when they sell treasury Securities and you buy them they shift

21:29

from J Morgan’s Reserve account to your securities account which is another account at the fed and still you still

21:36

have the money you had dollars in a JP Morgan account you now have dollars in

21:41

the savings account at the fed your wealth hasn’t changed nothing’s changed uh you do it at market levels where you

21:47

could do it anyway you really don’t care who is selling you those Securities you can buy Securities anytime you want

21:54

price goes up a basis point you know basis point lower in yield and suddenly people want buy that thing that’s what

22:00

the FED does it’s an auction process and so they’ve just changed the indifference levels of holding it and that’s the

22:06

indifference between at the margin the economy’s desire to hold cash you know dur to hold duration uh they give you a

22:13

basis point lower and you less likely to hold duration at the macro level and so people are holding reserves instead of

22:19

Securities accounts it’s not more than a basis point or to it’s not a whole lot at the margin and

22:25

uh and so um why would that change anything so I had

22:30

this conversation with a guy at the bank of England Andrew Crockett I was over there maybe 25 years ago and we were

22:37

there with someone from the bank of Japan they had just announced quantitative easing we’re having a friendly just three of us chatting I

22:45

said to the officer of the bank of Japan I said like why would you think it’s going to matter if you go out and buy

22:51

jgbs you know with your you know you buy them from the bank you credit their Reserve account so the the bank has CJ G

22:58

and more reserves so it’s not like there’s a lot of creditworthy borrowers just waiting for you to have loans loans

23:05

create deposits it’s got nothing to do with the lending side of the bank why why would you expect us to do anything

23:10

and uh Crockett looks at him and goes yeah what do you say to that so he knew

23:16

it wasn’t any surprise to him the guy said says uh well you know that’s our policy we’ll just have to wait and see

23:22

what happens well after 30 years of buying every jgb out there and shifting

23:27

on maybe the entire duration of Japanese what’s called public debt to zero duration didn’t make any difference

23:33

right like why would it the burden of proof to me is somebody to explain why you think it would do it not me to

23:39

explain it why it won’t do anything to well it made it made a difference in the sense that the Japanese government bond

23:46

market uh ceased to exist essentially for a while right you you went sometimes for days without any trading in Japanese

23:54

government bonds and so but so what it’s not like somebody wanted to trade and could do it nobody wanted to trade it

23:59

doesn’t exist overnight when people are sleeping you wake somebody up if you

24:05

wake them up it’ll trade well do do you think that a a well-functioning

24:11

sovereign bond market is an essential component for for any country to

24:16

function well is that a is that a requirement I guess you could Define it

24:22

well functioning economy that way but I sure would I remember when there were no government bonds like who cares we use T

24:27

7 they something as a benchmark and it doesn’t matter it’s just a reference point you don’t need a full Government

24:33

Bond marker for anything and I think Japan proves that

24:39

doesn’t have any effect on the macroeconomy if nobody trades jgbs who cares so what do you think would happen

24:46

if if the FED were to buy so much or such a large percentage of treas

24:51

outstanding treasuries that the treasury market uh as it stands today uh ceased

24:57

to to function sees to have the liquidity that it has would that have any implications for the US economy for

25:03

us markets for for the US government I don’t see it I go one step further suppose the treasury just shifted to all

25:09

three-month bills and there weren’t any bonds so who cares you know save that

25:15

step in between why does the treasury have to issue him in the FED bu him it’s kind of a waste of human endeavor with a

25:21

broker or two in between so just so so I met with shamon banki when

25:26

he was in in between being Vice chair for four years and then chairman he was head of the Council of economic advisors

25:33

I think there were just four of us and I wasn’t here to talk about modern monetary Theory because I wanted to get invited back of course but um he uh he

25:43

made this I asked a question he had just been talking about unconventional monetary policy and he had written something with Vince Reinhardt who was

25:50

head of H monetary Affairs for greenpan and enveri who helped me write some of

25:55

my speeches by the way when you talk to these operations guys at def fed they know exactly what I’m saying it’s that’s

26:01

their language and you don’t have to you never discuss it it’s just it’s always the starting point it’s just assumed and

26:08

uh but anyway so and I said to to him I said uh I guess he wasn’t chairman yeah

26:15

was chairman at the Cil I said you know be you you’ve been writing about

26:21

unconventional monetary policy where the FED might buy treasury Securities I said since

26:26

buying the treasur buying Securities from the is is functionally the same for

26:32

the private sector the treasury never issuing them to begin with okay and so rather than issuing them and selling to

26:38

the FED having the Fed Credit the accounts have you ever just thought about you know coordinating between the

26:43

fed and the treasury and just had the treasury stop issuing those bonds and he said well no it is different when the we

26:49

buy from the treasury we add reserves to the system that hasn’t effect so it’s like okay I don’t want to answer the

26:55

question but clearly he didn’t understand Reserve County because it it’s just a you know nonsensical answer

27:01

and uh and he had he was a nice guy and smart guy but you know he’s like a beast

27:07

student who studied real hard gut a and he was a professor from um Princeton and

27:14

his specialty was the gold standard the depression in 1930 and what caused it and everything he says is exactly right

27:20

everything he did to my original point was echoing these gold standard things

27:26

ex and ex like that was that more convertible currency under a gold standard okay but it doesn’t do that

27:32

under floating exchange rates reserves to holder of reserves has one option or two options do nothing

27:38

hold reserves I guess you could spend them somebody else holds a reserves or you can buy treasury security and shift

27:45

to a different account at the failure on the gold standard he has another option he can take a gold that option’s gone

27:51

and when you’re not competing with that option the entire dynamics of the monetary system is different it’s like

27:56

you’re watching a different channel on the television set that one program doesn’t relate to the other you can carry the language over but it’s a

28:03

different program they’re different people doing different things so um just to sort of pull a

28:10

little bit further into yes the reserve accounting yeah um so in QE

28:19

effectively the FED moves money from the Securities account into the checking

28:25

account or the checking account into the Securities account okay so they go out

28:30

yeah and they don’t go directly they go through one of the primary dealers and somebody sells that primary dealer

28:36

Securities right now let’s say I sell them like I don’t know it’s the FED

28:41

buying might be Bank of America buying to add to their portfolio right makes no makes no difference to the economy if

28:47

City Bank went out and bought all these bonds would it change anything no so anyway the FED goes out and buys these

28:53

things from me I happen to have you know let’s say let’s say I am JP Mor and I

28:58

have a Securities uh I own treasury Securities they don’t own a lot of them but they own a few and I sell them to

29:04

the fed and so I had dollars in my Securities account fed pays me by

29:09

crediting my Reserve account and the FED debits my Securities account so they debit the Securities account credit to

29:15

reserve account right that’s it debit 10 billion credit 10 billion yeah right so

29:21

I guess my question is um under basil 2

29:26

or Bank capitalization regulations is there a difference to the

29:32

bank in terms of its capital flexibility or you know ability to to to loan or

29:39

what have you between having a billion dollars in the Securities account or a billion dollars in the reserve account

