ower Initiative for Modern Money Studies@GowerInitiative
Stephanie Kelton – To Bond, or Not to Bond, that is the Question #Bonds #FinancialMarkets
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Stephanie Kelton – To Bond, or Not to Bond, that is the Question.
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Stephanie Kelton – To Bond, or Not to Bond, that is the Question.
(https://www.youtube.com/watch?v=ql0OFY7W3Qs)
“To Bond, or Not to Bond, that is the Question” – a paper by Stephanie Kelton, Professor of Economics and Public Policy, Stony Brook University and Scott T. Fullwiler, University of Missouri — Kansas City. Presented by Stephanie Kelton at the UK MMT Conference, University of Leeds on 17th July 2024.
Transkripzioa:
0:07
issuing bonds for a currency issuing government is a policy choice not an economic imperative it’s a policy Choice
0:14
here’s Randy and Yea issuing bonds is voluntary operation that gives the public the opportunity to substitute
0:22
non-interest earning government liabilities thank cash for interest
0:28
bearing government liabilities T bills notes bonds which are credit balances in
0:33
Securities Accounts at the same Central Bank if people believe the government needs to borrow to spend then you get
0:40
into all of these debates who’s going to buy them is the bid to cover ratio going
0:45
to be adequate and all the rest of the kind of stuff but if you understand that bonds are voluntary operations then it
0:52
becomes irrelevant these sort of debates whether there are takers for government bonds and whether they’re owned by
0:58
domestic or foreign citizens so we show most of the debates that take place are
1:05
just rooted in fundamental myths and misunderstandings about what’s really
1:11
happening basically the operational side now there may be reasons to be
1:17
concerned Warren touched on this the other day might it become an issue when
1:23
you have a large enough stock of public debt and you have a central bank that is
1:29
following a tailor rule or something like a tailor rule raising interest rates to try to fight inflation and you
1:36
could potentially get into a sort of toxic situation where the rate hikes themselves begin to feed inflationary
1:44
pressures 20 years ago I published a paper it was it appeared as a chapter in
1:50
this book where I sort of uh Randy mentioned the other day something about laugher and the napkin I didn’t put mine
1:56
on a napkin either but I drew in it kind of looks like laugh laer curve right where the point is that
2:03
if you’re in a low Dead uh environment and a lot of the well there are certain
2:09
conditions I’m not going to go into all of them let me just leave it at if you don’t have a large stock of public debt
2:15
and a few other things hold uh raising interest rates may have the usual
2:21
conventional effect that is they would be contractionary but if the public debt gets large enough raising interest rates
2:27
from say i1 to I2 could actually the stimulative at the macro level so we
2:33
got to recognize that and if that’s the case and it could create a sort of
2:39
unsustainable situation in terms of the inflation impacts is there an answer to
2:44
that the answer is sure you just keep the interest rate down because the interest rate has become the problem at
2:51
that point so Scott fulweiler wrote about this and I should say Scott would have been here today but he couldn’t
2:57
make it and so this presentation we did together okay so it’s it’s the both of us we both work on it uh this paper was
3:04
published by Scott in 2005 long before the FED started paying interest on
3:10
reserve balances but Scott asked the question what would happen if the FED
3:15
did what other central banks already do which is to pay interest on reserve
3:21
balances so he wrote this paper and it’s very good and it’s short especially for Scott uh
3:27
Fuller so Scott goes through this and he says you know we could issue bonds keep
3:33
issuing bonds and have a zero interest rate policy or just manage the interest rate so it stays below the growth rate
3:41
what would happen if we did that well we wouldn’t have the problem with the
3:46
intertemporal government budget constraint that all the mainstream economists use to tell us that fiscal
3:53
policy is on an unsustainable trajectory so they use this macro model and they
3:59
plug in uh the variables and they say based on the current outlook for
4:05
interest rates and growth rates in the debt and so forth we’re on an unsustainable trajectory we need to make
4:11
changes and Scott said well if you think it’s unsustainable just lower the interest rate below the growth rate and the debt will converge and the problem
