Applied MMT Podcast #11 | Interview with Warren Mosler (Part 1)
(https://www.youtube.com/watch?v=BwZp8YsL_CU)
In the first episode of this two-part interview, Warren Mosler, one of the “founders” of MMT, joins Adam and Ryan to discuss:
Warren’s perspective on rate hikes vs. other MMTers
Warren’s meeting with George W. Bush’s Chief of Staff, Andrew Card
Warren’s conversations with Paul Krugman on deficits/inflation
Warren’s conversations with Argentina’s central bank on interest rates/inflation
Forward outlook for rate hikes in the US
Recent banking crises in the US
Whether or not anyone at the Fed recognizes Warren’s perspective on rate hikes
Argentina’s inflation situation
Our institutional structure & standard of living
Ryan’s concept of the “real resource dividend
rump and Biden’s tariffs
COVID’s effect on emission reductions
Transkipzioa:
0:00
hello everyone and welcome to episode 11 of the applied mmt podcast I’m your host Adam rice
0:06
Ryan and I have a very special guest on today if you’re familiar with mmt he likely needs no introduction if you’re
0:13
not familiar with mmt our guest today is Warren Mosler who’s considered to be one of the founders of mmt
0:20
Warren spent decades working on Wall Street and also ran his own hedge fund and Commercial Bank
0:26
it was Warren’s experience on Wall Street and his observations that led him to form what has now become known as
0:33
modern monetary Theory so we are very fortunate to have him on the podcast today we touch on a wide
0:38
range of topics that we think you’ll really enjoy we actually talked for about 90 minutes so we’re splitting this episode up into
0:44
two parts and without further Ado we’ll get straight into it we hope you enjoy the episode and thank
0:51
you again for listening okay well uh hello everyone uh welcome
0:57
uh once again to the applied mmt podcast we have a very special guest joining us
1:03
today uh the the founder Godfather of mmt himself Warren Mosler
1:09
um Warren thank you for for joining us today ah good to be here
1:14
looking forward to it yeah and I I just I just really want to start off this conversation and and um just to give you
1:22
an opportunity for a quick little Victory lap oh thanks
1:28
economy’s not looking so not looking bad huh
1:34
I mean Adam and I have uh have been basically we connected last fall maybe
1:40
like late last summer and um uh I had gone to the the levy Institute uh taking
1:46
a a seminar there which was great uh on mmt and um I wrote a paper or excuse me an op-ed
1:54
in my local paper uh that was critical of uh Connecticut Center
1:59
um Chris Murphy uh because he was you know uh you know harping on the the deficit and blah blah blah and Adam
2:07
found it that was how we connected and um and so then since then we’ve been we
2:14
were like hey you know this guy wore Mosler seems to be a little bit on an island about this whole
2:21
you know interest rates yeah um supports our demanding so we’ve been talking
2:27
about this and exploring it and stuff for the last uh you know six or nine
2:32
months and um it’s been remarkable how
2:37
appreciate this has been so thank you so much for Illuminating this well a lot of
2:43
people would say I just have confirmation bias you know
2:50
I mean even look even even the uh academic mmt proponents are still you
2:57
know uh don’t hold money don’t share the uh my opinions on this or my conclusions
3:04
yeah go ahead so I’ve I’ve seen um I think I think Randy did an interview
3:09
with uh with Mike Norman and I think he did another one with um real progressives where he he said he’s still
3:16
expecting you know a crash landing as he put it I don’t know if you’ve I don’t know if you’ve talked to him about that
3:22
but um would love to hear yeah almost about a year ago you know I was in uh I was in
3:28
actually in Portland Oregon and he and met with him and Eric he’s telling me Oh No It’s You know the
3:34
rates are going to crash the economy and uh you know there’s a four-year lag or something like that it’s like okay
3:42
and uh that’ll take us across the next physical cycle maybe but if it doesn’t you know it’s not gonna happen but um
3:49
and I’m going to pointed out the whole thing about it’s you know he talks about Minsky that was his uh
3:55
his uh Professor uh you know who got his PhD with and knew well and he had I set up a
4:02
meeting for me with uh Professor Minsky and unfortunately he died not long
4:08
shortly before we were supposed to have met when I asked Randy at the time do you think he would have been on board
4:14
and understood what we’re talking about he said no I don’t think so but but anyway maybe he’s changed his mind
4:22
since but anyway um you know I was always hopeful that the people we met would would come up for it
4:28
because you know I had a lot of respect for them too so but you know he he operated
4:34
during a different era the SNL era and at a
4:40
time where um you know things did go bad because of interest rate uh sensitivity there were
4:47
major sectors of the banking system in the economy that were borrowing short in
4:53
um you know borrowing at floating rates and lending at fixed rates and then when rates went up which was unprecedented
5:01
um under volcker and even before that then they just lost a lot of money and went out of business I worked for this
5:07
savings loan a savings bank and we just took a deposits at five percent and made mortgages at eight percent and
5:13
everything was fine until rates went up to 10 or 12 and then then the whole business model doesn’t
5:18
work anymore and it’s gone and so that’s and that was the whole uh and I I
5:24
have a red Minsky but you know I seen some of the bits of his videos where he talks about
5:30
you know how these interest rate differentials can bring down the economy and he was absolutely right but since then
5:36
you know regulation has gotten uh much more strict on this type of thing it’s focused on it because it did cause
5:43
a couple of major crashes and and uh when I owned my bank and The Regulators
5:49
came in every year sometimes more than that they zeroed right in on our interest rate sensitivity we had to show
5:55
them that we were not going to lose money if rates went up and we had to model every asset
6:01
we had to make sure it wasn’t going to lose money you know the bank overall was not going to lose money for Richmond and
6:06
yeah and that’s how all the banks were regulated and have been regulated for a long time so
6:13
given that my bias would be that it’s going to be you’re going to get the odd bank that goes Rogan make some kind
6:21
of big interest rate bet loses money but it’s not going to happen like systemically it’s last year’s battle and it’s not
6:28
something that I concerned myself about at the macro level yeah at the micro level anyone Bank
6:33
take itself down but I don’t think the banking system is going to going to take itself down with that
6:39
right and it also Sam just in terms of you know environmental changes it feels
6:45
like you’re the only one pointing out you know debt as a percentage of GDP um it’s a much different story uh in
6:51
terms of interest payments where we are okay and then where we were 30 years ago yeah it’s shockingly different right not
6:58
even 30 years ago just 10 years ago yeah uh you know right in front of the 2008
7:03
crisis when they were raising rates debt to GDP was maybe 50 55 and that held by
7:09
the public was 35. now it’s 120 and 100 or 105 or something like that so uh in
7:15
the debt held by the public is what matters it’s tripled so the impact of a rate hike has tripled now back then
7:22
I was saying that I thought that debt to GDP was could be high enough so that the
7:27
interest rates would not have the desired effect you know when they cut rates Bernanke cut rates from five to
7:32
zero you know I was out front saying uh look they just pulled 400 billion of income out of the economy and I think that
7:39
could be large enough to offset any of the other effects and I think that’s exactly what happened and uh you never
7:46
saw any major stimulus from the zero rate policy because of of the you know effect on the budget deficit but that um
7:53
was only with a 35 debt to GDP and people were arguing against me back then
7:59
same thing with Greenspan when he started uh you know rates were low under
8:04
um uh Bush coming out of the 2000 recession
8:09
and I actually was in a meeting with Andrew carved at the White House he was Chief of Staff it was set up I had a car
8:17
company at the time and one of the guys was the ex-general motors engineer and he knew Andy card because he had worked
8:23
with him at General Motors and set up the meeting for Elizabeth and Idaho my wife Dakota to West Wing and talk to a card about
8:31
the economy which was bad at the time and uh it’s okay to be talking about this
8:36
yeah 100 of course yeah okay okay yeah if I’m off track or whatever just cut me off and pull me back oh this is great
8:42
all right all right so so anyway so we go past all the photographers and they didn’t like take a take our picture
8:49
whatever you know we go into the waiting room and they have these bowls where these miniature Snickers candy bars in
8:56
there and Elizabeth takes a handful and sticks him in her purse for souvenirs so
9:02
so card is a little late because of his last meeting but we got started and he
9:07
kept us there over time you know whatever it was supposed to be a half hour we ran an hour or whatever and first I explained to him why I
9:15
didn’t think the drop in rates to one percent at the time was going to turn the economy around it was because for every dollar borrowed
9:22
there’s a dollar saved and so we were just shifting dollars from between borrowers and Savers we were
9:28
hoping that the low rates would help the borrowers more than it would hurt to Savers but in addition the government
9:34
was a large net payer of interest and back then again debt to GDP was 50-ish percent
9:39
and uh we’re making the deficit small and cutting out all this interest income for people for
9:46
the last year so we’ve been taking away their interest income on a net basis and uh so I really didn’t expect them low
9:53
rates to help and they hadn’t helped and the administration was in trouble and I wasn’t a partisan supporter of the
9:59
administration but when they you know president calls and asks you for your opinion I’m you know he’s the
10:06
elected official I’m going to tell him what I know and so uh and Andy was a card was a very sharp guy you know the
10:12
ex-engineering type so we got along well uh and uh he goes he goes yeah he says you know
10:19
why would you use rate Cuts help that doesn’t make any sense what are we supposed to do so then I mean he was he was a very quick study on that and then
10:27
I showed him on the fiscal side and that is a direct ad he says well how large does the deficit have to get
10:33
I said I think you’re going to need like 700 billion which was five or six percent of GDP or something at the time
10:39
just like any other cycle to turn it around you know and he says well we don’t have much time do we I said no
10:48
well thanks very much and then so after we get out of the meeting a week later the President Bush was asked about the
10:55
deficit and he said look I don’t look at numbers on a piece of paper you said I look at jobs