29:45

yeah because the the longer sh um if it’s a three-month Bill no because

29:51

the treasuries are all zero risk weight and you know in SE Reserve so there’s no difference there if you’re if you’re in

29:57

a long ation uh as a Commercial Bank under Cam’s regulation CS so it’s

30:05

Capital assets management is earnings L is liquidity

30:11

and S is interest rate sensitivity so you’re are not allowed to have interest rate sensitivity and they run you

30:17

through tests if rates go up go down they want to make sure your capital for all practical purposes does change and

30:23

if it does you’re supposed to make adjustments so your your duration neutral you’re not a b basically B

30:28

supposed be zero duration so if you have long Securities and you go to short Securities you’ve changed your duration

30:34

and that may throw off your battles uh you know and if that’s the case you have make that adjustment so but otherwise

30:41

the Securities are zero risk way so it all it all depends on that you also have like Leverage ratios and uh it might

30:49

affect your leverage ratios and that’s your total assets versus your Capital but that doesn’t change your total

30:55

assets so I would say that particular thing only changes your interest rate sensitivity your duration of your bank

31:03

for an individual it doesn’t change yeah I guess point is that if you’re if

31:08

you’re the bank and you’ve got a Target um duration right you want to hold a

31:13

Target duration for your portfolio um the FED has just absorbed

31:19

some of your duration will the bank then not go out yes and no because you don’t

31:25

have to sell to the Fed just if they don’t get anything they’ll pay a half a basis point more

31:31

get it from somebody else right five basis points more whatever it is and

31:36

they can affect the curve on that I mean if you buy enough at any point in the curve the further out you go uh the more

31:43

likely you are to you know the value of what we used to call Pop I don’t know if you call it now is a lot large the value

31:49

of an 01 is a lot larger a lot more Bond as you go further out and so uh the FED

31:54

buying you know 20 billion long bonds has more effect than buying 20 billion three-month bills right okay and so um

32:03

if they go out to curve and buy long bonds they can move that market four five maybe 10 basis points if they bought enough maybe a half a percent but

32:10

in the scheme of things if you talk to the guy in the street about major problems in the US you say well you know

32:15

30-year interest rates have gone from you know 425 to 475 it look at you’re like what we that’s our biggest problem

32:23

it’s like who cares right half a percent of but if you’re in Middle Trading a big deal so I’m not you know depends on who

32:30

you’re looking at but that’s I think when they started issuing 20 years which were a lot at the time they put a dent

32:38

in the yield curve of maybe 15 basis points initially before it sorted out now that falls under what under fixed

32:45

exchange rates they used to call liquidity preference which says there’s always enough money to buy the long it

32:54

it but there aren’t necessarily enough people want to at that duration so the question is what’s the bid for duration

33:00

out there and the biggest surprise one of my biggest surprises that I look at because I never

33:06

know how large the ratio bid is is how large that bid is over the years I’ve seen all these panic situations the

33:13

fed’s going to do QT sell long bonds is gonna happen that the long Bond sells off and that it’s like this is you know

33:19

we gonna get up to 10% they’re not going to be able to sell it they’re gonna have failed auctions and all of a sudden it rallies like 100 basis points and it’s

33:25

like lower than it was before because it that bid for duration so where is that coming from well I can only look at the

33:33

data and guess but you’ve got Pension funds who buy long bonds because it’s Tuesday right they look at their

33:39

balances and on Tuesday whatever came in they buy it because they’ve got a 6040 mix or some nonsense and you know that

33:46

money just comes flooding in because every teacher puts $40 a week into a pension fund and the teacher’s

33:52

retirement fund buys Longs you and so uh and somebody needs to raise

33:58

and I can’t tell you where it all is but the bid how does the long get negatives

34:05

how long if we’ve seen this long curve how does that happen without a huge bid for duration right so there’s a massive

34:12

bid for duration out there and it’s part of the institutional structure somebody’s buying it insurance companies

34:18

have to buy it to match something somebody’s buying it to match long-term liabilities there’s a lot more long-term

34:24

liability out there than we than we and that I estimate it always like wow that

34:30

play LAN ried a 100 bces for nobody had any idea yeah we’ve seen in the last several

34:37

months now this this this conversation shifting about the US government solvency and a and a possible uh debt

34:46

crisis and the fact that the uh propensity to own US government bonds

34:51

would decrease as inflation expectations would rise not to mention uh the weaponization of the dollar and the

34:58

appetite for Central Foreign central banks to hold you you don’t seem to be concerned with with any of those factors

35:05

I’m trying to understand look if I was in charge if I was in charge I’d be even less concerned because I’d only issue

35:11

three Monon bills I’d have the FED set the rate of zero like we had for 10 years permanently they didn’t have to worry about any of that okay but yes

35:19

right now they worry about their own problems they created and feel they have to continue to create but even then

35:26

where is the tenure like 460 or something okay that’s like just that’s at the FED funds rate that’s a flat

35:33

yield curve how bad can it be if it’s 10 years flat like it’s not like it’s even

35:41

positive now is is now closer to three and a half so granted it’s no no no it’s

35:47

like four and a quarters four and a half right well three three cuts from five

35:53

and a quarter three or four yeah it’s slight it’s slightly POS posi now but either

35:58

way it’s not it’s basically 10 basis points where’s the 30 now the other

36:04

thing is you know you get positive convexity as you go further out and so the convexity adjusted spread on the

36:10

thir year is wider than a the nominal yields by quite a bit and you know I

36:16

used to do very well when people would sell off the long end and not not pay any attention to convexity or the people

36:22

doing it aren’t sensitive to it and the people are sensitive convexity are are uh minority as we were and you’d have

36:30

these wonderful opportunities to buy things against the long and have huge positively convexed portfolios and make

36:37

a lot of relative value you know lot of alpha over time and so that’s another place where the bid for duration comes

36:43

in because of all the positive convexity at the long in that is you know not something the average person reads to

36:50

Lost turtles or the watches the news thinks about or even the average think

36:56

about a lot for sure yeah yeah yeah yeah so what’s what’s it worth 30 basis points positive spe

37:03

longer now so what’s a zero what practical limitations for the government

37:08

uh forget that the Zeitgeist hasn’t gotten quite there yet uh and the Overton window these ideas haven’t quite

37:15

fully been established in the overturn what are the practical limitation is there an upper limit to debt GD there’s

37:21

two things there’s two things the limit to what can be spent is what is offered for sale and what is offered for sale is

37:28

a function yeah it’s a function of tax liabilities so you can’t buy anything now with confederate dollars because

37:34

there’s nothing offered for sale but if somebody put in a tax payable Confederate dollars now there’d be

37:39

things for sale people need the dollars to pay the tax and simple case of a monopoly they’ve

37:45

got they set the price level they tell you what it’s worth so uh

37:51

but you know so the limit is what the tax liability create the need created that’s the nominal limit created by tax

37:58

liability um if you just give people money like Social Security and now they

38:03

become agents to the government and so they the limit to what they can buy you have to consider not just the government

38:09

but plus its agents who are getting uh money they’re not selling anything to the government to just getting dollars

38:17

uh you know if you exceed what is available for them to buy and they start are paying higher prices they are