4:18
goes away that’s basically this problem so Scott’s saying the in the interest
4:23
rate is a policy variable okay the mainstream treats the interest rate as what
4:29
Market phenomenal right the market is doing it which is why the bond vigilante is matter but Scott’s saying no set the
4:36
interest rate so if it’s a policy variable there’s a very easy solution to this problem all right option three so
4:43
the first two options were issue bonds issue bonds and let the Central Bank fiddle with the interest rate issue
4:49
bonds and anchor the interest rate at zero now we’re moving into don’t issue
4:55
bonds don’t issue bonds and let the Central Bank play with the interest rate
5:00
that’s another option okay we could do that and once again Scott has that base covered he’s very good at this so in
5:07
this p in this piece paying interest on reserve balances more significant than you think Scott says uh with with
5:16
interest on reserve balances eventually the entire national debt could be held
5:22
exclusively as Reserve balances just leave it there simplifies monetary policy
5:28
operations and the more significant point is that it makes it clear to everyone that interest
5:35
on reserve balances demonstrates that the fed’s operations are offsetting in nature not financing so that’s the
5:42
purpose of that paper all right option four no bonds and Zer zero interest rate
5:50
or nearly zero kind of uh overnight interest rate Bill Mitchell says uh this
5:56
is the preferred option from an mmt perspective no bonds and permanent zero
6:01
interest rate policy now like I said that’s a
6:07
policy P it’s a prescriptive policy right that’s his position he would like
6:12
to see no bonds issued to the non-government sector and interest rates permanently anchored at zero he calls it
6:20
uh um omf overt monetary financing okay that’s his preferred thing but he says
6:26
it’s you know the preferred option from an mmt perspect perspective government should not issue any public debt to the
6:32
non-government sector as the benefits of doing so are small relative to the large opportunity costs all right so those are
6:40
four options he goes on talk about helicopter money mm always understood QE
6:46
as an asset swap with little or no transmission apart of apart from a placebo effect okay doesn’t really do
6:53
anything overt monetary financing he says Central Bank provides the monetary
6:59
capacity to support larger fiscal deficits with no further debt being issued to the non-government sector so
7:06
what bill has in mind is the central bank just buys the bonds directly from treasury credits A treasury’s account
7:12
treasury spends and you’re of and running okay the original mmt proponents
7:19
he says would characterize overt monetary financing as a highly desirable policy development because it makes a
7:25
whole bunch of this stuff cleaner and clearer right next
7:30
part what should we do to bond or not to bond that is the question right so what
7:36
changes if we consider options three and four both of which involve not issuing
7:41
treasuries at least to the non-government sector all right what changes well the big thing is public
7:47
perception right if you’re only issuing bonds to that are purchased by the central bank then the public understands
7:55
that they’re not being burdened by this debt stock that you don’t have to worry about who’s going to buy them and
8:01
foreigners and all the rest of the stuff we often hear about no increase in public debt for he says this is Bill the
8:07
Rabid Financial commentators to beat into a frenzy and push out predictions of insolvency it would get us all
8:14
focused on inflation risk instead of solvency and the morality play borrowing
8:19
driving us all into debt is immoral and all the rest of it who will buy them paying it back neuter the IMF the rating
8:26
agencies they have nothing to complain about and all of that of stuff so he says there are major political
8:33
advantages to moving to overt monetary financing all right I think we’re damned
8:40
if we do and damned if we don’t there’s no clear winner here there’s no way to
8:46
entirely avoid criticism weaponization no matter what you do all right so I’m going to show you some of this if we
8:53
continue to issue government bonds to the non-government sector the way we do today then we hear the usual stuff
9:00
economists the Press policy makers they weaponize the dead they talk about burdening future Generations who’s going
9:06
to buy it they weaponize the sustainability models they talk about exploding Debt Service it doesn’t
9:13
converge you got people like Olivia Blanchard Larry Summers Jason Ferman all using this framework to make the
