Warren Mosler: elkarrizketa (2023, azaroa)

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um it’s wonderful today to uh welcome as our guest Warren Mosler for most of you

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probably almost all of you Warren needs no introduction but I’m going to give him a short introduction anyway Warren

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is the widely respected Economist Finance professional and entrepreneur

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who a little bit more than 30 years ago um independently developed a set of

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ideas which eventually became known and modern monetary Theory uh he’s the

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author of soft currency economics which was a paper that he produced in the mid

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90s um and a book Seven Deadly innocent frauds of economic policy and the mmt

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white paper both of which you can access on the Mosler economics.com

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website and without Warren there’d be no modern monetary Theory obviously and so

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there’d be no torren University master’s degree featuring modern monetary Theory so many of you here are doing a master’s

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degree which would not exist uh were it not for for Warren and uh um what I

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wanted to do was to uh hear Warren talk about uh the background and the basics

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of mmt uh really so that you can um uh

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learn what mod monetary theory is from the originator

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um so uh maybe I can start by saying thanks very much for joining us Warren and where did

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these ideas come from did you get a flash of inspiration 30 years ago or or did it take years for you um to develop

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what became mmt that’s an interesting question so it

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I had to be thinking about something to be thinking about it and so and somebody

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had reminded me of something and maybe 1977 I was at Banker trust I was on the

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trading desk there and I was a new guy young guy

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there can you mute everybody Gabby yeah so there’s other there’s

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there’s other talk on the line is that just me or is it yes okay it’s

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good sorry folks can you please mute can everyone please

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mute I want

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okay good so uh and I was on a trading desk and and Al Alan Rogers was a

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trading manager and he used to talk like this he didn’t move his mouth and and he goes um it’s two billion twoyear notes

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going to be auction he says you know I don’t know where the money’s going to come from from for those you know they were afraid there might be a failed

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auction or something and I I remember saying to Allan it’s the same money that the treasury spends that’s used to buy

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the Securities it’s just debits and credits on the spreadsheet it’s circular he kind of looked at me sideways you

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know and then just went back on talking about whether or not there was going to be enough money out there to buy the

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bonds in the auction so I don’t know where I got that I mean nobody told me about that and it was just it was

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obvious enough at the time for me to just respond in this trading meeting I don’t I’d been there maybe a year or

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less uh before that I was at a small savings Bank uh and i’ had been uh well

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I was a bashing company doing with small institutional couns for a year and before that the small Savings Bank had

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$5 million in their Investment Portfolio and they I was the person they selected

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to look at it so I I don’t know where I got that kind of stuff and I remember when um maybe a year later when the FED

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um increased reserve requirements and

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Allan again is there with Alan Warner our Economist uh you know I hope the FED

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doesn’t just give them the money this time because the money supply is too high they got there’s too much money

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sashing around the money supply is too high they got to take it out and I said they have to give it to them where’s it

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going to come from is a spreadsheet is debits and credits assets and liabilities they’ve increased the

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reserve requirement it can only come from they have to make the entry he goes well there’s 300 billion Euro dollars

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slashing around they can bring some of those home I’m like like no they can’t it’s the same thing you know and then um uh I got

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a call from Cliff Viner who later became my partner he was at Phoenix mutual and he says um well I was reading this

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article by Eric Hinman Morgan Stanley’s Chief Economist about you know he

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doesn’t think the FED should just give him the money this time they should uh take it out of the money supply and

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reduce some money supply and I gave him the answer how they have to do it he’s he was he’s very analytical so I showed

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him the debits and credits so he calls Morgan Stanley and then he calls me back with their double talk

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answer and I straighten that out and he calls him back and then he calls me back second time and he says they they’ve

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retracted their analysis okay they they they agree that the FED has to give them the money and so that was this senior

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Economist at Morgan Stanley I was a very Junior person just talking to a client

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and uh now where I got that and that definitively I’m I’m really not sure I don’t remember discussing it with

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anybody I certainly remember um asking questions about you know fed funds what

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what happens so they fed debits our account credits their account things like that so I I was I looked at the

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operations they’re not that difficult right and so uh but and then every morning they used to

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come down and go oh they they went to check to see how many bonds the bank of England bought because if the bank of

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England ever didn’t buy our debt the US might default or rates would go up or something horrible would happen it’s

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like I like like why do you guys care about this they said they don’t go to

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them it’s the second highest bidder it’s the same money the treasury is spending anyway it doesn’t really matter who buys

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it but oh they were it was a big deal and then after that it was the Saudis and the Japanese and the Chinese you

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know what if they don’t buy the debt I just been hearing this stuff for 50 years so I remember you I remember you

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talk you discussing I think it’s in the S dead recent frauds book yeah um Italian

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government yeah yeah same thing Italian Bonds were U 200

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basis points 2% higher in yield than the cost of borrowing the L so you could

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borrow lra at 10% and buy L bonds at 12% you guaranteed a 2% profit if they

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didn’t default and the reason the spread was there is because it was universally

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thought that they were going to default and Rudy dor Bush was a big Big Time Economist back then from MIT and he’d

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been going around uh talking about how Italy with their debts of GDP of 120%

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was on the edge of default and they weren’t going to be able to buy their debt and the spreads widened out uh and

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uh and so I was looking at it I had never had any reason to think of why Italy would default or not default

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before that I think if I had had a reason to look at I would have come up with it sooner but I just didn’t have

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any reason until then that was probably 1993 and uh late 92

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93 and it dawned on me talking I was in just chat chatting about it because you

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could figure out why they went default it was you know a good investment for all my investors in the fund uh and so I

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went to like S&P and Moody’s and asked them had there ever been any defaults in local currency and they said yes there’s

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been seven or eight and when I looked at them they were things like oh Brazil

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defaulted the inflation was so high that the value of the bonds was trivial you

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know what would have been a billion pesos was worth two cents or something so nobody ever bothered to redeem them

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or they just let it go and so Moody’s called that a default and they said the United States defaulted when it went off

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the gold standard well okay that wasn’t floating exchange rate they agreed and Japan defaulted they told me Japan

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defaulted to the United States in yen in 1943 okay well that was a it’s not

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because they didn’t have the ability to make the pay they just you know there’s a war going on and they weren’t going to pay us any money so so there were no

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instances material instances of any whatever defaulting and the reason they were saying is because they can print

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the money but in none of the instances never has any uh government facing all these

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high debt levels ever printed the money to pay it off whatever that means you know that that never happened so it it

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had to be something else and that’s when I was talking to my research guy about what i’ heard it and it dawned on me

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that if we bought treasury Securities from the treasury Securities it didn’t

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matter to us whether we bought them from the fed or from the treasury because I

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would own the same thing which was you know deposited at the FED under the name of the treasury and my you know dollars

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would get transferred from Bank of New York to the FED for same place so those

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Absolut no functional difference to us in the private sector whether the treasury sold bonds or the FED sold

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bonds so if there wasn’t any for us and there can’t be any okay is was my

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conclusion my thinking probably isn’t any and so the whole thing is either a big borrowing operation or it’s just you

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know interest rate support which is why the FED would buy and sell Securities to meet their interest rate targets and then net immediately dawned to me okay

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this is just all one big glorified Reserve drain it’s just Securities are sold to uh support the policy rate at

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the time they didn’t pay interest on reserves and so uh you have to have an alternative to non-interest bearing

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Reserve accounts and the alternative was treasury Securities which were just time deposits at at the fed and and so that

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was kind of the answered that question all right and so at that point

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I realized the re that’s the reason they don’t default actually they’re spending first crediting accounts and then um

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debiting accounts uh for either tax payment or to uh facilitate the bond

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purchases and that’s really V Insight isn’t it that that and I yeah I knew the

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rhetoric inside the FED look we why would they why would they come in and do repo you know when payments were due

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from the private sector to the treasury because the funds aren’t there they have to add funds and the way they’ say it is

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we can’t do a reserve drain without a prior Reserve ad which is the same thing and so all those pieces just came

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together because that’s you know they’re all floating around in our heads anyway and it all just jelled for this

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particular purpose which was to determine to take a look at at default in local currency what it actually is

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and that then and at that point it was okay now it’s safe to buy these B Italian bonds but it isn’t for the same

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reason Japan didn’t make payments just because they have the ability to pay doesn’t mean they’ll do it they can still we have we can hit a debt ceiling

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and we don’t pay even though we have the ability to pay so um the the idea was to to Italy and talk to the people at

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treasury uh so that they would understand it so that they would realize it makes no sense to not pay

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everything is better if you do pay there’s no Advantage whatsoever to not going the other way and it’s automatic there’s no you know um risk of any or