38:23

redefining the currency downward by paying those higher prices and we call that inflation I call it one-time

38:28

adjustments in the price level you get there it’s always a series of onetime adjustments it’s like um Quantum it’s

38:36

not time doesn’t move smoothly it moves in Quantum measures yeah Quant so it’s the same

38:43

thing here it’s it’s one purchase at a time it’s moving is redefining the currency now there’s a lot of it so it

38:49

looks continuous but it’s not that’s you know what inflation would be properly

38:55

academically defined if if the definition were follow followed according to how academically F would be

39:00

something else and it wouldn’t be that now what we call inflation you know fine you know yeah but that’s a different

39:06

matter sorry to interrupt but I did want to take a quick second to remind listeners that while we do absolutely

39:12

love providing our audience with worldclass guests and weekly investment insights we wanted to remind you that we

39:18

actually do our best work outside of this podcast and we try to do this by providing Cutting Edge globally

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Diversified and systematic investment strategies that are designed to be broadly non-correlated to traditional

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want to see that theory that we’ve been talking about put into practice please do go ahead and check us out at

39:47

investres solve.com now back to the podcast all so not to get off the point

39:52

so the limits are couple of things what’s for sale right and that’s

39:57

evidenced by prices what’s we can look around and see what’s for S and if those

40:03

prices are going up it means government and his agents are paying more than what’s offered for sale at current

40:08

prices and so prices are going up and a lot of that depends on the institutional structure that sort of builds a lot of

40:14

that stuff in and uh some of it’s based on what you can casually call excess

40:21

demand but if you spend on a price rule if I say I’m going to go down the street and I tell you to buy every house on

40:28

that street but don’t pay more than $500,000 and they’re all for sale at about between 450 and 550 you’re going

40:36

to buy some of them but you’re not going to drive up prices if I tell you buy them all I don’t really care what it

40:41

cost then you’re going to drive prices so if you’re spending on a quantity rule instead of a price rule you get very

40:47

different outcomes so this government spending policy is critical in determining the outcomes it’s not easy

40:55

to follow but if you don’t understand it you never get it right okay but if you do understand it you at least understand

41:00

the problem and you can qualify your answer based on your understanding so which they can’t even do well is there a

41:07

difference between what someone might call um you know direct transfers for

41:13

example what happened during covid um yes and what some might call investment

41:18

where the government is is um going out to Tender to companies who are going to build roads and bridges and and set up

41:26

you know childcare servic Etc right so one is the um spending

41:32

power of government is being transferred to somebody else and you gotta hope they do the right thing otherwise if you give

41:40

them too much money and there’s not enough for sale they can cause prices to the government when it spends goes through Contracting and if they think

41:46

the price is too high they don’t have to pay it now if they need it like the military they just go to the highest the

41:52

lowest bidder and they go ahead and buy it anyway and they they will also Drive prices up if we’re buying oil from Saudi

41:58

Arabia at the margin we have to pay the price or turn the lights on so don’t

42:04

forget at the start of this whole thing Ukraine thing broke out and you know saudi’s raised their prices up to like

42:10

120 before it turned around and came down and that is highly influential in what we

42:18

call the inflation indicators which is CPI which is not it’s uh it’s our

42:24

politically determined inflation indicator and I’m arguing with if it’s good or bad right or wrong but it’s not

42:30

the price level okay and so that oil is a big factor in that most things prices

42:37

are derived from that and uh right down to your food supply and everything else and we had all those um Supply

42:44

constraints at the same time and we saw the same pattern of prices rising into

42:51

the peak of oil and then oil coming down after President Biden cut that deal with Saudi Arabia not the prosec

42:57

the journalists they killed Kashi and to make him a deal to get us weapons and

43:03

get him back from Russia they left us to go to Russia for weaponry and things

43:09

like that after president Trump had threatened them with those kinds of sanctions if they didn’t raise the price

43:15

of oil during Co because cut production by two million barrels a day which they eventually did with Russia they got

43:22

Russia to participate they ra rais the price but he was the one who insisted you know in the price was negative on

43:28

the board trade but I think the physical price was about 30 or 40 that needed to be higher because it was ruining our oil

43:34

industry so this whole thing about how to get more us oil output is simplistically based on higher price you

43:41

know we’re going to get high that’s their method of more production it’s get prices up so now there’s an incentive to

43:47

produce it’s capitalist so I would I interpret the idea that we want more drilling to mean we want higher prices

43:55

so more drilling makes sense I don’t know any other way they have in mind of getting more production maybe they’ve

44:02

got something I don’t know about but some subsidy or something I think it

44:07

means that’s what they did last time around yeah so that would be um an

44:12

example of uh in a technical sense industrial policy right the the government ising

44:20

okay yes okay um every it’s all industrial policy right once you have coercive taxation that’s a command

44:26

economy now whatever the government wants you have to sell it or we can’t get the money to pay the tax and it will price

44:33

whatever it wants so the relative value is high enough so that we sell that stuff to the government so we’ll sell

44:38

them sell them planes and tanks because you know the economy can get money doing that easier than making cars and buses

44:45

and fertilizer or whatever you know so they will outbid everybody for what they want and it becomes it is a command

44:51

economy the rest of it’s a market economy the economy that the government

44:57

where the government is spending directly into it yeah yeah yeah yeah because you’ve never heard them not get

45:02

what they want right they get what they want um going back

45:08

to I guess sort of related to quantitative easing but um secretary Yellen has been slowly but steadily

45:16

reducing the duration of yes uh debt issuance right um do you do you think

45:26

this is motivated or informed by um her

45:32

in general or or her policy um Associates starting to sort of

45:41

embrace the view that you’ve been articulating over the last few decades and and

45:48

recognizing yeah so the thing is do they have some kind of master plan to go to a

45:54

zero rate policy so they don’t want to get stuck with all duration and is that what’s actually chairman Powell is doing

46:02

is he coming up with excuses to lower rates because he knows that low rates will lower inflation now that he’s had it backwards

46:09

but he doesn’t want to say he’s had it backwards but by lowering rates the inflation indicators come down so he

46:15

keeps going down to zero you know do they is that what’s behind them

46:21

so I guess there’s an outside chance but just from the people I’ve met I think

46:26

we’d be given them too much credit to keep that secret like that and have a hidden agenda I the ones I’ve known

46:32

there hasn’t been a lot of I’m not saying inside like that it’s

46:37

just I don’t think so I mean you for me the level of confid confidence I’ve run

46:44

into at the highest levels of everything has always been severely

46:50

disappointing and have you seen that Jared Bernstein from finding the money that

46:55

CLI where they ask him why the government’s printing money and borrowing and he just fumbles terribly

47:00

for minute and a half and then they go to something else have you seen that it’s embarrassing but that’s how

47:07

they are they just don’t know so I you know you can that’s why I called the book innocent frauds you know you can

47:14

you know are they innocent or are they trying to perpetuate a fraud it’s almost like it’s more insulting to say it’s

47:20

innocent they don’t understand it but uh and there might be some like that but I

47:27

I mean i’ I don’t think they do I you know again I can be wrong maybe they do and