11:01
and he proceeded to and I got a nice thank you note from card I don’t know where it is it’s an epoxomer and he
11:08
proceeded to get through every tax cut he could imagine okay including retroactive tax
11:14
cuts nobody had ever done that before and he got through every possible spending Bill he could imagine which
11:20
included prescription drugs and the Republicans are still mad at him to this day for having you know put prescription
11:26
drug coverage into Medicare and anywhere else he could but he was just trying to get the deficit up and by the third
11:32
quarter they had gotten it up to like 200 billion and the economy turned
11:38
around and started to improve and it did not I’ll just say it didn’t cost him the election like it like it would have cost
11:44
right okay and so uh but just to say that back then
11:49
um I had the same story I had a lower jet to GDP but the data looked to me like it
11:55
was plenty high at that time to have the effect I thought but there are still people arguing otherwise right
12:03
um before that in the uh the Greenspan
12:09
increases were in the early 90s I think and uh same type of thing where um he
12:15
would have an inflation forecast with the low rates which wasn’t happening and then he decided to raise rates to lead
12:21
the Target and as he raised rates inflation went up they said oh see how good a forecaster this guy is
12:32
and my partner cliff and I used to always joke that it and recognize that
12:40
you always knew what M2 was because it was the same as the interest rate okay
12:45
so if they raise rates from three to five M2 growth would go from three to five because although it’s compounding
12:51
interest and paying out interest in it and so the interest we always looked at interest expense as a
12:59
kind of an inflationary bias and as a driver of
13:04
you know expansion through the interest payments from the government even you know even with again with the lower debt to GDP so and just the last part of this
13:12
a few years ago Paul Krugman and Stephanie Kelton were going at it on Bloomberg I don’t know if you remember that they’re having their back and forth
13:19
on mmt and Krugman was talking about how you can’t
13:24
just go use deficit spending to support full employment you’re going to get in trouble and I called them and asked them
13:30
I said like what’s the problem with this and he said well if you use deficit spending to support
13:38
Full Employment and the public debt gets too high you can’t raise interest payments to
13:44
lower inflation because those interest payments will cause inflation right so this is his argument against
13:51
sustainable and this was in the new Keynesian model and I said well I you know I completely agree with you but I
13:56
think we’re already there so it’s kind of a mood argument because uh you know 50 60 debt to GDP that’s
14:03
more than enough to drive that model and he disagreed he thought we could still raise rates to fight inflation therefore
14:08
we don’t want to lose that tool therefore we shouldn’t sustain full employment it’s like okay you know he’s entitled to his opinion I guess and so
14:16
uh that was only I don’t know a year or so before the covet spending so then after
14:22
the Cove is spending hit or up to debt to GDP is up to 105 held by the
14:27
public or 100 held by public you know I I emailed him a taxi and I
14:33
said well you think it’s debt to GDP is high enough for this to happen now and he said no he didn’t think so so
14:39
[Laughter] um and then I asked him about you know where in the model would it uh
14:46
would it be high enough to happen he said well I don’t you know I don’t remember this conversation I said we’d
14:51
had this conversation he said he didn’t remember the conversation and you know he doesn’t he doesn’t know what I’m
14:57
talking about about his model having you know this in there and but so let me let me give you one
15:05
more as long as we’re doing this so a year ago Elizabeth and I get invited to because
15:11
one thing leads to another to Argentina uh to meet with the Central Bank there and uh we met with the head of Central
15:19
Bank all right with Hector Central back in the guy’s probably down here and the first thing he says is oh you
15:26
know you don’t need to do an introduction I’ve been following you for 10 years so that was good and then they understood what I was saying and they
15:31
agreed and they had one of his research guys there started reading something for me from I don’t know
15:37
1987 or something some mainstream thing maybe Sergeant Wallace or somebody about how in the model if the debt to GDP is
15:45
high enough the rates are going to be right the fiscal effect is going to dominate and in Argentina they were the debt to
15:53
GDP wasn’t so high it was maybe 20 or 30 percent in pesos but their interest rate was 30 percent
16:00
so that meant the peso interest expense was eight percent of GDP which was very high and and I said okay well that money
16:08
is those pesos are going to people who already have pesos don’t want anymore obviously your savings desires have been
16:15
satiated a long time ago and they just sell them in the FX Market the currency goes down that raises the
16:22
inflation rate that you report to cut through the import prices right go up domestic prices go up and so you raise
16:28
rates again and you’re just you know feeding these Pesos into the FX machine
16:33
that’s going down continuously and generating the inflation that’s causing additional
16:39
rate hike so he didn’t disagree with me but you know they said you know we’ve got a pack for
16:44
the IMF we can’t do that and you know we’re still going to keep a real rate and uh it just it was it was more like
16:51
it’s you know cages thing about failing conventionally versus succeeding unconventionally they just weren’t going
16:56
to do it so since we left at the time let me just use some round
17:02
numbers but inflation was 25 and rates were 30. then
17:07
you know inflation went to 35 so rates went to 40. inflation goes to 45 and
17:12
rates go to 50. and unless I checked and rates were over 75 or 80 and inflation
17:18
had gone to 100. okay but if you look at it unemployment’s been coming down the
17:24
economy has been strong uh you know I’ve put as good and the trade picture is
17:29
good of course and uh they’ve and it’s like um you know so how does it end
17:36
so if we’re on that path now with debt to GDP as high as it is and as rates go up
17:42
it becomes a larger larger number right and and makes it you know adds to the
17:48
deficit and so uh we go up to six or seven percent because the economy is
17:53
strong and cpis lingering around five or six or they want to keep a real rate now all of a sudden
18:00
you know we’re driving up demand and and uh inflation shifts higher so the race
18:07
drift higher we’re up to 8 10 12. and you know how does it end do we just
18:12
follow Argentina up to 100 or more before anything happens unemployment’s at a 50-year low after a year where we
18:19
were supposed to be in recession with in the FED got severely criticized for engaging in policy which is going to
18:25
increase unemployment create all this misery instead you know it creates record low on it you know unemployment
18:31
they’re not getting any credit for that in fact they’re apologizing for it because they still want to create higher
18:37
unemployment right they’re Fair it’s it’s a their failed policy this this unprecedented Prosperity is a failed
18:44
policy okay and I I think the uh I think the
18:51
other mmt proponents are equally torn because they don’t particularly want to give the Fed Credit for having
18:58
brought on you know the most successful economy we’ve had in the last year and it’s
19:04
obscenely regressive right it can’t be any more regressive all the interest payments go only to people who already
19:10
have money and proportion they already to how much they already have you know a trillion and a quarter dollars larger than all the coveted stimulus
19:17
said a couple of guys at the FED of you you know unilaterally decided to
19:22
to give all these people you know trillions of dollars a year uh to fight inflation
19:30
the utter absurdity of it Congress and everybody agrees and they’re getting criticized for like not having done
19:36
enough soon enough and you know being wimping out you know unlike volcker who just you know got the job done by the
19:43
way that didn’t act isn’t actually how it cut down they got that history all wrong anyway but that I don’t want to get into that right now but so the thing
19:50
is where does this end so here we are we had a little Ripple in the banking system in March doodle
19:56
liquidity crisis and now we see Bank earnings are coming through stronger than ever and there’s no economic reason for any
20:03
Bank crisis liquidity is a technical reason you know a flaw in a regulatory
20:09
process that causes it’s got nothing to do with earnings or growth or asset quality or anything else it’s kind of a
20:16
random arbitrary landmine that regulation is thrown into the banking system but we’ve gotten through that
20:22
they’ve got a couple Band-Aids on it with these lending facilities you know I mean it probably is going to happen again it’s gotten behind us
20:29
and so that was going to bring down the economy do the feds work for them right
20:34
by uh uh weakening aggregate demand through fear and fear migration through any
20:43
monetary or physical but it didn’t work or it didn’t happen and so now we’re back on path even even in manufacturing
20:50
today came back okay we had a little Ripple in lending but that seems to have not had any effect on the macroeconomy
20:57
and and so uh okay so let’s say the boom continues like do they just keep going
21:03
it kind of looks like it doesn’t it well I was you know I was uh saying like
21:09
literally right before um uh we came on to Adam uh I I actually
21:14
think that this banking crisis potentially does give the FED political cover for for you know pausing a little
21:23
bit on on the regressive rate hikes well suppose they do that they’re certainly
21:29
not going to cut and with a seven or eight percent deficit now we’re we’re at the edge of like over stimulating this
21:36
economy I mean overheat you know whether they pause or not
21:41
all right it’s a question they’re not going to cut to two percent get rid of the fiscal stimulus from the interest
21:47
rates right so uh and a lot of them I think there’s thinking one more hike so just let’s
21:54
push the deficit up just a little bit more right maybe another 10 billion for Ukraine to
22:01
just uh you know make sure the thing eats up enough and uh
22:07
yeah so that that yeah they might do that but I don’t think that removes us not even long term but medium
22:14
term uh pressure I can keep based on their Theory or the way they see it to keep
22:21
raising rates and to not become the next Miller but to be the next voker I don’t know if you remember that Sagar or
22:28
you’ve heard about it but the the is predecessor at the Fed was saying exactly what you’re saying
22:34
and then things started picking up again and so Folker came in and just said you
22:39
know just put the hammer down and raise rates up to I remember fed funds 28 bid no offered on one Wednesday