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anything like that so uh one of my uh clients was Maurice Samuels more of an

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associate than a client he was at Harvard management managing their endowment fund for fixed income and it

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was it was much larger than my company and he had the Harvard Management on his business card so he had his secretary

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whatever contact the people at the Italian treasury to set up a meeting they said sure come on over you know Mar Samuel’s from Harvard management and so

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we went over there and talked to a guy named Luigi spaventa and he was um a professor who

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had been taking a stint at Treasury and he was either treasury secretary or

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assistant treasury secretary and we go into his office uh and um it

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was very gloomy there they were all worried about the fault on his desk was a document two inches thick from Rudy

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dornbush about why Italy was going to default and uh I said and he looked like

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he was like canes he was Italian he spoke British he spoke English with a

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perfect British accent had like a pipe and three-piece suit and uh looked like

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he was you know trying to imperson GS I said Professor Savanah it’s a rhetorical

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question don’t answer it but why is Italy selling these Securities btps ccts

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is it to get the L to spend or is it because if you spend a l and then don’t

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issue the Securities the interbank rate you know will fall from your target rate

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of 10% to uh to zero and he he he looks at me and he

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says says and he thinks about it for a minute he goes no the in bank rate will only fall to a half a percent because we

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pay a support rate they paid interest on reserves I didn’t know that at the time I said okay and before I could say

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anything he had figured the rest of it out and he jumps up out of his seat and he goes yes and they’re making us act

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Pro cyclical and he goes into this rage against the IMF for trying to impose austerity on them and and it went from

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Doom and Gloom to like this celebration and he starts inviting people in for from the next office is over and they

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come in and he explains it and everybody’s smiling now they had this huge cappuccino machine they’re making us Cino and Maurice and I had to sneak

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out to our next meeting we couldn’t stay there know we were there for like two hours we finally snuck out to our next

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meeting and then a week later announcements came out of Treasury no Extraordinary Measures will be taken all

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payments will be met and that’s when we felt comfortable owning the Italian bonds and we did for ourselves and our

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clients and you know it’s a very uh successful uh investment for our investors and that started me looking at

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the us because now here we have Ross barau talking about default in the treasury and the debt and he’s taking

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15% of the vote and changing the complete political Dynamics on this total nonsense and that’s when soft I

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apprach soft currency economics was 1993 to address that political situation to

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show that this that’s just a reserve drain it’s a residual it’s it’s the net

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Financial Assets in the economy It’s You Know It’s Just You Paid It Off by shifting dollars from Securities

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accounts to reserve accounts there’s no grandchildren or taxpayers in the room you know the whole thing so um did I

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answer your question you did yeah I mean make it really really simple um yeah uh

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before before people can pay taxes but also before anybody can buy treasury

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Securities in their primary Market the government has to spend the dollars into

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or the local currency units into existence or the central bank has to lend them into existence so so the

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Central Bank the central bank is a bank it’s just a te account like any other bank it’s no different except its

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clients are just other Banks and foreign central banks and they have accounts on its books and it can only debit and

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credit accounts on its own books and so you can’t if you have an account there you can’t have a credited it unless a

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Fed credits your account and then you can’t transfer that credit unless if you

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know you have it and so it all all the funds to be transferred to pay taxes or

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to buy bonds have to come from the FED which is an agent of Congress right and

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so and they can only be transferred from one account to another so it’s it’s actually very simple it couldn’t be

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simpler uh and it’s got nothing to do with funds in commercial Banks or anything else in their their own

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accounts each Commercial Bank has its own set of books and and only it can debit and credit accounts on its books

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any any banks like that and that’s what bank clearing is all about how do you get a deposit that’s on One bank over to

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be a deposit on another bank but all they can do is change numbers on their own books it sounds impossible but you

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do it through a Third Bank clearing entity where they both have an account there so at that third entity they can

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switch funds from their account to the other guy’s account and uh anyway I’m so why why are

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treasury bonds issued in the first place prior

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toing it was yeah obvious from an mmt perspective it was to defend the target rate but once you’ve got ex reserves in

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the system why still issueing I I think it’s um it’s just something left over

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maybe from a fixed exchange rate like the gold standard where the credit to

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the reserve account was convertible into gold or gold certificates convertible into gold so if the government spent

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simply by crediting accounts they were at risk that that whoever had those accounts could just on a whim say you

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know I want my gold whereas if they bought a treasury security then it’s there for a year two years five years

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and they can’t ask for the gold for five years so it’s to put some distance between convertibility you know uh of

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the you know the money and so um and that’s where you get the whole idea of a hierarchy of money back then was because

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you had uh distance you know between the gold and

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whatever you are holding so at the top maybe is the gold itself and then it’s a

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gold certificate or it’s a deposit at the central bank which is convertible

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into gold they’d be right up there in the hierarchy then after that it might be treasury Securities because you have

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to wait for them to mature and something might happen and then then you’d have corporate debt or something where to get

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the gold you know you have to get the money then you have to cash it in so you know the whole thing thing about the

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different levels hierarchy was was about distance from convertibility and so once

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you go on floating exchange rate that’s that’s all inapplicable yet you still see these things about hierarchies of

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monies with floating exchange rates I look at it it that doesn’t seem like seems like somebody’s trying to put a

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square peg in a round hole they’re trying to apply fixed exchange rate tool of analysis to a floating exchange

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rate so uh it’s 52 years since uh uh the US went off finally went off the gold

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standard are we saying that most economists understanding of the monetary system is more than 50 years out of

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date I’d say uh yeah there’s a lot of gold standard type assump fixed exchange

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rate assumptions in their models for sure in inter generational you know whatever they call

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it is uh that that’s a gold stand that’s a fixed exchange rate model

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yeah there there are a lot of fixed exchange rate assumptions in their model and of course none of them have a source

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of the price level in fixed exchange rates they had it which was the gold setting which was

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a price setting by the government right that would be the the price set exogenously by the

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government that they could then then markets would Express you know relative value markets Express relative value

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they don’t express absolute value and so all the feds models all the Central Bank models are all relative to Value models

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they don’t have any starting point so what they do is they assume the starting point is

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yesterday’s closing prices what well where did they come from you know and they’ll tell well

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they’ll tell you that you know we’ll start with yesterday’s closing prices then we’ll tell you why they might change expectations or something and and

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then but where did those prices come from well where did yesterday’s prices come from well they came from the prices

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the day before plus or minus whatever made them change so all they have is infinite regression with no absolute no

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no way to determine the uh the the the price level the absolute value of the price of and uh so you can take any one

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of these models and they’re just waiting to for you to tell them whether it’s dollars or Yen or pennies or whatever

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you want to do and then they’ll show you all the prices but they can’t get that information it’s got to come exogenously

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and that’s true of all markets and uh and so um and I’ll tell you that you

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know I just read a while back that they’ve been working on this for 50 years they haven’t come up with with and

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so what it is is is the the price level is a function of prices paid by the

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government when it spends and you only have to the government only has to spend on one thing and then the markets can

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take that information and do their best of course to determine relative value which gets filtered through all the

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other institutional structure as well so the government says announce the gold is going to be $2,000 and we’re going to fix it there now the markets can sort

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that out figure out where are prices are and but if the government’s not saying

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that then where does the price level come from well it’s it’s what it tells you you have to do to get the funds to

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pay taxes um when it’s spent and it’s not spending on gold at a fixed price so so you have to use it’s the rest of the

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spending it’s doing is giving the market information about absolute value which

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it then translates through Market forces into all the relative values which are all the other prices we see

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but as a point of logic as a point of logic there’s there’s no dispute about that can’t there’s no other

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way that feeds back into tax liabilities creating a demand for the currency in

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the first place what you say about the currency is a public Monopoly right so so what we what I do

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is start with what I call my base case for analysis which is the money story so you have to start somewhere and how it

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works and where it goes on and and the starting point is the tax liability the tax requirement rather than the payment

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of taxes and that leads to issues which I find Troublesome people saying taxes

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don’t fund spending where tax liabilities clearly facilitate the whole thing now the word fund is

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ambiguous does fund mean actually Supply the actual pieces of paper or credits

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necessary no that it doesn’t do that but it certainly facilitates the whole thing and so um you know we use the uh

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different examples the uh the example of Africa where the British wanted people to um

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work on a plantation grow coffee and the whole point of the whole thing is there’s always a taxing Authority that’s

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trying to provision itself that’s my starting point you have a government that wants Public Health you know it

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wants uh defense it wants public education how do you get people out of the private sector into the public

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sector and you do that by creating a tax liability in something they don’t have

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and that only you have so I use the African example where the British put a tax liability on everybody’s house and

