Warren Mosler: 8garren gezurra politika ekonomikoan

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Warren Mosler | The 8th Deadly Innocent Fraud

Bideoa: https://www.youtube.com/watch?v=vdua4gc-xus&t=540s

Presented 15 July 2024 | MMT Conference | Leeds University

Transkripzioa:

0:04

but the deadly innocent ones are the ones that are doing intense damage and I

0:11

would give them the the idea of innocent fraud is you’re giving them the you know calling them innocent is more damning

0:17

than Not Innocent because if they know this you know it’s it’s um I don’t know

0:23

but you say it’s so dumb enough I see any that came from John kenth

0:30

I picked up okay so the innocent fres had a myth

0:37

in a reality the myth is the fraud and the myth is that raising interest rates Works to slow the

0:43

economy increase unemployment and bring down inflation and as you heard from Randy

0:50

that was their intention when they started okay uh reducing interest rates

0:56

Works to support the economy reduce unemployment and increas inflation as Japan has been trying to do for 30 years

1:04

okay that’s supposed to work that way and this is driving policy it’s believed

1:09

it’s in it’s textbooks it’s you know Federal Reserve research this is what

1:15

they conclude this is what they do and this is the way they conduct policy and

1:21

and uh so let me get into it then remind me if I don’t tell you the reason it’s so damaging at the

1:27

end okay number one the f has it backwards and I’ll say they don’t know

1:33

they backwards they might be suspecting now after many of you and others have

1:39

been bombarding social media with the got backwards I and because of all you

1:45

doing that I managed to get a Bloomberg interview which I guys been avoiding me

1:51

for I don’t know eight or 10 years but I guess the social

1:57

pressure rate increases deficit spending to increase and support the economy

2:03

reduce unemployment and support prices okay it’s pretty obvious

2:09

right and they’re just like a complete denial now uh if you look at how much

2:17

well anyway cutting race is in fact actually reduces government deficit

2:22

spending which reduces economic growth employment and price pressures

2:30

okay so I actually have been on to this for a while but debt in GDP has been

2:36

lower it’s been about 35% it went up to 100% this Deb out by the public with Co

2:42

and that changed the Dynamics as Randy touched on that the idea is all model if

2:49

the de gets high enough the interest becomes that kind of a problem where RS are no longer

2:56

anti-inflation the only okay when what happens when the types interest rates the only thing that changes is the fed

3:03

and the treasury pay more interest to the economy okay the FED pays more interest on reserves and RSE purchase

3:10

accounts these are there because of their quantitative easing where they went out and bought Securities they have

3:15

some anyway but uh and that built those numbers up trillions were before it was

3:21

trival so when you look at total government deficit spending you uh on a

3:26

functional level include net spending by by and I don’t know the CBO didn’t use

3:35

to do that Stephanie you know the CBO now including that in their deficit well there’s remittance they sh

3:42

yeah do they count that as part of the deficit yes okay so they just came out with a 7% number for deficit us deficit

3:49

down so I think that probably includes the FED payments otherwise they would have had 6

3:56

half the treasury pays interest on new Securities that issues those are called

4:02

treasury bills notes and bond so every week the treasury selling new treasury bills the old ones mature at least for

4:09

the first year you know for the first couple of years the new bills were

4:14

issued at higher interest rates higher interest expense than the ones that matured so their interest expense is

4:20

going up as the old debt rolls off and the new debt is put on those are pretty fast the whole bill portfolio doesn’t go

4:27

long in the year first year weren’t all the way up to 52% but they’ve been gone

4:32

continuously and that number has gone up continuously and it’ll continue to go up I think the duration is about four years

4:38

of the treasury portfolio which means uh you know on average it would take four years for the whole 28 trillion to

4:46

turnover but the FED owns a lot of them and pays interest um you know overnight

4:53

turn them so that that loss that recognizes shows up is is Def

4:59

um and in the financial markets if if you’ve got a security that yielded 3%

5:08

your fund and you know that when it comes due six months from now or a year from now the new investment rate is 4%

5:16

or 5% that is already factored into your you know assumptions of what you have to

5:22

do on your assets sign so even though these the interest ratees the average

5:28

rate paid last year 3.4 something like that uh the markets discount the fact

5:35

that they’re going to be getting higher rates later the financial markets and that’s not everybody so it’s only a

5:41

partial effect so the effect is a little bit higher um and the rate increases are not done

5:48

in conjunction with offsetting tax increases the increase in government interest expenses all new deficit

5:55

spending you never see the FED say we’re raising rates and we’re going to increas taxes

6:00

they just raise rates the government pays more the deficit goes on period in

6:05

short Fed rate has continuously flood the economy with new money there I did I

6:10

did I Ed the word money New Balances at the FED it’s reserves it Securities okay

6:19

this this is a very casual presentation meant for General audience or other people can

6:26

understand flooding the economy with money and what I’m saying is they’re throwing kerosene on the fire and not

6:32

water on the fire they’re drilling holes in the boat to light the water

6:39

out oh here’s the interest expense that’s annualized so the new rates the

6:46

annualize from last month that was the end of the quarter so it’s a little bit old like 1.2 trillion now

6:54

something and gdps um 28 by the public so

7:02

that’s three 4% pushing 4% ter is

7:08

yeah new territory here’s the debt to GDP I was talking about so back before 2008 we were

7:15

somewhere around 35% and that now it’s up to

7:21

97 that was the end of the quarter 379 I don’t know if it’s going up a little or down it’s way out it’s about a triple

7:26

what it was so if the debts in GDP had been

7:32

where it was then they’d only be paying interest on 10 trillion

7:38

instead and the interest expense would be a lot lower and it would be less of a factor however even back when uh

7:45

chairman banii cut race in 09 08 uh my concern was that that cuted

7:53

race a cut $400 billion of interest income out of government

8:00

spended okay and so that was working against their stimulus which was trying

8:05

to you know deficit spend to add spending so here we had 400 billion of drag from the rap C and it’s interesting

8:13

I was at a Fed meeting with partment Korean and a research guy at the fed his

8:19

name was Dave we’re talking about quanita treur was buying um Securities

8:25

this was before the r c was right after the

8:30

ra and he was talking about how you know whether it be inflation I said look I’m

8:38

not so much interested in that is that when you buy these Securities at four or 5% you’re paying zero on Reserves at the

8:45

time it already cut RS you’re eliminating interest income from the economy you just cut the economy’s

8:52

income by 90 billion dollars a year with this rate cut and we have we’re having a

8:58

very professional conversation three normal voices all of a sudden it was

9:04

like this guy was hit with an electric shock and he goes against like defensive

9:10

I’ve never seen anybody in govern with he goes look we only have one lever and it’s interest rates and we believe lower

9:16

rates are easy and you know we’re not going to discuss that so sorry I asked a

9:22

question about removing 90 billion okay so they must have been having some kind of a discussion behind that I guess I

9:28

don’t know uh so that anyway now the debt the GP is way up there so back then if you increase rates 1% that would be

9:36

at interest income of maybe 35% of GDP after everything’s

9:41

discounted ultimately and today 1% increase is going to increase

9:48

by almost 1% full percentage of G so now it has three times the fiscal impact it

9:54

had then and I was concerned about it then I was concerned about it before that I my first paper I WR back in 96 or

10:01

97 called the natural rate of interest is zero talking about how this interest income effect is enough and I started in

10:10

financial markets in the 1970s and uh even when vulker was doing what he was doing I was thinking that

10:17

the debt to GDP even at low levels was supplying enough interest income to reverse the effects that they were

10:24

trying to achieve and that the effects on the economy were from the deficit

10:29

spending and not from the change in interest rates even that so boker’s I don’t my narrative is not that boker’s

10:36

rate hikes caused the crash is that boker’s rate hikes caused inflation to

10:42

be where it was or supported it where it was anyway we had oil price increased at the time inflation was running and I’m

10:49

just going to use very round numbers I 12% and the deficit was six so adjusted

10:55

for inflation the deficit was running a okay and so if you looked at the public

11:02

debt in real terms it was going down you know that doesn’t happen very

11:07

often it normally happens in front of a crash like we had in 197 1980 so I

11:13

Associated that crash even back then with the drop with you know fiscal shock

11:18

now the interest rates helped the support by helping to keep the inflation up so the real value of the public that