22:46
okay and that and that did not slow anything down everybody’s earning
22:52
20 of their CDs and their money you know it’s gasoline on the fire until the real public debt collapsed by six percent due
22:59
to the inflation and that and that deflationary fiscals by a stance um you
23:04
know so I crashed everything and it came out nobody was looking for it at all the same way today nobody’s looking for
23:09
rates to be adding to the uh aggregate demand back then nobody was looking for
23:15
the inflation to be in in a subsequent reduction in the real public debt of something like six or seven percent you
23:21
know which is like running a six percent budget surplus nobody looked at that as a deflationary contractionary bias and
23:28
but it did it just crashed everything and right a book in the accredited voker for raising rates now I guess you could
23:34
say the rate increase helped inflation which the cause of real public debt to also indirectly I guess rate increases
23:41
could be given so Warren created a question for you go ahead um yeah yeah do you get the sense that anyone in the
23:48
FED is thinking like this or do you think um you know it’s all conventional monetary policy thinking there
23:54
okay so I I think it’s all conventional policy at least at least at the fomc level
24:01
at the analyst level I talked about this to
24:07
people who I think are still there I think there’s a guy named Dave Wilcox who’s still there in research this was back when I started doing QE I
24:13
got I was at a small meeting they just wanted to know what the financial sector thought about QE and
24:19
you know I said I’m not so much worried about kiwi being money printing or anything like that but I we are seeing
24:25
uh fed profit 90 billion going back to the treasury and that’s 90 billion that of income that the
24:32
economy would have had so you know I see it kind of as a as a deflationary bias rather than inflationary bias
24:38
and we’re having a nice matter of fact boring back and forth
24:43
and that just hit some kind of live wire and he goes you just like it’s like somebody changed the channel or
24:48
something out of nowhere and he goes look we have one lever and it’s interest rates and we believe
24:55
you know lower rates are expenses you know expansionary that’s our story it’s like okay sorry I asked so it it seems
25:04
to me I that must have stemmed from some kind of internal discussion and they
25:09
decide that this is their official position and there’s no more talk about it somehow I don’t know how but those
25:15
are different people back then you know we went through yelling and then Powell’s incident so
25:21
bye so but he’s still around and there’s a guy named Jim Claus is still around I used
25:27
to talk to him about it all the time and they had a guy who only left a couple years ago Steve owner who used to
25:33
study the propensities to consume the differences between borrowers and Savers to see how much what the effect of rate
25:39
hikes would be because uh you know they all know that I mean these guys are good they know the cash flows they know that
25:45
when you raise rates for example you’re shifting money from borrowers to Savers and the only the only way there’d be out
25:52
of effect from your private sector apart from the government spending thing would be if borrowers were hurt more
26:00
than Savers were helped in other words borrowers cut back more than Savers added the propensity to consume an
26:05
interest income was lower for Savers than it is for partners and he would just study that I mean phds real serious
26:12
smart you know not you know by not not a partisan person or anything like that very nice guy and uh he said you know we
26:21
believe that there’s a difference in that you know the high rates will affect the borrowers more than they will
26:26
then the response we’ll get from the Savers he says but you know I’ve been doing the econometrics for a while now and I just haven’t been able to detect
26:32
it okay so they they’re certainly aware of
26:38
it they’ve got people assigned to look at it now I was at I did a presentation with a large pension fund in Canada
26:44
about a week ago they just same thing we’re talking about one of the things I asked him was look
26:50
you’re covered by every research you know they’ve got hundreds of billions under management you’re covered by every research firm in the world
26:56
is it just me saying this or is there someone else you know out there and they said no it’s
27:02
just you so that’s also partially answering your
27:08
question anecdotal well I would I would I would just add to that you know ab and I are doing our
27:15
best over here to uh um you know amplify that message out out
27:21
into um you know the the universe for who so you mean you mean marginalized you mean
27:26
marginalize yourselves yes exactly exactly
27:33
misery loves company right yeah yeah yeah so uh but look it’s always been this way
27:41
right Stephanie Kelton tells a story about when she first met Randy and he told her about you know I said the
27:48
government has to the money to pay taxes come from the government they have to spend first that you know I shouldn’t believe it and she went out and did a
27:54
research paper on it he told her to do a research paper she researched and looked it up and discovered that yeah that’s how it works the point being that uh
28:02
it’s not like the first time you hear until the lights go on for everybody it says there’s something about it that’s
28:08
even more than counterintuitive it’s um it just doesn’t make sense at some
28:13
fundamental level where it doesn’t now that happened to me once
28:19
it was on a trade Merrill Lynch years ago iOS and POS you know what you guys
28:25
Capital markets guys I don’t even know yeah I work
28:30
um at a hedge fund in New York we okay do credit inequities so but not not much rate okay so these were interest only
28:39
that they had taken Jenny May age and uh split up the cash flow so one Toronto
28:46
whatever it was so see the aisle which got only the interest payments and the other one was the pl which got only the
28:52
principal payments and um and so they just allocated
28:58
all the interest to one investor group and all the principal papers to another group so it was the first time they divided mortgages up into iOS and POS
29:06
and I said well how much do they cost and I was he said well the iOS are 55
29:13
and the POS are 55. and uh and how much are the Jenny May hates he
29:19
says well right there at par right now so I said okay so you’re like Market this thing up 10 points
29:28
showing it to me it says I said I I can’t imagine there’s anything left in this for me so I think I’ll just pass
29:34
that was the biggest biggest mistake of my life because you know as it turns out
29:40
the um iOS were probably worth 75 and the POS 25. so even with their huge markup
29:46
uh and I’m sure somebody just realized that by all the POS from them at 55.
29:52
I mean on the items and uh you know made 20 points but I didn’t because I just
29:58
looked at the macro and said okay you’re trying to make 10 points off of me I’m not going to do this right yeah you know
30:03
so I know so I can understand how people can just see something and dismiss it which I did it you know I saw this and
30:11
just dismissed it on the surface and I think it’s the same mental process that causes people to dismiss some of
30:18
these other things I’ve been saying for a long time you know and that keep coming up and uh right yeah what’s shocking to me
30:25
and Ryan and I have talked about this a lot is just you know we’ve been hearing for over a year now that this recession
30:30
is coming and all the data keeps coming back positive but no one’s even changing their opinion in light of the data
30:36
yeah it’s just confirmation bias confirmation bias yeah it’s the biggest case of confirmation by should probably
30:43
ever see in your life if it turns out to be correct you know so you’re living through uh you
30:50
know interesting times as they say where you’re seeing the whole world completely wrong on something this
30:55
simple I have to I know it drives me insane yeah yeah yeah
31:00
and uh no discussion right it’s none I
31:06
try to bring it up at work I mean literally Warren yesterday yeah um my my boss is a founder of our firm
31:12
you know smart guy I’ve been been in capital markets for 30 40 years and he
31:18
just got back from Argentina and was talking about how they have 100 inflation and and you know their
31:24
interest rates are 81 percent and I was like you don’t think that there’s a
31:30
reason those are somehow connected like yeah and what are they going to do about it
31:35
well the raise 220. just keep raising it’ll come down
31:40
eventually right just keep drilling holes in the boat till all the water goes out
31:53
and the thing is your economy is doing well though right real terms yeah I mean
31:58
well that’s what he says that look everyone has a job a lot of people have to work two jobs um but yeah but you know no one can buy
32:06
what he says is that no young people can afford to buy a house um you know everyone lives with their
32:11
parents I’m hearing that I’m just like that sounds like they need to build more houses well but you know I don’t know
32:18
how true that is because they’re saying the same thing here uh-huh you know so I’m not sure how much that that’s about their interest rate
32:25
policy and their inflation policy as it is about you know there are other policies right right yeah income
32:31
distributions and stuff yeah no just just the rest of their institutional structure right because um
32:38
certainly the government or whatever can
32:44
you know their GDP is up so that the allocation GDP could be in more housing
32:49
if they wanted it to be so there’s gdps out doing some things right there’s some activity that’s everybody’s working
32:55
everything there’s full employment their output is at full employment levels it’s just a question of the the
33:02
you know you know what that output is right right what’s the distribution of the output
33:08
how much of it is going into housing versus I’m just going into you know accountants for the banks or something whatever
33:15
you know whatever it is people are doing down there and I’m sure there’s like like if it’s anything I hear you got you
33:22
know have to at least acquire the people digging holes in another quarter filling them and it’s just you know all these
33:28
unnecessary compliance jobs created by the institutional structure that are just in the service sector just bogging
33:34
everybody down and so there’s nobody left to build houses and do these other things right so right so I mean it’s
33:40
kind of it’s got to be that yeah it’s got to be that yeah I mean I talked with my my contract we had some some work on
33:46
our house done and it’s just it’s just hard to find people with the real skills
33:51
to do the jobs that that you know at the Quality that that people Demand right if
33:58
you can’t just hire a guy off the street to do you know to do some some of these shops you’re a licensed contractor you
34:03
know you have you know they have a real liability if if you know they screw something up or if
34:09
um you know like a you know you cover up the wrong gas pipe or something or something else
