Warren Mosler finantza sektoreaz: kostu/profit-eko analisia

Entzun, hemen: https://www.youtube.com/watch?v=lAc2KJq2aPE

Patricia and Christian talk to MMT founder Warren Mosler about bond markets, Beyond deflation and degrowing the financial sector

Transkripzioa:

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that creates a lot of volatility when you have mortgage-backed Securities in the financial markets rates start going

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higher portfolios has to sell some and when rates go lower they have to buy some and so you get a lot more volatility when rates change now if the

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FED owns them it just doesn’t care if their loan turns out to be longer because race run higher they don’t care and they don’t do anything so what they

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do when they buy mortgage-backed Securities are when they fund mortgages directly is they take volatility out of the market which I think serves public

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purpose which is why I’ve proposed all mortgages be funded by the central bank and not by the private sector so we

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don’t have all this crazy volatility every time rates change you don’t need the financial sector for the real stuff that gets financed it’s just all like

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people digging holes and showing them in

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this is the mmt podcast with Patricia Pino and Christian Riley

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foreign Y and welcome to the modern monetary Theory podcast you can find us on

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let’s dive in welcome one and all to the mmt podcast I’m Christian Riley and I’m

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Patricia Pino and joining us once again today it’s our privilege to welcome back

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MMD founder Warren Mosler hi Warren hello good morning here good afternoon there so this week was a good week for

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stocks I read the S P 500 Index went above 4 400 for the first time since

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April 2022 yes your response to that on Twitter was pretty good Tailwind from

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the eight percent plus fiscal deficit tell us what you mean by that well if you look at the government deficit for

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the last year it’s close to two trillion dollars which is something like eight percent of GDP and not that that’s

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what’s going to be going forward but it’s probably not a bad indication and that doesn’t include the net

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interest the FED pays on reserve that the FED on some Securities that pay interest treasury Securities and to pay

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for those Securities it creates Reserve balances it pays for them by crediting Reserve accounts of the seller and then

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it pays interest on those accounts and then some of those accounts say a lot of the holders of the reserve accounts to

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shift their money to what are called RRP Accounts at the FED that have collateral for technical reasons some banks need

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those things and they pay interest on those as well and they’re paying the overnight rate on those which is five

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and a quarter percent now I think Which is higher than the interest series have to that they receive on the treasury

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security so the FED is a net payer of interest and it’s accounted for by showing a drop in fed Capital which is

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meaningless operationally but it allows the accountants to make sure they got the they haven’t made a mistake and that

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is just functions the same as the treasury paying interest for the economy people the economy don’t care whether

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they’re getting the money it all comes from the FED some of it the FED is debiting the treasures Council it’s not

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so but it’s all the same so the deficit’s actually higher than that so I’ll throw in maybe eight percent Plus

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or something like that to account for that extra and that extra could be I don’t know a couple hundred billion a

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year it could be a lot so we have this deficit spending that’s not it’s proactive unemployment’s at a record low

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it’s not for unemployment compensation because of the crisis or recession it’s not because of you know collapse and

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income because of a recession that so you’ll see the deficit going up counter cyclically when you get a recession as

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transfer payments go up unemployment insurance goes up and tax receipts fall because of the recession this is not

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that at all this is all proactive during an expansionary phase GDP has been positive for last year and the deficit

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spending has been proactive it’s been Social Security increases military spending and probably half of it four

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percent is from interest expense because the FED has been raising rates so we got this whopping eight percent deficit

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which we I don’t know if we’ve ever seen this in a normal in a peacetime expansion you know coming out of the Great

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Recession of all nine of 08 you know nine with the stimulus I think the deficit might have gotten up to nine

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percent counter cyclically but I never got up you know prosecutively like this so This is highly unusual to have

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deficit spending with unemployment at 50 year was you know deficit spending this height and so that’s driving demand

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and you know the big question is well is any of that interest income being spent and I mean I don’t know I don’t go interview the people or anything like

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that but I could see the GDP numbers and the total spending numbers and they’re all going up as if it was going to

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expand so until somebody shows where else that spending is coming from I don’t think there’s any harm in assuming

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that it’s a contributing factor now maybe if those were just stimulus checks like we sent out under covid more of it

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would get spent maybe only 50 is getting expense or 40 or something but there’s

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enough of it getting spent to drive the economy and it’s going up because treasury security is that mature are the

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older ones that were at lower rates and then the new ones pay higher rates new treasury bills pay higher rates itself

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it’s continuously moving up here and so we’ll see that increase to I don’t know nine percent or something

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before too long and that’s going to continue to drive growth I mean I don’t think there’s any

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mystery that increased government spending all else equal drives growth yet every narrative out there says you

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know recession is going to be you know 12 months from now that’s been going on for a year and they keep pushing it off

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and it’s based on this theory that or this model assumption that higher rates will cause a recession

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through some Channel with long and indeterminate lags somehow but it hasn’t

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happened there’s certainly if you listen to Chairman Powell’s last speech last week he’s they’re definitely questioning

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your whole their models because he just said we’ve been raw every time so whenever we present this argument to

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other economists just generally and those who agree with you they raise a really interesting point and I think I’d

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be interested to hear what you have to say about it but it’s that obviously the people who hold bonds either mostly

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pensioners or people that have already large amounts of savings right who will have what purchase ponds and their

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propensity to consume will be much lower than if the same money was going to the

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working classes people who don’t have savings so how much of this kind of feeding into

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the stock market has to do with people simply having more savings and not knowing where to put them so they just

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buy stocks with it and how much of it is genuinely them going out to spend things

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and creating employment and that feeding into the profitability of these stocks yeah I don’t know

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but I don’t really care why does it matter you know but one

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creates growth and the other one doesn’t or am I wrong I don’t know you can look at the growth in the economy you know in

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the US economy at least is growing and you could say I don’t know housing obviously you know there’s always

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winners and losers right so housing was a loser for a while but even then you know you had housing had an enormous you

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know run up for whatever reason call it a bubble maybe but it didn’t but what happened it went up like 30 percent

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in one year the prices and then we have this interest rate hikes and mortgage activity drops and everything else and

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the prices go flat they go sideways for a while now they’re going back up again that’s not much of a break okay so

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that’s one of the losers on the other side you’ve got all the winners that you’re talking about and

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are they spending their money well housing is going back up with the and the all cash fires if you look at it

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have been there the whole time and it continues to go up and do you get valuation adjustments sure what about

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earnings for stocks earnings for banks earnings for all these corporations look at corporate earnings in general they’re

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they’re way up okay because you’re flooding the economy with dollars you

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know net dollars net spending deficit spending and those dollars go somewhere

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so you try and see if from the data where they’re going so you see corporate earnings going up

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you see back earnings going up we had a bank crisis that lasted about two or three weeks mostly a scare mostly a

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liquidity crisis the banks didn’t actually like lose any money or anything and certainly not because of rates

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wasn’t material enough to eliminate the capital now I know the FDIC botched it up when they made the sale you know it’s

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the miracle of making the blind man lame I used to call it where they take a bank that’s worth a lot in one piece they

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break it up into its pieces it’s when each piece is worth less than the whole which it is and not a lot it was a few

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billion dollars but the other Banks you know SVP Bank two weeks before most analysts were

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recommending buying it because the earnings were good and they knew that they had bonds that were bought with

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lower rates but they also have a lot of deposits that have to stay there at zero rates you know one matched off against

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the other you know until the ftic broke them up but you know and so and then First Republic I don’t know there’s

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nothing wrong with that bank good earnings and everything else and the problem was we called liquidity people

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because of rumors and everything else and fears they tried to get 40 billion

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dollars worth of there’s a 300 billion dollar Bank something like that about 40 billion in deposits people are given