9:19
argument that the US needs to reduce the deficit because it’s on an unsustainable
9:24
trajectory based on these models weaponized Bond vigil anes you’ll lose control of rates and and all that sort
9:31
of stuff but if we propose Zer which eliminates a lot of those problems then
9:37
they weaponize something different they say well if you if you keep the interest rate at zero then you’re depriving the
9:42
Central Bank of its ability to find our star and so you’ll hear stuff about fiscal dominance or one uh argument or
9:49
another it’s going to be inflationary and all that if we say don’t issue bonds
9:54
to the non-government sector then they’ll just say your printing money is going to be inflationary
10:00
so what’s an mmti to do the hell are you supposed to do they’re going to pick on you no matter which one you choose so we
10:08
created this little table and we just sort of imagine you know under which of
10:13
the four options do you avoid the most
10:18
criticism okay where where is it the cleanest and as you can see there’s not really a clear winner here okay if we do
10:26
what we do today which is column one they weaponize at that they weaponize the uh intertemporal government budget
10:32
constraint you hear about Vigilantes but you know at least you’d leave them with
10:38
the interest rates so they wouldn’t complain about interfering with the central bank and because you leave them
10:44
with the bonds and the interest rate they’re not going to complain about printing money you move to the next option and you got a different set of
10:50
things I don’t have time to go through each one of them okay but make the slides available but the point of this
10:56
is to say there’s not a clear winner in terms of the options okay
11:03
so so I’m going to put my cards on the table because as I said when I first got
11:09
involved in this project it was the descriptive stuff that interested me I liked it I liked learning about and
11:15
digging into and arriving at a place where I thought I had pretty good Mastery of the monetary operations it
11:22
felt good to understand so I like the descriptive stuff and that first paper I referred to earlier was descrip
11:29
and then I went to work on the hill and I realized what a mess we’re in because I was surrounded by people working as
11:36
the chief Economist for the Democrats on the Senate budget committee that no one
11:41
in the Senate and their staffers had the obvious idea how to understand the role
11:48
of deficits or debt in the economy that they were all falling prey to these myths and misunderstandings so I would
11:55
go around playing this game and I would ask them hey if you had a magic w wand and I told you you could wave the magic
12:01
wand and it would eliminate the national debt would you wave the magic wand
12:06
everybody said yes not even hesitation of course I would wave the wand I want the debt gone said okay well what if I
12:13
give you a different wand and I say if you wave the wand you will eradicate the world of treasuries no bills notes bonds
12:21
they’re just all gone would you wave the wand and they would look at me like I had three horns you know coming out of
12:27
my head say why would I do that why would I want to do that so they didn’t even understand that the thing we call
12:34
the national debt is nothing more than the stockpile right the stock of us
12:40
Treasures held in portfol excuse me portfolios and all the rest of it right they didn’t understand they want one to
12:46
go away but they want to keep the other well I’m sorry you can’t have it both ways so that started to shake my
12:53
confidence in things and then I wrote the deficit myth and I talked about some of this I told these kind of stories was
12:59
in the book and I said look I’m sort of agnostic on whether we issue bonds or
13:05
don’t issue bonds the problem seems to be the way we refer to them it’s the word debt that has everybody hung up
13:12
right and so maybe we just need to give it a different name Warren used to recommend calling it instead of the
13:18
national debt having a giant Debt Clock Loom over people in New York City
13:23
ticking away Warren would say you know just call it the interest rate maintenance account maybe everybody
13:28
would just just calmed down a little bit we’ve said call it the dollar savings clock we’ve tried right marketing
13:35
rebranding it’s just that it didn’t catch on and everyone is still very clearly worried about and weaponizing
13:43
the national debt and then you see what happened in the UK with Liz trust and everybody believes that the bond market
13:50
smacked her down and said you will not get the fiscal package that you are
13:56