47:34

they’ve read my book yeah I don’t know I don’t know I would be remiss if we didn’t Circle back to something you just

47:41

said a moment ago which is the idea that if we reduce interest rates we would help reduce inflation I mean that that

47:49

that flies in the face of I guess everything I learned in University which maybe was all wrong but I I love I love

47:56

if you could explained that notion uh to me because I think that’s one of the more controversial things I’ve heard uh

48:02

so far and I am trying I am trying to keep an open mind but that is definitely something that doesn’t uh doesn’t really

48:07

Square for me so my partner and I were talking about this not too long ago you

48:13

know like back in the 80s when we were running fixed income we were saying this you know when

48:18

they’d raise the FED funds rate or greens span would raise the rate we say okay watch you know inflation is going

48:23

to start creeping up now he’s going to take credit for having been a good forecaster when really he’s causing us

48:29

so it’s not something I’ve come to most recently okay this it’s been a long time

48:35

now I had a conversation with Paul Krugman six eight years seven years ago

48:42

when he was he and Stephanie Kelton were on Bloomberg going back and forth with written articles

48:48

about mmt and a job guarantee and I said

48:53

to him like what’s your problem with the job care you know with the def job well if deficit spending gets high enough for

48:59

the job guarantee then the FED can’t raise rates to fight inflation because when you raise rates the extra income interest

49:07

the treasur is going to have to pay will add to deficit spending that’ll cause inflation so the FED loses that tool and

49:16

I said well you know what I agree with you Paul but I think we’re already there now our debt to GP was only 35% held

49:21

public but I’d already started saying that since the early 80s when I first got got into this stuff saying that

49:29

noticing that it’s already happening okay and I said and so I I agree with

49:34

you but I think we’re already there and so I don’t think he says well I don’t think so I think we raise risk we still

49:41

have that tool to fight inflation and we kind of ended we just agreed on that it wasn’t even agreed to screen we both

49:46

agreed that that’s in the new Keynesian model then the question was whether or not we thought that debt of GDP was high

49:53

enough well after covid the de GDP went from held by the public went from 35 to

49:59

like 97 or so maybe went to 100 and I go okay well this is like I’ve seen it the

50:05

effect at 35 it’s you I’m pretty sure that were it’s three times the fiscal impact than it was back then when the

50:12

FED started raising rates I was the first one out there saying this is going to backfire it doesn’t work that way other forecast of

50:18

inflation uh of unemployment going up I said it’s wrong unemployment is going to

50:23

go down not up because they deficit spending SC and it went up to 5 6% of

50:29

which 3 or 4% was interest rate and that’s what happened unemployment came down it didn’t go up went up because we

50:36

had big immigration that number went up but the jobs have always been there and uh and

50:43

it’s still only 4.2 and GDP I said was going to be strong it’s been Gang Busters the whole time 3ish percent

50:49

everybody was forecasting flat to negative you look at the old fed forecast they’re all forecasting as zero

50:55

propensity to spend interest that has to be in their model because it’s the same new Keynesian model only with that for

51:03

that you know assumption would they not be forecasting a strong economy if they had a normal type of P spend interest

51:10

income as they had for other kinds of spending they would have shown runaway GDP and all that and inflation came down

51:19

because oil came down or inflation indicators came down oil came down the supply shocks went out the way but if

51:26

you notice it’s leveled off core inflation has started going sideways started creeping up approaching the FED

51:32

funds rate which has come down so the targets a little bit low instead of five and a quarter it’s four and a half or

51:37

whatever it is and if they bring it down then it’ll level off there you know but and that’s not dayto day that’s you know

51:45

year to year or whatever that’s that’s longer term and there’s a lot of yeah go ahead you’ve taken pains to to

51:51

distinguish between uh inflation indicators and an inflation or an inflation rate yeah yeah can you can you

51:59

measure inflation in a way that’s not using an inflation indicator how would you I can but nobody’s using it so it’s

52:07

kind of a waste of time how you quantify it I look at right

52:14

so I I try and Define it in a way so it all fits into the same you know Theory

52:21

or explanation or model so it all fits the same model so I see you know the

52:26

government that has the dollars that we need to pay taxes so it’s price Center just like Monopoly you know economics

52:33

micro 101 tells you how Monopoly works that’s very simple everything I see substantiates that it all works through

52:39

an Institutional structure which clouds it and everything but it’s still there you can still see it happening and it’s

52:45

still a consistent explanation and and what as we see the price level changing I see it as a series of one-time changes

52:52

and okay they can call that inflation and I I have to go use the words or else nobody’s gonna know what I’m talking

52:58

about but um I can’t every time I say oh well the series of one time adjustments

53:03

has now confounded to like equivalent of a 3.5% annual rate or something I just

53:09

say okay the inflation indicators are going up at three and a half two so will the inflation indicators eventually

53:15

Converge on the actual rate of inflation or are they destined to forever so so I

53:21

now okay so to answer your question I have to decide well what academic Al is

53:26

the rate of inflation where did it come from all that right so academically it’s a continuous increase in the price level

53:33

so under fixed exchange rates that would be a continuous increase in the golds

53:38

Supply the reserves because that’s how you measure the inflation as a change

53:44

the price level is measured by your gold reserves and if you double the gold reserves like San Francisco Gold

53:50

Strike government monetizes it buys the gold spends it prices uh go up you have

53:58

an inflation you have the value of gold the relative value of gold is fixed at

54:03

$35 whatever it was back then it’s decreasing now to the B of everything else because of the new Supply straight

54:10

Supply demand qu quantity Theory it fits there’s nothing wrong with quantity theory on a goal standard it actually

54:16

fits very nicely the reason everybody’s proves that it’s wrong is because we’re on a floating exchange rate well it’s

54:22

the wrong context of course it’s wrong it’s got nothing to not supposed to be right but is right with fixed exchange

54:29

rates so inflation would have been a continuous depreciation

54:34

of the uh currency which would be continuous new gold Supply coming online

54:41

or a devaluation where you devalue gold continuously so you get a change in

54:46

relative value either nominally or in real terms and that would have been inflation under the gold standard so

54:52

what is it under floating exchange rates well

54:58

you know what we have in the gold standard is an interest rate set by

55:04

market forces and it’s generally a positive curve because there’s risk in holding

55:09

gold and uh the indifference levels of people holding paper versus gold you

55:15

know they want to get an interest rate or they just as soon hold the gold because that’s a risk-free asset that’s the top of the pyramid there’s no

55:22

pyramids for floating exchange rates except government and other credit but with gold the pyramid is how far away

55:29

are you from the gold you got the gold in your pocket you got the gold in a bank fall you get the gold certificate

55:35

from the government you’re getting further away you hold a 30-year Bond now you’re getting pretty far away from the gold right so you get this positive

55:42

yield curve and that interest rate implies a continuous rate of change of

55:51

the price level because it’s the price of gold going up you look at the forwards they’re going to going higher

55:57

or lower right discount you know depending on what it is okay

56:03

so whatever gold is that’s the price level so you get forward prices that’s

56:09

the price level and um and so to

56:14

translate the language to floating exchange rate was is inflation it’s a continuous change in the price level so