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instructions to the bank to make payments to other Banks they were moving their money to other Banks and

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Story I Heard was SVP put together the collateral they’re allowed to use a commercial loanbook and we’re bringing

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it over to the FED to use this collateral because it’s all going to be documented it’s a lot of paperwork

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and they got there like 15 minutes after the close and so it’s too bad it doesn’t count and

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the banks failed but whatever it failed because so many people tried to move their money to another bank not because

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of they were going to lose it or anything like that they weren’t and no nobody lost any money all depositors

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were paid which is after a few days they realized all a few weeks all deposits were getting paid

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whether they’re sure or not and there was they started using some kind of wholesale Loan program where they could

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pull their uninsured loans and somehow get them into 250 000 pieces so the

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whole thing would functionally be insured and some people just stopped worrying about losing their money and

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the whole crisis went away because it was a crisis of liquidity it had nothing to do with the economy or Banks getting

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underwater because they were borrowing short and lending along it had nothing to do with that and since then Bank

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stocks have been going up Bank earnings are good and there are no crisis we had a legitimate potential crisis with the

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debt ceiling and personally I deferred purchases of doing things because that

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thing had hit would have been catastrophic now that’s passed us and so you know I’ve resumed my normal

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expenditures and I’m sure that’s pretty common that was a serious you know a risk and during that

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whole period of time the government’s deficit spending did slow down they raised interest rates they paid out more just that people were holding back while

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their coffers were continuing to fill and now it’s going to fill out again it’s going to have this burst of

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spending when you said you would defer and you’re spending what was the worry if the debt sailing agreement could not

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be reached you know that the banking system would seize up again yeah well the whole economy could go into a

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downward spiral because if the government can’t spend because of the deficit limits that means people aren’t

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getting the money they don’t have the income which means they’re not paying taxes and so that means the government

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has to spend less and if they spend less and there’s less tax being paid because most of our taxes are transactions based

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so you get a downward spiral that nobody in the media was talking about which

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particularly concerned me is like nuclear weapons and that downward spiral if there’s no end to that that just

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everything kind of goes to zero until deficit ceilings passed you could easily lose 25 or 30 percent of GDP in a couple

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of weeks and I I didn’t want to buy anything or do anything pay off any

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loans or anything I wanted to just stay as liquid as I could into this debt ceiling thing so I kind of crawled up

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into a hole personally like no other people who did the same thing just they’re trying to develop yourself you

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know mental model of what’s going on when the stock market goes up one of our patrons Priya darshan Singh asks when

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the stock market goes up for those holding Equity Securities their wealth

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goes up as if out of thin air what is the corresponding liability for the

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additional wealth thus created it’s a corporate liability so the corporation has a stack of

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liabilities in the equities on the bottom of the liability stack they call the credit stack so the first

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liabilities might be to pay taxes you know then after that they’ve got let’s say senior bondholders and then Junior

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bondholders and then unsecured debt and then after that if there’s anything left over the equity holders get it that’s a

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corporate obligation so if there wasn’t any Equity then first there’s only one share or something then that shareholder would

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get all of that and so it the market values that Equity the market values

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that corporate liability to pay out its profits net profits could we look at it from the other way around and say that

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the liability went up before the market value of the stock itself went up to

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reflect that I think it’s the same thing the market value is the liability it’s like the liability what’s the Bitcoin

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where does the market value come from you know or anything else your house goes up 30 where does that come from you

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haven’t sold it it’s where somebody’s willing to buy it right but it’s not a guaranteed

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liability is it in this case well yeah stocks are just where somebody’s willing to buy it on that day

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at that point in time for a certain number of shares but also the company could turn out not to be as profitable

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as believed sure or more profitable what’s happening is the market has undervalued these companies because it

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was assuming some kind of earnings recession and negative earnings and it just never happened we did have a little

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bit of a setback in earnings because there was a setback for covid and then after covet it was a big burst a profit

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square right and then they come down a little bit but now they’re going back up again as the economy normalized kind of a you know reaction to covet down up and

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leveling off there was volatility yeah just to put a button on this interest income Channel question you know to the

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people are arguing that people who hold government bonds and they’re getting those coupon payments from the

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government they’re already very rich and people that rich have a lower propensity to consume the less wealthy people and

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this is what you’ve just talked about at the beginning yeah they probably do I’m not going to argue with them but if you notice Rolls-Royce has sold out for like

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four years

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Yeah Yeah so basically I’ll say your position back to you and you say whether I’ve understood it correctly it’s just

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well that you know that GDP growth is coming from somewhere and until somebody could come up with an

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alternative explanation this is where I’ve been saying it’s coming from 200 meter super Yachts right yeah

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cut down half the rainforest for the teak decks and look at all the employment you get all the junk all that

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money trickles down to something it’s the biggest case of trickle-down economics and history and I’m not saying

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a lot trickles down or that it’s any Posse I’d ever recommend it’s the most obscenely regressive stimulus policy

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ever the amount of the interest being paid by the US government succeeding what we paid out in stimulus checks and

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they are stimulus chicks but only the people who have money in proportion how much they have kind of an obscenely

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regressive policy is that but that’s what’s going on and the argument is oh it’s okay to be regressive like that because those

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people don’t spend the money it’s like okay well that sets me up nicely for another Patron question which is Eugenio Triano

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is asking now that the rate hikes have stopped and the rate of price Rises I

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mean I’m not sure that they’ve stopped it’s just they’ve had a pause this time haven’t they that’s just me editorializing there well they skipped a

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meeting but they said there’s going to be two more coming even now sir two more okay fair enough so there’s your expectations Spears there right so what

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he’s asking is you know now that the rate of price rises in the US is decelerated do you expect the FED to

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stay put resume their Rises we get to cut rates well we’ve already answered that I guess because they’ve told us what they’re planning to do at this

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point but what will the effect on GDP be if it begins to cut rates or when it

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eventually begins to cut rates is there a danger of a contraction in that case or should fiscal spending counteract

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that because you know what you said is the rate hikes have been stimulatory and finally he’s got one more thing to add

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in here do you expect to see any impact to the larger US economy from the resumption in student debt that is lucky

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likely to happen in October and I suppose it means student debt repayments so in reverse order I’ve heard that’s

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like the payments will be like 5 billion a month so that’s 60 billion a year which is

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two tenths of a percent of GDP you know so something but it’s not catastrophic

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and it’s the question is will that affect those people’s spending how many of those people you know have the money

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you have been anyway and have done well and have equity and is it going to affect their lifestyle I don’t know but

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the data will tell us so there’ll be some in that cohort of people who start

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repaid debts who can’t afford it so they are going to cut back on lifestyle or take out other loans to pay the previous

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loans yeah or get the money from their parents that’s pretty common because parents sort of

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feel they’re supposed to pay for the kids education anyway so they help them with the student loans although there will be people who can quote or quote

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afford the repayments and then that will come out of their income and they’ll have less disposable income I guess

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there’s there will be definitely be those two cohorts but I guess this goes to your idea of like unemployment being

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an unspent income story because there’s an industry behind all of that right there’s the finance industry that’s

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income to them those debt repayments well you know the part of it the

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interest is yeah and so whether that results in unemployment or not is okay

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what do those businesses that get that income now do with that income yeah but I don’t think two-tenths of a percent of

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GDP increase in you know in Psych attacks let’s say it’s just not enough to move the needle right okay it might

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go up a tenth of a percent or something I don’t think it’s enough to do much we’re already at eight percent so let’s

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say the deficit goes to 7.8 so I’m still big so the other question that Eugenio

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asked was is there a danger of a contraction or should fiscal spending counteract that I don’t see much