proposing we aren’t willing to finance it and now labor is terrified and everybody looks at what happened to Liz
14:02
truss and they view that as a lesson for future governments and so at some point
14:07
you go you know maybe we’re not going to win this fight maybe we’re not going to get the policy response we need to deal
14:14
with climate and housing and all the rest of it uh because we can’t get
14:19
Beyond where we are in our understanding of deficits and especially the debt so I
14:25
did an interview with the ft and they asked me if you had five wishes or a magic wand and you could do five things
14:31
what would you do Warren and I talked a little bit about it uh before I committed to all five of those and I
14:38
made one of them I said no more bonds just don’t do it they’re more trouble than they’re worth we’re not going to
14:43
educate people fast enough to get Beyond this to get the right policy so let’s just stop right so that’s kind of where
14:51
I have arrived and I like my little play on words here which is if we were to do
14:57
that if the UK were to do that it could enjoy guilt-free spending isn’t that
15:06
nice you know the German word for Deb is guilt right and we do feel guilty about
15:14
increase in the deficit because it adds to the debt and we have this idea that this is a burden somebody’s ultimately going to have to pay it back so let’s
15:20
just get let’s just get over it let’s stop issuing it the labor party’s fiscal rules are clearly I think intention
15:28
Within missions you want to build a lot of housing but you want to rely on the private sector to do it just spend and
15:34
build the public housing leave the resulting pounds in the system let the bank of England decide what to pay on
15:40
those Reserve balances and tell the market to pound sand that is my position
15:46
uh as I stand here today so what can we do to De weaponize right uh to avoid
15:53
this is Scott’s line mass destruction de weaponized to avoid we got to have policy responses some of the very
16:00
critical challenges that we are facing and we’re having trouble getting there I think largely because we’re still too
16:07
hung up on what the national debt so-called means and the dangers the
16:12
dangers that it poses so we have written a lot over the years trying to educate
16:18
people trying to help people understand that there are options and that the way
16:23
we understand things today has flaws and and there misunderstandings and so so
16:29
forth again this is Bill Mitchell what would happen if a sovereign currency issuing government ran a fiscal deficit
16:36
and didn’t issue debt at all or sold bonds only to the central bank instead of the non-government sector what would
16:43
happen if we did over monetary financing and he says uh with a fiscal deficit and
16:48
no bond sales you get excess reserves in the cash system and the overnight interest rate Falls to zero or to the
16:55
support rate we’ve explained this a million times I have Warren has Scot has ad nauseum the only difference between
17:01
this and issuing bonds to drain the reserves is that the central bank has to use a different technique to hit its
17:07
interest rate target that’s all that changes and Larry got it Larry recognized it there’s no difference
17:14
between issuing the bonds or not issuing the bonds the difference is on Whose Ledger are you going to write down the
17:20
liability on the central bank’s Ledger or the treasuries and who’s going to
17:26
get I was going to say credit for but I don’t want to say that who is going to pay the interest the central bank or the
17:31
treasury that’s what the difference comes down to all right so here’s Scott fulweiler again from his 2005 paper
17:39
deficits that are unaccompanied by Bond sales are viewed disapprovingly as
17:44
monetization even though there’s no meaningful difference between doing it the way we do it today issuing the bonds
17:51
deficits always create net Financial Assets in direct proportion no matter which way you do it what matters isn’t
17:58
whether you sell bonds but whether the deficit is too large given the non-government desire to net save once
18:05
you have interest bearing reserves it becomes obvious that Bond sales are
18:11
offsetting interest rate maintenance not financing operations with interest on reserve balances eventually Scott says
18:18
the entire national debt could be held exclusively as Reserve balances or as
18:24
learner said issue bonds only in keeping with the principles of functional
18:30
Finance so paying interest on reserves simplifies monetary policy frees the treasury and the fed from selling bonds
18:37
to support the interest rate target it just makes it cleaner and more transparent otherwise it changes very