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they called it a hut tax I think the French did the same thing and so and if you don’t pay your Hut tax the military

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is there we’re going to burn your house down so it’s coercive taxation has to be coercive the Internal Revenue Service

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the taxing Authority is the biggest baddest agency in government and they have incredible powers to do bad things

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to you if you don’t pay your taxes that’s what’s underpinning the whole system you know whether anybody likes it

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or not uh and uh so they put a tax liability on it and

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what does that do it creates a population that suddenly

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needs the dollars or the crown or whatever the tax liability specifies to

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pay their taxes otherwise they’re going to get their house burned down all right and so it creates people looking for pay

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paid work now that’s exactly how we Define unemployment people looking for paid work not people looking to

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volunteer at the American Cancer Society right and you can’t have people and so

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the tax liability functions in the first instance to create unemployment people looking for paid work for the further

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purpose of the government to hire those people to provision a government which is why it’s undergoing this exercise in

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the first place and so it’s very simpar it’s been done for thousands of years

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you put some kind of a tax liability in place the simplest one to think about is the uh property tax they used to use a

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head tax if you didn’t pay you got your head cut off but it um if you start using a transaction tax like an income

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tax it gets a little blurry it’s still there but it’s a lot more complex the analysis because it’s a moving Target

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and you have to have imputed taxes and all that so I won’t run off on that but so we’ll start with a simple you know

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asset tax a house tax or head tax uh that creates unemployment you then

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hire the people uh and now you’ve provisioned yourself you pay them and

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then as the last step they pay the tax and uh and so yes the

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government didn’t need their tax money to to spend in fact it had to spend

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first before they could pay the tax and as people generally want to um the tax

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liability creates a need to pay taxes but it also creates a savings syst desire because it instills enormous

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anxiety in the population it’s it’s probably the source of most of the anxiety and all the medications people

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around is this ongoing tax liability it’s it’s brutal all this Greed for

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money and all these people that you never get enough and I we had a Salesman who was 85 years old and as he was being

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wheeled into the hospital about to die he did one last trade on his phone from the gurnie to make some to make more

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money this is what the tax liability does to the human right but it’s very effective it Provisions the government

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and wins the wars for the government and uh you know so so here it is and so

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we’re so anyway so the sequence the whole sequence yeah is a mmt contribution to get the sequence right

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every Congressman has a sequence wrong they think they have to get the money to be able to spend and if they don’t get

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it they can’t spend unless they borrow if they can’t borrow they can’t spend and if they do borrow they have to leave

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the debt to the grandchildren to pay it back some they’ve got when you have the sequence backwards it gets goes all over

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the place and that’s that’s why I was doing this to try and sort out that sequence and get it right and it comes

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down to as you said y go ahead they think the deficit spending pushes interest rates

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up well it can sure if you tell me if I’m if I’m in charge of the government and you want me to you know I could do

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enough deficit spending to get prices as high as you want problem yeah but they they they deficit

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spending drives interest rates up uh in your story deficit spending spending

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more than you collected taxes without uh uh draining the addition system put

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interest rates down doesn’t it right but let’s look at the purpose of taxes is to

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creates things offered for sale the government can’t buy anything unless they’re offered for sale and they’ll be offered for sale sell at certain prices

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and as long as the government’s paying those prices and no more then the prices aren’t going to go up because the

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economy needs the government’s money you know otherwise it’s not going to be able to get his house burned down so it has to sell at the government’s prices if

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the amount the government’s spending is you know contained let’s say if the government wants to spend more than that

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and people start raising their prices because they don’t need it anymore because they already have enough to pay taxes and to save the government can pay

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more and buy that but now it’s redefining the value of its currency downward so if it starts paying $440,000

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for soldiers and it gets you know a million of them and it decides it wants more soldiers but at $40,000 there

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aren’t any more soldiers coming out so it starts paying 50,000 now now the currency is worth

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less by that amount it’s now redefined its currency downward and in fact for the same tax liability it’s spending

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more to get it’ll get fewer soldiers because they you know the the

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economy can get the money to pay the tax by sending fewer soldiers to the government so pavino uh chivo was an

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intern for me back in 1997 and I had to write a paper on that it’s your math model of called Monopoly pricing and

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it’s very simple model but it’s well worth it and it’s the foundation for the whole price level and the whole system

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and it’s it’s on your isn’t it it’s on economics yeah yeah yeah under mandatory

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readings that was my daughter’s name for the category and

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it shows you exactly how the price level works so that doesn’t mean all the

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things you can do to affect the price level are politically expedient in fact a lot of them aren’t you would never

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even attempt to do it but you could from a logical point of you know just from an operational point of you sure you can do

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that so um so if you wanted prices to fall 50% the government could just cut

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the prices it offers for everybody 50% the economy has no choice if it doesn’t

29:56

offer things at the lower prices government spending goes from five trillion to zero you’ve got this massive

30:02

deflation until you get the money you need from the government to pay the tax and to save but is that you know

30:10

constructive public policy no of course not but it makes the point of how it works people confuse the politics with

30:17

the economics sometimes don’t they yeah yeah sure sure and they’ll say well it’s wrong what I just said is wrong because

30:24

if you did that you’d lose the election well that’s just a faulty logic great that’s not what I was saying at

30:30

all yeah so so you can’t have genuine inflation unless the government

30:35

increases the prices that it’s prepared to pay for things over time yeah and in fact what you get are onetime a series

30:41

of onetime price increases as the government does that and so all the all

30:46

the major inflations in Latin America were traced to indexation where if the CPI went up the

30:54

government would automatically pay more which uh I won’t go through all the channels but they were already at a

30:59

level where that caused foreign exchange to go down and part of it was the distribution things that caused it which would make the CPI go up which would

31:06

make them pay more which would make foreign exchange go down and so the exchange rate go down and so they had

31:11

this you know runaway inflation because of indexation which is the government paying it but if you look closely it’s a

31:18

series of one-time increases it’s not a continuous increase maybe we could move on to yes I

31:25

was just going to suggest um a lot of questions that people have sent in Stephen do you want to

31:31

yeah maybe we could start let me just say I have all the time you want but if you have a limit that’s fine too that

31:37

it’s great it’s great to have you and we’re so grateful that that you’ve given us your your time today um yeah there’s

31:44

a question from Richard here um which says central banks have one tool raising

31:50

or lowering interest rates either direction we have winners and losers can you suggest another tool that central

31:56

banks could use use that would spread the pain and reward more equitably now I I suspect Spread spread

32:05

what pain go on what pain are we talking about spreading well

32:12

uh of course as many of us know uh central banks often get the interest

32:18

rate story The Wrong Way Around yes yes talking about the effect on on the economy and and the use of interest

32:25

rates in order to attempt to manage inflationary pressures conflicts with

32:31

what we just talking about um well yeah unfortunately for the central banks I

32:36

guess yeah debt of GDP has gotten so high that the fiscal impact of rate

32:42

increases which is it increases the public uh the deficit spending overwhelms any differences of propensity

32:49

to spend between borrowers and Savers so any what you call monetary effects or credit effects get drowned in the extra

32:56

funds that the government suddenly starts spending because when they raise rates they don’t increase taxes to pay for it that’s just flat out adds to

33:03

deficit spending you know when you’re over 100% debt to GDP you know 1%

33:08

increase in rates is adding let’s say 1% to the deficit spending now it’s not all

33:13

at once because it’s not all short term but if you look at the present value calculation it has that effect and it

33:19

rolls around pretty quickly and if you look at the data from countries that do that it’s pretty clear to me every time

33:25

that that’s what’s happening especially in the United States in the last year and a half as they started raising rates

33:30

the deficit spending went up to like 6% of GDP and a u you know in an expansion

33:37

cycle which is crazy and half of that maybe 4% of that is interest uh you know

33:42

on the debt so uh and that’s still going up and so the economy keeps getting stronger so they keep raising rates and

33:48

more so it keeps getting stronger you know it doesn’t end it’s really it’s really important people understand it’s

33:55

it’s it’s comp icated because in Australia we have a much lower government debt to GDP ratio that’s

34:01

right that’s right so you might not have the same feed feed pass through and and we have a different

34:07

mortgage Market too so the impact on yeah on households placing rates is not

34:12

the same here as the US which is uh it it’s it’s important that policy makers

34:18

don’t seem to understand this because we basically match what the US is doing with interest rates virtually yeah the

34:24

time and in the in the private sector when you raise rates you’re just shifting

34:30

income between borrowers and lenders right so it’s a net zero for the PIV

34:35

private sector and there’s winners and losers for sure but um it’s not going to affect the macroeconomy unless the