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dangerous contraction when you’ve got an eight percent Federal deficit because the government itself is directly 25

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percent of the economy indirectly maybe 50 through all that medical payments and

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and I just saw Medicare payments just went way up but anyway and so you’ve got half the economy getting that

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Acres kind of like 16 you know of the high off right that’s like 50 of the

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economy is getting eight percent of GDP so it’s a big number and it’s hard to like imagine any kind of a Slowdown with

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that kind of spending now the exception would be if prices went up faster than the

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deficit spending and I don’t see that happening now I don’t see price going up at eight percent the core pce that the

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FED watches is about four it’s been going sideways now which is what they talked about their forecast has been for

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it to go lower and it’s still to go lower I’m sorry it’s about four and a half maybe five and they’re projecting now 3.9 by the end of the year but like

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chairman Paul said he’s been wrong about this and they’re watching it that’s why they need to have at least two more radiacs to bring this down but of course

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my narrative is it’s supporting it the reason it’s been sticky at high levels longer term not month to month or even

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three months or three months is because the interest rate of five percent acts to support or price level growing at

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about five percent and so that’s what he’s up against now and he doesn’t understand that at an eight percent deficit is keeping demand high enough to

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keep it so that unemployment is going to stay well you’re not going to have any well academic demand causing crisis to

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come down everything’s going to have to be on the supply side so I don’t see that coming down and the

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more they’ve raised race of course the higher it’ll go and so I think you’re going to get a little worried when it doesn’t come down they’re already

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worried and the hikes might exceed 25 basis points if he channels his Paul

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volcker personality which he’s talked about he doesn’t want to be the next Arthur Miller who was disgraced for not

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raising race when he should have which would have been right now and he wants to be volcker who he’s going to talk

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about two percent at a time go from five and a quarter to seven to court to be able to like stop you know if this thing

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starts running away from this level say we’re sort of wrong about this pause with an announcement as

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then yeah I think it wouldn’t surprise me for them to start going higher to try and get ahead of the curves the

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way they say it the housing’s coming back you know we see mortgage applications starting to go up it’s only a week or so but you know they should

21:45

have kept going down we see housing prices start going up we see sales starting to go up looks like they bottom

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the end of November that was the one area of weakness and now that’s turning up it’s not going to be subtracting from

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GDP anymore and with the debt ceiling behind us you know the next quarter’s GDP could be

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higher than the one and a half to two and a half where this quarter is coming in right now and that’s just good

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they’re going to be at a loss what to do and the only thing they can do is raise rate high

22:11

enough to break it down that’s all they know at some point you will cause a recession there why oh let’s look at

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Argentina you know when we were there I was here with Elizabeth a year ago met with the Central Bank rates were like 25

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because inflation was 20 or range for 30 because inflation was 25 or something

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like that I met with the head of central back there and a couple of other people in a private meeting and he said well you don’t have to

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introduce yourself I’ve been following you for 10 years so so that was nice and then he had his analysts with him who

22:39

agreed with me on the interest rate thing saying yes Sergeant Wallace or some of the mainstream guys did this in

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1987 it showed the same thing that if debt to GDP gets high enough and so in Argentina it was the same thing if you

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keep racing rates you’re just pushing up your inflation rate and they said we have to do that we have an agreement with the IMF and why not they kept doing

22:58

it so inflation went to like 30 so race went to 35 and inflation goes to 40 so race goes at 45 inflation goes to 50

23:05

rates go to 55. and just a few weeks ago rates went to 97 because inflation was

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up to 90 or 100 or something and no recession okay no financial

23:16

crisis no banking crisis unemployment’s way down the economy is strong you’re just

23:21

throwing all these pesos at it and yeah most of them wind up getting sold in the foreign exchange markets for nobody

23:27

wants them it drives the currency down drives inflation up and they’re in this inflationary spiral and they keep

23:32

raising rates and feeding Pesos into the foreign exchange markets creating your own inflation so it’s the same thing is

23:38

there not a chance that the interest rates at some point cause some sort of financial instability well it didn’t

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happen in Argentina they’re at 100 now would it in 1979 under volcker

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yeah we had a different you know institutional structure for the last I’d say since the SNL

23:56

crisis in the 80s the bank Regulators are intensely focused on interest rate Sensitivity I had a small bank for 20

24:03

years those guys would come in and they’d do everything they could to make sure you know they had requirements where you had to produce reports showing

24:09

that if interest rates went up you weren’t going to lose money your assets were matched to liabilities if you had a

24:14

five-year loan and five percent you better have a five-year deposit or something to three percent so that you

24:21

were going to make money for that loan so if deposit rates went up you know you’re already locked in or you had floating rates on your loans so the

24:27

deposit rates went up you’re well in the race would go up and they had you test for two three four five hundred basis

24:32

points whatever increases to make sure that your earnings didn’t go down if rates wanna

24:37

and if they did they’re all over you they could shut you down they could take fire management they do whatever they

24:43

want they were not nice feet do you think that you felt it more because it was a small Bank no I think the large

24:48

Banks got hammered on this so I can imagine what a JP Morgan Somebody went through because that’s where they see

24:53

their systemic risk you know if my 20 million dollar Banks feel they don’t care but it was a trillion dollar Bank

25:01

yeah they don’t want to do that so they are all over those guys you know against this you know sure they don’t have that

25:06

kind of systemic risk that they’re doing their models correctly to make sure rate increases don’t damage

25:13

in their Landing policies the rates are charging their terms of the loans it’s all based on that could it not be argued

25:19

though that for too big to fail Bank well for small enough to fail Bank like perhaps yours was Warren they’re all

25:25

over you because they’re like okay give us a reason to shut you down and for JP Morgan they’re all over them going okay

25:32

you’re too big to fail so you know it will tell us what you need first to show you up well no well too big to fail

25:38

means that they’re going to have to pay for the losses right so they want to

25:43

make sure there aren’t any losses and they come in and they see you’re making 10-year loans and you’re borrowing the money overnight they say no could race

25:50

go up you’re going to lose money on that loan we’re gonna have to pay for it so we’re not going to do that now what’s interesting about that which ties back

25:57

to svb bank is these Banks had all these uninsured deposits right so svb bank for 300 billion might have

26:04

had I don’t know I’ll just make something up 100 billion of insured deposits and 200 billion of uninsured

26:09

and so when there was a problem the uninsured guys wanted out because they got scared so why would the Regulators

26:14

allow that many uninsured deposits that could cause a liquidity crisis it’s

26:19

because The Regulators were worried about losing money in terms of a economic bank’s failure

26:25

and in a bank failure like that where they don’t have let’s say svb at 300 million of assets

26:31

let’s say they lost 150 million dollars somehow you know and if they were all insured

26:38

deposits then The Regulators would have to be on the hooks for 150 billion dollars

26:43

but if there’s 200 billion of uninsured deposits where they would take the loss first then after that the insured

26:49

deposits would be okay so it wouldn’t cost the FDI see any money so they looked at uninsured deposits as a buffer

26:55

like Equity Capital almost against the deposits that the FDIC was insuring right

27:00

so they liked it they liked having a lot of uninsured deposits because that meant they weren’t going to have any losses on

27:06

their insured deposits which they didn’t so svb failed whatever but there was no losses on the insured deposits there

27:12

were some losses on the uninsured that they decided to pay but when they were regulating them you know the week before

27:17

the year before that wasn’t part of their equation they were just concerned about whether they would have to pay out

27:22

money on their Deposit Insurance and so that near-term bias towards you know a

27:29

specific policy gave them an incentive to create systemic risk because the uninsured deposits were not at risk to

27:35

that one bank’s ftic you know bailout money they were a risk to the whole banking system because then it would all