18:42
little fundamentally again no difference between issuing government debt to the non-government sector and the Central
18:49
Bank paying interest on Reserves at the Target rate they’re identical but the politics can be different all right it
18:57
doesn’t make it less inflation AR if you issue bonds it doesn’t alter the quantity of net Financial Assets in the
19:03
non-government sector and it doesn’t add jet fuel to the spending it doesn’t make
19:09
the deficit more stimulative because there’s no difference between so-called
19:14
Bond financed and money financed deficits there’s no reason for the government to sell bonds at all that’s
19:21
from Full Wilder’s pwor no further increase in the debt means no
19:26
unnecessary and counterproductive debt sealing drama no fights about burning
19:32
grandchildren all that sort of stuff all right this is just a image that Scott
19:38
uses a lot because people don’t understand they see the way the
19:43
government arranges treasury auctions coupled with deficits I say oh well this is how we
19:50
pay for things and I call this one on the left covert monetary financing and
19:56
the one on the right overt monetary financing it’s the same thing the Central Bank back stops the dealers and
20:02
it all works the same way you end up in the same place whether you do it overtly or covertly that’s the point here so
20:11
would stopping Bond issuance undermine Central Bank Independence no if you’ve
20:17
got interest bearing Reserve balances the central bank still has control of the overnight interest rates that’s the
20:23
policy rate if you moved away from that uh and oh you’re not issuing bonds then
20:30
government agency Securities or swaps could emerge as benchmarks you could still have something the private sector
20:37
could use to price risk even without treasuries because you often hear well if you get rid of bonds that’s the
20:42
risk-free rate that’s used to price risk for other Securities and lending and so
20:48
forth you you’d have a huge problem if you got rid of bonds and Scott is saying no you wouldn’t there are other ways uh
20:54
to do that the transmission of monetary policy with interest bearing Reserve balances is identical to that uh with
21:02
non-interest bearing Reserve balances and bonds to drain the excess balances treasury Securities could eventually be
21:08
replaced the interest rate on the national debt would then be whatever interest rate the central bank is paying
21:15
on reserve balances there’s no inherent reason for treasury liabilities to exist
21:20
across the entire term structure except to support operations for long-term
21:27
interest rates if you want do it that way all right now how would you manage credit
21:34
conditions without the tailor rule if you said to the central bank keep the
21:39
interest rate at zero uh oh how do you conduct monetary policy how do you
21:45
manage credit conditions oh Warren has a paper where he put forward I don’t know
21:50
20 30 different proposals for how to change uh what the treasury the fed and
21:57
the banking system everything from regulatory change changes to operational changes and so forth there a whole list
22:04
of things that we’ve proposed over time about how to go about managing
22:09
influencing credit conditions lending and all the rest of it but that’s there Eric T Mo and Randy did an edited volume
22:16
Randy’s book on Minsky Eric’s uh book on Central Bank and asset pric and all the
22:22
rest of it it’s all there uh bill has dealt with the question of well if you’re not able to
22:28
ra interest rates and you have a permanent zero interest rate policy won’t you just get asset bubbles people
22:34
say that all the time bills written about that uh and address those concerns everyone from the Federal Reserve to
22:41
some mm legal Scholars Nathan tankus and others have written to answer this
22:47
question how can you manage credit conditions if you’re not relying on changes in the short-term interest rate
22:53
the answer is there are 101 things that you can do all right
22:59
if you look at uh what other countries have done this is a from a paper where
23:04
they looked at um how many times countries have tightened or loosened
23:11
policy using tools other than the overnight interest rate okay so loan to
23:17
value debt to income other sorts of criteria being used to either loosen credit conditions or tighten credit
23:23
conditions how many times have countries done that this looks at that this one tells you how effective it’s been and
23:30
the paper just makes the arrives at the conclusion that it’s quite effective you
23:35