34:42

propensity to spend interest income is lower than uh uh for the U you know the

34:49

lenders than it is for the for the borrowers and and that’s what the Federal Reserve you know sort of assumes

34:55

that’s what the the uh Reserve Bank in Australia assumes in fact I think from

35:00

looking at their forecast that they assume that interest income doesn’t get spent at all there’s a zero propensity

35:07

to spend it that’s the only way they could be forecasting a recession from the rate hikes because it would

35:13

show you know all this spending taking out taken out of the economy and then as the economy’s shown

35:21

that now they’ve adjusted their models and they’re no longer showing recession I would guess their models now show you

35:27

know maybe 50 or 60% propensity to spend interest income whatever it is but I think they just started with a wrong

35:33

assumption on how much interest get income gets spent you can excuse me a second a glass of

35:43

water um the story there is that at least in the US the interest the general

35:50

view about the impact of changes in interest rates on total spending and on inflation is the wrong way

35:55

around so that when they increase interest rates it it is more likely to accelerate spending than decelerate it

36:03

because the big PIR of interest in the US is the federal government because there is such a high um government debt

36:10

to GDP ratio in Australia it’s more complicated

36:16

I should had this out there first uh that’s okay

36:21

Warren uh anyway we don’t think that central banks are best position to

36:26

manage inflation in the first place do we yeah so um look they don’t understand the source of the price level they don’t

36:33

understand any of that they have their relative value models and then they have their historical correlations and you

36:39

know they do the best they can with without the understandings and it’s really the

36:45

treasury that’s in charge rather than the central bank I like that you sometimes tell the story about a child

36:51

in a in a uh in the passenger seat in the car with a toy steering wheel yeah

36:57

yeah yeah and it’s it’s which is Congress it’s congress’s decisions and you hear people saying

37:03

well mmt thinks we should shift responsibility from the FED to Congress but you’ll never get Congress to do

37:09

anything so that’s ridiculous well it missed a point that the feds the kid with a steering wheel that doesn’t

37:15

do anything it’s always been Congress it’s just had the illusion that the fed’s doing it or people have believed

37:20

it but they’ve never done it so it’s not talking about shifting anything it’s already there it’s been there the whole time

37:27

yeah interest rates just redistribute income in the private sector yeah now it’s it’s it’s worse

37:33

than that yeah because because when you when a government

37:39

raises interest rates the only thing that happens operationally is the government pays out

37:45

more interest on its public debt it doesn’t do anything else it makes an announcement there’s a press release

37:51

does that but then it pays more interest on reserves more interest on treasury bills more interest on new treasury

37:57

Securities it just starts paying more interest and increasing deficit spending that’s all it does and that those funds

38:04

go to people who already have money they don’t go to anybody else you only earn interest on money you already have in

38:10

proportion to how much money you have so the FED in the US by raising rates from zero to five and a half has decided to

38:18

award $ 1.2 trillion which is larger than the defense budget at an annual

38:23

rate it wasn’t that for the last year but the anual rate is there $1.2 trillion which is larger than a lot

38:30

larger than the military spending the people who have money in proportion to how much they have nothing could be a

38:37

more obscenely regressive policy and they’re doing this to fight inflation and to cause unemployment to go up so

38:44

that the economy will get some slack and inflation will come down now how does that could that possibly make

38:51

any sense to anybody who looks at it from an operational point of view it’s it’s like the most ridicul ridiculous

38:57

thing you could hear if somebody ever you know some Congressman brought up the idea well look we got inflation so what

39:02

we’re going to do is we need to get unemployment up so let’s approve $1.2 trillion do to pay to people who already

39:08

have money in proportion to how much they already have I mean it’s like you know even the most die hard you know

39:14

Reagan trickle down conservative wouldn’t come up with that it’s just too far fetched for anybody yet that’s what

39:20

the feder reserve does unilateral and it does one more thing it’s kind of like a

39:25

stock split you know if you have company that has shares of stock and they split

39:30

it two for one the stock Falls in value 50% because you have twice as many shares for the same Equity they do it so

39:36

the price is lower so more people can buy it or something but the value drops so when the government is paying

39:43

interest you’ve got the public debt which is a net Financial Assets in dollars and it’s awarding another 5% to

39:51

the public you know through people who already have money trickle down whatever it’s kind kind of like a five you know

39:57

it’s like like a stock split or a stock dividend we just they’re reducing the value of that whole thing they have by

40:03

just handing out 5% more of it uh and

40:09

it’s completely you know uh on the demand side there’s no supply side event here at all and

40:15

so what I’ve noticed over 50 years is that the inflation rates of most

40:21

countries very closely approximate the um interest rate this the shortterm the

40:27

FED funds rate the interbank rate whatever they’re going to call it the lior rate and I could always just by

40:33

looking at liore pretty most 99% of the time be able to

40:40

understand what the inflation rate was going to be you know not in the same day but over three or six month period of

40:46

time they all gravitated towards short-term liore and and it’s just

40:52

uncanny how that works all the time and of course the economists will look at the causation the other way well that’s

40:57

because Central Bank puts it there because of inflation now I’ve always looked at it I understand that and they

41:03

do that and they talk about it but when they try and change it to make things happen the inflation rate tends to go

41:09

towards where uh you know what rate they change so when Allan Greenspan was fed

41:15

chairman and his forecast show inflation was low interest rates were maybe

41:20

1% and his forecast showed that inflation was going to go up and so he raised rates based on his forecast and

41:28

rates did go up and they all thought he was a genius for having this great forecast and I remember looking at it

41:33

saying no he caused that to happen the higher rates caused the inflation to go to his forecast now I can’t prove any of

41:40

this okay I can only give you the the outline and I’m not trying to say it’s a fact if you say that to American

41:47

economists of about our age they always vulker yeah okay so my story with vulker

41:55

I have a different Narrative of course of course but I was right in the middle of that I remember being on the on the desk and see on a Wednesday which was a

42:01

settlement day seeing fed funds at 28 bid no offer and on my screen going this guy’s

42:09

because what he did was he gave up control of the interest rate he had in Washington and instead shifted it to the

42:16

New York fed who did the actual monetary operations he told the instructions for the New York

42:23

Fed was don’t let borrowed reserves go above $50 billion the banks need more than that don’t give

42:29

it to them okay they just starve them for the money to to stop inflation well

42:34

it’s not possible because the reserve requirement is based on your calculation of what your deposits were at that time

42:42

two weeks two weeks ago then so you calculate that you need 55 billion as a

42:48

system two weeks ago and then there’s only 50 billion there where are you going to get and the other five is an overdraft and the and Washington’s

42:55

telling New York don’t let him borrow on this overdraft you know and so they would trade fed funds to each other each

43:02

Bank try and cover his position which would only establish a short you know an overdraft in the next bank and they just

43:08

kept bidding These funds up and I saw in 28 no offer and and they still had 55 billion of you know reserves five

43:15

billion of which was an overdraft that was not allowed and so it was up to the New York fed to decide when enough is

43:21

enough and say okay we’ll give you enough we’ll cover that over draft with

43:26

a a loan at 14% a loan at 19% a loan at 22% and set the rate that way so instead

43:34

of the Washington and and New York Fed was saying to Washington fed like what rate are we supposed to give them the

43:40

money you know are we supposed to price this overdraft act so all they’re doing is really is pricing the overdraft by

43:45

giving them an alternative source of funds and Washington didn’t understand the question Folker did not understand

43:51

the question and so they just wound up doing this for I don’t know six months or something the New York fed just out

43:58

somehow trying to figure out second guess Washington and they set the rates at 20 22 20 they had them all over the

44:04

place and did the high interest rates bring inflation down or was it something else okay so the way I saw it was a high

44:12

interest rates were pushing inflation up okay they were causing because they were going operating through the cost channel

44:18

the money supply if you want to call it that uh but the U lending and the um you know loans create

44:26

deposits and all that it we had this credit expansion going uh because of the inflation and it actually creates a

44:34

money shortage because if you if you have a you know Apple computer and you

44:40

have $200 billion in cash and price is double you need 400 billion to run your company you’re going shopping with $200

44:47

in your pocket and the price is double you need $400 so it causes a it causes a money shortage inflation does it’s not

44:54

the other way around and B um the deficit spending was 6% which I

45:00

thought was very high but the inflation rate was 12 I’m using very round numbers here okay and so the the real public

45:08

debt was dropping okay by like six% which is the same as running a 6% budget surplus with

45:15

no inflation right and so the the net Financial Assets in real terms in the economy were dropping

45:22

precipitously and at a time when people needed more net Financial assets they needed more Equity to support their

45:29

credit structure they you know this the savings desire was going skyh high because of the inflation and and your