11:24

down anyway little bit of a side hisorical side TR

11:29

on the federal debt 96% of GP three times higher than cycle the rate

11:35

increases increased interest expense three times the fiscal impact during

11:40

prior periods which even then I thought the impact was more than sufficient to have this kind of effect so about two

11:47

and a half years ago when they first started raising race I I normally wait to see how data works I came out

11:52

proactively ahead of time saying this is nuts okay three times the impact of the

11:58

last one and I the data on the last one’s pretty borderline it looks like it probably was working backwards then as

12:04

well and certainly in the rate cuts it looked like it was working backwards because things were slowing down and in

12:09

Japan with the zero rates you know it didn’t have any effect okay um and there

12:16

was I heard there was one other investor in the room here who was looking at the same thing but it was pretty lonely

12:22

position to have and U okay

12:29

get to the fundamentals of how monetary policy is supposed to work in the

12:35

economy okay not including the government for every dollar borrowed there’s a dollar save you look at a bank

12:42

balance sheet they have loans and deposits okay if you do it at an individual level somebody owes you money

12:48

interest rates go up or down that affects how much he he gains and you lose or you lose Gams right not um this

12:56

would only slow the economy if the borrowers cut their spending more than the Savers increase their

13:03

spending so in the economy without government for every dollar borrow there’s a Dollar Save when you raise

13:08

rates all you’re doing is transferring income away from borrowers towards Savers that’s supposed to have a

13:15

profound effect on the economy because it’s presumed that borrowers are a lot more sensitive to that and they’re going

13:21

to get cut out and stop spending which is what GDP is and the savers who get the extra money they’re probably not

13:27

going to spend nearly much of bers going to come back because people who aren’t interest are like foreigners and Pension

13:34

funds and you know places that don’t spend their income so there’s a presumption that this difference uh is

13:41

enough to have a big effect on the economy raise rat slos economy so

13:47

there’s a guy used to work with fed that used to visit named Steve and he was in operations and one

13:53

of his jobs was to look at this to see what these differences are and propensities to spend income how much

14:01

difference is there between borrowers and Savers ask you you know how much he says well look our position is that

14:08

there is a difference and that low raising rate is going to slow things down because it will hurt the borrowers

14:13

more than it will help to save goes but you know I’ve been doing the econometrics now you know for 20 years

14:19

and I haven’t been able to detect it in the D so

14:27

and okay studies that’s a word for I talk to Steve that’s what I’m getting

14:34

studies show this is a small factor it’s dwarf by the enormous amount of new

14:41

interest here’s the other problem or this maybe the biggest R hkes are

14:47

obscenely regressive interest payments only go to people who already have money obviously right and it’s in proportion

14:55

to how much you already have so the more you have the more you get okay fed R rate hikes are causing the government to

15:02

spend trillions of dollars on interest only for people who already have money in proportion to how much they already

15:08

have what kind of government policy is this Reagan would have blushed if

15:13

anybody suggested this to or Dashers remember I call it basic income

15:21

for people who already have money now there’s some basic income proponents here but how many of them favor giving

15:27

income only to people who already have money in proportion to how much they already have like none right so this is

15:33

like off the charge as they say this policy for anybody okay what could be

15:39

more obscenely regressive and the FED decides to do this on its own to fight inflation there’s no Congressional vote

15:47

so you got these guys at the fed and in the Bank of whatever saying all right we got an inflation problem here’s what

15:52

we’re going to do we’re going to give people who already have money a lot more money in proportion to how much they

15:57

have you know until this goes away and if it doesn’t go away we’re going to keep giving him

16:03

more all right so it’s funny except this is happening this is real world stuff

16:10

this is not like some Theory this is what they’re doing okay so

16:16

um I was in Argentina Disney was it two years

16:22

ago augus here uh and I met with this guys the central bank because they had

16:29

inflation at 25% I think my numbers might be off my and and ra rates to 30%

16:36

I wrote this thing which you can get on my website it shows that and I was saying that the same thing this was in

16:42

the paper but that was causing your inflation and they were doing this pretty much because the IMF was

16:49

demanding it keeping a real rate you have to keep the interest rate higher than the inflation rate to fight

16:55

inflation and I I went to so I I meet this guy at the central bank I don’t

17:00

remember his name he goes hi you don’t have to introduce yourself I’ve been reading your stuff for 10 years now so

17:06

that was kind of nice so I go through this stuff and and he he had somebody

17:11

else there with him one of his associates and he says oh yeah Sergeant Wallace or somebody May kind find out

17:19

said this in 1987 you know so we understand this but you know we can’t do anything and besides it was this guy

17:26

Guzman or something made Central Finance Min who had made they they were

17:32

all white parted it they like the arrangement for some reason I guess CU they got a lot of new money foreign

17:38

exchanges so anyway so I leave the meeting and he’s got all the information he knows all this and in the next two

17:46

years inflation goes to 35 so they raise race to 40 okay inflation goes to 50 so they

17:53

raise rates to 60 inflation goes to 70 so they raise rates to 80 okay how this

17:59

in inflation goes to 100 they’re at 110 they’re up to what 200% and then this guy with a chainsaw

18:06

wins an election and then they cut rates to only 40 but okay so how much were

18:12

they deficit spending with rates at 100% I I can figure that out their debt to GDP is only 40% well that means they’re

18:20

spending 40% of GDP to pay interest this is nuts and it goes to people who don’t

18:26

who already have money who have all the PES they want sell in the Foreign Exchange Market PES it goes down so they

18:31

get more inflation so they get more interest this things goes on for years until guy with a chainsaw takes over and

18:39

he’s got rates down to 40% which still isn’t enough and so the inflation is still going away I don’t know what the

18:44

next step is going to be and and they did that in turkey and guys kept throw out gun and the next guy ra ra again so

18:52

um so the thing is where does it end in the United States right now we think

18:57

we’re in a slow spot with the cut rates and maybe they are Maybe I’m Wrong which

19:02

is great I’m 75 this year I can just crawl into a little hole and go

19:08

away and get out with my life but I think there’s a pretty good chance of 7% deficit this thing is just

19:15

kind of some kind of statistical soft spot uh because unemployment claims are

19:21

down to 220,000 like record lows and they gone up to 240 which is still record low but they went up 20% then

19:29

they came right back down and the unemployment rate is now reported they gone up from 3 and a half to 4.1 over 6

19:35

months which is certain percentage it’s still hovering on what would have been 50 or lows and it’s based on this

19:42

household survey that’s very small no participation and they trying to get rid

19:47

of it defund it it might be right but the establishment survey which is much

19:53

larger and shows a job growth if you use that for the employment source of employment numbers you still get about

19:58

3.8 but they’re seeing it go up which is okay and the fed’s talking and they want to seem to want to lower rates and maybe

20:05

they will now if they do lower rates they’re not going to lower interest expense because it’s still catching up

20:12

from where it was last because there’s still Securities maturing and rolling over and everything else and the average

20:18

rate paid by the treasury was only like 3 and A4 3.3 last year a trillion dollars on 2018 so that um even if they

20:27

do that r going up and the CBO is predicting the deficit to go up now what’s interesting is that rates are 4%

20:35

of the 7% deficit but that 3% is helping a lot that’s still very large for a pro

20:40

cycal deficit one of the largest ones we’ve had after twoe expansion tax revenues have not been going up a little

20:47

bit but they’re pretty flat and they’re always not you know under estimates of what tax revenues because as Randy

20:53

pointed out when the economy grows the tax revenues grow even faster than the government government can spend money

21:00

deficit goes down and the whole thing crashes might take a few years but that’s the process this time these tax revenues aren’t I don’t know why I can

21:07

guess that it’s got something to do with these tax credits that they’re giving for energy Investments because those

21:15

things are open-ended it’s not like oh we’ve got 100 billion limit or 40 billion Li they’re

21:21

unlimited okay and what do I read I see these charts going straight up of new solar and wind being deployed everywhere

21:28

which is fine you know the cost but it’s it’s it’s gone nuts and then um

21:33

personally I just put up solar in one of my rental buildings I have and you know now I won’t have to pay any taxes next