can use other tools that daren’t the overnight interest rate to manage credit
23:40
conditions other countries do it and they do it very effectively mmt has an answer for every one of these
23:46
weaponization we show that printing money as Scott says isn’t a thing if they really understood the operations
23:52
they wouldn’t say it if you’re not issuing debt it means you don’t have to deal with the fiscal sustainability that
23:58
comes out of the um intertemporal government budget constraint if you’re at Zer or managing interest rates it
24:06
means you don’t have to worry about Bond vigilantes Mosler Minsky Mitchell Ray T
24:11
Mo Etc have done research on as I just said macr credential other ways to
24:17
influence credit Beyond using short-term interest rates functional Finance means fiscal policy has a strong counter
24:24
cyclical role to play and yet we still have to recognize and be prepared for the fact that no matter which option we
24:30
choose people are going to complain about one thing or
24:36
another all right coming close to the end adding some additional concerns so
24:44
we open a conversation and as I said you know the descriptive stuff we’re aligned
24:50
around but on a prescriptive side and on this question about whether we should continue to issue bonds whether we
24:57
should only issue them directly to the central bank whether we should not issue them at all or whether we should carry
25:02
on with current practice issuing bonds to match the deficit to the non-government sector we’ve been having
25:09
these discuss it’s important that we talk about this and that we understand one another’s concerns so ry’s raised uh
25:17
some concerns around Financial fragility oh I’m sorry I’m not there yet this is a different one I’m about to get there uh
25:25
all right mm have had their own additional reasons for favoring no bonds
25:31
and or sir all right this is a different slide if you are doing things the way we
25:37
do them today which is column one and you have a central bank following a tailor rule or otherwise using rate
25:44
hikes to fight inflation the rate hikes might become inflationary so that’s an issue if you do things the way we’re
25:51
doing it today Financial fragility Alam Minsky right the rate hikes leading uh
25:57
highly lever um borrowers into potentially unsustainable speculative reponds and
26:03
positions it’s corporate welfare is what bill and Warren call it like Ubi for the
26:08
rich or whatever so you have those issues if you stopped issuing bonds and or did serve then those problems
26:17
disappear you’re not going to cause Financial fragility if you’re anchoring the interest rate at zero you’re not
26:22
going to have uh rate hikes becoming inflationary because you don’t have uh the bond market any longer and so forth
26:29
right so those problems go away why ISS you de at all if there’s no compelling case to do so as Bill Mitchell says why
26:36
do we keep doing it so I’m going to jump here to some of Randy’s concerns that have been raised just in internal
26:43
conversations and I think he’s had a a paper just uh recently on some of this
26:49
at believe Le right so he’s asking look if we got rid of bonds completely would
26:56
it really not matter matter would it create some problems maybe in terms of
27:01
the Public’s portfolio preferences would it compromise the business model of banking where could there potentially be
27:09
problems there does a modern financial sector need risk-free collateral for liquidity it’s important to deal with
27:16
these questions right shouldn’t be proposing something without thinking about all of the potential risks and
27:22
things that you know you got to uh anticipate problems that you could create so
27:29
we’ve dealt with these I think uh to some extent Scot and I were thinking them through on the saving vehicle issue
27:36
if you just keep with current practice then there’s no problem everybody has their risk-free asset and you’ve got
27:42
your treasuries uh Bank costs and profits not a problem because banks have
27:47
access to uh treasuries a risk-free return uh doesn’t compromise the
27:52
business model of banking you have no liquidity approaching but if you move to options three and four or and this is
27:58
ry’s question and maybe concern then do you start to get into uh a new set of
28:05
problems right do you open yourself up to a new set problem and we’re open to that possibility we’re saying yeah it’s
28:12
worth thinking about right all right so what about two
28:17
additional options ask yourself this question what if the Central Bank issued the Securities instead of the
28:23
treasury there’s an idea Central Bank can do that so central banks have a lot
28:28