45:36

desires are in real terms when you’re in a real economy they’re not nominal terms they’re fundamentally determined in real

45:41

terms and so we had this horrible crash in 1979 1980 from this collapse of the

45:48

real public debt so when you look at the public debt going up you got to look at it after you know in real terms to see

45:54

what it’s how it’s stressing the population and it’s stressing the population when it’s in real terms okay

46:01

not in nominal terms and so uh that’s what happened and so the whole collapse

46:07

the the the high rates prolonged the inflation they caused the public debt to collapse in real terms which caused huge

46:14

fiscal contraction and and it was one of the more severe but but you don’t hear

46:19

that narrative from anybody no okay and it was so it was so severe that um OPEC

46:25

had been raising oil prices they’ve gone from $3 to $40 in 10 years I think less

46:30

than eight years n years and U you know which is how many times higher 13 times

46:36

higher or something that’s like today going from you know 70 to a th000 or something like that and everything’s

46:43

getting passed through because fertilizer is all petroleum you know costs were going all over and everything

46:50

governments are certainly indexed to that they’re not going to starve their employees they’re going to pay them enough so they can pay the higher price

46:57

so we had this um government spending paying paying the higher prices as OPEC

47:04

was raising the price our military is a huge buyer of oil we didn’t cut consumption because OPEC was Raising

47:09

prices and so uh the price of everything went up to match that which which is a smart thing to do because either you’re

47:16

going to have your real terms of trade deteriorate where you’re sending 10 times more stuff to to Saudi Arabia for

47:22

their oil because your prices stayed low in their oil went high or your prices go up to match it and then you’re sending

47:29

your real terms of trade stay the same so we were in this Lea frog thing which was sort of sustaining a real terms of

47:35

trade so that was you know it wasn’t like in real terms it wasn’t a bad thing to be doing politically it was a

47:42

disaster but that’s a different story um but if you look at just from the economic point of view it was wasn’t a

47:47

bad thing and um it was a wild era because of that you

47:52

know much more than anything anybody’s seen since and uh so anyway it all collapsed

47:58

because the real public debt fell so it’s a TP it’s just another vicious fiscal contraction that caused it now

48:05

the other interesting thing that happened was um the reason the price of oil collapsed was because demand dropped

48:11

by like it was glob it was a global collapse like 15 million barrels a day

48:16

and and Saudis they can’t cut production they cut production by 15 million barrels a day to try and hold the price

48:23

but they can’t cut production anymore because then you have to cap well and shut them down so there was just this excess oil and the price went down to 10

48:30

and it stayed there for a long time until demand picked up enough to where they could start setting price again

48:36

which is a whole other story I won’t go into now well we’re going to maybe going to another student question but I just

48:43

yeah yeah to end that discussion um it makes sense then as you often say that

48:49

we may as well have a policy interest rate in the US of zero and just leave it there yes I think one once you so in all

48:57

the you know my base case for analysis like the British when they went to Africa they taxed there’s a Hut tax

49:03

people came to work they paid them anybody who wanted to work they’d take them down there why not they spent more

49:08

than they collected and they didn’t pay interest on that extra like why would they nobody asked for it it was it

49:14

didn’t even come up and you couldn’t think of any reason to do it and it’s the same with um any of these way back

49:21

then with any of these currencies you know Alfred deg great he did the same thing no nobody ever pays interest on

49:26

that the question never came up there was never any reason to do it or benefit to do it we started the UMKC buckaroo I

49:33

don’t know if you talked about that student currency yeah they they want yeah so they tax the students 20

49:40

buckaroos a semester you earn them by going to work at the hospital or the police station you get paid one per hour

49:47

and they earn enough to pay the tax and some extra to save them because they like to save and there’s no interest

49:53

it’s a zero rate policy so in the basic case for analysis you have a tax liability people show up you pay anybody

49:59

who shows up that’s a job guarantee uh why not and then they earn more than

50:05

enough to pay the tax they certainly can’t earn less than enough and you don’t pay them any interest on it and it

50:11

works just fine and the the value of your currency stays stable okay the UMKC

50:18

pays one Buckaroo per hour of student labor 25 years ago it pays that today

50:24

the value of the buckaroo in terms of dollars if kids sell them to each other has gone from $5 to $25 so it’s

50:30

appreciated 500% but that’s only because the dollars depreciated right it means

50:35

you know $5 you used to buy at an hour of student labor now it takes 25 you know 25 years later that’s got nothing

50:42

to do with this currency it’s internally stable it it doesn’t matter if the

50:48

school goes out and borrows foreign currency they can still tax these kids

50:53

pay these kids they have full employment in buck the whole time they have constant deficits they have zero rate

50:58

policy it’s independent of anything else the university does financially it’s a it’s its own circuit it’s not you know

51:05

it’s it’s entirely stable over 25 years it’s the smallest open economy you could possibly imagine that used to happen

51:12

every time I spoke in Australia with Bill Mitchell’s conference well what you don’t understand is a small open economy

51:17

that feeds up very nicely to alistair’s question which is that you don’t use the term monetary sovereignty whereas some

51:24

mmt ists talk a lot about countries needing to build monetary sovereignty over time to reduce their susceptibility

51:31

to exchange rate depreciations why is that why don’t you like the term you

51:36

know I asked him to define monetary sovereignty can you define it for me it it it it’s sort of a circular definition

51:43

right does I guess it’s a c currency issuing government that collects taxes

51:50

in its own currency doesn’t have a fixed exchange rate and we usually say has no significant foreign currency debt okay

51:57

so if it has let’s say it has a fixed exchange rate and it has foreign currency debt so now is it not a

52:04

monetary Sovereign it’s potentially financially constrained

52:09

in a way that it wouldn’t be if it did well not not but not in its own currency it can still hire the unemployed in a

52:16

job guarantee or just in regular public services that doesn’t stop it it’s not going to bounce checks in local currency

52:23

it can set a zero interest rate it doesn’t stop it it doesn’t interfere with anything at the local currency

52:28

level it’s totally separate circuit that and so that’s why I don’t I don’t I don’t think this use of the word is

52:34

constructive and understanding foreign trade understanding uh problems of

52:39

emerging markets and other places totally counterproductive Warren

52:45

you can you you run out of foreign foreign exchange reserves run out of the ability to borrow foreign currency you

52:50

can be but you can but you can still sustain full employment your local currency okay and you can still

52:59

um you know and if you look at the real wealth of a nation which is everything you produce

53:05

domestically plus Imports minus exports 70 or perc more is your domestic output

53:12

when you’re looking at 30 and 40% unemployment the the losses from unemployment at these countries are much

53:18

larger than any that might happen to the real terms of trade because no matter what happens to your international

53:23

finance the real term of trade stay the same and if you’ve given away some of

53:29

your trading Edge you know it affects your prices that you trade at you’ve given away some of your real terms of

53:35

trade fine okay and what I’ll say is you want to optimize your real terms of trade and here’s how you do it and but

53:42

to to mix that in with monetary sovereignty with which

53:47

is got something to do with the local currency and its ability to function and to use that to uh sustain full

53:54

employment to produce the real goods and services that you’re going to use to trade to get your Imports uh you know is

54:03

it it’s uh it’s very counterproductive and trying to understand how that works and that’s why I like when we were at

54:08

the conference the people who do that they they can’t keep straight how the whole thing works because they’ve got all that stuff you know interfering with

54:16

their ability to to get to the bottom of the of what’s actually going on I should say that Warren and I were at a

54:23

conference in Berlin uh Durk and others organized recently

54:29

before that um we were at an mmt summer school in Poland and uh this leads on

54:36

nicely um to another question we’ve had about what advice would you give to the government of a crisis prone economy

54:42

like Argentina because I know from Poland that Warren has a set of slides on his on the mostler economic site

54:50

anyone can look at um which address that very issue yeah so um

54:55

I tell the story we have like Boy Scouts in the US I don’t know if you have such a thing so I tell the story about these little boy scouts come home and the

55:02

scout master says what was your good deed for today and the little boys go oh five of us helped this old lady cross

55:08

the street and he goes well why did it take five of you he says well she didn’t want to go

55:13

so what you have is a situation in these countries

55:19

where you know they don’t they the situ

55:25

there now is benefiting the people in charge the ruling class is benefiting tremendously

55:32

from what’s going on there now and they don’t want to do these things they don’t what do you mean yeah I could have full

55:37

employment I could have get rid of inflation like why would I do that I’m doing really well with the system I have

55:43

so first you have to have you know the old lady has to want to cross the street you know how many psychiatrist does it