27:42

shut down because everybody would you know all the banks had uninsured deposits and they’d all slaved I’ll go

27:47

to JP Morgan or something and then they’d all go under and so the FDIC inadvertently created this huge systemic

27:54

risk which they dealt with but you know when what they were trying to do was eliminate individual back risk which

28:00

they did so they limited individual Bank risks to insure deposits by at the same

28:05

time they created a systemic result the whole thing in that sense was a failure of Regulation they were looking at the

28:10

micro and not the macro and it’s kind of an honest mistake I guess there’s nobody there thinks like that and they’ve addressed it so it’s a

28:18

thing of the past I think which is what happens look Bank regulation evolves as you have problems they do things to

28:25

avoid the problem the next time and I think most analysts appreciate the

28:30

extent to what’s that’s happening they say oh we know how banks are they you can say whatever you want they’re going

28:35

to borrow certain lead law and if they were on the front lines at a bank dealing with Regulators they would know

28:41

they don’t do that anymore yeah they used to they used to do it a lot you know but they don’t do that

28:46

anymore so they’re kind of fighting last year’s War when they’re worried about that consolvency right now and while interest

28:53

rates are going to create a financial crisis I think I think that’s last year’s battle and I don’t think the

28:59

institutional structure now is vulnerable to that kind of risk right now they are vulnerable to unemployment

29:04

going up to you know 10 people not being able to make their payments and then all their assets go bad and then the whole

29:10

thing comes in that’s systemic risk of sale you can’t get around that but not these other things that happen

29:16

during good times just because the FED raised rates okay that kind of sets me

29:21

up for something that another Patron Vincent Gomez was asking he writes it

29:27

would be really helpful if Warren could explain how the banking system is just a residual holder of government securities

29:33

they can either hold the reserves created in the process of government spending or swap them for bonds which

29:38

they often will so why do we have such volatility in bond markets what is the

29:44

point right so the volatility and bond markets comes from the FED sets the overnight rate

29:50

and then the treasury sells longer term security so how do you know what rate is that they’re going to clear at well it

29:57

depends on what you think is going to happen to the overnight rate it’s the overnight rate right now is five and a quarter and you think it’s

30:02

going to go to 10. then they don’t have to Market in general thinks it’s going to go to 10

30:08

then the longer term rates are going to trade up so that you know the yield you receive is equivalent to just keeping

30:15

your money in overnight funds for the next let’s say it’s a 10-year yield for 10 years so if I put my money in the

30:21

bank at right now at five and a quarter and their bank’s now paying the policy rate and you put your money in a 10-year

30:27

treasury note whatever the market yield is that yield Expresses in difference levels it says that my return over the

30:35

next 10 years staying in overnight money getting the policy rate is going to be identical to your return in the 10-year

30:41

treasury security so if the treasury Securities at five and a quarter and the overnight rate is

30:46

five and a quarter the markets are saying you know over time the FED rates can average five and a quarter you know

30:53

right now the 10-year treasury rate might be uh four percent with the overnight race is five and a quarter

30:59

that’s because the markets believe that rates are going to come down from here if I keep my money overnight at five and

31:05

a quarter I’ll get that this year next year I’ll get four and three quarters and I’ll get four the next year and the

31:10

next year I’ll get three and a half and I’m going to average the same that the person in the 10-year note is

31:16

getting now which is four percent so the markets are expressing in difference levels you know and there are some technicals

31:23

there might be exceptionally large auction it might move things a few basis points but by and large it’s just expressing in difference levels so as

31:29

the news changes inflation comes in higher so now the expectation is fed’s going to raise

31:36

rates but what does that mean expectation well you’ll see the 10-year bond go up to maybe five percent because

31:41

the expectation changed from the average over those 10 years is going to be four to the average over those 10 years is

31:47

going to be five and so expectations in the tenure are

31:52

the same thing that expresses expectations of where the overnight rate is going to go

31:58

and that’s how the term structure works when they set the overnight rate and then the market has to figure out what

32:04

it wants to pay for a water term what how much interest it wants to receive or not or pay on longer term Securities to

32:10

summarize that could I say it simply that the volatility in the bond market comes from a speculation on the future

32:17

decisions of the Central Bank yeah it’s a volatility of expectations as to what

32:23

the central banks can do next that keeps changing every time unemployment number comes out every time

32:28

the GDP comes out the expectations of what the central bank is going to do changes so that’s reflected in the

32:36

yields of the longer term Securities okay well that brings us to this side of the pond because there’s a monetary

32:41

policy committee meeting at the bank of England next week the financial press this week reported that our government’s

32:48

borrowing costs at some point Rose above the levels that were hit during the Liz truss many budget Fiasco but this time

32:55

the borrowing costs quote-unquote borrowing costs as I’m going to call them Rose in light of stronger than

33:01

expected jobs and pay figures and that’s reinforced expectations that the bank of

33:06

England will hike rates next week or maybe this week to the people who are listening to this well by the time it

33:12

gets published but what they mean by government borrowing costs going up is that the yield on government bonds in

33:19

the secondary Market went off as I understand it and maybe it’s just me right or where the yields they’d have to

33:24

pay to sell new ones also right okay this is what I’m asking I I have a problem when guilt yields are described

33:30

as what it costs the government to borrow yeah that’s if they sell new ones it’s what it costs them yeah right right

33:36

that’s the cost if they sell new ones right okay then the market is determining that yes by choice I mean

33:42

that’s what the essential bank that’s what the treasury that’s what Parliament wants they want the market to determine it they don’t have to issue those funds

33:48

at all they get these issues three-month bills or whatever you call them there I think it’s just called the three-month

33:53

bun deal you have three months Securities you could just do everything in three months and not worry about the bonds at all now under was trust if the

34:00

bond yields went up that was anticipation that could be inflation or something would happen that would cause

34:05

the central bank to raise rates so let me check this with you guys to see if I’ve got this right Bond Traders this

34:11

week are looking at better than expected jobs and pay figures that came out and they’re thinking the way the VOA are

34:18

going to react is by raising the base rate by we guess 25 basis points yes and

34:23

the bond Traders are reacting to that by selling off guilts which pushes up the yield on those guilts and then the

34:30

newspapers report that as an increase in the cost of borrowing for the government first of all does that bit sound right

34:36

well you know if they push rates up 25 whatever the government issues to borrow is going to be 25 higher roughly but

34:43

they frame it as if the market is imposed a new cost of borrowing as opposed to the whole thing being

34:49

triggered by the government deciding to pay more on it on its existing debt but the government allows Market forces it’s

34:55

a matter of policy that they want markets to do that markets won’t do that unless there’s a policy in place for

35:01

them to do it the policy is they issue longer-term Securities if they didn’t if they only issued three month ponds or

35:07

whatever you call them and then it would just be at the policy rate whatever the bank of England said

35:12

it’s like going to the bank with some money and saying I’d like to save some money with you and then go well how much

35:18

interest would you like us to pay you you know well you know the banks do

35:23

compete for your money so if they say we’re paying three and another bank says four you go to the other bank yeah yeah

35:29

but no Bank goes you know you name it name your price I like the government

35:34

down here the government down here decided the USVI Senate you know passed through a resolution or

35:41

something to borrow money from the banks they didn’t say anything about the banks have you know have to approve the loan

35:47

it says you know the article is written like the government decided to borrow from the banks not that the banks agreed

35:54

to lend them anything which you know half the time the banks won’t do it but they still act like it’s the other way

35:59

around but you know no bank would go you tell us please you know yeah how much

36:04

interest income would you like to get from us you know well the thing is if you tell them four and they’ve got

36:09

somebody else showing their money at three and a half they’ll say thank you very much but we have a better offer we’ll be right back after this message