34:16
right it’s not they’re not just a handyman um so it’s just it’s difficult to find people with the real experience and
34:22
skills to do that and I’m just thinking to myself I’m like well that’s clearly because we had this elevated level of
34:29
unemployment for so long and we have a real skills deficit because we because we because of the high unemployment
34:36
right and the Market’s part of it you know they’ll say oh you know I’d have to you know if we’re paying forty dollars
34:42
an hour we can’t find anybody right who can live it on 40 an hour today you know fifty dollars an hours
34:48
two thousand dollars a week a hundred thousand dollars a year you know if you have a family
34:54
you know and you’re making a hundred thousand dollars a year your wife has to work right and uh and you know you’re
35:00
not driving around a Mercedes and flying a private jet or anything you’re just you know with all the
35:05
insurance costs and everything else and you’re just scraping by and and uh and
35:10
there hasn’t been an adjustment in at that level yet so in that case the
35:16
demand isn’t actually there right if the demand was there you’d see construction workers at 100 an
35:24
hour so so the the um if the market were the really clear
35:31
yeah the wages they’re paying paying tells you what the actual demand is uh-huh
35:36
it’s like everybody wants it but nobody wants to pay the guy where he can live at this same standard
35:43
of living you know that the guy that the homeowner was living at right right you can’t you can’t afford to live in the
35:49
house he’s building for somebody else if you if you are if you start paying people enough so that they could afford
35:54
to live you know in a nice house you’d get a lot of people in that and it would turn
36:00
around so it’s it’s a it’s a market right now responding to like what’s called true demand and
36:07
actually low levels of aggregate demand our aggregate demands is relatively low
36:13
you know you can imagine if you look at when I uh in the 1970s I started working
36:20
1973 and the year before we had like 2.6 million housing starts there were only
36:26
200 million people so today that would be the equivalent of 4 million housing stocks right so today
36:31
we have 1.4 million one point well even during the boom we had maybe two million housing starts with 50 more people and
36:40
it was an unsustainable pubble it’s like how did that happen right it’s like it’s
36:46
obviously not it’s just our institutional structure and the finance sector
36:51
you know used to be five percent of s p profits and now it’s 30 percent right yeah and it’s
36:58
it’s not adding anything you know fire they caught Finance Insurance real estate it’s not adding any real useful output
37:05
to anywhere just people digging holes of people filling it in and it just grows and it’s absorbing our standard of
37:12
living you know that’s what’s holding us back our real standard of living back that’s what’s that’s why we don’t have anybody
37:19
with any skills to do construction but nobody’s connecting those dots right right yeah yeah
37:25
they’re like two like they die too obscure dots to be connected I don’t
37:31
know connecting the dots just it’s not obvious thing but if you look at the real compliance costs of income tax
37:38
how many people are tied up in all the record-keeping that everybody has to keep to make sure they’re keeping proper
37:44
tax records individuals and businesses and all the legal that companies spend on taxes and tax compliance and where to
37:51
locate and corporate structures and all the people going to school to get
37:56
educated for that and although the whole legal system for enforcement and
38:02
you know I suggested it was probably 10 or 15 percent of GDP that’s tied up just in tax compliance in the U.S and I had a
38:10
friend at the University of Chicago business professor he goes I asked him if that was a reasonable number he says
38:15
well he said I think it may be higher someone all right so we’ve got 15 of our workers
38:24
let’s say which is it it’s not exactly linear thing but we’re just involved in tax compliance
38:31
for uh income taxes you know sales taxes when you add sales taxes state and local
38:36
train all the transactions taxes and it probably is 20 or whatever he thought it was all right you know so if you just
38:43
went to a straight property tax right now State local property taxes are maybe one percent of value
38:49
you jump that to whatever it takes to have a you know base for currency demand so it would say it’s 10 flat property
38:55
tax your compliance class basically go to zero I mean you don’t even have to know you don’t have to know who owns a house
39:01
you don’t have to know who’s working if your house doesn’t pay its tax you sell it you don’t even care who the owner is
39:06
right so and it’s already done the local government’s already already have a system for
39:12
before closing on houses for property taxes right okay you just freed up 20 of
39:18
the working population which is 25 or 30 million people right to do something to do something else and
39:25
whatever they do is going to add to the standard of living and so whose standard of living are they going to add to
39:32
right they’re not going to add to anybody at the top because they’re not going to go from three meals a day to four meals just because they have more
39:37
money or something right and they’ve already got medical care right and they’ve already they’re not gonna
39:42
stay spend more time in your private jet or anything so the consumption of the Top’s not going to change much but if it
39:49
goes into like quality Public Services you know health care and things like that Universal Health Care
39:55
it’ll all go to the lowest income groups you know the people are going to buy them up will be the highest beneficiaries and you’ll see anywhere
40:03
from a 50 to 100 increase in their real standard of living for free for free at
40:08
nobody’s expense because it’s all it’s all new wealth you know if 30 percent of GDP added to
40:15
the economy which now would be you know seven and a half trillion dollars of new
40:20
real wealth added you know not a cost but a net gain in real estate
40:28
no which is staggering right and that’s just by getting rid of
40:34
the income tax now who wouldn’t be in favor of that all right yeah now uh but
40:42
when I I made that presentation Stephanie Kelton had me to a presentation in her class
40:48
and there are a lot of uh left-leaning people kids in the class let’s say they were kind of hard they
40:54
were kind of horrified by this whole thing because they said you know that’s a very regressive thing because these
40:59
rich people need to pay their share for their taxes and uh and with this you’re not going to be
41:05
paying anything and you know it’s uh you know so they just they’re just kind
41:10
of like against it from a social Equity point of view and I’m trying to point out from a social Equity point of view the real
41:16
consumption in the economy is going to shift dramatically to the lowest income groups from the
41:22
highest income groups regardless of any one individual’s nominal increase he’s
41:27
just not going to have as much stuff to buy it’s not going to be out there you know the stuff is going to be public
41:33
transportation and Healthcare stuff that he’s not it’s not for sale for him to buy right right but they just couldn’t
41:39
get that far right well I think it’s and and they’re just walked away and they
41:46
would not even touch this thing and it’s the most Progressive thing they
41:53
could possibly do uh and they won’t even like pretend it’s it’s an option
41:59
oh it kind of and Adam and I have been talking about this you know idea a
42:05
little bit and I want to sort of throw this at you sort of stress test it yeah this this this term I I’ve coined called
42:13
the the real resource dividend and I’ve read criticisms of sort of our modern
42:19
capitalist economy um you know people will talk about the so-called Nike vacation of the economy
42:26
right rather than actually doing manufacturing domestically you know Nike
42:31
will Outsource the manufacturing uh and design process to you know Place
42:36
countries like China and basically make gigantic margins from from lucrative
42:42
licensing deals and stuff yeah chapter five chapter five in my 7dif book right
42:47
yeah I have it right in front of me so and I guess what and maybe maybe I’m
42:54
just you know subliminally regurgitating what you’ve already written and I don’t even realize it but but
43:01
this idea of okay well we just freed up real resources right we yeah you know
43:07
all these people can now be employed so it’s like the private sector has delivered like a real resource dividend
43:14
back to this public sector and the public sector refuses to cash the check
43:19
yeah and it’s um you know and we have a 50-year low of unemployment and they say
43:25
uh oh it’s taking away all our jobs it’s like what are you talking about yeah do large countries have more
43:32
trouble finding jobs in smaller countries oh gee you know look at China how many jobs they have because they have twice
43:37
as many five times as many people is that right you know like like the natural state is
43:44
everybody working but anyway um yeah so so we had president Trump
43:49
decide that Canada wasn’t charging us enough for lumber you know so we so he puts a 17 tariff on
43:57
them right to punish them for not charging us enough remember one you don’t you don’t want to send this guy out shopping for you anywhere
44:05
yeah then president then President Biden comes in
44:10
and doubles down he said they’re still not charging us enough so that’s another 17
44:15
Canadian Lumber so this is not partisan politics they have 95 in approval from
44:21
the electorate that Canada needs to be punished for not charging us enough as does China and everybody else and then
44:26
it’s like all right look building costs just what Lumber costs are up for housing we have an inflation problem uh
44:32
that’s uh uh you know that means mmt doesn’t work
44:43
on Monty Python that’s what this whole thing is right the whole public debate on this whole
44:49
thing is like that it’s just to blame it all out of it yeah right it’s like okay like I know it’s my fault it’s just a
44:56
question of how we uh you phrase it Whatever Happened it’s my fault or let’s
45:03
get past that so uh yeah and so that’s exactly what you’re talking about so all these things
45:09
that are enormously to our advantage they just kill these geese Lane golden eggs all the time you know we still do
45:15
okay our productivity is so high if you look at a real productivity not too long ago a couple hundred years
45:22
we couldn’t have this conversation because 99 of the people who have to be in agriculture we’re going to starve
45:27
right okay and then that’s less than one percent is in agriculture now and we
45:33
export food we produce like 8 500 calories a day per person or something and so what happened to everybody else
45:39
were we all unemployed no somehow unemployment’s three and a half percent okay and so uh well manufacturing you
45:46
know well that was everybody for a while now it’s seven percent or something of employment you know is there a shortage