55:49

take to change the light bulb well only one but the light bulb has to want to change right so you got to you got to um

55:58

uh the assumption that these countries actually want some of these Progressive goals we have is completely wrong okay

56:06

the idea that turkey wants something other than it has I think is completely wrong I think they’re perfectly happy

56:13

with what they have and uh the idea that in the United States we could have full employment I don’t think these people

56:19

like full employment that are and I and I don’t think the majority of Americans like full employment

56:25

okay because when you’re at full employment if you want to hire a plumber you got to pay him $75 an hour when there’s a lot of unemployment you can

56:31

get plumber at $20 an hour and there’s people waiting in line you know to kiss up to you to take care of you because

56:38

there’s unemployment so the 90% that are employed when you have 10% unemployed they really like it that way because

56:45

everybody becomes their slave to their money and they go in a restaurant they can demand service and everything else

56:50

and now we have a little bit of a labor shortage we have very low unemployment they hate ha it oh I can’t get help I

56:57

these people want more money they you know they want to take they want to do you know they don’t like it at all so number one we got to be aware that when

57:05

you ask me you know what would it take to what would you recommend to these countries

57:10

it’s who am I talking to and what what would they like to see happen right so given that I’ll let you rephrase the

57:20

question I let me give you an example I was in Argentina a year and a half ago yeah and I met with that head of Central

57:26

Bank he was a young guy and the first thing he said was well you don’t have to introduce yourself because I’ve been reading your stuff for 10 years and

57:33

there were only like four of us five of us at the meeting including the guy who brought me there and we talked they had

57:39

interest rates at 25% they just raised them because inflation was 20% and I had my presentation here which

57:47

I just gave him a copy of pointing out because he that the higher rate was

57:52

causing the inflation and as they rais rates infl was just going to go up and there was just no end to this and the

57:57

other one one of the his analyst said yeah there’s a 1977 or 87 paper by Sergeant Wallace or

58:05

some M you know they’re saying the same thing and I said yeah when debt to GDP gets too high or the interest rate

58:10

itself gets too high because uh even with low debt to GDP they only had 30 or

58:15

40% debt to GDP but at 20% interest that’s 8% of GDP that’s a big number

58:22

okay and so as the interest rates gets high it increases the deficit in the spending and U even with low debt to GPS

58:29

just and he said his answer was he they just negotiated an IMF program he kind

58:35

of liked the program and they were required to they were required to keep a real interest rate are you happy with

58:41

left over with z for dinner oops we got somebody else somebody needs to mute

58:47

thank you somebody needs to mute okay so they they had an IMF package and he didn’t

58:53

want to rock the boat on that so he’s he said you’re right I know we’re going to keep doing what we’re doing so after I

58:58

left inflation goes to 30 so they went to 35 inflation goes to 50 they go to 55

59:04

it’s the same thing right it’s flooding the market with pesos on interest expenses and there’s other channels as

59:10

well and last week it got to like 250% to try and fight inflation it’s like

59:15

there’s no end to this and does he know about it yeah they doing anything no so uh I

59:24

think probably the thing to say then is if uh if we were to imagine that people

59:29

in positions of power in Argentina seriously wanted price stability and full employment uh what what might they

59:38

do to bring that about so what one thing is look the in all these countries

59:43

behind the scenes either explicit or not I think the exporters are in control they control the narrative they they

59:50

have large numbers of employees and you know exports reduce your real wealth but they red they increase the wealth of the

59:56

exporters at the expense of everybody else and so you’ve got this export-led growth narrative that’s supported by

1:00:02

mainstream economics everywhere that was the whole mercantilism thing was ex exporters right fixed exchange rates

1:00:09

build your reserves that was supporting

1:00:15

exporters oh you’re on mute you somehow Warren’s got

1:00:20

muted I’m sorry I think that was me

1:00:27

how’s that yeah that’s better okay so the the the exporters in Argentina sell

1:00:32

everything somewhere else they don’t sell anything in Argentina so they don’t want domestic demand they like a lot of

1:00:39

inflation continuous because it keeps their costs down and that’s all they care about are their costs they can sell

1:00:45

somewhere else and they’re supported by this whole narrative even if they’re not

1:00:51

specifically making the noise themselves they’ve got everybody body around them supporting it you know they they’re

1:00:57

hiring people they have all these jobs you know they got all this non and they know you have to be competitive that’s

1:01:02

how you earn foreign exchange that’s how you pay the IMF the IMF programs are all there to support exporters so the IMF

1:01:08

loans can get paid back right and so there’s this whole like cabal operating that’s supports

1:01:17

exporters and there’s a there’s a superior morality assigned to ex exporting rather than domestic

1:01:23

consumption it’s like a Puritan ethic or something you know to do this and so

1:01:29

you’ve got to get past that narrative before there’s going to be and replace it with something else you know which a

1:01:37

progressive narrative let’s say but until then the these people are so deeply embedded that they don’t even

1:01:43

know it themselves and I remember President Obama who was supposed to be a progressive he got up and said look the

1:01:50

US has a problem they were talking about the trade deficit he was like you know all wrapped up about it and wound up about

1:01:58

it he said look we’re consuming we have to consume less and Export more okay as

1:02:03

a nation and so he gets this Council of economic advisers and the leader the

1:02:09

head of it is Jeff imil from General Electric who is our number one exporter so this like this is like

1:02:16

deeply ingrained thing which is obviously the correct way to go I guess

1:02:22

it you know like it’s not questioned goes without saying you support export

1:02:27

Li growth and even Yan when you were asking about Germany was the same thing everything all these narratives in her

1:02:34

head that were pushing back were all these export Le growth narratives the whole defense of China and how well

1:02:40

China is doing is all this export-led growth thing you know it’s it’s and at the end of the day export-led growth is

1:02:47

exploiting labor to have lowcost Goods that they can sell somewhere else rather

1:02:53

than have have the goods wind up with the people who produced them and uh supporting the

1:02:59

exporters okay so I’ll let you rephrase the question one more time well let’s move on to another

1:03:05

question from from s and another part of the world oh how can I get how would I get to Full Employment it’s pretty much

1:03:12

the same everywhere it’s it’s very quick so just what I told them you go to a zero rate policy you stop paying all

1:03:19

this interest out to people who already have money and proportion to have your foreign exchange rate go either stop going down or goes down less say other

1:03:26

channels about that you um have a job guarantee to to see to get and you fully

1:03:34

provision the public sector at the same time so you get everybody you want in the public sector for Quality public

1:03:39

services and then anybody left in the job guarantee you have loose enough fiscal policy to transition them back to

1:03:45

the private sector and so you’re at full employment you’ve optimized your domestic your real wealth reduced

1:03:52

domestically and you’ve also uh helped your real terms of trade which is a little more complicated but it does help

1:03:58

them and um and that was fine and he he liked the answer and he agreed but it wasn’t anything they were going to get

1:04:04

anywhere near at that point in time there’s no political will to do that and it’s the same thing for turkey

1:04:11

and same thing for Venezuela same thing anywhere it works anywhere but they’re not going to do it it’s just not in the

1:04:18

interest of the leadership and you’re reminding me of that famous paper from keski in the

1:04:25

1940s about the political economy of Full Employment there a bit Warren which

1:04:30

I’m I’m sure you’re familiar with moving on to yeah to move on to uh Susan’s question uh was the European monetary

1:04:37

Union de on arrival or are there structural or operational Innovations short of becoming one country that might

1:04:45

increase the fiscal space and flexibility of its middle income members that was Susan’s question yeah so um

1:04:52

first of all they did what they did because that was the only way they would have a European union and a single

1:04:58

currency so some of the ridiculous things that are in there like the 3% limit you know the Nations wouldn’t have

1:05:05

joined without it because they they were they had their own ideas of things and that was part of their ideology right

1:05:11

and so and the idea that these there’s really no bailouts that the deposit

1:05:17

insurance for the banking system was at the national levels because Germany didn’t want to bail out Italian Banks and so on now they to have that in there

1:05:24

or nobody was going to sign this thing to begin with so they did what it takes to get it signed and I think to prevent

1:05:31

World War III because Europe up till then had a bad history of fighting with each other and they just had the thing

1:05:37

in where was it kovo I remember and uh that might have even been a little after

1:05:42

so they they they have a brutal history you know you go to one of these countries and name a country they’ve

1:05:47

been in constant Warfare for like thousands of years and so and it and it worked we haven’t seen that kind of

1:05:54

warfare in Europe I know Ukraine’s Europe but not within the European Union

1:05:59

um and uh but it was an unworkable document it could not function

1:06:07

economically it was going to hit some brick walls and when it hit those walls I said at the time that they’d be they