21:39

year it’s a 40% tax credit for buying solar stuff through house I buy a car

21:44

and I plug it into the house as a solar battery I get a 40% discount on my car so there’s all these open-ended tax

21:52

credits are going on and probably a lot of other things I had a friend worked for a who worked for accounting company

21:58

accounting firm I said is anybody else doing this he said oh yeah all our clients you said we have these what used

22:05

to be called tax shelter where they invest $100,000 and they get a $40,000

22:10

tax credit and it goes into solar for some building somewhere they said are you doing a lot of them because oh yeah

22:17

oh yeah everybody’s tax return I do what about the other firms yeah it’s really competitive all the firms are doing the

22:22

same so I I don’t know it’s just standing total information but tax revenues have not been going up it’s

22:27

another automatic stabilizer that’s been disabled transfer payments are not going

22:34

up because unemployment is low it’s not going on so this deficit keeps going

22:40

right so where are we the entire Financial Community believes increasing the government’s

22:45

deficit

22:51

spending look like I so um throwing trillions of dollars of

22:59

interest payments to people who already have oh I see reads This One S the F Congress the entire Community

23:06

believes that increasing government’s deficit spending by throwing trillions of dollars of interest payments to

23:11

people who already have money fights inflation by causing unemployment to go up in the economy to slow down that’s

23:17

why we’ve all been forecasting recession ever since the started the rate increases which is true it’s but

23:24

monetary policy works for the lab it was six months to a year became 18 months

23:29

became 2 years now it’s finally kicking in because of these numbers or so maybe

23:34

it does okay Japan has been saying monetary policy worked with a lag it had zero rates 30 years they say we just

23:41

need a little more time and so did the central ecd we just need a little more time

23:48

after 10 years of zero okay what’s been happening in the economy the economy has

23:54

been booming relatively speaking type of growth is not going common real

24:00

grow unemployment near 50e lows even after these increases it’s a high

24:06

percentage increase it’s enough to cause the FED to worry about spiraling out of

24:11

control uh and they may cut rates in September ever since the economy is

24:16

defying the fear mongering and rapidly growing okay growth is now only 2% this

24:21

quarter first quarter was only 1.45 because firms didn’t build

24:27

inventory they let their inventory R down because they were watching all these forecasts okay now they got to rebuild

24:33

them and I think it’s all going to come back but you know I I could be wrong uh

24:39

inflation indicators Spike due to covid disruptions and an oil price spike from the Ukraine war oil went up to like 120

24:47

remember early on and so everything else goes up fertilizer made out of oil right

24:52

so food prices go up surprised shipping charges everything goes up okay and then

24:58

as some kind of Unholy deal was made with the Saudis I w’t go into what that

25:03

probably was and how that worked but prices came down and they’ve been kind of flatlining sideways ever since

25:10

inflation indicators is what I call them it’s not really inflation but what we call inflation indicators you know guess you know they

25:18

went up came down and now they’ve gone sideways for the last three or four months slight down tilted them okay you

25:26

know we won let’s cut interest rates Maybe again maybe they will okay fed still thinks the rate hkes are

25:33

restrictive and just need a little more time to create a Slowdown and they now think they may have already done

25:40

it okay here’s the latest inflation numbers is changed from the previous

25:47

year inflation shot up July 22 was a peak in oil prices surprised

25:54

that CPI shows the teeth is like the same minute okay comes down

26:01

now I don’t know I guess if you have enough analytical tools this becomes a

26:06

sharp decline it looks to me a lot like it’s you can say it’s still going sideways

26:13

I’m not saying it’s not going to go down to right to their target or anything but you know oil prices stopped going down

26:19

and now they’ve actually started to go up a little bit 86 for Brent last I saw

26:29

the FED has it backwards it responded to high inflation indicators low unemployment rate hikes rate hikes on

26:36

employment go lower and inflation indicators went higher up till July uh

26:41

when the FED saw that they hyped again they continue to raise rates as they saw their inflation going up the spiral

26:48

continues with no end in sight if they don’t see the error of their ways reverse course that might be right or

26:54

wrong we will know probably in the next three to six months if that turns out to be correct and we’re we are on the path

27:02

of Argentina we are now chasing our tails on the way up because they will raise

27:09

rates again if the inflation numbers flatten from here from that sharp

27:14

downturn you saw and start to drift up a little bit that’s going to happen and

27:20

then I don’t know how it ends or if we get lucky some other deflationary shock like a collapse in oil prices may cause

27:26

them to cut rates to stimulate economy which doesn’t work either what’s the answer the F should

27:34

cut its policy rate back to zero it’s a budget cut of over a trillion dollars a year this is$ 20

27:40

trillion scored for deficit reduction by the CBO in 10 years it’s the lwh hanging

27:45

food for deficit reduction where are all these fiscal Hawks when you need

27:51

them they’re gone they’re nowhere in sight and now if that’s going to be too much of a cut of course so the econom

27:57

will slow down so now you can add back in public spend you know spending for uh

28:03

you know public education and health and anything else you want you know or defense if you’re rightwing but it gives

28:08

you fiscal huge fiscal space okay upward pressure is removed from the inflation

28:15

I’ve observed and I’m not going to say anymore right this that the infl the

28:20

inflation rate tends to

28:26

uh hover around the interest rate so when you raise rates to 5% like we have

28:33

5 and a half the inflation rate’s going to creep up towards the 5 and a half to the FED fund rate over time I’ve just

28:40

seen that over my 50 years and watching it happen every time and I think it’s a different presentation it’s partially

28:46

this interest expense it’s also forward pricing and U it’s Al you know but um

28:53

I’ve just observed that so it wouldn’t surprise me to see these inflation indicators back up over time and in fact

29:00

the last wholesale price number that came out Friday right started moving back up again okay upward pressure is

29:08

removed from the inflation indicator so they can settle back to where they were before the co Crisis crisis only want to

29:15

say because rates back to zero they can go back to where they were when rates were zero if we leave rates high you’re

29:21

going to sell back to the interest rate of today which is 5 a half% not back to

29:26

0%

29:35

that’s it how’s my [Applause]

29:44

time we’ve got about 12 minutes for some questions

29:53

okay thanks for that Warren um the the uh has uh uh mortgage back Securities

30:01

Etc in treasuries they get interest uh from the treasury interest payments and

30:07

then they re uh remit to back to the treasury now because they’re paying

30:14

interest on reserves they’re actually have negative yeah that’s called REM

30:20

right they’re negative yeah that’s part that’s deficit spending but is that is

30:26

that measured in when I at the treasury daily treasury

30:31

statements not there yeah Stephanie we talked about this and she talked to the CBO and no it’s it’s straight on the C

30:39

it’s on the CBO it’s on the cbo’s budget Outlook so you have expenditures and

30:44

revenues and remittances to the FED are revenues but when when remittances go to

30:49

zero you just see zeros in all of those future years as long as they netive well

30:56

they actually they do go they

31:06

goesan disappear and so that increases the def and then also to the Chanel

31:13

because the government itself is that’s on the EXP side and they have on side

31:19

both inre so are we saying that policy is FIS policy it’s hijacked right changing

31:26

interest rates balance for sure for increasing

31:36

government I call the fiscal impact of their monetary

31:43

policy in a situation where you had a 0% interest policy and

31:48

a looking from what Brandon’s graph showing increase deficit is indication

31:55

on recession should an M government do anything about

32:01

that in particular because if Supply does come out we St future inflation or

32:07

you just leave it and the job guarantee okay so right now the deficit

32:13

7% and and the other thing is look one of the arguments I got which is also not necessarily wrong is that that 4% on

32:21

interest doesn’t count in fact for the IMF when they look at the deficit of Argentina look the

32:28

they you can’t even find the interest expense in the report you know you got maybe it’s at the end of the report

32:34

somewhere but it’s always hard to find and the idea is that nobody ever spends interest income they don’t sell it for

32:41

foreign exchange they don’t do anything it just piles up to whoever got it there’s a zero propensity to spend

32:46

income and I think that’s like at least was in the FED models so as they were

32:53

raising rates and all this income was going out they were modeling uh the idea would not none of it would get spent and