45:51
of stuff no okay so if we went to eight percent in manufacturing you know our
45:57
houses would be filled up with junk and nobody could breathe right so we don’t we don’t need any more productive
46:03
manufacturing capacity obviously we you know it’s like so
46:09
um well where’s the other 90 well it’s just services you know and what’s the limit to that
46:14
well none if we just keep particularly when we keep adding to an Institutional structure that requires
46:21
you know all these people digging holes and filling them in compliance people and you know the legal system and yeah all
46:29
the you know everything else we’ve got Private health care is tying up five billion people that don’t need to be involved in health care they’re on
46:35
administrative and advertising and marketing and promotion you know that’s so we come up with ways to ensure that
46:43
we can’t use this other 90 productively but it’s there to be yeah it’s there to be it’s there to be had
46:50
right you know and uh and to actually if we got efficient at providing the
46:55
services we need we like I was saying before we probably don’t need more than half of it and the other half could be
47:01
you know adding to our real public services or education and you know everything that’s uh you know adds to a
47:08
real quality of life and it’s not it’s not happening in fact the whole thing about climate
47:14
change Global that’s not happening either now there are some changes taking place like electric cars which will
47:20
change a little bit but there’s no uh not not you know there’s like incentives in place
47:27
so there’s uh economic incentives in place for that to happen so it’s happening which is fine but the um if
47:33
you look at what happened during covet the first week or so you know it was the first time you could
47:40
see China from a satellite because the air cleared all right suddenly the emissions are
47:48
down 50 or more harmful ambitions and we won we won the battle against harmful
47:54
emissions we won the battle against global warming right about CO2 we won
47:59
all that stuff and we did it by eliminating non-essentials
48:05
pretty good everybody still had enough to eat enough clothes you know and uh nobody drove because there wasn’t
48:11
anywhere to go not because there wasn’t enough gasoline it just you know we just cut back it was pure conservation and it
48:18
was you know you know voluntary people were getting shot for driving or arrested it
48:25
was pretty much all voluntary and so uh yeah and then we squandered that entire gain
48:32
without even a discussion the whole discussion was how do we get the economy back to where it was stimulus checks and
48:38
unemployment compensation and all this and getting people back to work and reopening and a year later emissions are
48:44
back to about where they were and everybody declares victory so there was like no discussion about hey let’s bring
48:50
this back without bringing back all these harmful emissions what’s any ideas on how we can do that I mean did you
48:57
hear one iota of discussion from anybody on that so like how much of a priority is it not
49:05
much not not enough so when you had actually saved the world Save the Planet whatever that means and uh
49:12
there wasn’t even a discussion about like hanging on to that victory just squandered that whole thing and
49:19
then saw and now we’re talking about maybe we can get down in 30 years to where we were two years ago right right
49:26
right right yeah I actually I don’t know sorry yeah go ahead warrants right I’m sorry I’m
49:33
not trying to like push the agenda although it’d be nice I’m just pointing out like just pointing out the reality
49:38
of where we are right and I I you know I was thinking about a similar thing uh you know during
49:44
covid in this push for remote work and there were a lot of benefits of that
49:50
you know people were moving to towns that you know that there wasn’t a lot of activity in these towns previously and
49:55
there was affordable housing in these towns and maybe we could you know if people are working remotely maybe we can
50:00
get people moving to these towns and rebuilding these houses and rebuilding these communities and now the push is
50:06
just oh everyone has to be back in the office in cities that are getting more and more unaffordable you know and
50:11
that’s just a conversation that also isn’t being had yes right right yeah
50:17
yeah we talked about in the last episode I mean so uh we visit uh my company we
50:24
visited our largest investor uh up in um uh outside of uh Hartford in
50:31
Farmington Connecticut and they were talking about I mean the vacancy rates in Hartford it’s it’s like horrifying
50:38
it’s like 50 in in Office Buildings and that’s before considering the actual
50:45
like volume foot traffic that uh that that that that they’re getting so I’m
50:51
just sticking to myself I’m like what a waste of substantial real resources like why
50:58
would the government not come in and repurpose that to something useful you know make it like a uh a Child Care
51:05
Center or or you know a public library or something like it just
51:10
um it’s just it’s extraordinarily wasteful and it doesn’t really seem like you know if there’s no bid for that
51:16
asset like you know the yeah it’s not inflationary to you know for the
51:22
government to come in and use up something that’s not being used yeah well you know or the private sector
51:28
can you know they repurpose space and shopping malls now to all kinds of things right right so uh yeah I don’t
51:36
know what they would do with these Office Buildings but I don’t know just make them into resonances I guess
51:42
yeah I know I know New York City um I think the I forget what it was
51:47
exactly but I think one of the first major like transformation projects to building uh I believe either just went
51:54
under construction or just reopened uh they turned a massive office building it used to be um the New York daily news’s
52:01
headquarters into residential you know progresses
52:08
sure sure so you know in a large cities are more resource efficient than this
52:14
rural areas I think last I saw in terms of like energy
52:20
yeah yeah per capita yeah that makes sense that makes sense
52:25
all right everyone that wraps up the first part of our two-part episode uh our interview with Warren Mosler we hope
52:32
you really enjoyed the conversation the next part is just as interesting so thank you again for listening if you
52:39
are not a subscriber it’d be great if you could subscribe and we will see you next time
oooooooooooooo
Warren Mosler: elkarrizketa, 2023, 2.partea
Applied MMT Podcast #11 | Interview with Warren Mosler (Part 2)
(https://www.youtube.com/watch?v=lQfBrOJnurg)
In the second episode of this two-part interview, Warren Mosler, one of the “founders” of MMT, joins Adam and Ryan to discuss:
– Warren’s take on the inverted yield curve
– Cost of capital & entrepreneurship
– Effects of low interest rates
– Where does additional interest income go? Is it driving growth?
– Interest rates and equity valuations
– Fiscal contraction in early 2022
– Lack of conversation around fiscal policy as opposed to monetary policy
– How oil prices are determined
– Oil prices as a tail risk
– HTM securities & bank regulation
– Framing the national debt as the “national credit”
Transkripzioa:
0:00
hello everyone and welcome to episode 12 of the applied mmt podcast this is the second part of our two-part
0:07
interview with Warren Mosler one of the founders of mmt as usual thank you for
0:12
listening and we hope you enjoy this episode hey so one one of the uh reasons I
0:20
reached out Warren was um you know because we we try to bring uh you know we try to take mmt and you
0:27
know we’re trying to expand the pool of people who might be interested in mmt and
0:33
um you know obviously you have uh you know a great uh history in in financial
0:39
markets and um so one thing that investors and analysts who are not particularly macro
0:46
economics you know inclined um uh you know reference as as you know
0:53
proof that a recession is right around the corner is the inverted yield curve and so you know in that kind of vein
1:02
right like you know we have uh financial markets people and stuff uh listening to this podcast like could you just kind of
1:08
explain what that actually is how useful it is and maybe maybe give some insights
1:15
into the the institutional structure of the rates Market because it’s not it’s not really I think I mentioned before it’s not really a mark I’m that familiar
1:22
with I do all high yield inequities so yeah so uh
What is the yield curve
1:30
you know what it’s saying is that market participants believe that um
1:36
rates are high enough or somewhere near High Enough there will soon be high enough where
1:42
they will create a recession or some situation where the FED will then be cutting rights and
1:48
cutting rates aggressively and uh and so the
1:55
reinvestment rates for uh you know for for forward time periods are lower and
2:01
lower and lower so if I have uh money I want to invest now for three months uh I
2:07
can get maybe five percent or something like that if I say okay well I’m gonna have money coming in in two years what
2:13
can I invest it at uh you can only get maybe three and a half or something like that and that’s called the um
2:21
that’s what’s up that’s what’s behind the yield curve the investment rates going forward for short-term Investments
2:27
and log rates are nothing more than a series of short-term rates and
2:33
so the um two-year note the two the yield for a two-year investment would be
2:40
uh where buyers and sellers come together lenders and Savers come together and uh they’re in difference
2:46
levels about what’s a fair rate uh would be the what they believe is going
2:52
to be the average of you know three month rates over the next two years because if they thought three
2:58
year rates are going to be a lot higher they wouldn’t buy the two-year note at uh four percent or whatever say one and a half five six
3:04
or seven and uh and so the actual yields of of funds and other
3:13
interest rates Securities are in difference levels between buyers and sellers between investors and
3:18
savers um and so what the yield curve is is a forecast of where
3:25
investors Savers and lenders think you know or kind of agree or settle on where
3:31
rates are going to be that those are the levels they trade where they are willing to buy or sell but they agree rates are
3:38
going to be as time goes on and inverted means to forward the rates are as you go
3:44
further out to yield groups you buy a two year three or four year you get lower and lower yield because investors
3:49
agree that uh the highest probability you say yields are going to be a lot lower and so
3:54
they’re half the buy the investors are happy with those yields the borrowers are happy with those yields and uh and
4:01
so they’re just it’s a market consensus it’s just an expression of the market now the market can be wrong but
4:07
historically the Market’s been right more than it’s been wrong and so the yield curve has been a good indicator but that’s all it is is a market
4:14
forecast there’s nothing more in there there’s uh uh and the leading indicators of