of options if the government stops issuing bonds you can have Central Bank Securities you could rely more on
28:34
reverse repost time deposit accounts uh you could have fed accounts or central bank accounts and you could even make
28:40
them available to the business Community or to individuals it’s obvious if we do
28:45
that that central banks can never run out of money Central Bank could issue its own liabilities at any maturity it
28:52
desires if it did that it could announce the rates at each maturity there’s a
28:57
twoyear 5 year 10 year 20 whatever if you weren’t doing zero interest rate
29:03
then you could set rates across the entire term structure you have risk-free
29:09
uh interest rates across the term structure for private lenders to price from if you’re doing Z then you could
29:14
set rates slightly higher or not Scott says that’s his uh line you could have
29:20
on tap Securities which would mean risk-free collateral is plal you just
29:25
announce the price and let the quantity flow you’d avoid the stupid approach
29:31
currently employed which assumes that the desired increase in collateral is
29:37
whatever number happens to pop out of the budget box at the end of every year you get the number of treasuries that match the deficit the mainstream would
29:44
say this infringes on Central Bank Independence but the reality is it gives them more tools if you were to do
29:51
something like this so in conclusion some of you have seen the film finding the money and those of you
29:58
who’ve seen it probably will never forget a particular scene in the film where a White House Economist is
30:06
asked you know why is the government issue treasuries if you have if you have the ability to issue currency why do you
30:14
borrow and he flubs the question okay and I think the question is more
30:19
interesting in an era in which the central bank is paying interest on reserve balances it’s like if bonds are
30:27
about interest rate maintenance and that’s why we were issuing bonds to drain off reserves to allow the central
30:33
bank to achieve its interest rate target assuming the target is above zero now
30:39
that we’re paying interest on reserves now the Central Bank what’s the further purpose of issuing treasuries it’s it
30:46
becomes almost duplicative at that point right so I added another column which is
30:52
options five and six we could let the central bank issue Securities and then leave the central bank to set the
30:59
interest rates at different maturities uh including the overnight interest rate or we could anchor the overnight
31:04
interest rate at zero now does a more clear winner begin to
31:10
emerge doesn’t it maybe Warren says no so this is why
31:15
we’re doing this right because it opens up a conversation but when we think through the different issues and we just
31:22
answered yes or no on each of these this is how the chart filled itself out okay
31:27
so so uh I’m sure Warren will tell us why um this last option is no good but
31:32
the point is that no matter what we propose it’s going to be criticized okay
31:39
and our view Scott’s View and my view is that MNT is about making choices within the right framework and not avoiding
31:47
choosing something because we’re afraid of what the other side will say accusing us of printing money or compromising fed
31:54
Independence or whatever that’s not the right way for us to make a decision on this we ought to do so um in an mmt
32:02
consistent way
oooooo
We are now enrolling students for the February, June and September intakes of our global online MMT-informed Masters degree in the Economics of Sustainability. https://modernmoneylab.org.au/courses/
I had a chat with @StephanieKeltonabout the course last year.
ooo
Stephanie Kelton, in conversation with Steven Hail, March 2025
Transkripzioa:
0:00
hi I’m Steven hail I’m the academic
0:02
director of The Graduate certificate
0:04
graduate diploma and master’s degree in
0:07
the economics of sustainability of
0:09
modern money lab and torren University
0:11
Australia and I’m joined today by
0:14
Stephanie Kelton who is Professor of
0:17
economics and public policy at Stony
0:19
Brook University in Long Island author
0:22
of the 2020 New York Times bestseller
0:25
the deficit myth former Chief Economist
0:28
on the Senate budget committee in
0:30
Washington DC and many other things too
0:34
welcome Stephanie thank you your book
0:36
and your blog have been hugely
0:38
influential in the last few years
0:40
including with our
0:42
students how did we come to know each
0:45
other well I think we got to know one
0:47
another well uh when I was here in
0:51
January of 2020 at your invitation
0:53
really I mean I was the hardcour
0:56