56:20

when I look at the price level with floating exchange rate it’s different from the gold standard so for example

56:26

when we had that Gold Strike we fix the price of gold at $35 all the prices go up that’s inflation today we have gold

56:34

strike and the price of gold goes down that’s deflation because we’re not fixing so the exact same event exact

56:40

same shift in relative values one’s inflation once’s deflation so they’re different context so we got to kind of

56:47

to be able to use the same words and have them mean something we got to turn it around so inflation there’s a

56:53

continuous change in the price level I see that as forward pricing so if you

56:58

look at spot gold at um was 2600 or whatever it is for gold and you have a

57:05

zero rate policy like Japan and Yen forward gold would be 2600 to Yen whatever that

57:13

is and the Y of course forward would be different from the dollar but that’s that’s how it’s equated that’s how those

57:19

three points meet but in yet gold prices are flat whatever they are I guess it’s would be uh 26 200 60,000 or so times

57:27

100 which 2.6 million or something like that so um but it’s flat all the way up

57:34

okay in the US gold prices are because we have rates at four five% they’re

57:39

Contin going continuously higher forward at a four five perent rate something like that roughly so is gold funded at a

57:48

is gold funded at a substantially different rate forward than other assets are priced forward well it it might be

57:54

but there’s a risk of on a risk adjustment basis they’re all the same they’re all discounted by the risk-free rate which is the treasury rate right

58:02

okay so the funding rate is is let’s say the sulfur curve the Euro dollars

58:08

exactly they’re all pretty close plus or minus a risk adjustment you know okay okay okay so our storage cost you know

58:16

for high storage cost have Chang it so assuming no storage costs and no risk adjustment and the yield curve so and

58:23

what that rate is it’s the price of what you would have to pay for gold right now

58:28

as an agent you know what today’s agents have to pay to buy for forward delivery

58:34

so if you want to buy gold a year from now you have to pay a 5% premium and it’s fair value because the seller of

58:41

gold wants a 5% premium otherwise he can get the price today and put in the bank at 5% right so right four and a half

58:47

per. so it’s indifference levels are 5% higher so the term I call that the term

58:54

structure of prices okay and the term structure of prices are the prices faced by today’s agents

59:01

it was today’s flat yo curve 10 years at 460 you could say that the term structure of prices appreciates

59:09

continuously compounded at a 4 and a half% rate for 10 years so I would say

59:14

the rate of inflation over the next 10 years academically defined as the term

59:20

structure prices is 4 and a half% now whether that means anything or not that

59:25

doesn’t mean Spock price of gold is going to go up continuously or the price of it’s going to go up continuously but

59:31

it also doesn’t mean that it’s not so here’s a question for you do the forward

59:36

prices that are high much higher now you know there price what’s five% compounded

59:43

continuously for 10 years went 70% higher something 80% higher does that

59:49

influence where the price at spot price at Gold is going to be 10 years from now I think it does people deciding to mind

59:56

gold know their costs they know what they’ll pay for people they any kind of forward planning is done based on those

1:00:04

raids it probably does but I don’t have the hundreds of millions of dollars to hire phds like the FED does to do that

1:00:10

correlation but you think it might be useful for them since every time they change the rate they’re changing the ter

1:00:17

strcture of prices they’re changing the academic definition of inflation you know directly one to win so by by

1:00:24

implication has as long rates or whatever as rates rise as the term structure

1:00:29

steepens then the the expectation would be that that that is a in general maybe

1:00:36

over the long term on average an indicator of the price expected price

1:00:41

appreciation of the gold over that over that time period I’d say it’s an influence okay I don’t know how strong

1:00:47

an influence and look central banks on 35% of the world’s go they decide to sell it it’s going down no matter what

1:00:54

the forward price is so right things can change they relative valuable but so when I see the inflation indicators

1:01:01

gravitating towards the FED funds rate over a 50 year period of time you know every there are plenty of resets in

1:01:07

there every time there’s a reset because of oil price shock or something it starts doing it again every time there’s

1:01:13

a break it starts doing it again it makes me think you know there might be something there that I don’t have the

1:01:19

resources to to affirm or deny but but that’s kind of the best we can get to

1:01:25

quantify the acted inflation rate currency regime yeah that’s kind of

1:01:32

the gentle wind blowing behind the boat you know that you have to sail against

1:01:38

you know and I’ve noticed it now part of it is because it’s all deficit spending so when you’re deficit spending for

1:01:43

interest if you that’s different than if they rais taxes to pay for it and we had a balanced budget then I think

1:01:50

everything’s going to collapse but when you’re just deficit spending to pay interest isn’t that like a stock

1:01:56

dividend for an equity or a split you know 5% stock split or something or

1:02:01

stock dividend what does that do to the value of the stock goes down would you classify natural demands for it would

1:02:09

you classify the owners of Treasury Securities then um to the extent that they own those Securities are agents of

1:02:16

the government um I haven’t done that but

1:02:22

I’d say to the when they start spending yeah I’d say PE

1:02:27

as the interest they get is yeah I guess you could I guess depends on what the

1:02:32

further purpose of the analysises I don’t know if I’d make the general case because they’re not doing anything

1:02:38

they’re just sitting there with res balances at the Fed so they’re not acting as agent doing anything when they

1:02:43

bought them all they did was shift their duration of their fed liabilities so they didn’t but to the the private

1:02:50

sector is receiving income from these Securities that could be spent yeah so

1:02:55

they are agents in that sense as getting dollars that fed didn’t have to give

1:03:01

them and they’re not they’re not selling anything yeah that extent they become

1:03:06

AG in a what the fed or or sorry what the government did when it deposited

1:03:12

funds directly in everybody’s um accounts during Co yeah right yeah so it’s like 1.2 trillion of stimulus

1:03:19

checks the interesting thing is they only pay it to people who already have money and it’s proportion to how much

1:03:24

you have so what kind of a what kind of Congress would actively vote to pay $1.2

1:03:32

trillion this coming year in money to people who already have money in

1:03:37

proportion that they are you know how much they already have in order to fight inflation I mean what kind of an

1:03:43

obscenely regressive idiotic policy is that nobody who heard it that way and recognized it could possibly vote on I

1:03:51

don’t think unless they somehow thought I don’t know it just seems so far-fetched that anyone who was properly

1:03:57

presented with it would actually do it but that’s what they’re doing that’s what they’ve been doing for a long time

1:04:03

so you asked me are they aware that that’s what they were doing doing this couldn’t be more regressive plan I mean

1:04:10

if Elon Musk and Donald Trump have a plan to help the high end why do they

1:04:15

want to race they couldn’t I think this gets gets interestingly to to one of the

1:04:21

hearts of the matter right which is that so you’ve got this $1.2 trillion dollar in um I don’t know why my video just went

1:04:28

out but um you’ve got this $1.2 trillion dollar a year going out to oh to asset

1:04:34

owners treasury owners and um you could if you were to reset rates or have a

1:04:41

very different structure to how the government is funded you could take that $1.2 trillion and use it to invest in