1:06:14

would make the correct choices because there’d be no other choice then after hitting you know one or two or three

1:06:19

brick walls they would have you know a successful currency Union and which I

1:06:25

think has happened I mean you can argue it so the first problem they had was the

1:06:31

banking system a banking system can’t work without credible Deposit Insurance you’re just a liquidity crisis waiting

1:06:37

to happen which we saw in the US and then we short up our Deposit Insurance there hasn’t been a problem since had

1:06:43

nothing to do with interest rates of the economy it’s just you know Deposit Insurance so

1:06:50

um uh in 200 um 12 it was all ready to fall apart and

1:06:58

Mario dragy got up there and said we will do what it takes to prevent the fall which guaranteed all the national

1:07:05

debts it meant the central bank they all had a central bank guarantee all the spreads went away they all converged

1:07:11

down to the policy rate over period of time and the deposit insurance was

1:07:17

credible because once Italy or Spain could uh write a check to their Banks

1:07:22

and knowing that their Bonds were guarant by the Central Bank the checks weren’t going to bounce and they were fine uh and so um so they got through

1:07:32

that hurdle the next hurdle was that it was impossible to operate with a 3%

1:07:38

deficit limit uh because they had no ability to conduct countercyclical fiscal policy it was okay on the way up

1:07:45

but it doesn’t work on the way down it’s kind of like when you drive into a car rental return they got those things on

1:07:51

there with spikes on them you can drive over and forward but you can’t back up right so the economies were okay and way

1:07:58

up you had private sector credit expansion you had exports you had all kinds of things and it wasn’t great but

1:08:03

it was okay but then when things went South it didn’t work so when you look at

1:08:10

coid what happened was they abandoned they they changed the deficit limit to

1:08:16

3% limit into a policy tool okay so it no longer became a limit it became a policy tool and Italy ran 11% stuff said

1:08:24

fine no problem because it was appropriate for the economic conditions that’s what a policy tool is and now

1:08:29

they’re discussing whether it should go back to 3% or whether they should allow it to be higher they’re not sitting

1:08:35

there going look we have a 3% by law no discussion they’re recognizing it as a policy tool and I think they’ll

1:08:43

um they’ll they’ll come through with that and use it as a policy tool and now they’ll have a counter cyclical policy

1:08:50

tool and so once they do that they’re kind of home clear so would that do what

1:08:55

it takes guaranteed by dragi which didn’t have to happen he could have let the whole Union disintegrate but he

1:09:01

didn’t and uh and with the use of a policy tool

1:09:07

with Co turning that livit into a policy tool I I think they’ve got all the tools they need to now have a very prosperous

1:09:15

European union and and they are unemployment numbers are still high but they’re like at kind of alltime lows at

1:09:20

6% so they are doing it and they’re going to be cautious they’re not going to just increase deficits to try and get

1:09:26

unemployment down to zero or anything like that but they’re going to understand what the tool does and then now they have three or four years of

1:09:33

hard data where their analysts can tell them exactly what happens when you raise or lower the limit and they don’t have

1:09:40

to be afraid of you know the sky is falling or something like that because they’ve got the data so they’ve got

1:09:46

everything they need now all the tools they need to succeed I think and the other thing that happened I used to be

1:09:51

involved with all these movements to leave the L start your own currency or leave the I mean leave the Euro go back

1:09:58

to lra leave the Euro go back to drba and people don’t want to do that you

1:10:05

know and I would show people how to do that if you want if you got people want to do it here’s how you do it there won’t be any inflation but it’s not

1:10:12

going to work people aren’t going to do it even in Greece when they had their crisis which was horrendous they took a polls and 70% of

1:10:20

the people they were asked do you want the Germans to run the money or you want your own you know Greek government to

1:10:25

run your money they ALS 70% said they want the Germans to run their money they just don’t trust their own governments

1:10:31

running the money they’ve been through such bad times in the past with uh you

1:10:37

know 20% plus inflation and currency going down 50% or more that they don’t

1:10:42

you know they they can’t see the Euro itself as the problem it is the problem

1:10:48

but they don’t see it that way because through this whole thing the Euro’s been stable if they took it a trip somewhere

1:10:54

they could buy things you know and interest rates were low the whole time by their standards very low zero and

1:11:01

everything El and inflation was very low they’ve never had this period of time with this kind of low inflation so it

1:11:07

can’t be the current the unemployment problem can’t be the currency of course it was it was a 3% deficit limit which

1:11:13

was tied in with the currency and so there was never I didn’t think there was ever any real chance that that uh

1:11:20

there’d be any kind of popular support for leaving the Euro I could sympathize with it because they were in a straight

1:11:25

jacket of 3% but uh they came out of it okay without people leaving the EUR or

1:11:32

threatening they came out of because of Co and so now it’s Home Free so go ahead

1:11:38

so would you say Rec signs around the world in the US and the Euro Zone to an extent of policy makers catching on to

1:11:46

some of the insights from mmt oh yeah be optimistic I like to make the point that

1:11:53

you know mmt is one and just kind of declare Victory and move on because if you look at Obama when he wanted to do a

1:12:00

stimulus first of all his advisers cut it in half because they were too scared to even show the two trillion to

1:12:05

Congress so they showed 900 billion over two years just to and then he and secretary Clinton flew to China who they

1:12:12

thought were our Bankers to make sure they would buy the debt before they started proposing running a deficit okay

1:12:19

and then Paul Ryan that number one Republican was talking about going to become the next Greece and we’re going

1:12:25

to be on our knees at the IMF begging for money we can’t have this program and

1:12:30

you heard Paul Krugman had this big document saying interest rates were going to go up and all all these all

1:12:36

this you know nonsense that well was was there in Spades and it we had a much

1:12:43

weaker recovery than we should have had and it it was it was not good and then

1:12:48

eight or nine years later with President Biden it’s like they pass you know $5

1:12:54

trillion in coid spending not a word about that other stuff all they talked about was how much inflation might or

1:13:00

might not cost and maybe the Republicans were against that much because it would cause inflation and Democrats wanted

1:13:06

whatever they compromised at some number but the the change in the argument was clear that it went from solvency to

1:13:14

inflation which is exactly what we’ve been trying to get across for 30 years

1:13:19

and so I you know I you know take the win right yeah I I I wish we were a bit quicker to

1:13:27

take the win in Australia our policy Mak slower yeah yeah

1:13:33

sure unfortunately but we’ll catch on eventually I I guess um I we probably

1:13:41

ought to be moving towards uh towards ending now um is there anything that you

1:13:47

would recommend uh our students or other people on the line read or or look look

1:13:53

at to um deepen their understanding of some of the things we’ve been talking

1:13:59

about your I think it’s I think what we talk about clean sheet of paper is easy

1:14:06

to understand yeah especially my book is very easy right it’s it’s non-technical

1:14:12

and it’s all there but the hard part is reconciling it with what you hear and

1:14:17

what policy makers are saying and then trying to get through to them and in a

1:14:23

way that they can understand it and I think that’s the challenge and I think there’s been a lot of inroads and it’s

1:14:28

made a lot of sense because if you Google any one of those policy makers

1:14:35

like mmt and then the name you’ll see a statement that they’ve made you know if you you do Jerome Powell mmt it’ll come

1:14:42

up Powell says it’s nonsense Mario dragy mmt he’s Mario

1:14:47

dragy says we should take a closer look or something so they it’s gotten to the point where they’ve all I’m commented on

1:14:53

it which means it’s there and so learn the fundamentals which isn’t that hard

1:15:00

uh and it’s all in the white paper and the white paper has links to all the things that are written be be careful of

1:15:07

what the other mmt proponents right because a lot of them get pieces of it

1:15:13

wrong and what I what I’m just G you know from I’m talking from my point of view yeah and then when you start

1:15:20

arguing with policy makers from what would call out of Paradigm things uh

1:15:25

you’re G you can lose the arguments because you’re wrong so when you um and

1:15:33

so I would be careful of those things whenever anything’s out there that isn’t

1:15:39

reconciled with what I’m saying get to the bottom of it and if you think I’m wrong and they right fine but get to the

1:15:45

bottom of it because you don’t want to walk around with you know in a paradigm that has you know it’s you want it to be

1:15:52

Bulletproof I’ll tell you I’ve had this stuff out there for 30 years now and I don’t think Steve I don’t think there’s been a word

1:15:58

that’s been you know uh shown as not correct right I mean I had typos but apart from

1:16:04

that uh I’d say virtually every time that I

1:16:09

think I disagree with Warren then a few months later I’ve changed my mind yeah

1:16:14

and sometimes it was because you hadn’t quite had what I was saying in context which is okay but the fact that you go