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37:40

let’s dive back in so the bank of England are also added guilts into the market by quantitative tightening right

37:47

and the FED are doing the same thing with treasuries and another one of our patrons Paul danderand is asking can

37:54

anyone explain why the FED thinks it needs to reduce its balance sheet and what mmt says about this and what’s the

38:01

problem if any with the FED holding treasuries mortgage-backed Securities or

38:07

government agency debt well there’s no problem and I specifically have advocated that they hold mortgage-backed

38:14

Securities but that they actually just fund The Lending in the first place so you don’t even have them just have it on

38:20

the federal Home Loan Bank or Fannie Mae whoever’s doing the lending just have them lend the money through the backing

38:26

system like they do now and just keep those loans on their books and let the FED fund them directly don’t even have

38:32

the agencies find anything in the market and pay 25 basis points for risk perception or something and the reason

38:39

is fixed rate mortgages can be paid off at any time and so they have what’s called convexity

38:45

which means that if I’m an investor and I invest in a

38:51

seven percent mortgage now a new mortgage security it’s going to have an average life because people pay every month of maybe seven years something

38:57

like that five to seven years but if rates go higher that average life could go out to 10 or

39:03

12 years or more because people are gonna with a low rate so I’m not going to refinance it they’re going to be less

39:09

likely to move just like people now with three and a half percent mortgages or post-mortgages went from a seven year

39:14

average life where people would move or pay them off to maybe a 15-year average life because people don’t want to do

39:20

that because it’s a good deal so if I invest in these seven percent mortgages and rates feel higher instead

39:25

of having a seven year security I might wind up for the 15 year security at the same time afraid to go lower everybody will refinance pay mine off and I’ll

39:32

wind up with a two-year security instead of a seven year so afraid to come down it shortened to freights go up it gets

39:37

longer it’s like it works against me in both directions so to make that’s called you know

39:43

volatility of you know interest rates are volatile as the FED moves them up and down the amount of volatility of

39:48

rates you know negatively affects me and that’s called negative convexity these mortgages you don’t know if they’re

39:55

going to get longer or shorter but you know it’s going to be the wrong one they’re going to get longer rates go

40:00

higher and shorter afraid to go lower so you’re gonna get hurt either way and so you don’t buy them unless you get some

40:05

extra yield to make up for them so treasuries 10 years might be four percent you might be able to get six and

40:11

a half on a mortgage if you’re an investor okay that’s a good deal I’m getting six and a half instead of four but you know at least if I get to four

40:17

and rates come down I get to keep it for the whole 10 years and if rates go up it’s still going to be a 10 year it’s

40:22

not going to get stuck with it for an extra five years so there’s a price on that okay and if

40:28

you’re a large portfolio you have to hedge that so if you’ve got billions and billions even smaller for it but if you own these

40:34

things and interest rates start to change suddenly you’ve got much longer Securities than you wanted you got to

40:41

have the same risk you’ve got to sell some so when rates go higher and prices start going down you have to sell some

40:46

and take a loss and the other thing happens if prices start going higher you’ve got to buy some and pay more

40:52

expensive prices so as the markets go up and down you’re always buying and selling at the wrong time

40:57

hoping you don’t waste enough money to eat up your entire two and a half percent Advantage because you got a six

41:03

and a half instead of four right and that’s called Dynamic hatching and it’s the same as option Traders have to do

41:09

the same thing there’s optionality in these things they’re positively convex they have options and so that creates a lot of volatility when you have

41:15

mortgage-backed Securities in the financial markets because rates start going higher they’re all everybody the

41:21

portfolios has to sell some it may it exacerbates to move the same thing when rates go lower they have to buy something so you get a lot more

41:28

volatility and disruption when rates change now if the FED owns

41:33

them or find some it doesn’t care it just doesn’t care the way I say it is it eats the volatility if their loan turns

41:39

out to be longer because rates run higher it’s like they don’t care and they don’t do anything so what they do

41:44

when they buy mortgage-backed Securities or when they fund mortgages directly is they take volatility out of the market which I think serves public purpose

41:51

which is why I’ve proposed that all mortgages be funded by the central bank and not by the private sector so we

41:57

don’t have all this crazy volatility every time rates change just what you wanted to hear huh yeah yeah

42:04

now explain that in a tweet

42:09

so this idea of mortgages being provided by the public sector as opposed to

42:14

private banking which they sort of already are okay but I remember you

42:19

saying a while back and maybe this doesn’t conflict but just to clarify that the private sector was better at

42:27

assessing risk than the public sector and that was one of the reasons why you

42:32

didn’t think the activities of the Commercial Banking sector should go on the public sector or maybe a misinterpreted you so what I said is

42:39

that would be a reason to have the commercial Banks make the decision as to whether they lose money

42:45

in the case of a default all right but once we have insured mortgages they’re all Fannie Mae insured now anyway

42:50

they’re all chitty May insured mortgages so the private sector doesn’t take the loss on those the government’s already

42:56

setting the terms and it was kind of like a buffer stock housing policy right it’s it’s geared towards low-income

43:02

people and they feel the social benefit of getting more people in the houses is worth the risk of having the occasional

43:08

loss you know from a social level and so we’ve done this for a very long time we’ve had generations of Americans grow

43:15

up in the low government Finance home so the Fannie mayor Genie made mortgage rate

43:21

might be six percent where the private sector mortgage rate might have been seven and a half and a lot of people couldn’t have afforded it so it it

43:27

brings it the affordability down to a group of people that wouldn’t have been there before who raised their children in homes instead of in cities or

43:35

whatever and there’s been a decision made that that serves public purpose now

43:40

if you don’t think it does if you think raising kids in private homes is bad then you wouldn’t do them you know so

43:46

it’s part of social policy and it’s been a part of U.S social policy for at least 50 70 years now I think maybe more to do

43:53

that to provide lower interest rate mortgages to lower income people and it worked it hasn’t lost money for a long

44:00

time the only time it lost money I think was in 2008 on a mark to Market it didn’t actually lose money on a cash

44:06

flow basis you know it’s just the market value went down temporarily like who cares so of course you know the right

44:13

wing deemed out a total failure of 50 years of policy the fact that two generations grew up in homes and became

44:19

good citizens and went to college means nothing failure had a mark to Market loss of 12 billion dollars so we never

44:25

should have done that stuff whatever you know it’s political

44:30

they like to focus on the things that they care about yeah yeah right so we’re back doing it and they may still think

44:36

it’s a bad idea I don’t know but it’s a political decision you know what happens what it is and then politically you have

44:41

to decide if that’s what you want so while we’re talking about all these Shenanigans is it fair to say our view

44:47

is Japan Central Banking wise has it about as right as you can get it this

44:53

current environment and have for a while with their zero interest rate policy and their yield curve control is that fair

45:00

to say yeah at the same time you know you don’t have like a lot of Syrian immigrants looking to go to Japan but I

45:06

mean whatever problems they might have you know let’s say that they did have refugees needed to get into Japan you

45:13

know and it created maybe a border crisis or something like that it’s still not going to be solved by you know hey

45:19

well let’s just uh you know 25 basis point hike right but it’s also you know

45:25

I don’t know how much of it is an understanding of how rates work I think their core inflation is still only like

45:30

two and a half percent and coming down quickly and for 30 years been unable to

45:36

keep it at two percent it was always below Target and so they’re keeping rates low to make sure that course we

45:43

set their target before they consider a rate hike and so they still sort of how the narrative backwards as far as the

45:49

headlines go now behind the scenes Phil Mitchell’s been there talking to him I got some Japanese people I talked to not

45:56

in the central banks but you know peripherally they’re associated with them and they seem to understand what