1:04:50

you know Bridges nurse well the first thing you can do first thing you can do is stop paying right that long would

1:04:57

stop stop the distributional aspect now if you did that budget deficit would drop to not to first day but it would

1:05:04

drop to one or two% of GDP which would probably cause a lot of slack right fiscal unemployment and now you could

1:05:11

redeploy those resources into something more useful right and uh probably useful

1:05:17

by almost anybody’s you know estimation certainly come up with a lot

1:05:24

better ways topl 1.2 trillion it’s not that you need that money it’s you know

1:05:29

it’s interesting when people talk about money moving and this money could do that you know all it is is debits and

1:05:36

credits right so it’s and in this information AG it’s just dots going on and off you know on some computer screen

1:05:42

or on the you know pluses and zeros and ones on a computer until we get Quantum but it’s still zeros and ones and if

1:05:51

anybody looks at their TV screen and they watch the football game they see people moving across the screen

1:05:56

but there’s nothing moving on that screen you get very close there’s just dots going on and off it’s got the appearance of motion well you know dolls

1:06:03

don’t move it’s just accounts going up and accounts going down and there you know you don’t need the energy from one

1:06:10

dot to light up the next dot or else a person can’t move across the screen right a scorekeeper the

1:06:16

scorekeeper doesn’t need Revenue to be able to credit your account they just credit and debit their own account for

1:06:23

accounting purposes accounting is just uh after the record key they account for it they keep records of it by making an

1:06:29

entry but it doesn’t come from the account they they debit that’s just the when they credit your account that’s

1:06:34

just an entry so they know what they did it’s a record of what happened during the day and if you look at it the

1:06:41

government spends $7 trillion what does it do with credits Reserve accounts of all the commercial Banks mostly on

1:06:46

behalf of their clients it then debits those accounts for five

1:06:52

trillion uh taxes get paid mostly client account the remaining two trillion by

1:06:59

and large decide to shift those dollars uh to from Reserve accounts to

1:07:05

Securities accounts okay and so the two trillion winds up in treasury Securities

1:07:10

now uh formally for formally the 36 trillion is either cash reserves or

1:07:17

treasury Securities they’re all fed liabilities because the FED controls the

1:07:23

composition between those fre places they do it reactively generally to what

1:07:30

the economy needs that’s what they call offsetting operating factors so that uh

1:07:35

their interest rate targets are met with the zero rate target they just have to keep excess reserves and Supply cash

1:07:41

demand it’s so simplest thing you don’t need inbank trading you don’t need anything else you don’t need any

1:07:47

treasury Securities all those people trading treasuries can go out and cure cancer or do something useful

1:07:53

right and if you look the real compliance cost for all these policies how many people are doing things that

1:07:58

are functionally digging a hole and filling it in for massive salaries you

1:08:04

know too often right uh and well earned because it’s a tough thing to do but it doesn’t need happen um I think we’re

1:08:12

losing 25% to 30% of GDP in real compliance costs people’s time that

1:08:19

would be spent otherwise and if you look at that time being spent on I’ll just say public education public health

1:08:27

and transportation public transportation just for three things

1:08:33

uh that enhances the standard of living for the lowest income earners the most

1:08:39

people at the top already have those three things they’re not going to get enhanced and so what you’ve done is

1:08:44

increased the real standard of living of that group which might whatever percent

1:08:50

it is by maybe 50% so we’re sitting on potentially increase a 50% increase in the real

1:08:57

standard of living of the lowest 50% of income earners just by not squandering

1:09:04

real compliance costs without taking anything from anybody you know just uh

1:09:10

people who’ve been digging holes and filling it in or suddenly doing something useful to somebody and uh it’s not going to happen

1:09:18

it’s getting worse it’s not getting better well and also you’ve got a you know the reason why there’s regulations

1:09:23

and compliance is because some subset of actors or Bad actors and um oh yeah yeah

1:09:30

so you know right if you need Bank regulation but you don’t need them to

1:09:36

lend against Financial assets okay uh but given the way the system is structured today yeah that this is the

1:09:43

part where I I continue to struggle given where we are today with the system yeah any I mean I mean if we were to to

1:09:50

to take on some of the the policy uh suggestions that you’re making the

1:09:57

system would collapse as it wait let’s look at the zero rate policy you’ve already done that for 10 years nothing

1:10:02

left then we backed off that was already changing the income distribution numbers

1:10:08

and the GD coish they’re already starting to change and moderate a little bit with a zero rate policy wait Z zero

1:10:14

rate policy created more uh income inequality not less not to no check the

1:10:21

numbers I mean it’s a narrative because asset prices went up Japan they didn’t have any asset price problem with 30

1:10:27

years of it and so those went up for other reasons so to to so we did have asset that is the um what what do you

1:10:35

think the difference is between how things evolved in in most

1:10:42

western democracies and what happened in Japan because I’m with Richard that you know most of my investing life I have

1:10:50

been either strongly or mostly of the opinion that that very low

1:10:56

rates um accelerate asset bubbles I mean for real estate it seems clear and the

1:11:02

IMF just published a very I think a strong case for the elasticity response

1:11:07

of of real estate prices to interest rates but I think it’s it’s less clear in other um in other dimensions but what

1:11:15

why haveen we seen that did we see that in Japan we have seen it here so about

1:11:20

25 years ago I was talking to a guy in Australia a real estate guy i’ down here

1:11:26

in must have been the late 90s I was there in 87 anyway I said how’s the real

1:11:32

estate market he said well he said it’s it’s pretty strong right now he said mortgage rates are 17 and a half perc

1:11:38

but I think if they put them up to 18 it’s going to collapse okay thanks my next call I talked to somebody in Japan

1:11:45

how’s the real estate market well it’s still really slow we’re three and a half% I think if we take it down three

1:11:51

it’s going to get going you know uh look we had a strong housing market in the

1:11:56

late 70s with 15% mortgage rates than we had here even with three and a half you

1:12:02

know if you look at it particularly per capita I I started off in uh 1973 I was

1:12:07

at the savings act we’ had 2.6 million housing starts with 8% mortgage rates

1:12:13

and only 200 million people okay so that’s almost double the population today 340 and 2 million is an

1:12:21

unsustainable bubble with lower rates you know it’s yes the rates have some effect in the

1:12:27

short term at the margin but fundamentally I don’t think that’s driving things we have yeah but how do

1:12:35

you think about the the price of real estate versus medium income which makes

1:12:40

real estate completely unaffordable to the average uh citizen how do you square

1:12:46

that okay we had this question you were going to ask me that You’ never did about yeah in the 1980s how yeah yeah so

1:12:54

what there’s old principle of mainstream economics just like the new cians have

1:12:59

it in their model that rate increases are going to cause inflation now when I asked Paul about that a couple years ago

1:13:05

I said it doesn’t look like it’s causing he said he goes well I never said that

1:13:10

no I think R is still gonna bring it for you know still gonna slow the economy down he still was forecasting a collapse

1:13:16

okay anyway um we have Game Theory right so if you

1:13:21

look at the labor market it’s a disparity of power people have to work to eat which they have to work or