33:01

if none of it would have gotten spent their forecast would have been right we would have gone into recession okay

33:06

because there wasn’t enough deficit spending away from them I didn’t think to keep us going but with this extra

33:13

4% you know even if umy Mike Green said he did work on that he’s pretty good he

33:19

thought at least like half was getting spend well okay so that would mean that effective deficit instead of 7% is five

33:26

still way these are orders of magnitude up the other thing is you have to look at the

33:32

real defit spending adjusted for inflation because people’s savings as some presentation point

33:41

out is it your savings in Real GDP is in real dollars okay so if price is doubled

33:48

everybody needs to have twice as much funding to operate tce as much cash twice as much in reserves uh and so um

33:56

with with the rate coming down I can that chart the real deficit after

34:02

inflation is going up now the fed’s looking at is saying the real restriction is increasing we have a 5 a

34:09

half% rate with 5 a half% inflation there’s no restriction but with inflation at three now we have 2 and a

34:16

half% of restriction that’s the real rate they call R squ okay but so as the inflation rate

34:23

drifted down the R square is going up and you’re saying oh no we better cut rates before this you know uh

34:30

restriction causes a collapse and I’m saying the fiscal impact of the rates is

34:36

going up and it’s like 10 times higher than the monetary sign the difference

34:42

between borrowers and saving so as the inflation rate is coming down even if the deficit stays at

34:48

7% adjustment for inflation it’s gone up so it’s gone up from like two or three

34:53

to four or five you know over the last six months you know inflation indicators are

34:59

correct so but the argument that the fed’s using to say this is an emergency

35:04

we better cut rates because we’re tightening so quickly to use that you know use their numbers and use in the

35:11

better argument and said hey the deficit spendings going up you know after inflation by that much you better you

35:18

know things are going to get stronger not weaker okay so that’s been another effect over the last six

35:24

months yeah what what’s your position on just removing the FED ability to do anything

35:31

with well okay somebody has to do it so we could have a congressional committee

35:36

set rates or something would they do anything differently I don’t know probably not they might you know they

35:42

all don’t like inflation and they have to make a point of it or else they can’t get elected they all believe raising

35:48

rates that’s why it’s a deadly innocent fraud they might have had rates of 7 or 8% now to make sure they get reelected

35:54

who knows you know that they’re really hard on inflation like this whip fed

35:59

point of a point and Maybe not maybe they would have been you know appointees from the president or something we want

36:06

a lower race so we can win who knows it’s it’s always being kicked

36:13

around um so thanks for this um I do

36:19

believe that a lot of points are making here I just want to maybe provide more

36:28

so let me explain so in mro typically there is the substitution and the income effect what central banks too much too

36:36

much importance on substition effect no one

36:44

canes but that’s what models for instance on the other hand what you’re

36:50

saying is Inc Channel and we should this one could also that cost Chanel of

36:58

monetary policy I I don’t know what you think maybe played a role in the 70s you

37:04

see that when theid yeah that’s what I was talking

37:10

about before that I was going to here but the whole cost structure goes up that’s part of forward pricing yeah and

37:16

you want to buy a house it takes a year to build it it’s all built in everything’s built in inventory cost of

37:22

inventory goes up so the income chall in

37:29

the same direction okay now there are other channels so let me just two the

37:34

first one is credit channel so just the that people cannot borrow so easily for

37:40

for instance so let’s talk about that crit you go into a bank and let say you’re the economy and you say I want to

37:47

borrow money and the banker looks at you and he says well you know interest rates are a lot higher so that works against

37:55

you but your income is even higher so that works for you so the economy itself becomes more credit worthy and

38:02

you’ll see like after even after 79 borrowing shoots back up you get a l

38:08

because their lags and it’s it’s they’re winners and losers okay it’s very very disruptive it’s very regressive yes but

38:15

people who want to borrow on the one who are getting higher income from the interest yeah it’s yeah yeah it’s not a

38:22

direct it’s not the same people I understand so it’s it’s l it’s bumy as a

38:27

de channel is the asset price channel the asset price Channel when you increase interest rates you reduce

38:34

almost immediately for mathematical reason the l valuations oh your valuations so so you have the stock

38:41

market that has two things valuation and earnings so the first thing that happens

38:46

they see rates go up valuations cause the stocks to go down but then the earnings go up so then they go up even

38:53

higher so look at what happened in nominal terms to the stocks in Argentina inflation just crazy but in real terms

39:00

they’re still not up there but just bonds existing

39:08

bonds stays right where it was so those people don’t gain they have more money coming in

39:14

their new money is at their Equity is reduced I mean this is the trigger for financial crisis their spons

39:21

reduced Equity there are people

39:28

you know who are mismatched who who have different durations and assets and liabilities

39:34

that will lose money and go out of business the Real Estate Investment Trust all leverage people are going to

39:39

lose you know and and banks used to lose on that some still do the bank regulation changed that you know maybe

39:46

in the late 80s or ’90s so that American banks at least are not permitted to have

39:52

matur you know interest rate sensitivity they might still do it C I understand

39:57

all that but across the board you have you’ve seen Bank earnings going up not down through this whole thing and so uh

40:06

you know and it’s not that some banks have could close down or gone out of business but at the macro

40:13

level depending on the relative prence of those channels don’t you think that sometimes an increasing rate is fast

40:21

enough and could actually trigger recessive forces uh yeah it could short ter you know so I waited it didn’t but

40:29

it could it could have that could have been the case but it didn’t and even commercial real

40:36

estate been reading how H crisis

40:42

com all right it’s not a sure thing I agree but if you have over if you have

40:49

enough time you know it’s strong enough trillions of dollars of new income out

40:54

there you’re going gets it somebody you know the next

41:00

generation is that far ahead right last question thank

41:07

you I heard that GDP is going up and the econom is booming

41:14

now it seems that there’s some similarities between the USA and last and Britain in as much as we’ve been

41:20

massively de industrialized um that the financial sector seems to be like of c a lot of

41:28

this growth now the financial sector I mean a lot of their financial instruments are debt held by the B

41:36

populus that the uh asset prices are going up which means that you’ve got

41:41

mortg is going up but your Rend so people individuals mortgages are going up and rent prices are going up

41:49

so we might have a like a banner figure of a huge GDP however the amount of

41:55

money held by millions of ordinary people that they can actually spend into the economy goes down so I don’t did you

42:05

know the word I use is obscenely regressive is that not strong

42:11

enough it’s it’s horrible it’s no I’m totally against this policy struggling with the word booming I’m against this

42:17

policy it means that it’s going up the numbers are going up but there’s winners and losers Rolls-Royce has what a

42:23

fouryear backlog or something you know you know PR jets flying into these green

42:29

conferences you can’t get a parking space you know there winners and losers

42:35

here you know would make re and thater blush how much they’ve gotten away with on this distribution it’s completely out

42:42

of control this is just added to so yeah I I don’t disagree with you but overall

42:48

total sales have gone up that’s called booming you know jobs and plenty of jobs you other people are are their real

42:55

incomes any better off than they were before prob people selling their blood though yeah yeah yeah yeah and it’s only

43:03

just getting started who’s here from argen

43:08

gu people say that they think laen saying everything’s

43:13

great for three people for seven

43:19

companies but the total’s great I you know I told this story before my first

43:26

time that anyone there were these uh water faces he had one hot and one cold

43:32

and it’s like how are you supposed to wash your hands and somebody mentioned Charles goodart before he was at that

43:38

event with and I was teasing Charles about it he says yes we do that to make the point of what averaging really

43:45

[Laughter] means everybody

43:51

[Applause]

43:58

I just a brief announcement War has agreed to sign anybody’s books purchase

44:04

oh you already did okay but the deadly innocent ones are

44:11

the ones that are doing intense damage and I would give them the the idea of

44:18

innocent fraud is you’re giving them the you know calling them innocent is more damning than Not Innocent because if

44:25

they know this you know um I don’t know but saying it’s so dumb enough I see do

44:33

any that came from John kenth in

44:39

ick okay so the innocent frauds had a myth and a reality the myth is a fraud

44:45

and the myth is that raising interest rates Works to slow the economy increase unemployment and bring