4:21
that are much the same thing they’re more forecasts than they are of
4:27
actual things such as industrial production or consumer
4:32
spending that are leading indicators of of what the economy is going to do there
4:38
are more things like the yield curve which are just forecasts of what the Market’s going to do so we’re loaded
4:44
with forecasts right now and uh the if you look at the feds forecast they’re forecasting a recession for
4:52
the rest of the year basically they they think the whole year is going to be flat and the first quarter is now coming into
4:58
two and a half percent so for the whole year it’d be flat it’s got to be down somewhere in the rest of the year right
5:04
you know it’s average flat and uh the two and a half I’m giving you is here we
5:09
have to Fed GDP forecasts notice how we’re forecasting the past we’re trying to forecast the first quarter which
5:15
ended March 31st economists get paid to forecast the past and Goldman Sachs is
5:20
forecasted at 2.2 I think or something something to be proud of
5:31
all right all right so if you look at the forecast
5:36
fish forecast for the past it means the future is going to have to be very negative uh which is hard to imagine
5:43
starting with unemployment at a 50-year low and job growth at a very very high and of course they say
5:50
nobody wants to work any more than they’re getting three or four hundred thousand new hires every month at least at least those guys want to
5:57
work maybe next month nobody will want to work uh and you look at the
6:04
Atlanta fed wage tracker I think I last saw six percent growth rate and there’s some indication that wage growth has
6:11
been slowing no wages so there’s but there’s it all indicates there’s good demand uh and of course when you get a
6:18
lot of new hires your overall wage growth is less because the new hires tend to come in at lower wages
6:24
it’d be different if they were didn’t have any new hires and then all you have is the increases you have to
6:29
give people already working in a tight labor market you get a different number so just the fact that there’s so many new hires is
6:35
strong economy but it also was Works to keep wage growth you know sort of like where
6:42
they like it so I don’t know if I exactly answered your question about the yield curve well I’m gonna fine-tune
6:48
that or maybe yeah maybe uh fine so like I’ve heard people try to make the argument that there’s
6:55
that they’re like you know the yield and very yield curve uh mechanically slows
7:01
down Bank lending um how does it do that I I think the argument is that
7:09
um you know Banks can even the reinvestment rates are uh for the future
7:14
are insufficient to you know versus um just saving oh well if they were then
7:22
the rate would be there because that is the rate where okay
7:31
you know that’s like saying the market is wrong the Market’s not wrong the market is what it is right right it
7:39
might its forecast might be wrong but those are real levels where real buyers and sellers are coming together and
7:44
agreeing and voluntarily happy with those two sides and uh and if somebody comes into the
7:51
bank for a while and then the bank looks at its cost of funds marks it up three percent offers a loan
7:57
you know the rates are what they are right right yeah yeah that you know the
8:03
I mean it’s so funny like like the rates are what they are I I was going to try to say before like all this obsession
8:10
over the rates level for you know expansion or not it’s like
8:15
how I’ve never heard of an entrepreneur um saying oh rates are low I should start a business
8:21
yeah right it’s like oh I see a business opportunity I need a loan what’s the rate
8:27
yeah I know right you know say I you know this is my sit these are my sales forecasts I can get this price
8:35
which is enough to cover uh my expenses and leave me with a 30 margin now part
8:41
of his expenses are the cost of capital so the cost capital is in there and if
8:47
if the cost of capital if it doesn’t work the cost of capital is what it is he says all right this model works with
8:53
a price 10 percent higher it doesn’t work with the price I’m forecasting can I get a price ten percent higher and
8:59
he’ll do a market study or whatever to see if he can sell at the at the price and if you can any
9:04
tries to fund it so what what determines whether he can get 10 percent higher well it’s where
9:12
you know the buyers have to have the money to spend he has to be competing for Consumer dollars that are out there looking to be spent and those consumer
9:19
dollars are fed pretty much directly but certainly indirectly by government deficit spending
9:24
as the deficit gets higher the government’s net spending is adding
9:31
that many dollars to the consumer’s checking accounts who can then end their borrowing power who can then go out and
9:37
buy you know houses and cars and medical services and education whatever they want yeah right yeah and so
9:46
with a sufficient deficit spending there is a price that will allow for
9:52
business expansion okay so that’s that tells you whether the deficit spending is enough you look
9:57
at the economic growth and right now we look at economic growth and it looks
10:02
like the deficit spending is plenty to sustain two and a half percent real growth to sustain lending borrowing it
10:09
whatever the interest rates are it seems to be enough to be pushing us through that so the data is telling us
10:15
that yes the economy can afford these interest rates now part of it is as the FED raises rates instead of the rate
10:22
becoming less affordable it becomes more affordable because when they raise rates what they’re doing operationally is
10:28
paying more interest out to all the Savers and with the debt to GDP this High they’re pumping in more than enough
10:34
money for the business models to be able to uh afford the rates you know so it’s so they’re creating
10:41
your own ability to afford the rate Center increase and and then some right
10:46
right you know it’s so funny like people talk about uh lo you know low rates as
10:52
being loose I’m like well okay I you know I have to look at my firm you know
10:57
our the returns for our Flagship fund um you know probably generated seven or
11:03
eight percent in excess of the risk-free rate for the last 20 years or something like that well guess what the risk-free
11:09
rate at one and a quarter is uh you know versus the the risk-free rate at four
11:14
well our returns were there for a lot a lot less and we could have taken the
11:19
same credit risk and made much higher returns than we did because because the risky rate was so low that how can that
11:26
be characterized as as loose it doesn’t make any sense
11:33
yeah well if and if you look more broadly the
11:38
you know when rates were low we did not see increases in investment increases in borrowing that the FED had assumed were
11:44
there and they said our models are broken and same for the bank of Japan you know they had 30 years and they didn’t see
11:50
any kind of uh monetary or credit expansion of any consequences after 30
11:55
years of zero rates and and they said well you know we just need a little more time right that’s the same thing that’s
12:01
the same thing drag you said and the same thing Yellen said you know we just need more time with these low rates to
12:06
kick in and it’s the same thing the mmt proponents are saying about the high rates we just need more time for the
12:11
recession all right exactly yeah but so there is a
12:16
strong Dynamic effect of debt to GDP being high enough where the
12:22
you know the increase in rates is causing whatever a larger increase in
12:27
demand right and not not even an equal increase in demand a larger increase now I I
12:33
can’t tell you that for sure that would happen before it happened I can just say look this is going to
12:38
increase deficit spending by a whopping amount and let’s see how much of that actually
12:45
gets spent into the economy because a lot of the mmt proponents are saying none of it gets spent pension funders more interested doesn’t
12:52
spend it you know here’s the competition of bondholders say you’re an interesting on Smith these people they’re foreigners
12:57
they don’t spend ads like okay so we can look at all the Micro Data and or that we can find but let’s look at the macro
13:04
data so this was you know a year ago so I started looking at the macro data uh
13:11
and I see the economy is doing better you know we were almost flat almost negative well we had negative GDP I know
13:16
it was inventory saw that but still it was negative [Music] we had a big fiscal collapse at post
13:23
covered like after any War the deficit went from 15 to 5 or something but then it started going back up again because
13:29
of interest because of military spending and then Social Security and all these other index things it started going back
13:35
up again so it’s all right let’s see what happens and now it starts to grow and now for a while now we’re been about two and a
13:42
half is that commensurate with a deficit of seven percent of GDP is some of that
13:47
getting spent is that where it’s coming from it’s like it’s not a bad narrative you know what’s what’s Why not start with
13:54
that narrative instead of starting with the net where the narrative it’s like oh the deficit’s really only two percent because the other four or whatever is
14:01
interest that doesn’t count and uh well then how do you explain it two and a half percent well
14:07
private sector this is that resilience I don’t know look the I think the burger
14:13
proof is on somebody to say that there’s not sufficient amount of
14:18
this money getting spent to support the growth when there has been for the last year uh and if there isn’t and the economy
14:26
collapses and we still have an eight percent seven percent deficit fine okay the propensity is to consume out of that
14:32
spending we’re we’re low enough or we’re not sufficient to drive growth
14:37
but uh just the data from the last year indicates that the narrative seems to be
14:43
intact that that’s enough of that interest expense is getting spent directly or indirectly
14:48
to support obscenely regressive of course but support current levels of growth that
14:55
we’re seeing right right I mean would it be because Banks
15:01
generally lend against income right they’re sort of alone that you’re sort
15:06
of like capitalizing the The Firm or persons but what what do you think what are you seeing for corporate earnings
15:12
they look pretty good to me oh yeah yeah no I mean and and the other thing is you
15:20
don’t want to leave the levy profit equation from 1930 that still valid shows right corporate earnings and
15:26
deficit spending go hand in hand except when it’s interest well looks like maybe that counts too you know got it from the
15:34
last year yeah no I think that’s yeah though corporate earnings have been strong and the other thing is like the I mean
15:41
corporate default rates are still below uh you know long run averages
15:47
um yeah today they just came out with mortgage to Foster all-time low you’re just flooding the economy with
15:54
money so what happened to the stock market in Argentina you know phenomenal that I actually
15:59