46:02

we’re talking about how the zero rates the high rates are inflationary but that’s not their official narrative the

46:08

official narrative is still 100 conventional that they’ve got a deflation problem still

46:14

and they’ve got to have low rates to make sure they don’t settle back into deflation and that’s their political risk they still try to stimulate the

46:21

economy in a monetary way right and of course we’ve been telling them for 30 years that the zero rate doesn’t

46:27

stimulate the economy and they keep raising the consumption tax because they’re afraid of the deficit spending you know so they’ve still got the

46:33

narrative backwards at least officially now maybe the central backers all have a correct I don’t know who they are I

46:39

think Bill seems to think they do have it correct behind the scenes you know but I don’t have first-hand information it’s nice to see like one

46:47

government in the world telling the bond market what’s going to happen rather

46:52

than the other way around well you know it used to be Greece for the Euro they would set their long-term track memories

46:58

12 11 in the market that’s what you got so nobody remembers that I guess but in

47:04

places like the US and the UK where we don’t have a taste for and yield curve control what do you think about the idea

47:10

of a central bank just being given a higher inflation Target well what’s the point what’s the point of your career of

47:17

control I don’t know how about just stop issuing those long-term Securities so I asked chairman Bernanke that question

47:22

when I had a meeting with him there’s only four of us at the meeting when he was chief economic advisor at the White

47:27

House he’d just been Vice chair of the FED for four years took a year at the White House then became share of the Fed and you know I said one of the questions

47:34

I asked we’re just here to kind of ask innocent questions and they just talked about unconventional monetary policy had

47:40

written a paper with Vince reinhardnick who actually helped me write some of my speeches my OMG speeches so these staff

47:46

guys who knew exactly what I was talking about but I said look given the fact that you know the fed’s talking about buying treasury Securities as part of

47:53

your conventional monetary policy you know given the fact that the treasury selling securities in the market and then the FED fine

48:00

is functionally equivalent to the treasury not selling them to begin with maybe it’s just issuing a three-month

48:06

bill or something I said given that has been any discussion of the FED coordinating with the treasury so the

48:11

treasury doesn’t have to sell them in the FED buy them just have the treasury not issue he says well no there is a difference when we buy them at the FED

48:17

it adds Reserves so clearly he’s killing treasury cells and subtractions he didn’t understand he

48:24

clearly did not have find them any kind of a minimal understanding of monetary operations he

48:30

was all like Ivory Tower Theory even though he did Vice chair in the FED for four years and to that point

48:36

he made a statement later and said well you know when investment picks up it’ll use up the available funds and drive up

48:43

interest rates all right so he’s just been Vice chair of the FED every meeting they have to vote do you want race to go up down or

48:49

be unchanged there was no Market changing rates right they were doing it with a raising their hand to vote so he

48:55

knew yeah he still had the idea in his head that’s investment picked up it would raise rates and so he was just

49:02

totally divorced from the operations level of the Federal Reserve he just had no idea how it worked which came out you

49:08

know during the crisis because he couldn’t even have liquidity for like properly for six months and they did all

49:14

kinds of tarp and other things I also which were totally mislabeled and misunderstood and

49:19

didn’t function the way they thought I’d didn’t understand markets or anything but you know but it all came from this

49:25

academic model that he had at Princeton or wherever he was teaching you know and which was based on fixed exchange rate

49:31

policy obviously but he didn’t understand that distinction he was a very nice guy there’s no conspiracy theory he was trying to do the right

49:38

thing I mean it’s you know very upstanding person personally but it just wasn’t in the skill set they

49:44

just didn’t have it now I think I bring up the higher inflation Target because I’m thinking that would change the game

49:50

completely then because then the markets would be looking at positive job figures

49:56

like the rest of us would be looking at them like oh that’s good oh so if you raise the phase inflation Target to 10

50:02

percent yeah just as a workaround right there they’re emphatic that two percent that’s where it has to be or else and

50:09

chairman Paul wasn’t found about that in the last piece it needs to come down there to help long-term growth and employment and

50:15

everything else otherwise your whole economy is messed up yeah yeah so you have to kill the economy to grow it

50:20

right what do they base this two percent on again price stability you know for investment and for planning and all

50:27

kinds of stuff but like how is it derived why two percent why not three percent well they like zero but they

50:34

think two percent gives you enough to have it gives you some kind of an incentive because your savings and your

50:40

nominal savings is is being willed away it’s kind of like a tax right and so it gives people incentives to work and try

50:47

harder I think that’s my understanding but again that’s just Vibes right but it’s

50:52

not a deficit Target it’s an inflation Target yeah absolutely yeah yeah that’s just five it’s like yeah two percent

50:57

it’s gonna be all right yeah yeah no it is no science there so this is what I’m saying all right

51:03

seeing as you guys are just bothered about a number let’s just change that number and then when wages grow and jobs

51:09

figures get better but you know we’re thinking oh great you know more people are in work and they’re getting paid more than Bond markets are going oh

51:16

that’s terrible news oh no sorry bond market said that’s terrible news because the central bank’s going to raise rates whereas you know if the target was

51:24

higher they’d be like oh maybe the Central Bank won’t raise rates we don’t have to create all this instability of

51:29

the bond market and you know Happy Days right but of course raising rates is great for Corporate America and earnings

51:34

and Banks and everything else yeah at the macro level raising rates is like boom time right yeah yeah the other

51:41

thing is as they raise rates if there’s an effect that slows down housing let’s say

51:46

what kind of already happened okay so housing drop 50 or something it’s not going to drop to zero just because race

51:53

car you know it reaches a core where people have to buy they pay cash whatever and so there’s like a diminishing

51:59

effect on housing as you raise rates higher and higher the initial rates have a larger effect after a while the effect

52:06

slows down right but the effect I’m paying interest out is not it keeps going up you just

52:12

pounding out more interest and so the debt gets larger and the debt to GDP goes up and you’re pounding out more and

52:17

it accelerates up so it’s kind of asymmetrical so you know in Argentina their debt to GDP is only 30 but with

52:24

100 race that means interest is 30 percent of GDP it’s crazy you know so as you go higher their

52:30

interest payments become a higher higher percent of GDP they do less and less damage to the interest sensitive sector

52:36

because they’re already down to whatever they’re going to be with South American countries it’s often said in developing

52:42

countries in general it’s often said that they don’t have a choice and they have to raise rates whenever America

52:48

raises rates or else they lose out how much truth is there in that and what’s the alternative to racing rates well as

52:55

you know mmt doesn’t apply to South America [Laughter]

53:01

that’s fine you said it now it’s on the record so I just did a with that Argentina thing I did a presentation I

53:07

don’t know if you’ve seen it stuck a file on Twitter a couple of times and I’ve had lots of proposals over time but

53:13

look any country can sustain full employment if you’ve got to sell off some of your real wealth to pay external debt because

53:20

politically you think it’s a good idea and don’t want to not pay you’ve got to do that whether you’re at full employment or not if you’re at full

53:27

employment your domestic output is going to be higher you can have more chits to pay your debt with it and so you’re

53:33

going to be better owners your real wealth is you know domestic output plus Imports minus exports right and when I

53:40

say that they say oh so exports are bad so let’s say exports are bad like the

53:45

straw Manning is crazy even with mmt proponents and then they’ll agree that exports being an economic cost means

53:51

they’re bad then it doesn’t sound a morality thing here you know they are what they are well anyway so the thing

53:57

is you can use your domestic current you can go to a zero rate policy and stay there you can use your domestic and stop

54:03

paying all that interest and stop feeding it into foreign exchange markets deal with your problems some other way instead of making it worse not that it’s

54:10

going to cure everything but it takes away you know one of your problems one leg of your problems you know and then