1:13:28

they’re in trouble even if you’re the last guy to be hired the fact that everybody else has a job doesn’t help you if you don’t get one so you’re not

1:13:34

in a better bargaining position because everybody else has a job as an individual the micro yeah business only

1:13:40

hires if they feel like it that day they decide to wait a week they wait you know they’re not nothing bad’s GNA happen they have to like to return on Equity

1:13:47

there’s there so and I’m not saying they don’t have times where they have to hire people but overall it’s a massive

1:13:52

disparity of power so Elementary Game Theory tell you that real wages will stagnate at some kind of subsistence

1:13:59

level which you know vary from society side and and we have other support

1:14:04

unless there’s some kind of support for labor and up until that early at least we had support through labor unions

1:14:10

which were you know pretty ugly way to do it I think I mean you have to support it a

1:14:18

good A large group of people is better off but it’s very uneven and um for whatever reason the corruption and labor

1:14:25

is Sag I why that happens but there something else in it doesn’t have to be

1:14:31

that way but it is and so I’m not against labor UNS per se but I’m certainly against what happened the

1:14:38

corruption yeah yeah that was there and that may or may not still be there so anyway so I don’t I don’t want to get

1:14:43

off in that argument but in the 80s that all fell apart with um competition

1:14:49

International competition rean breaking the oak unions and everything else but

1:14:55

it was largely we had all caply everything you know the automakers would get

1:15:01

together the Unions would strike one they’d agree on something to give raises

1:15:06

in line with productivity the others would fall into line and just raise prices and that was the path of least

1:15:12

resistance for business and business always follows the path of least resistance they want to make money was pretty clear and that went away with

1:15:20

foreign competition so the only reason wber had power was because business had power without big

1:15:25

if business doesn’t have any pricing power labor doesn’t have any power they can just they’ll just shut the firms down there’s nothing The Firm can do

1:15:31

about it and they lose their leverage and that went away and predictably those

1:15:37

lines diverge where the productivity line and the earnings line diverge now part of that is that line I don’t think

1:15:43

includes benefits so you got double check to make sure the benefits are in there but even with

1:15:49

that it is if you look at the real standard of livings what’s happened is you know one wage earner the husband

1:15:55

typically could earn enough at a medium Factory job or at a supermarket job to

1:16:02

support the wife and have two cars and the television set and the kids went to school and they were dressed nice and

1:16:07

had plenty to eat went to college and today husband and wife working is

1:16:14

struggling with that and uh and you know at least on the surface is you know in

1:16:21

some ways worse off and so you could call a 50% decrease in the standard of

1:16:26

living two people have to do the job instead of one and the anxiety level now is much higher and so our prescription

1:16:34

drugs are a lot higher and uh you know everything else that goes with that and

1:16:41

uh if you look at all the Miracles of the internet what it’s doing and companies like Google and Facebook they

1:16:47

just replace Madison out it’s all just big advertising agency thing that’s the real strength of that which is you know

1:16:55

it is what it is we’re spending enormous amounts of energy on Advertising if you look at how much it’s all consuming and

1:17:01

all the data centers and all the AI what’s what’s it all for why are they doing this to sell

1:17:07

advertising which is you know what’s making the system run it’s really interesting if you ban Internet

1:17:13

advertising you know all of a sudden our energy consumption everything else goes way down we’ve met all our goals for the

1:17:20

next hundred years on emissions control and what if we lost all these

1:17:25

people trying to sell us things so I want to I want to pull on a of the thread back to wages so that comes from

1:17:33

what you’re talking about what you’re seeing people struggling that a lot of it is from this disparity of power where

1:17:40

there’s no longer any support we won’t even minimum wage is always seven and a half bucks we’re not even like doing

1:17:46

that at least that used to be sort of a little bit of minimum support so if nobody recognizes that cause then nobody

1:17:53

recogniz recognizes the need for minimum support uh as an Institutional necessity

1:18:00

and so it doesn’t happen and labor gets crushed and our disparities of income go off minimum wage in Australia is I don’t

1:18:06

know 20 or $30 an hours so other people do things about this if we

1:18:12

don’t but is the job guarantee not a potential policy like labor supportive

1:18:19

policy would that shift the power dynamics not a seven and a half dollars an hour so the concept is that you have

1:18:26

to do it from the bottom up because of this disparity of power would you understand that yes now you can

1:18:31

introduce everything from the bottom up so now the job guarantee is $15 or $20 an hour because you want that to be the

1:18:37

minimum wage everything will adjust and you’re going to keep fiscal policy tight

1:18:43

enough so that there are people looking for the job guaranteed job if you don’t

1:18:48

suddenly you have nobody in the job guarantee and you’ve got an inflation going okay you failed but if you keep

1:18:54

fiscal policy tight enough so they’re one or two% of the people in the job guarantee it’s turning over regularly

1:19:00

and you’re introducing other benefits it comes with child care it comes with Healthcare comes whatever you want now

1:19:05

everybody else has to provide those to be competitive so you’re using Market forces to introduce benefits from the

1:19:12

bottom up instead of the top down and so if you want that as public policy that’s

1:19:18

the way to do it now a lot of people like I started earlier don’t want to see

1:19:23

that at public poliy they want to see see somebody desperate so that they will come to cut their lawn for $20 you know

1:19:29

or beg for their money they want to see that happen and they’ll complain if it’s not like them oh I remember when I could

1:19:36

you know call up a repair man and he was there in an hour those are the good old days yeah 15% unemployment turn to the

1:19:42

oil crisis or something you have people showing up really quickly so it depends on how selfish the person passing

1:19:50

judgment on the economy is yeah now do these policies all apply to other uh

1:19:56

Sovereign Nations that have control over their own currency putting the EU aside because they’re monetary Union do they

1:20:03

apply or is there something special about the us as they apply to to the

1:20:09

euro the Euro Zone also but at the level of the ECB and the European Parliament they don’t bounce checks European

1:20:16

Parliament ECB had their trillion EUR a day you know when they spent that money they look the next day to see where it

1:20:22

was and they couldn’t even find it in accounting they just crediting accounts just like the fed well they don’t have a

1:20:27

FIS Union they don’t have a fiscal Union right so so they have this Frankenstein system where there’s a monetary Union

1:20:33

without a fiscal Union and so yes they have a rule they have this policy where we’ll do what it takes to prevent

1:20:38

default which means they can run any debt to GDP they want as long as the European Central Bank approves it and

1:20:45

allows them to keep funding themselves so they sort of have it see here the states have to run balanced budgets

1:20:50

because they’re quote you know presumed to be off on their own so the central government govern runs the 100% deficit

1:20:56

120 deficit in Europe central government doesn’t do it so the states do it somewhere in the public sector they have

1:21:01

to do it or else oh this is what I missed back you know that’s where the net Financial assets come from okay the

1:21:08

public debt whether it’s state at level guaranteed by the ECB or at the federal level here is the equity behind the

1:21:16

entire credit structure that’s a net Financial assets of the economy that are there to support grit and when that and