don’t know on pesos look just bring it up it’s through the roof okay oh really well yeah because because of the
16:06
inflation and so you could say oh in dollar terms it hasn’t been doing so far it’s fine but that means you know our
16:12
stock market at least in dollar terms is going to go up through the roof now in the meantime there’s a big
16:18
you know give and take because as rates go up okay earnings are better but
16:23
valuations have to get through a higher discount rate right and right which one’s going to win well
16:29
if you look at Argentina it’s kind of a flat-ish for a while and then all of a
16:34
sudden the inflation thing wins and it just shoots up okay so uh evaluation wins it wins and
16:40
wins then it doesn’t and then suddenly the asset values you know shoot up and so if you look at all these countries
16:47
with high interest rates and high inflation rates the nominal stock market prices go up like turkey you know in
16:54
lira they’ve been going on you know dramatically for years because then you
17:00
discount it all by the inflation rate to put in dollar terms and it doesn’t look so good but domestically in terms of the
17:06
local currency it just goes up so it becomes kind of an inflation hedge right all the assets of General Motors
17:13
if we started trading in pennies instead of dollars we redenominated it’d be worth 100 times more right
17:19
[Laughter] so so maybe you have a higher discount rate for your present value of future
17:25
earnings but they’re also growing at a higher rate because of the inflation also right right right yeah yeah so it’s
17:32
not that you know that clear-cut that the discount rate is going to win in the
17:39
evaluation game over the inflation rate and it can it can and you’ll see big
17:45
pullbacks when they announce we’re going to fed’s gonna really clamp down and we’re going to jump like volcker did to
17:51
nine percent from six or whatever which is what he did and you get a big setback but then as the numbers come through it
17:57
all recovers nobody’s going to believe that with the first announcement so you don’t want to
18:03
get you don’t you don’t want to get caught along with the first announcement right right right so it’s very very I
18:09
can’t trade it you know it’s impossible for me to even imagining trade yeah because of that what what I find astonishing is that the
18:18
fiscal tightening that we experienced in 2022 particularly in the first half of
18:25
22. yeah that I mean that how is that not the cause
18:30
of the massive stock market sell-off yeah I know I know I know
18:37
and it’s typical post-war typing right right we had a huge uh tax drain
18:44
whatever and and you know I think April last year had the highest tax receipts
18:49
ever and you know that okay we got the two we got the two uh uh Court straight
18:56
cores of negative GDP growth and the stock market rolled over and then
19:01
um I think the s p was down slightly in the back half of the flash but like the Dow
19:07
right with with which is a little bit more economically sensitive was up in in
19:12
the back half of last year and that included you know the the uh the fourth quarter which was the
19:19
first quarter of the 2023 budget which had all this kind of indexed
19:24
um yeah uh you know price increases like uh that you reference earlier and you
19:29
know the the the interest rate hikes had started to sort of flow through
19:34
yes yep so it’s just it’s just astounds me that that that that that
19:42
that flows component is not talked about literally at all I mean I don’t I know I
19:48
know especially all these deficit Hawks out there talking about how bad it is for all these years Suddenly It’s
19:55
really the highest peace time of proactive deficit we’ve ever had and they’re not even talking about it
20:00
I don’t know why they’re not talking about it right right I mean people will say oh
20:07
you know all this speculative uh you know Tech stuff and Bitcoin that was
20:13
always your interest rate for now and and Adam has made the point repeatedly on this package he’s like Bitcoins up 80
20:18
this year yeah yeah I mean the the number of times that I’ve read you know
20:25
I mean everything is being attributed to this the zero interest rate phenomenon yeah oh Facebook over hired because of
20:31
zero interest rates oh Bitcoin went crazy because of zero interest rates but there’s no talking about fiscal on
20:37
either side yeah Russia invaded Ukraine because of zero interest rates so
20:45
because of who’s monetary policy and it’s mmt’s fault
20:50
not true we did mmt and look what it got us
20:58
the Democrats did mmt if the Republicans Cato started that for
21:04
the election last year that you know the Democrats did mmt and look what it got us don’t vote for right right right
21:10
despite the fact that it was under the Trump Administration that that passed
21:15
most of the like I think you know uh three trillion out of the 5 trillion
21:20
total in in you know fiscal spending in response to covid was done on the Trump
21:25
Administration but it was the the smaller tranche that was passed by Biden
21:31
that that’s what caused the inflation right right the straw that broke the camel’s back right
21:37
and uh yeah so anyway you know what’s also funny is uh you
21:45
know the how misunderstood the oil Market is and I
21:50
mean I can’t tell you how many times I’ve heard oh no one understands the oil Market no one understands no one can
21:55
predict anything no one under and and you know when when the Saudis uh a few
22:01
weeks ago announced a production cut and uh you know immediately the light bulb went off it’s like oh that that means
22:07
demand is down and the price spiked initially because everyone I guess you
22:12
know the speculars sort of Pile in and now it’s back down you’re on or or you’re the date yeah
22:19
well you know at the margin they’re setting price because as a point of logic they have to whenever you have relatively fixed short-term demand
22:26
somebody on the supply side has to set price or the price either goes to zero or Infinity that’s just markets 101. and
22:34
and they’re the only ones with excess capacity so obviously they’re the only ones setting price and letting quantity
22:40
adjust kind of like a gas station you post your price and then people come in for gases
22:45
right and and you set your price and you let the quantity adjust and so um and if
22:52
you do that it’s your character situation is characterized by excess capacity if you’re just in a lower price
22:57
until it’s your stuff sells and you’re not going to have any excess capacity and that’s everybody else in the oil Market societies were sitting there with
23:03
excess capacity so it stands out like a sore thumb near the swing producer’s setting price all right so how do they
23:10
determine what they want to do that’s the other interesting thing it’s only two guys it’s the oil Minister and the
23:15
King right and they were both brought up in their own private a380s right and
23:22
and you know if you’ve known anybody that’s come from privilege and thought they were a little bit off
23:28
you know multiply that 100 to get what’s going on in these in the heads of these guys right got it you know and uh and
23:36
and you know they have a bad night in London they’re going to raise oil prices or lower well who knows what they’re going to do and they decide they want to
23:43
you know they’re mad at Biden or they want immunity from killing journalists and all they have to do is lower the oil
23:49
price all right let’s do that for a while they play the long game right they’re not they’re not real short-term oriented and but you just don’t know and
23:56
you’re not going to say and you got Biden and Trump on all these the rest of
24:02
the world um giving them disguising the fact that they’re setting
24:07
price by telling them they should pump more or pump less saying that somehow you know change in
24:13
quantity will change the demand it’s not just price setting and and they’ll argue that they’ve got the oil Market in
24:19
balance and the supply and demands and balance and uh I don’t know you know they’ll do everything except
24:26
not reveal that it’s just a simple price setting you know and it’s through the osps they do it through spreads against
24:31
benchmarks but Underneath It All it’s still simple price break it has to be as point of logic there’s no other possible
24:37
way oh the price can be set that there could be a price the price can be determined Okay so
24:44
what’s their strategy now is it to keep prices low to get rid of excess production because they know we’re going
24:50
electric cars long term or you know I don’t know is it to keep prices low where they are now so rushed
24:56
to keep Russia’s income down for the War I don’t know now Russia hasn’t figured
25:01
out that they can ask any price they want for their oil and get it okay they’re exporting I don’t know
25:08
salary million brows a day if they say all right we want a hundred dollars how much less are they going to sell
25:14
is World demand gonna drop by the amount that they don’t sell maybe maybe but so maybe they only sell
25:22
5 million barrels at 100 instead of seven million at 60. right or 120. is it
25:29
going to go you know they’ve got it and we need it they do not in Putin Russia has never understood
25:36
that that um they can set any price they want and sell most of it
25:42
and they just don’t get it and so now would that mean oil is expanded around
25:48
the world of production and eventually the price would go back down yeah probably but for the next six months to
25:54
a year or what right there are large lags before you can replace seven million brows a day is
26:00
demand gonna fall I doubt it not because of price that doesn’t move the price of gasoline enough uh 50 cents a gallon
26:07
it’s not going to change anything so um so yeah so I’m just saying that they
26:13
don’t understand it either got it yeah and I guess that’s kind of a little bit of a tail risk for the
26:20
economy as if oh yeah huge shelters because you know all our actual recessions have been the last few have
26:26
been led by oil prices going up a lot yeah 2008 it was 150 something it
26:32
doesn’t mean you can’t have recession without it but it does mean if they do it you get slammed I I mean that is just
26:38
so shockingly underreported yeah yeah yeah yeah yeah exactly
26:45
exactly um so one uh uh little uh bit I know a lot
26:52
has already been said about uh the whole svb thing and I wanted to uh two two
27:00
things uh I was hoping to Once uh stress test this idea with you
27:06
but a lot of the criticisms I’ve heard about the so-called held to maturity
27:12
accounting um and the I guess the institutional structure around that and you know these
27:19
these Banks should have to run those losses as expenses through the income
27:25
account and take a charge against their capital and and raise capital and blah blah blah and one of my pushbacks
27:33
against that has been well okay so my wife and I we we bought a house in in
27:38
2021 we we got very very favorable uh rate on our mortgage so theoretically
27:46
that mortgage loan would trade at like 70 cents on the dollar
27:52
um I don’t book that you know that’s a you know that’s a liability on my balance sheet that went from 100 to 70.