54:15

deal with what’s left and so turkey is kind of interesting they keep raising the minimum wage

54:21

probably big numbers like 50 you know another 50 and so they’re kind of keeping the people in that category

54:28

which are lower income because it’s minimum wage right whole with inflation so you always have winners and losers

54:33

well they’re now all of a sudden all the working population is they’re not losing okay now fixed income people may be

54:39

losing higher income people who have to scramble to try and keep up with inflation but it’s a pretty good size

54:45

constituency is is keeping up and so erdogan wins the election because they vote for and so he’s got to Working

54:51

Class People behind him because that’s his special interest group that he keeps even with inflation by giving them

54:57

raises and bringing in businesses and even with all the external debt and everything else that group in real terms

55:04

is keeping up to a high enough extent where he keeps getting reelected suing the elections

55:09

around us which of course I don’t have any idea and it’s a very Progressive policy in that sense not universally

55:15

Progressive but Progressive from the sense that the real output number one goes to the people doing the real work

55:21

that’s not like the least Progressive thing in the world or anything this is it’s not bad and not that I support the

55:27

society nobody’s trying to you know Syrian refugees trying to go to Turkey either what you said is your adult you

55:33

say you know you know support the regime’s policy right right it’s not my first choice for Public Policy but if

55:38

the working classes are keeping up then why does inflation matter you’re right it doesn’t matter to them

55:44

no maybe their grandmother is some 16 come inserting her but so people can work and get jobs and you know

55:50

unemployment is low and they’re getting a fair wage in their estimation then this is good you know and 100 inflation

55:56

is like eight percent a month so it’s not like you gotta run to the grocery store it’s two percent a week or

56:02

something it’s only two percent right so if you get paid enough Lira for groceries and if you wait a week you lose two percent

56:08

it’s not like you lose it all and they vote for the guy right it’s politically successful

56:13

and that’s that’s all I’m saying right now just before we move on because we had a question from one of our patrons

56:19

John Everson about turkey and we’re just here right now and he was writing after

56:24

holding down interest rates for a long time because like you Warren they believed High rates actually contribute

56:31

to inflation they’ve given up and they plan to double them next week I know

56:36

they’ve got some new Central Banker ins right totally neoliberal type fairly

56:41

young person right and well first of all is that the previous Central Banker is

56:47

that correct to say that they actually believed you know the same as you it wasn’t easy for him to find a central

56:52

Banker to actually do it right you have to fire a couple of them and they found some guy who agreed to do it so they

56:57

were at one with this idea that high rates are contributing to inflation no it was just surgical okay so it wasn’t

57:03

even the central Banker no no they did it reluctantly but yeah I don’t think they liked it hello he may have been

57:09

getting pushbacks from people you know higher income groups who wanted their savings to keep up with them for place because look they were giving index

57:16

deposits out to those people which is a high rate policy but it just didn’t show up in the overnight policy rate but they

57:22

had all kinds of index stuff going on that I’d read about casually I mean study turkeys but it’s all about

57:29

politically who they’re trying to help to stay in power and so John’s asking the currency devaluation and inflation

57:35

has been massive so far it’s going to get worse what’s the mmt analysis I guess we’ve

57:40

been through that now but what’s the cure for turkey so it’s an internal distributional issue

57:46

in real terms they’ve got good growth real terms they’ve got you know high levels of employment in real terms and

57:53

the real wealth of turkey psych for them doing okay doing well and just because

57:58

the numerator keeps changing it works politically for her to gone to let the numerator change and then just keep

58:05

indexing his constituency and so it’s a rational policy from that point of view they’re not serious about

58:11

fighting inflation or anything you’re serious about getting reelected right so you know as long as the cohort they he’s

58:18

prioritizing keeps up it’s all good yeah it’s a problem for some analysts you know because it goes against what he

58:24

learned in school or something but for the well-being of the country it’s not a problem and there are no studies that show high

58:30

rates of inflation or real economic problem they all show that they’re not and that you can get high in often more

58:35

often get high levels of growth with high levels of inflation and just to be correct I said and John said currency

58:41

devaluation I guess he’s talking about depreciation against you know the Lira went from 20 to 23 it’s like why do they

58:48

care they don’t care does that bring us to the Beyonce article about me

58:53

it was an inflation yeah well I mean yeah shall we dive into that yeah

58:58

because that’s effectively it she’s causing more spending isn’t she yeah yeah that’s right so she had a concert

59:04

in Sweden more than 4 000 people flocked to Stockholm to watch her concert Michael Grant the chief Economist of

59:11

danske Bank in Sweden estimated the Beyonce effect that’s what he’s calling it added at least 0.2 percentage points

59:18

to the headline right so my questions are do we think the odd inflation is transitory or secular

59:25

should we create a strategic Beyonce Reserve to cool off the VR inflation I’d

59:31

say it’s a one-time increase in that inflation it’s transitory I think it’s transitory

59:36

they could they cut it on the supply side as well right if they had I don’t know prepared a bit better for this increase in demand

59:43

whilst they had booked the rooms in advance maybe but it’s just a market allocating by price on it it’s inflation

59:49

is a general increase in the price level not not a relative value story that was just a relative value story

59:55

now the fact that I got into the index means wages could have been indexed you could change a relative value story into

1:00:00

a you know inflation story price level story but that’s public policy it’s a one last question from one of our

1:00:07

patrons just to go out on this is from Nick Saba he writes hi Warren I’m

1:00:14

interested in the idea that public sector debts can be thought of as private sector assets on the rare

1:00:19

occasions when the government has been in Surplus such as during the Clinton Administration how did people in the

1:00:26

private sector have any money okay so by money you mean like Bank deposits right

1:00:31

I’d imagine yeah I know you hate imprecise language but yeah I know I don’t know you know money could be you

1:00:37

know why Paul Davis has said if you have an open line on your credit card that counts as money so I I don’t know but in

1:00:44

the private sector loans create deposits Banks buy loans from the borrower and

1:00:49

they pay for them by Credit Union their account and those are balances that the

1:00:54

depositor has and then uses to buy other things so what you have are private sector and public sector deficit and

1:01:02

unemployment is the evidence that the total deficit spending is

1:01:07

insufficient to cover the need to pay taxes and desires to net save in that

1:01:13

currency because unemployment was low say 3.5 percent or something let’s

1:01:19

assume there was no unemployment that would tell you that people preferred to reduce their savings rather

1:01:25

than add to it which is what they were doing because private sector debt was running at seven percent of GDP the

1:01:32

deficit was zero or three percent Surplus or something and those were the

1:01:37

indifference levels people were happy to do that now why were they happy to do that because they were number one that

1:01:44

doesn’t mean it’s sustainable but that’s what was happening at that time now at the time I was saying this is not a

1:01:49

sustainable process to use when God leaves a lot rules language so that’s the language we used back then this is

1:01:55

not a sustainable process to have private sector debt growing at seven percent a public sector was running a

1:02:02

one or two three percent Surplus and you know and drive growth that way but we had a couple of things happening we had

1:02:08

a housing boom where people wanted to buy homes and and take out mortgages we had Y2K where there were businesses were

1:02:15

spending more than their incomes deficit spending to upgrade equipment that they thought was going to sell or Y2K then we

1:02:22

had this crazy.com boom where people were investing into impossible business

1:02:27

plans huge numbers to fund all these.com companies and people were willing to you

1:02:33

know they were voluntarily reducing their savings to do this they were borrowing you know savings is money you

1:02:39

have minus what you owe and it was private sector debt was driving it so we have a strong strong private sector debt

1:02:45

growth and so the private sector was doing the deficit spending that funded the growth the sales the GDP and I guess