1:16:20

back and reconcile it whether it takes a or two months and talk to other people you know um and you’ll find out at the

1:16:28

end of the day that you know what I have is logically sound it’s bulletproof it I don’t lose any arguments with policy

1:16:37

makers when I talk to them on discussions uh and because it’s just too

1:16:43

simple I mean this was common knowledge 250 years ago everybody in Africa knew how the silly Crown worked everybody in

1:16:50

Pompei knew how their coins worked you know that the government would tax you

1:16:56

so that you have to earn these coins you’d show up they pay you to be a police officer in these coins and then

1:17:01

you’d pay them some some of your ideas people had half

1:17:06

developed before had they Alfred melinis a 100 years yeah yeah yeah he was a lawyer yeah he just wrote up how the

1:17:14

currency worked back then and he had it I’d say it all there sure and uh and

1:17:19

there are pieces of it in different places but that doesn’t mean it came from that and the other thing is people

1:17:26

will argue historically which and I’ll say it doesn’t matter and and Randy Rand

1:17:32

says to me oh no it does matter it’s got to be historically consistent it’s like like why well otherwise people aren’t

1:17:38

going to take you seriously it’s like okay but that doesn’t mean it’s not going to be right if you put me in a room full of people and I have to set up

1:17:44

a monetary system I know how to do it whether that’s the way the British did it or that somebody did it you know

1:17:50

4,000 years ago I don’t really care uh I can set it up right then and there it’s going to work and it’s going to function

1:17:57

be a full functioning monetary system just like the dollar the pound or anything else and and that’s what I’m

1:18:04

focused on how today’s currencies work rather than arguing about how we got to

1:18:09

where we are I like that part I’ll you know look at it and read about it but it’s

1:18:14

not it’s not what the important thing is to have a progressive agenda right and

1:18:20

what I have is a base case for analogy and get can they say oh mmt is uh means

1:18:27

you have to have a JG or something no I have a base case for analysis where you

1:18:32

put on a tax and you hire anybody who shows up for work you pay them they pay the tax and save some now if you want to

1:18:39

give me a reason to not hire everybody who shows up or

1:18:45

not pay them enough so that they can pay the tax the total payment so I have to go burn their houses down we can discuss

1:18:52

it and I’ve had these discussions and it by the end of the discussion it’s like

1:18:57

well okay we are better off having a you know my reason for not having a JG the

1:19:03

burden of proof is on somebody who thinks you should not have the JG the burden of proof is not on me to say why

1:19:09

you should have it the burden of proof is on you to say why we should not have well instead of having these people there we’re better off if they’re going

1:19:14

to be unemployed like why the private sector won’t hire them once they get unemployed they’re going to be

1:19:20

unemployed a lot longer don’t we want them back working in the pr private sector doesn’t the private sector only hire people working or prefer to hire

1:19:26

working people so let’s you know let’s keep the buffer stock fresh and clean and ready to go to work and they go well

1:19:33

okay yeah if that’s when you put it that way it makes sense so um I haven’t had

1:19:38

anybody the Buckaroo the UMKC the Dennis and dollar which is Fidel’s you know

1:19:44

they’ve been working for decades and nobody’s had any reason to change from

1:19:49

that and and they all have full employment abs absolute price stability and zero rate policies and they haven’t

1:19:56

had any reason to try a higher rate it’s like they when they look at it and they think it through they go like why would

1:20:01

we do that you know or why would we cause some of our people to be unemployed we want to do public service

1:20:06

for the school like you know there’s just no uh why would we try and balance

1:20:13

a budget you can’t come up with any reason to do that once you they’re operating this model and so I’m all open

1:20:20

you know I’m all ears to anybody who wants to de deviate from the base case but we start with the base case a simple

1:20:26

model to show how it works and then if you want to deviate from it fine but the burden of proof is on you to deviate

1:20:31

from it because the way it is works really well it it fully fits and

1:20:37

supports the progressive agenda which I’m synonymous with the green agenda by the way it supports all everything like

1:20:45

that we want to do you know efficient deployment of resources everything else as a base case to and

1:20:53

I haven’t had an environmentalist come in and say well we want to deviate from the base case or anything it that doesn’t help anything yeah it’s all

1:21:01

supportive so we’ve got the pillars there and if they need to be changed fine but go you got to show me that you

1:21:09

know you can talk to policy makers politicians I’ve had conversations with politicians where they’ve understood all

1:21:15

this but they won’t talk about it still yeah

1:21:21

theor that’s sort of thing um we’ve uh uh in in in Australia we have a very

1:21:28

popular show on ABC called Q&A if you’re wondering why mmt hasn’t been more on

1:21:34

Q&A they invited Bill Mitchell on once the labor party objected and they

1:21:39

withdrew the invitation uh I’ve done a talk in CRA at the department of prime minister and

1:21:44

cabinet I tried to get them to have Stephanie to give a talk they’re scared of the ideas some people some some we

1:21:52

have senior people in Australia who are perfectly happy with things as they are at the moment and and some of them understand

1:22:00

yeah to to my to my point before yeah yeah absolutely so we have to force them

1:22:06

to to but look it’s gone from it’s gone from me to guys in my office you know to

1:22:13

a few academics to millions of people all Grassroots not a single celebrity not a

1:22:19

single mainstream Economist of any note some students and things have come over

1:22:25

but um now who so it’s been a Grassroots movement that’s gone from zero to like Millions where every policy maker knows

1:22:32

about it and tries to avoid it right so that that’s pretty amazing most Grassroots things are things like you

1:22:39

know save the whales or you know you know environmental degradation and things like that how many Grassroots

1:22:45

movements are there over like monetary operations so it’s it’s completely improbable that we’re at the point where

1:22:52

all of you are here like intently on this understanding that this is the

1:22:57

biggest thing you can do to to to bring about you know a constructive change in

1:23:03

life no matter what you’re trying to pursue whether it’s uh you know on the environmental side or which you have to

1:23:10

do or you’re goingon to have nothing of course but um you know or anything else on the social Equity side this is all

1:23:16

like fundamental and so people are on it and it’s it’s it’s technical it’s monetary operations it’s debits and

1:23:22

credits at the central bank and it’s a huge Grassroots movement I I I just

1:23:27

think it’s like been an astounding thing to watch for me for 30 years to see this happen with no top- down support it’s

1:23:35

all been bottom up it’s all been people like yourselves a lot of you probably aren’t even trained in economics or anything but want to get involved and do

1:23:41

this and once you start get into it a little bit you very quickly see how all these people who are authorities or

1:23:48

whatnot are wrong I mean really wrong dead wrong okay and and uh and that just

1:23:56

is a good feeling from not that they’re dead wrong but that you if you know you

1:24:01

know something that they don’t and you’re right and they’re wrong it doesn’t happen in too many fields you

1:24:07

don’t get too many nuclear physicist up there talking you go man that guy’s wrong and I know how that quantum

1:24:12

mechanics works okay but these senior economics people we’ve got it where regular people you know from any

1:24:19

profession can look at them and say you’re completely out to lunch you know and so uh that that’s motivating and

1:24:26

it’s motivating because of all the constructive change you can bring if we can just get them to come around or go

1:24:31

away one or the other right and so my hats off to all of you for being here and doing this well that’s a fantastic

1:24:39

place to to end Warren I’d like to thank you so much for for being with us and uh

1:24:45

um you can give everybody my Twitter and my email just ask me questions anytime

1:24:51

you know well I think you might you might get quite a few questions Warren because the ones that some of the ones people sent

1:24:58

in before but we didn’t get to the ones that are on the screen some of which I

1:25:04

I’ll be able to answer as well but yes you should follow Warren on well if if you ask them on the Twitter account then

1:25:10

other people can all see it that’s right it’s kind of it’s kind of like a bulle board absolutely and and and I answer a

1:25:16

lot of questions on Twitter not because the guy asking him I particularly want to answer but but I know you’re getting

1:25:22

those kinds of questions so I want to give you sound bites and so if I can do it in Twitter and a few characters

1:25:28

that’s something you can do with your next door neighbor or your bank president or whoever you’re talking to next can we ask you back again in

1:25:35

another trimester Warren oh yeah that would be absolutely great um well thanks

1:25:41

thanks again and I thought said the end at the beginning but uh uh what Warren

1:25:47

Warren’s insights transform my life my career my view of the economy they are

1:25:52

the reason why uh we are running the courses that we’re running and if we

1:25:58

ever make any real progress then U Mr Mosler is GNA go down the history of

1:26:04

economic thought as a a very important figure so let’s give him a round of applause and thank you very much Warren

1:26:11

for being thank you very much