27:58
I don’t book that 30 as income so why should the bank have to
28:04
uh book that as an expense as a loss you know you don’t have to answer to the
28:11
FDIC or anything the way the back does right they’ve got your deposits so they’re they’re
28:17
government regulated insured deposits but what what it is is like on the other side let’s say
28:22
they have compensating balances for their checking accounts that don’t earn interest let’s say and you can’t move those so I’ve got an account and I have
28:30
to keep 250 000 in my checking account at all my business account you know uh
28:36
and I can’t I can’t move it I’ve signed on for five years or something right
28:41
with the bank and so they consider that cost of that money
28:47
and the duration is five years and they make you a mortgage with a five-year fixed rate of three
28:52
percent and they’re giving me zero you know for five years whatever I’m locked in so now they’ve now now they’ve
28:59
got a match so now that the Regulators come in and say hey you’ve got a three percent mortgage a Freights go up you
29:04
got to pay six percent for money you’re going to lose they go oh wait a minute over here I’ve got this deposits on my
29:09
business accounts that are locked up for five years at zero percent as a that company’s cost of being able to do
29:16
business with me I’m allocating those against this loan book it’s a pair off
29:21
you know so I’ll put this in hold to maturity and I’m just going to accrue the three percent over five years uh-huh
29:27
okay so what’s wrong with that so when you see if that’s the whole picture nothing’s wrong with that and
29:33
there’s no Financial risk associated with that there’s no reason to like Mark that to Market unless you’re going
29:40
to market the like you said give them a profit on the five years they’ve got locked in at zero or something but then
29:45
just it’s just a waste of accounting time you can just say one’s locked in at three one’s locked in at zero so let
29:52
them accrue three percent a year for five years and then we reset everything
29:57
when I had a bank when I had a bank that’s the way it went we have to like show this to The
30:03
Regulators otherwise they’d write us up and fire the management uh-huh and they were not nice people they were like IRS
30:09
agents yeah uh-huh right and but the other thing is like it doesn’t give any credit for the for the
30:15
amortization right it’s not like I could pay back that loan at 70 cents on the dollar yeah
30:21
right right right right right yep okay so that’s the negative convection
30:27
involved on the launch you can pay it back if rates go down but a phrase Co-op you don’t have to
30:33
right right that’s why right okay so that is why I am a strong supporter always have been of the fed or one of
30:40
its agents Fannie Mae or something like that um having mortgages you know buying all
30:47
these mortgages on their books and having them or funding providing match funding for the banking system to make
30:53
mortgages because that way the government eats to convexity and that’s that’s a loss or risk that’s
31:00
trivial for government and it doesn’t you know as opposed to letting the banking system or the lenders and
31:06
Pension funds be subject to all this negative convexity and have to have these wild Dynamic edges on all the time
31:13
that that seriously volatility so by buying all these mortgage backs the Fed
31:19
was taking an enormous amount of vile out of the markets I thought that was a constructive thing you know for to serve public purpose
31:25
given the rest of the institutional structure now at a permanent zero rate policy you don’t have to have any of it to begin with but given what we have I
31:33
thought that was like nice to do that get rid of this unnecessary volatility from all these uh fall hitches out there
31:40
that have to be there you know right right but now they’re like so they never
31:45
even considered it for that reason and they’re not even considering that when they’re letting it run off so but it was
31:52
nice while it was there and ball came down you know and that was a good thing are they kind of doing a similar thing
31:57
with this Bank term funding program right they’re they’re sort of they’re they’re saying like you know we’ll we’ll extend
32:06
um uh you know we’ll uh extend credit against uh you know certain Clara so
32:12
that uh yeah do you know what the collateral is right now what’s the latest collateral I didn’t even look is
32:18
it the one question I’m not I’m not sure yeah the problem was they would only
32:23
accept government collateral it’s a discount rate and at a penalty rate so that drove a funds rate so they didn’t
32:28
want that so this is like an offer an alternative to the discount window and I I didn’t even look up the
32:35
collateral but they should just you know take all the banks collateral at a haircut equal to the capital ratio say
32:41
90 percent you know our 10 at most or there’s no discount because the FDIC is already
32:49
ensuring any deposit going in there so the ftsc has already examined the bank determined that the assets are
32:55
sufficient quality for them to allow insured deposits up to the full amount right of all banks right you know
33:03
there’s a limits in size but not limits in quantity so they you got 100 billion dollar Bank you could the FDIC is fine
33:10
with 100 billion and 250 000 insured deposits your assets are good for that but if the FED makes a deposit
33:18
it’s not insured by ftic okay and the quality is not good enough so it needs government collateral okay it’s the
33:25
exact same deposit okay right right you know if defensive depository
33:31
you know it requires collateral if I’m a depositor the FDIC will cover me but they won’t
33:37
cover the FED if they’re a deposit like why not right because why because they exceed the 250 000 limit how about the
33:43
FED does it in individual deposits of 250 000 each broker yeah yeah
33:50
yeah and let someone make it have the FED use of broker CD Market to find the
33:56
Banks then there’d never be another liquidity crisis right you can put that down as my proposal to make the point
34:06
but you know I saw the same thing right and so uh and so it’s just a landmine in
34:13
the institutional structure that that they don’t just guarantee liquidity yeah yeah one other thing about the
34:21
institutional structure and this just came out in the so uh uh Western Alliance Bank I think reported the other
34:27
day and their CEO made some comments about options Market activity particularly in
34:34
the pre-market stuff and I guess one of the problems that that happened is that
34:41
like you know options in these Regional Banks were historically very very
34:46
limited not like a lot of not a lot of activity I guess you know the retail day Traders trading on the Robin Hood
34:52
accounts weren’t that interested in trading um Regional Bank stocks but all of a
34:57
sudden this svb thing happens and I guess you know Capital markets participants get nervous they start
35:04
buying put options on you know the uh the bank stocks in their portfolio well guess what the when the dealer
35:11
sells that put option they have to short the stock to keep their their book hedged yeah
35:18
so Dynamic yes yeah right so that I I I that creates this sort of dynamic of
35:25
like uh it can by virtue of I guess they call it like a gamma squeeze
35:31
yeah the dealer is short file and the option holders along right so and then but that can if you
35:40
know the if people pile into these these put options all of a sudden that can that can actually cause the the you know
35:48
the stock price to the client and then you know it does put on buying puts buying puts is selling the stock with a
35:55
dynamic hinge right right so you can sort of and because the stocks got
36:01
killed all of a sudden someone’s like oh my gosh like you know Western Alliance
36:07
or Pac West or First Republic their stocks are down 80 90 like I may have to
36:12
pull my money out of that right and it’s sort of this this yeah yeah yeah out of the bank yeah right it’s like this self
36:19
fulfilling prophecy right triggers the liquidity crisis yeah yeah so I just
36:25
want I mean I mean in general I think the the options Market has gotten out of control but as it specifically relates
36:32
to um you know you know banking stocks like
36:38
that like they they should just be they should just get those shouldn’t really trade in on the options Market I don’t
36:44
think because of this you can’t get it like you can’t have the options Market causing runs on the bank this is
36:50
something that’s I don’t think is really serviceable right but if you have if you have the lending facility open or
36:56
you know allow the FED to buy broker CDs to through to any Bank who needs insured
37:02
deposits which we already have and then it does it doesn’t matter if there’s a run or not
37:07
right those those deposits will you know find their way back in yeah through the fed and uh are just
37:15
open the discount window unlimited with no penalty rate you know and that will do the same thing so there’s there’s a
37:21
lot of ways to skin the cat if you don’t want Banks to be at risk of liquidity crisis so why would you want them to be
37:28
a risk well the only theory for that is uh hey you have no choice so under fixed exchange rate policy you don’t because
37:34
the government just doesn’t have the resources but um but under floating exchange rate you
37:41
know why would you want to use Market the liability side like that and the answer is for Market
37:46
discipline uh you believe that you get information from the depositors
37:51
uh as to whether the bank is a good bank or a bad Bank based on whether they put their money in it or not which is
37:58
patently ridiculous it’s the only possible but the only possible reason
38:03
for having a system like this is an absurdity that uh oh should I put my
38:09
checking account have my checking account of Bank America or Citibank let’s see which one’s got the better financials like you can’t do that
38:16
you know the top analysts in the world can’t figure it out you can have the average per you think by having the
38:22
average person required to do that to keep his money safe you’re going to like gain some insight into
38:28
the finances of Citibank and Bank America why are you doing this
38:33
right so uh you’ve got the FDIC coming in and actually examining their books
38:39
regulating them determine whether they’re solvent I mean how does having people decide in addition to that you
38:46
know make add to that process how does that give you help you in your regulation it does right like it can’t
38:53
possibly help it just hasn’t been thought through it’s an anachronism from fixed exchange rates where you didn’t have the choice and it’s there and it’s
39:00
a landmine and it’s it’s like you know just another absurdity in our modern world [Laughter]
39:08
hey guys I um oh do you have to hop I do have to I do have to jump off
39:14
um Warren thank you so much for coming on uh I don’t know if you have time to to continue with Ryan or not but um I
39:20
just wanted to thank you before I jumped off and uh I really appreciate it okay well thanks for having me here good
39:27
talking to you you too yeah bye hey Warren one last thing for you uh if
39:34
you don’t mind uh this is very quick um I have I was talking uh talking with
39:40
Adam about this and I I tweeted somebody up the other day We call we refer to the national uh we
39:46
constantly use the term national debt what do you think about making a uh making it a a practice to call it the
39:52
national credit yep fine I mean I’m certainly not against it
39:58
I think that could actually help you know I mean something that mmt has been very good at is is reframing stuff and
40:04
I’m kind of like well if I manage a portfolio of yeah of you know you know
40:11
corporate bonds right I call them credits I don’t call them debts yeah right so let’s just get kind of a
40:18
similar thing let’s just call it the national credit and I think you know maybe that won’t sound as scary yeah no
40:25
it’s fine I originally called it back in the 90s the interest rate maintenance account
40:30
because it was you know before interest on reserves that’s how we supported interest rates at the Target so I
40:36
thought Irma you know Irma nice name I like that yes it’s interest rate
40:41
maintenance account but yeah so I oh and that’s fine you know anything that anything to help
40:48
yeah well Lord knows we we could use it yeah yeah good no good idea
40:56
um well anyway so thank you so much this has been uh incredibly fun and important
41:04
um yeah and and uh we’ll uh you know hope to have you back on sometime soon real good okay good talking to you right
41:11
all right thanks