1:02:53

maybe a more basic level Nick might be asking well given that the government

1:02:59

was taxing more than it was spending because it was running a surplus didn’t that Hoover up all the money sorry to

1:03:06

use that loose term this didn’t that Hoover off all the money in the private sector and I guess the answer is well

1:03:12

obviously no you know but like you said it wasn’t sustainable yeah so you would

1:03:17

have somebody’s selling their house let’s say somebody buying their house maybe a retired person is selling their

1:03:24

house and a person who just got a.com job is buying it they’d sell it for back then maybe 250 000 was a lot of money so

1:03:32

they’d go to bank and get a mortgage for 250 000. the bank would then buy that mortgage note and and put it in

1:03:39

a deposit for the borrower who would then use it to buy the house and would pay the seller so at the end of the day where there was there were no balances

1:03:46

there was a loan for 250 000 you know the bank had a loan on us books for 250 000 it was a deposit of new money that

1:03:52

wasn’t there before for 250 000 to the person who bought the house sold the house and the person who bought the

1:03:59

house reduced their savings by 250 000 with that mortgage they now owed 250 000

1:04:04

that they didn’t owe before so that reduced their savings so here we had a big reduction of savings okay in the

1:04:10

economy because if this is the only transaction 250 000 which went to the person who sold the house which then

1:04:17

paid fifty thousand dollars in capital gains taxes to the government all right so now if you look at the private sector as a whole there’s a 250

1:04:24

000 mortgage for the young couple the 200 000 deposit for the older couple and

1:04:29

they were net negative as a sector okay which again is not a sustainable process but it went on for several years I mean

1:04:36

as long as credits holding up and there’s enough deficit spending public and private together in this case all

1:04:42

private to drive things that lasted for a while and then it all collapsed of course yeah right right we keep hearing

1:04:49

news that companies are choosing not to list on the London Stock Exchange over here and they’re going elsewhere the

1:04:56

latest example this last week was we soda does it matter to regular people in

1:05:01

the UK If a company lists on the London Stock Exchange or the New York Stock Exchange you know they’re winners and

1:05:07

losers and the thing about the financial sector in the UK I don’t know what it is

1:05:12

now but it was a major like an exporter really it took in net revenues from

1:05:18

offshore and that of course helps keep the currency stable while you’re buying

1:05:23

Imports and running a trade deficit now if the financial sector is not doing that anymore if it’s lost that then

1:05:29

that’s going to affect your real terms of trade and it’s kind of a zero marginal cost export industry except all

1:05:37

the brain drain that’s in it so the idea was you would transition those people into doing something else that’s useful but I’m sure there hasn’t been much of

1:05:43

an effort now they probably just left and they’re working in different places in the world and so it’s a brain drain

1:05:49

out of the company you’re losing your real resources which are the people that capable of earning the money providing

1:05:55

services that have you know Surplus value so to speak and so I haven’t looked at the macro numbers for the UK

1:06:00

but you know so I’m just guessing many years ago at a conference you said my tagline

1:06:05

is the financial sector is more trouble than it’s worth do you still feel the same way yeah just at the macro level

1:06:13

sure it’s probably consuming 25 of GDP or

1:06:18

something like that between Finance Insurance real estate maybe 30 and that’s real resources

1:06:24

people working in these things that could be our curing cancer or something like that and are doing software or cold

1:06:30

fusion or anything instead of digging holes and filling them in which is what the financial sector does and being paid

1:06:36

you know millions of pounds and dollars for doing it which means the rest of the economies as that much less in real

1:06:42

resources in the financial sector you know people are getting all the real resources the largest homes and the food

1:06:48

and the super yachts and everything else and it’s just not my idea of how to conduct public policy

1:06:53

in the UK the financial sector is about 10 of GDP what about insurance is that

1:06:58

part of it I’m not sure actually but even that 10 sounds quite a lot and some

1:07:05

people may argue okay well but you’re exporting some of those services and getting services in exchange but I would

1:07:11

still feel much more comfortable if we had some lower level of finance and then use the rest of our economy for

1:07:17

productive things even if we ended up exporting them the example I give in the

1:07:22

US is when I first went to work in 1973 we had just had 2.6 million housing

1:07:28

starts with a population of something less than 200 million people and all we had were some stupid Savings Banks like

1:07:36

I worked at we made 140 a week we made loans at eight percent and we took in the positive five and played golf at

1:07:42

four o’clock every day and and we were maybe the financial sector was probably less than five percent of GDP years

1:07:49

later with the financial sector at 30 percent of GDP you know 1.8 million homes is a unsustainable bubble with a

1:07:56

population of 350 million people so you don’t need the financial sector for the

1:08:02

real stuff that gets financed it’s just all like Kane said they said it’s casino and it’s just like I just said people

1:08:09

digging holes and filling them in getting paid huge sums to do it because the institutional structure has put

1:08:15

those incentives in place and rewards them and we just don’t need to do that so what level you mentioned it was five

1:08:21

percent before is that where you would say that’s enough or would you place it even lower than that so but with

1:08:27

technology we can probably do it with less right because you can Bank from home on your computer you don’t need all

1:08:32

these Banks all of it was so you know maybe two percent or something and GDP is much larger so it doesn’t have to

1:08:39

grow with GDP maybe grow with population but not with GDP well I think this is degrowth that everybody can get behind

1:08:47

so Warren before we wrap up the exciting news for us in the UK and Europe is that

1:08:53

you are on tour this summer and I’m told you are participating in an event in London on the 1st of September at an

1:09:00

event organized by the garage Initiative for modern body studies can you tell us anything about that or anything else

1:09:05

you’ve got going on I think you probably know more about it than I do I know we’ll be there and I told them whatever

1:09:11

they want to do is fine and they’ve rented a venue to have it so there’ll be room for a lot of people and we’ll see

1:09:17

who’s there and what we’re going to talk about and then the mmt conference in Germany on the ninth I’ll be at that Elizabeth

1:09:24

and I’ll be there and I’m looking for people just recreationally to play tennis with us if anybody’s in that

1:09:30

category I’m like a three five player you know senior citizen

1:09:35

right okay so people should tweet you if they’re in Berlin or London there are

1:09:40

send me an email or Twitter message yeah that’s a great place to leave it we’ve

1:09:46

been speaking to mmt founder and author of The Seven Deadly innocent frauds of Economic Policy Warren Mosler we’ll link

1:09:52

to where you can stay current with Warren and where you can organize a game of tennis with him and we’ll also link

1:09:58

to where you can find out about where you could sign up for the gar initiatives mailing list for updates

1:10:04

about their event that’s going to feature Warren in London on the 1st of September and to where you can find out

1:10:11

more about the mmt conference in Berlin which Warren will also be part of and that takes place on the 9th and 10th of

1:10:17

September also just a reminder that applications for the mmt summer school in poznan Poland close on the 30th of

1:10:24

June you won’t want to miss that because it will feature L Randall Ray Nathan tankus Yan Lang and last week’s guest

1:10:31

Professor Stephen Hale and for our patreon subscribers there’s links where you can listen to the edited audio

1:10:36

highlights of the book launch of the recently published MMC key insights leading thinkers along with many other

1:10:43

Patron only episodes check out the show notes for all of the above but for now thanks so much for joining us today on

1:10:49

the mmt podcast Warren Mosler thank you for having me on and looking forward to doing it again thanks very much

1:10:59

[Applause] [Music]

1:11:05

that was the mmt podcast with Patricia Pino and Christian Riley

1:11:11

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

1:11:17

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

1:11:24

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

1:11:30

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

1:11:38

hope to hear from you [Music]

1:11:49

thank you I should have said dead cat Beyonce that would be a better pun anyway I’m a dad I

1:11:56

have to make jokes like this ok