44:52

down inflation and as you heard from Randy that was their in they started

44:58

ra okay uh reducing interest rates Works to support the economy reduce

45:03

unemployment and increase inflation as Japan has been trying to do for 30 years

45:09

okay that’s supposed to work that way and this is driving policy it’s believed

45:15

it’s in it’s textbooks it’s you know Federal Reserve research this is what

45:21

they conclude this is what they do and this is the way they conduct policy

45:27

and uh so let me get into it then remind me if I don’t tell you the reason it’s so damaging at the

45:32

end okay number one the FED has it backwards and I’ll say they don’t know

45:39

they have it backwards they might be suspecting now after many of you and

45:44

others have been bombarding social media with the did they’ve got it backwards I

45:49

and because of all you doing that I managed to get a Bloomberg interview odls which I guys been avoiding I know 8

45:57

or 10 years but I guess the social

46:02

pressure rate increases cause deficit spending to increase and support the economy reduce unemployment and support

46:12

prices okay it’s pretty obvious right and they’re just like a complete

46:18

denial now uh if you look at how much well anyway cutting rates is in

46:25

fact reduces government deficit spending which reduces economic growth employment

46:31

and price pressures okay so I actually I’ve been

46:38

on to this for a while but debt to GDP has been lower it’s been about 35% it

46:44

went up to 100% this debt out by the public with Co and that changed the Dynamics as Randy touched on that the

46:52

idea is it’s in all theic models if the Deb gets high enough the interest

46:57

problem where RS are no longer anti-inflation the only okay when what

47:04

happens when the FED hikes interest rates the only thing that changes is the fed and the treasury pay more interest

47:10

to the economy okay the FED pays more interest on reserves and reverse purchase accounts these are there

47:17

because of their quantitative easing where they went out and bought Securities they have some anyway but uh

47:23

and that built those numbers up trillions were before Tri so when you look at total government deficit

47:30

spending you uh on a functional level include the the net spending by the by

47:36

the F and I don’t know the CBO didn’t use to do that Stephanie do you know is

47:43

the CBO now including that in their deficit well there’s remittance they sh

47:48

yeah do they count that as part of the deficit yes okay so they just came out with a 7% number for defit deficit down

47:55

so I think that probably includes payments otherwise they would have

48:01

had the treasury pays interest more interest on new Securities and issues

48:07

those are called treasury bills notes and bonds so every week the treasury selling new treasury bills the old ones

48:13

mature at least for the first year you know for the first couple of years the

48:19

new bills were issued at higher interest rates higher interest expense than the ones that mature so their interest

48:25

expense is going up the debt rolls off and the new debt is put on those are pretty fast the whole bill portfolio

48:32

doesn’t go longer than a year now the first year rates weren’t all the way up to 5 and half% but they’ve been gone

48:38

continuously and that number has gone up continuously and it’ll continue to go up I think the duration is about four years

48:44

of the treasury portfolio which means uh you know on average it would take four years for the whole 28 trillion in

48:51

turnover but the FED owns a lot of them it pays interest

48:56

you know overnight not term so that that loss that then recognizes shows up is is

49:04

Def um and in the financial markets if if

49:09

you’ve got a security that yielded 3% your fund and you know that when it

49:17

comes due six months from now or a year from now the new investment rate is 4% or 5% that is already factored into your

49:26

you know assumptions of what you have to do on your asset side so even though these the interest ratees the average

49:33

rate paid last year was maybe 3.4 or something like that uh the markets

49:40

discount the fact that they’re going to be getting higher rates later the financial markets and that’s not

49:45

everybody so it’s only a partial effect so the effect is a little bit higher

49:51

um and the rate increases are not done in conjunction with offsetting tax increases the increase in government

49:58

interest expenses all new deficit spending you never see the FED say we’re raising rates and we’re going to

50:04

increase tax pay for they just raise rates the government pays more the deficit goes on period in short fed

50:11

ratees continuously flood the economy with new money there I did I did I use the word

50:18

money New Balances at the FED it’s reserves it’s Securities okay

50:25

this this is very casual meant for General audience so other

50:30

people can understand flooding the economy with money okay and what I’m saying is

50:35

they’re throwing kerosene on the fire and not water on the fire they’re drilling holes in a boat to light the

50:41

water out oh here’s the interest expense

50:47

that’s annualized so the new rates for the annualized from last month that was the

50:54

end of the quarter so it’s a little bit is like 1.2 trillion now

50:59

something and GDP is um 28 trillion by

51:05

the public so that’s I three 4% pushing 4% now ter is

51:13

yeah new territory here’s the debt to GDP I was talking about so back before 2008 we were

51:20

somewhere around 35% and now it’s up to

51:26

7 point that was the end of the quarter 379 I don’t know if it’s G up a little or down it’s way up it’s about triple

51:32

what it was so if the debt in GDP had been where

51:37

it was then they’d only be paying interest on 10 trillion instead

51:43

of and the interest expense would be a lot lower it would be less of a factor however even back when uh chairman banii

51:52

cut race in 09 08

51:57

my concern was that that cut in race they cut $400 billion doll of interest

52:02

income out of government spending okay and so that was working

52:08

against their stimulus which was trying to you know defit spend to ad spending so here we had 400 billion of drag from

52:16

the rate CS it’s interesting I was at a Fed meeting with Department Korean and a

52:23

research guy at the fed his name was Dave will we’re talking plan was buying Securities this was

52:31

before the r right after the r

52:38

and he was talking about how you know whether it would be inflation I said look I’m not so much interested in that

52:45

is that when you buy these Securities at four or 5% you’re paying zero on Reserves at the time it already cut R

52:53

you’re eliminating interest income from the economy you just the economy’s income by 90 billion a

52:59

year with this rate cut and we had we’re having a very you know professional

53:05

conversation through normal voices all of a sudden it was like this guy was hit

53:11

with an electric shock and he goes yes like defensive I’ve never seen anybody with he goes

53:18

look we only have one lever and it’s interest rates and we believe lower rates are easy and you know we’re not

53:24

going to discuss that sorry asked a question about removing 90 billion okay so they must have been

53:31

having some kind of a discussion behind that I guess I don’t know uh so that anyway now the Deb the GP is way up

53:37

there so back then if you increase rates 1% that would be at interest income of

53:43

maybe 35% of GDP after everything’s discounted worked out ultimately and

53:50

today 1% increase is going to increase by almost 1% full percentage G

53:57

so now it has three times the fiscal impact it had then and I was concerned about it then I was concerned about it

54:04

before that I did my first paper on rates back in 96 or 97 called the natural rate of interest is zero talking

54:11

about how this interest income effect is enough and I started in financial markets in the

54:17

1970s and uh even when vulker was doing what he was doing I was thinking that

54:23

the debt to GDP even at low levels enough interest income to reverse the

54:29

effects that they were trying to achieve and that the effects on the economy were from the deficit spending and not from

54:36

the change in interest rates even that so voer I don’t my narrative is not that boker’s rate hikes caused the crash is

54:44

that boker’s rate hikes caused inflation to be where it was or supported it where

54:49

it was anyway we had oil price increased at the time inflation was running and I’m just going to use very round numbers

54:55

I 12% and the deficit was six so adjusted

55:01

for inflation the deficit was why we’re running a surplus okay and so if you looked at the

55:07

public debt in real terms it was going down you know that doesn’t happen very

55:12

often it normally happens in front of a crash like we had in 197 1980 so I

55:18

Associated that crash even back then with a drop with you know fiscal shock

55:24

now the interest rates helped the support by helping me keep the inflation up so the real value of the public debt

55:29

went down anyway little bit of a side hisorical side TR so interest on the

55:35

federal debt 96% of GDP three times higher than my cycle the rate

55:40

increases increased interest expense three times the fiscal impact during

55:45

prior periods which even then I thought the impact was more than sufficient to have this kind of effect so about two and a

55:53

half years ago when they first started raising rates I normally to see how data works I came out proactively ahead of

55:59

time saying this is nuts okay three times the impact of the last one and I

56:04

the data on the last one’s pretty borderline it looks like it probably was working backwards then as well and

56:10

certainly in the rate cuts it looked like it was working backwards because things were slowing down and in Japan with the zero rates you know it didn’t