1:21:24

it’s um it’s in real terms you need so much of that in real terms to support you

1:21:29

know an equity just like apple needs so many dollars in real terms to have a cushion uh and if you don’t sustain that

1:21:37

then everything collapses so in 1979 where the inflation rate was higher

1:21:42

than the rate of deficit spending you had like 12% inflation and 6% deficit

1:21:48

spending the real public debt was collapsing at 6% a year which is crazy

1:21:53

the equity behind their at the macro level the credit structure collaps and we had the worst collapse

1:21:59

we’ve had you know one of the worst collapses we’ve had the’ 08 was the same thing we had the deficit down to 1% we

1:22:05

had inflation running at five or six and the real number might have been the inflation indicators oil I tripled right

1:22:11

it went up to 150 160 and so um we had a total collapse into real

1:22:18

public debt and the whole thing just collapsed there’s no equity insufficient Equity behind the credit structure to

1:22:23

support it we had a big credit expansion and it just collapsed same thing in 2000

1:22:29

the real de deficit went down we had another oil pop back then and um you

1:22:37

know you have a leverage economy because of housing Y2K and everything else budet went into Surplus plus the inflation so

1:22:44

the real public debt was collapsing and it’s just everything caved in and every single time we’ve had a cave it’s been a

1:22:52

consequence of a collapse in the real public debt three years ago fed’s tightening everybody sees the crops I go

1:22:57

what are you what are you talking about we got a 6% increase in the real public debt not well 3% real 6% nominal said

1:23:05

show me one time in history where that’s ever not led to strong growth and nobody

1:23:10

could come up with one but they still didn’t look at it they thought this other thing the high rate hikes would be

1:23:15

more powerful it was they could have been right I mean I I didn’t know what was

1:23:20

going to happen I’m just KN looking at what I was looking yeah yeah well I know you said that

1:23:28

you’ve got a dinner to go to and and 530 5:30 Mar thank you thank you I was

1:23:33

having too much fun here yeah me too um and I and I wanted to to save time to

1:23:39

ask you if you have any sort of investment um views or you know asset

1:23:45

allocation views or what have you the reality is you’ve given us a very detailed framework and explained it very

1:23:51

well over the over the course of the discussion do you want to leave us with with anything um that might be

1:23:57

non-consensus yeah it’s not not this is not a market play but the tips now are

1:24:04

30 years of Two and a Half per. why is the government paying two and a half percent

1:24:09

over CPI when it sells bonds what are you doing you know if there is a spike in

1:24:16

CPI you’re gonna have to pay it which will increase deficit spending they won’t raise tax to pay for it and if

1:24:22

it’s and if it’s large enough that’ll create more problems you’re going to have a Argentina on your hands it’s like

1:24:28

that’s how they all started with this indexation absense and uh linking

1:24:33

their Mexico linking the peso you know the Tessa Bonos linking it to US dollar and the Russian Ru you know linking it

1:24:40

to the US dollar things you know you make promises you can’t keep and you get this uh uh what’s called hyperinflation

1:24:47

which is an exaggeration but you know compounding inflation unver virtuous cycle on the upside and you could have a

1:24:54

currency an inflation that people would call hyperinflation 10 15 20% the

1:24:59

currency collapse going down you know based on it so why are you doing this you don’t not doing it because you’ve

1:25:06

already spent the money it’s just a reserve trade the feder will say or something well you know it gives us

1:25:11

information as to what the markets what do you need that information for like this is nuts sell a billion or something

1:25:17

don’t sell I think 10% of the public debt approaching 10% is tips down it’s growing right so and as an investor not

1:25:25

knowing anything uh to be able to get a real return of 2 and a half% is the chicken

1:25:31

way out you’re not going to get that in anything else you know you look at the Argentine stock market it’s gone up

1:25:37

17,000 per. but in real terms it’s down 10 right whatever down five you know

1:25:43

over the last 10 years so yes the stock market will go up huge n nominally if

1:25:49

you get a big boom but will go up in real terms I don’t know well now they

1:25:55

have Javier Mele cutting deficit and and strengthening the currency lowering

1:26:00

inflation the stock market is up I’m originally from Brazil so a lot of my skepticism uh around these policies are

1:26:07

underpinned by being a child of the 80s having lived through what was called hyperinflation back in Brazil back in

1:26:13

those St yeah I I am faced with uh some cognitive distance of my own in in and

1:26:20

and trying to embrace some of the ideas that you’re espousing here today but I I I appreciate you giving it a try yeah so

1:26:27

um I was in Argentina two years ago met with the Central Bank there was I forget the guy that was a young guy there only

1:26:33

a couple of with S I did a presentation on ASO which is online you can have the link if you want and uh somebody was

1:26:40

saying uh and inflation was 30 or 35 and

1:26:46

the interest rate was 30 or something I’m sorry it’s the other way around inflation was 30 or 35 the interest rate

1:26:52

was 40 or whatever and the IMF was making them keep the uh interest rate

1:26:57

above the inflation rate to have a real rate and I was saying this is CA inflation and it’s it’s going up because

1:27:02

of that from lower levels and for the reasons we’ve talked about over there it’s worse because at

1:27:08

40% interest which is where they are now by the way they’ve only come down to 40 they haven’t come down to anything reasonable they’re looking at 15% of GDP

1:27:17

an interest expense that’s a pretty high number so anyway said and and he agreed

1:27:22

but they had the imfd and there not he could do and he quoted the sergeant Wallace thing from

1:27:27

1987 that’s pretty much the same thing the new Kian model which is what Krugman said when I talked to him way back so

1:27:34

they they agreed with this but they couldn’t didn’t want to weren’t in a position to do anything so since I left

1:27:40

you know inflation went to 40 so they went to 50 infl went to 50 so they went to 60 they went all the way up to 200

1:27:46

before the chainsaw hit right and inflation did come down after they cut

1:27:52

rates or if it’s came down a little bit and after they rates it came down so this the cut rates to 40 or 35 or 40

1:27:59

depending on what rate you look at and inflation somewhere around 35 I don’t think they get much lower than that

1:28:05

unless they keep cut bringing the rates down now that report in the whole meeting is was on the desk of the

1:28:11

Central Bank the head of it he understood it there’s no push back and with him are his staff so they were it

1:28:18

was in front of them so maybe it did get through to somebody who’s not doing anything uh you know now doesn’t have a

1:28:25

job now maybe it got through to people empowered now maybe somehow you know it got pass along I don’t know so I I’ll

1:28:32

just leave you with that so watch to see how much of that you think is attributable to the interest rate how

1:28:38

much of the cutting super kit which is half a percent of GDP or something how much is to just making a 25% cut in the

1:28:47

deficit by cutting rates the low hanging fruit is cutting the interest rate whether they keep doing it or

1:28:54

whether the correlation holds up I don’t know but that I’d say keep an eye on that awesome wow all right we’ll let you

1:29:03

get to your dinner thank you very much thanks for if you have any followup

1:29:08

questions I just email or send them or if you want to do it again let me know phenomenal thank you very much enjoy

1:29:14

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1:29:19

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1:29:25

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oooooo