56:18

have any effect okay um and there was I heard there was one other investor in

56:24

room here who was looking at the but it was a prettyy lonely position to have

56:31

and okay so now let’s get to the fundamentals of how monetary policy is

56:37

supposed to work in the economy okay not including the

56:43

government for every dollar borrow there’s a dollar save you look at a bank balance sheet they have loans and

56:49

deposits okay if you do it at an individual level somebody owes you money interest rates go up or down that affs

56:56

much he he gains and you lose or you lose and he gains right not um this

57:02

would only slow the economy if the borrowers cut their spending more than the Savers increase their

57:08

spending so any economy without government for every dollar borrow there’s a Dollar Save when you raise

57:14

rates all you’re doing is transferring income away from borrowers towards Savers that’s supposed to have a

57:20

profound effect on the economy because it’s presumed that borrowers are a lot more sensitive and they’re going to get

57:26

cut out and stop spending which is what GDP is and the savers who get the extra money they’re probably not going to

57:33

spend nearly as much as the bers going to come back because people who are’t interest are like foreigners and Pension

57:39

funds and you know places that don’t spend their income so there’s a presumption that this difference uh is

57:46

enough to have a big effect on the economies raise rates slows the economy

57:52

so there’s a guy used to work with fed that I used to visit Nam Steve and he was in operations and one of his

57:59

jobs was to look at this to see what these differences are in propensities to spend income how much difference is

58:07

there between borrowers and Savers ask you know how much he says well look our

58:12

position is that there is a difference and that low raising rate is going to slow things down because it will hurt

58:18

the borrowers more than it will help the sa goes but you know I’ve been doing the econometrics now you know for 20 years I

58:25

haven’t been able to Det Ed in a

58:33

and studies that’s a word for my talk to Steve that’s what I’m getting studies

58:40

show this is a small factor it’s dwarf by the enormous amount of new

58:47

interest here’s the other problem or this maybe the biggest R hkes are

58:52

obscenely regressive interest payments only people who already have money obviously right and it’s in proportion

59:00

to how much you already have so the more you have the more you get okay fed R rid hikes are causing the government to

59:07

spend trillions of dollars on interest only for people who already have money in proportion to how much they already

59:14

have what kind of government policy is this I mean Reagan would have blushed

59:19

anybody suggested this or that remember I call it basic income for

59:27

people who already have money now there’s some basic income proponents here but how many of them favor giving

59:32

income only to people who already have money in proportion they already have like none right so this is like off the

59:40

charts as they say this policy for anybody okay what could be more

59:45

obscenely regressive and the FED decides to do this on its own to fight inflation

59:50

there’s no Congressional vote so you got these guys at the FED in the Bank of whatever saying all right we got an

59:56

inflation problem here’s what we’re going to do we’re going to give people who already have money a lot more money

1:00:01

in proportion to how much they have you know until this inflation goes away and if it doesn’t go away we’re going to

1:00:07

keep giving them more all right so it’s funny except this

1:00:12

is happening this is real world stuff this is not like some Theory or anything

1:00:17

this is what they’re doing okay so um I was in

1:00:24

Argentina is was it two years ago August here uh and I met with this

1:00:31

guys the central bank because they had inflation at 25% I think my numbers

1:00:37

might be off by now and and ra race to 30% I wrote this thing which you can get

1:00:42

on my website and shows that and I was saying that the same thing this was in

1:00:48

the paper but that was causing your inflation and they were doing this pretty much because the IMF was

1:00:54

demanding keep a real rate you have to keep the interest rate higher than the inflation rate to fight

1:01:01

inflation and I I went to so I I meet this guy at the central bank I don’t

1:01:06

remember his name he goes hi you don’t have to introduce yourself I’ve been reading your stuff for 10 years now so

1:01:11

that was kind of Ni so I go through this stuff and and he he had somebody else

1:01:17

there with him one of his associates and he says oh yeah Sergeant Wallace or somebody you may kind of find out said

1:01:25

this in 1987 you know so we understand this but you know we can’t do anything and besides it was this guy Guzman or

1:01:32

something made theal the Finance Minister had made the thing they were all whiteart of it they like

1:01:38

the arrangement for some reason I guess because they got a lot of good money so anyway so I leave the meeting

1:01:46

and he’s got all the information he knows all this and in the next two

1:01:51

years inflation goes to 35 so they raise rat to 40

1:01:57

okay inflation goes to 50 so they raise rates to 60 inflation goes to 70 so they raise rates to 80 okay how does this end

1:02:05

inflation goes to 100 they’re at 110 they’re up to what 200% and then this guy with a chainsaw

1:02:12

wins an election and then they cut rates to only 40 but okay so how much were

1:02:18

they deficit spending with rates at 100% I I can figure that out their debt to GDP is only 40% well that means 40% of

1:02:26

GDP to pay interest this is nuts and it goes to people who don’t who already

1:02:32

have money who have all the peses they want they sell in the Foreign Exchange Market PES goes down so they get more

1:02:37

inflation so they get more interest this thing goes on for years until a guy with a chainsaw takes over and he’s got rates

1:02:45

down to 40% which still isn’t enough and so the inflation is still going away I don’t know what their next step is going

1:02:50

to be you and they did that in turkey and guys get throwing out the next guy

1:02:55

raage R again so um so the thing is where does it end in the United States

1:03:02

right now we think we’re in a slow spot with the fed’s going to cut rates and maybe they are Maybe I’m Wrong which is

1:03:08

great I’m 75 this year I can just crawl into a little hole and go

1:03:13

away and get out with my life but I think there’s a pretty good chance of 7% deficit this thing is just

1:03:21

kind of some kind of statistical soft spot uh because unemployment claims are

1:03:26

down to 220,000 like record lows and they G up to 240 which is still record

1:03:32

low but well they went up 20% or something then they came right back down the unemployment rate is now reported

1:03:37

that gone up from 3 and a half to 4.1 over 6 months which is certain percentage it’s still hovering on what

1:03:44

would have been 50y year lows and it’s based on this household survey that’s very small no participation and they

1:03:52

trying to get rid of it defund it it might be right but the establishment

1:03:57

survey which is much larger and shows a job growth if you use that for the employment source of employment numbers

1:04:03

you still get about 3.8 but they’re seeing it go up which is okay and the fed’s talking and they want to seem to

1:04:09

want to lower rates and maybe they will now if they do lower race they’re not going to lower interest expense because

1:04:15

it’s still catching up from where it was last because there still Securities

1:04:20

maturing and rolling over and everything else and the average rate paid by the treasur was was only like 3 and A4 3.3

1:04:27

last year a trillion dollars on 2018 so that um even if they do that rates will

1:04:33

keep going up and the CBO is predicting the deficit to go up now what’s interesting is that rates are 4% of the

1:04:40

7% deficit but that 3% is helping a lot that’s still very large for a procyclical deficit one of the largest

1:04:48

ones we’ve had after twoe expansion tax revenues have not been going up a little bit but they’re pretty flat and they’re

1:04:54

always not know under estimates of what tax revenue because as Randy pointed out

1:05:00

when the economy grows the tax revenues grow even faster than the government can spend money deficit goes down and the

1:05:06

whole thing crashes might take a few years but that’s the process this time these tax revenues aren’t I don’t know

1:05:11

why I can guess that it’s got something to do with these tax credits that you’re

1:05:17

giving for energy Investments because those things are open-ended it’s not

1:05:22

like oh we’ve got 100 billion women or 40 billion unlimited okay and what do I read I see

1:05:29

these charts going straight up of new solar and wind being deployed everywhere which is fine you know the cost but it’s

1:05:36

it’s gone nuts and then um personally I just put up solar in one of my rental

1:05:42

buildings I have and you know now I won’t have to pay any taxes next year it’s a 40% tax credit for buying solar

1:05:47

stuff for your house I buy a car and I plug it into the house as a solar battery I get a 40% discount on my car

1:05:55

so there’s all these open-ended tax credits are going on and probably a lot

1:06:00

of other things I had a friend worked for uh he worked for a accy company com firm I said is anybody else doing this

1:06:07

he said oh yeah all clients do said we have these what used to be called tax shelters where they invest $100,000 and

1:06:15

they get a $40,000 tax credit and it goes into solar for some building somewhere they said are you doing a lot

1:06:21

of them because oh yeah oh yeah everybody’s tax return I do what about the other yeah it’s really competitive

1:06:26

all the firms are doing the same so I I don’t know it’s just anecdotal information but tax revenues have not

1:06:32

been going up it’s another automatic stabilizer that’s been disabled transfer payments are not going

1:06:39

up because unemployment’s low it’s not going on so this deficit keeps going all

1:06:45

right so where are we the entire Financial Community believes increasing the government’s

1:06:51

deficit spending

1:06:58

look like I so um throwing trillions of dollars of

1:07:05

Interest payment to people who already have oh I see it reads is one sentence the F Congress the entire

1:07:11

Community believes that increasing government’s defit spending by throwing trillions of dollars of interest payments to people who already have

1:07:18

money fights inflation by causing unemployment to go up in the economy to slow down that’s why we’ve all been

1:07:23

forecasting recession ever since started the rate increases which is true

1:07:29

it’s but monetary policy works with a lack it was 6 months to a year became 18

1:07:34

months became two years now it’s finally kicking in because of these numbers or

1:07:39

maybe it does okay Japan has been saying monetary policy worked with a lag that

1:07:44

had zero rates 30 years they say we just need a little more time and so did the central

1:07:51

ECB we just need a little more time after 10 years of zer okay what’s been happening with the

1:07:58

economy the economy has been booming relatively speaking 3% type of growth is not un

1:08:05

common real grow unemployment near 50e lows even after these increases it’s a

1:08:11

high percentage increase it’s enough to cause the FED to worry about spiraling out of control uh and they may cut rates

1:08:19

in September ever since the economy is defying the fear mongering and rapidly

1:08:24

growing okay is now only 2% this quarter first quarter was only

1:08:30

1.45 because firms didn’t build inventor they let their inventories run down

1:08:35

because they were watching all these forecasts okay now they got to rebuild them and I think it’s all going to come

1:08:40

back but you know I I could be wrong uh inflation indicators Spike due to covid

1:08:46

disruptions and an oil price spike from the Ukraine war oil went up to like 120

1:08:52

remember early on and so everything goes up fertilizers made out of oil right so

1:08:58

food prices go up surprised shipping charges everything goes up okay and then

1:09:03

as some kind of Unholy deal was made with the Saudis I go into what that probably was and how that works but

1:09:11

prices came down and they’ve been kind of flatlining sideways ever since inflation indicators is what I call them

1:09:18

it’s not really inflation but what we call inflation indicators gu you know they went up came

1:09:24

down now they’ve gone sideways for the last 3 or four months slight down tilt to them okay you know we won let’s cut

1:09:32

interest rates maybe again maybe they will okay fed still thinks the rate hkes are

1:09:39

restrictive and just need a little more time to create a slow down and they now think they may have already done

1:09:46

it okay here’s the lest inflation numbers is changed from the previous

1:09:52

year inflation shot up July 22 was a peak in oil prices surprised

1:10:00

that CPI shows a peak like the same minute okay comes down

1:10:07

now I don’t know I guess if you have enough analytical tools this becomes a

1:10:12

sharp decline it looks to me a lot like it’s you can say it’s still going sideways

1:10:19

I’m not saying it’s not going to go down to right to their target or anything but you know oil prices stop going down and

1:10:25

now they’ve actually started to go up a little bit 86 for Brent last I

1:10:34

saw the FED has it backwards it responded to high inflation indicators low unemployment rate hikes rate hikes

1:10:41

on go lower and inflation indicators went higher up until July uh the FED saw

1:10:48

that they hped again they Contin to raise rates as they start their inflation the spiral continues with no

1:10:54

end if they don’t see the error of their ways reverse course that might be right

1:11:00

or wrong we will know probably in the next 3 to six months if that turns out to be correct and we’re we are on the

1:11:06

path of a Argentina we are now chasing our tails

1:11:12

on the way up because they will raise rates again if the inflation numbers flatten from here from that sharp

1:11:20

downturn you saw and start to drift up a little bit that’s going to happen and

1:11:25

then I don’t know how it is or if we get lucky some other deflationary shock like a collapse in oil prices may cause them

1:11:32

to cut rates to stimulate the economy which doesn’t work either what’s the answer the F should

1:11:39

cut its policy rate back to zero it’s a budget cut of over a trillion dollars a year this is2

1:11:45

trillion scored for deficit reduction by the CBO in 10 years it’s the low hanging

1:11:51

food for deficit reduction where are all these fiscal Hawks when you need them

1:11:57

they’re gone they’re nowhere inside and now if that’s going to be too much of a cut of course so the economy will slow

1:12:03

down so now you can add back in public spend you know spending for uh you know

1:12:08

public education and health and anything else you want you know or defense if you’re rightwing but it gives you fiscal

1:12:14

huge fiscal space okay upward pressure is removed from the inflation indicat

1:12:20

I’ve observed I’m not going to say anymore write this that the infl the

1:12:26

inflation rate tends to

1:12:32

uh hover around the interest rate so when you raise rates to 5% like we have

1:12:39

five and a half the inflation rate is going to creep up towards the 5 and a half to the F fund over time I’ve just

1:12:45

seen that over my 50 years and watching it happen every time I can it’s a different presentation partially this

1:12:52

interest expense it’s also forward pricing and uh it’s Al you know but um

1:12:58

I’ve just observed that so it wouldn’t surprise me to see these inflation indicators creeping back up over time

1:13:05

and in fact the last wholesale price number that came out Friday started moving back up again okay

1:13:12

upward pressure is removed from the inflation indicator so they can settle back to where they were before the co

1:13:18

prices prices I want to say because rates back to zero they can

1:13:23

go back to where they were when rates Z if we leave race high you’re going to settle back to the interest rate of

1:13:29

today which is 52% not back to

1:13:40

0% that’s it how’s my

1:13:50

time we’ve got about 12 minutes for some questions okay

1:14:00

thanks for that Warren um the the FED uh has uh mortgage back Securities Etc in

1:14:08

treasuries they get interest from the treasury interest payments and then they

1:14:13

re uh remit to back to the treasury now because they’re paying

1:14:20

interest on reserves they’re actually have negative that’s

1:14:26

they’re negative yeah that’s that’s deficit spending but is that is that

1:14:32

measur in I at the treasury daily treasury statements not in there yeah

1:14:39

Stephanie we talked about this and she talk to the CBO and no it’s it’s straight on the it’s on the CB it’s on

1:14:46

the cbo’s budget Outlook so you have expenditures and you have revenues and remittances to the FED are revenues but

1:14:53

when go to zero you just see Zer in all of those future years as

1:15:00

long well they actually they do

1:15:05

go Ates because disappear and that

1:15:14

increases the and then also to the channel because the government itself is

1:15:20

paying out that’s on the expenditure side and they have it on the

1:15:26

so are we saying that mon policy is fisc policy it’s hijacked right changing

1:15:32

interest rates alter balance for for increasing government

1:15:42

spending I call the fiscal impact of their monetary

1:15:48

policy in a situation where you have a 0% interest policy and an

1:15:55

looking from what ry’s graphs showing increase in deficit Serv is an indication oncoming

1:16:02

recession should an M government do anything about that in particular

1:16:08

because if Supply does collapse we St future inflation or you just leave it

1:16:14

and the job guarantee okay so right now the deficit 7% and and the other thing is like one

1:16:20

of the arguments I got which is also not wrong is that that 4% on interest

1:16:27

doesn’t count in fact for the IMF when they look at the deficit of Argentina

1:16:32

look at the primary deficit they you can’t even find the interest expense in the report you know you got to maybe

1:16:38

it’s at the end of the report somewhere but it’s always hard to find and the idea is that nobody ever spends interest

1:16:44

inome they don’t sell it for foreign exchange they don’t do anything it just piles up it whoever got it there’s a

1:16:50

zero propensity to spend income and I think that’s like was in the FED models so as they were

1:16:59

raising rates and all this income was going out they were modeling uh the idea that it would not none of it would get

1:17:04

spent and if none of it would have gotten spent their forecast would have been right we would have gone into

1:17:11

recession okay because there wasn’t enough deficit spending away from them I didn’t think to keep us going but with

1:17:17

this extra 4% you know even if um name Mike Green said he did work on thaty at least like

1:17:26

half was getting spent well okay so that would mean that effective deficit instead of 7% is five still way up there

1:17:33

these are orders of magnitude up there the other thing is you have to look at the real dep of spending adjusted for

1:17:39

inflation because people’s savings as some presentation point

1:17:47

out is your savings in Real GDP is in real dollarars okay so prices doubl

1:17:54

everybody have twice as much fund iner twice as much cash twice as much in the

1:17:59

reserves uh and so um with with the inflation rate coming down I can that

1:18:05

chart the real deficit after inflation is going up now the feds looking at is

1:18:11

saying the real restriction is increasing we have a 5 a half% rate with 5 a half% inflation there’s no

1:18:17

restriction but with inflation at three now we have 2 and a half% of restriction

1:18:23

that’s the real rate R square okay but so as the inflation rate

1:18:29

drifted down the R square is going up and you’re saying oh no we better cut rat before this you know uh restriction

1:18:36

causes a collapse and I’m saying the fiscal impact of the rates is going up

1:18:43

and it’s like 10 times higher than the monetary sign the difference between borrowers and Savers so as the inflation

1:18:49

rate is coming down even if the deficit stays at 7% invested for inflation it’s gone up

1:18:57

so it’s gone up from like two or three to four or five you know over the last 6 months you know if the inflation

1:19:03

indicators are correct I’m so but the argument that the fed’s using to say

1:19:09

this is an emergency we better cut rates because we’re tightening so quickly to use that you know use their numbers and

1:19:16

use in the better argument is said hey the deficit spending is going up you know after inflation by that much you

1:19:23

better you know things are going to get stronger not weaker okay so that’s been another effect over the last six

1:19:30

months yeah uh what’s your position removing the ability to do

1:19:37

anything well okay somebody has to do it so we could have a congressional committee set rates or something would

1:19:44

they do anything differently I don’t know probably not they might you know they all don’t like inflation and they

1:19:50

have to make a point of it or else they can’t get elected they all believe raising rates that’s why deadly innoc

1:19:55

and fraud they might have had rates at 7 or 8% now to make sure they get reelected who knows you know that

1:20:01

they’re really hard on inflation like this whip fed do quar of a point and

1:20:07

Maybe not maybe they would have been you know appointees from the president or something we want a lower rate so we can

1:20:13

win who knows it’s it’s always get kicked

1:20:19

around um so uh than please um

1:20:24

that a lot of points are making here value I just want to maybe provide

1:20:31

more I think it’s so let me explain so in mro typically there is the

1:20:37

substitution and the income effect what C too much to much import on Subs effect

1:20:44

no one

1:20:50

serious that’s what models for instance on the other hand what you’re

1:20:55

saying is there’s an income Channel and you should pay this one could also say that there is

1:21:02

the cost CH of monetary policy I I don’t know what you think maybe played a role

1:21:08

in the 70s you see that when

1:21:14

mid yeah that’s what I was talking about before that I would going to here but the whole cost structure goes up that’s

1:21:19

part of forward pricing yeah and you want to buy a house it takes a year to build it all built in everything’s built

1:21:25

in inventory cost holding inventory goes up so income and

1:21:33

in the same dire okay now there are other channels so let me just two the

1:21:39

first one is channel so just the that people cannot borrow so easily

1:21:47

for let’s talk about that credit you go into a bank and say you’re the economy

1:21:52

you say I want to borrow money and Banker looks at you and says well you know interest rates are a lot higher so

1:21:59

that works against you but your income is even higher so that works for you so

1:22:05

the economy itself becomes more credit worthy and you’ll see like after even after 79 borrowing shoots back up you

1:22:12

get a l because their lags and it’s it’s they’re winners and losers okay it’s very very disruptive it’s very

1:22:20

regressive want borrow all the getting from the interest yeah it’s yeah it’s

1:22:27

not a direct it’s not the same people yeah I understand so it’s it’s it’s bumy

1:22:32

and Del channel is the asset price channel the asset price Channel when you increase interest rates you reduce

1:22:40

almost immedi for mathematical reason the lo valuations oh your valuations so

1:22:45

so you have the stock market that has two things it’s got valuation and earnings so the first thing that happens

1:22:52

is see rates go up valuation the stocks go down but then the earnings go up so

1:22:57

then they go up even higher so look at what happened in nominal terms to the stocks in Argentina from inflation just

1:23:04

crazy but in real terms they’re still not up there but just bonds existing

1:23:13

bonds stays right where it was so those people don’t gain they have more money coming in

1:23:20

their new money is at their Equity is reduced I this iser crons

1:23:27

[Music] rity yes there are people

1:23:32

who you know who are mismatched who who have different durations on assets and liabilities that

1:23:39

will lose money and go out of business the Real Estate Investment Trust all leverage people are going to lose you

1:23:46

know and and banks used to lose on that some still do the bank regulation changed that you know maybe in the late

1:23:52

80s and 90s American banks at least are not permitted to have maturity you know

1:23:59

interest rate sensitivity they might still do it and not get CAU I understand all that but across the board you have

1:24:06

you’ve seen Bank earings going up not down through the souls and so uh you

1:24:12

know and it’s not that some banks have could close down or gone out of business but at the macro level

1:24:19

the depending on the relative prominence of those channels don’t you think that

1:24:24

incre in R this trat is fast enough it could actually trigger recessive forces

1:24:30

yeah it could turn you know so I waited it didn’t but it could it could

1:24:36

have that could have been the case but it didn’t even commercial real estate

1:24:42

I’ve been reading huge crisis

1:24:50

com it’s not a sure thing I agree but if you have over enough time you know

1:24:56

you’re throwing enough trillions of dollars of new income out there you’re

1:25:02

somebody gets it somebody you know the next generation is that far ahead

1:25:08

right last question thank you I’ve heard that GDP is going up and

1:25:16

the econom is booming now it seems that there’s some similarities between the USA and the

1:25:23

last br in as much as we’ve been massively de-industrialized um that the financial

1:25:30

sector seems to be like the course of CA a lot of this growth now the financial

1:25:36

sector I mean a lot of their financial instruments are Debs held by the by the

1:25:41

populus that the uh asset prices are going up which means that you’ve got the

1:25:47

mortg is going up but your R so people individuals mortgages are going up and the rent prices are going up

1:25:55

so we might have a like a banner figure of a huge GDP however the amount of

1:26:01

money held by millions of ordinary people that they can actually spend into the economy goes down so I don’t did I

1:26:10

you know the word I use is obscenely regressive is that not strong

1:26:16

enough it’s it’s horrible no I’m totally against his policy struggling with word

1:26:21

booming I’m against his policy it means that it’s going up the numbers are going up but there’s winners and losers

1:26:27

Rolls-Royce has what a four-year backlog or something you know you know private jets flying into these green conferences

1:26:35

you can’t get a parking space you know there winners and losers

1:26:40

here you know would make radi and that blush how much they’ve gotten away with on this distribution it’s completely out

1:26:47

of control this is just added to so yeah I I don’t disagree with you but overall

1:26:53

total sales have gone up that’s called booing you know jobs and plenty of jobs but other people are are there real

1:27:00

incomes any better off than they were before probably people selling their blood though yeah yeah yeah yeah it’s

1:27:08

only just getting started who’s here from our something they

1:27:13

gu people say that they think Warren say everything is

1:27:19

great for three people EXA for seven companies

1:27:25

you but the total’s great I you know I told this story before my first time

1:27:31

with anyone there were these uh water faes he had one hot one cold it’s was

1:27:38

like how are you supposed to wash your hands and somebody mentioned Charles goodart before he was at the event with

1:27:44

me and I was teasing Charles about it he says yes we knew that to make the point of what averaging really

1:27:52

means to leave

1:28:03

everybody I just a brief announcement War has agreed to sign anybody’s books

1:28:09

if you purchase them today oh you already did okay great know

oooooo

Gogoratu ondokoak:

Zazpi gezur politika ekonomikoan (Warren Mosler-en aurkezpena, 2015)

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Warren Mosler-ek: Politika ekonomikoaren gezurrak