visiting professor and I think I got to
0:58
spend almost 2 weeks in Adelaide and I
1:01
was finishing up the book and I think
1:03
that you and I spent a little bit of
1:04
time working through one of the chapters
1:07
that I was sort of struggling to edit
1:09
and get back to the Publishers so that
1:11
they could actually have the final
1:12
manuscript and I think that that’s where
1:14
we got to know one another the best yeah
1:16
and we ran a conference here at the time
1:18
with I think over 400 people at the
1:22
conference and indirectly that
1:24
conference LED on to us talking to
1:26
torren University and devising this
1:28
program which we been running out for 2
1:30
years with your support it’s great to
1:33
have you as a adjunct or honorary
1:35
professor at the University and it’s
1:37
been great to have you um involved in a
1:39
couple of events with our students in
1:41
the last couple of years I think our
1:44
program is the only one in the world
1:48
definitely as far as online programs is
1:49
concerned where Modern monetary theory
1:52
is either the basis of or at least
1:55
influences every subject in the program
1:59
and I think that’s important do you
2:01
agree what you’ve done stepen honestly
2:04
is beyond what I ever would have
2:07
imagined and I taught for many years at
2:10
a university where we had lots of mmt
2:12
economists but the whole of the program
2:15
wasn’t really infused with mmt and this
2:19
is I mean you’ve taken this to a whole
2:22
another level here and it’s really
2:25
inspiring to watch what you’ve done and
2:27
to see the enthusiasm you got students
2:30
from all over the world and I know that
2:32
many of them have to join sometimes they
2:34
they join in real time and it might be
2:37
two or three o’clock in the morning and
2:39
they want to be sure that they’re there
2:41
for the live portion of uh some
2:43
interaction with some of the incredible
2:45
faculty that you have so I’m just
2:48
thrilled to see you know what you’ve
2:50
built and continue to build with torren
2:52
University oh thank you very much
2:54
Stephanie I should add that they don’t
2:56
have to be up at 3:00 a.m. we run
2:59
everything twice
3:00
but we have several students who come to
3:03
both live webinars in the subject
3:05
they’re doing at the so they do they get
3:07
up in the middle get enough absolutely
3:10
right yes yes we have uh some people you
3:13
know quite well teaching for a Scott for
3:15
Wilder John Harvey Eric Dean um not to
3:18
mention me do you think these are good
3:20
people to study with well they’re great
3:22
people to study I know what you’re going
3:24
to say ask you anyway some of them are
3:26
my former colleagues Scott F Wilder was
3:28
a former colleague ER Dean was student
3:30
of ours John Harvey is so incredible
3:32
that I invite him to guest lecture in a
3:35
course that I teach so when I’m
3:37
handpicking people that I think are
3:40
outstanding in the classroom that bring
3:42
something that I think is important that
3:43
I want my students to hear these are the
3:46
kinds of people that I pick and
3:48
sometimes I only get a one-off lecture
3:49
and you get a whole course out of some
3:51
of them so it’s really remarkable yeah
3:53
we’ve been very fortunate in who we’ve
3:55
been able to have join in the program
3:57
it’s been great to have them uh we have
4:00
two themes I suppose going through the
4:01
master’s degree mmt is one of them the
4:04
other one is environmental
4:05
sustainability how do they fit together
4:08
well it’s really difficult to imagine
4:10
doing one without the other really to do
4:14
economics well I think is to recognize
4:18
uh some of the insights that mmt has
4:20
long emphasized which are you know real
4:24
resource constraints and inflation
4:26
limits and so forth but really truly
4:29
building in
4:30
the ecological constraints and helping
4:32
people appreciate why it’s important to
4:35
do that why you can’t just sort of
4:38
passively mention that one must pay
4:41
attention to things like planetary
4:42
boundaries and then move along but to
4:44
really do that kind of Deep dive and to
4:47
properly integrate that into a
4:49
macroeconomic framework is creating an
4:52
offering that I don’t think exists
4:54
anywhere else in the world why are you
4:56
in adelite at the moment well we’re here
4:59
to to bring this film this documentary
5:03
uh which is in a sense a the story of
5:05
mmt in many ways it’s called finding the
5:07
money and we’re screening it in major
5:11
cities all across the country for the
5:12
next 10 days or so and I think it got
5:15
started even before I arrived you know
5:17
this is a a film that tells the story of
5:21
the kind of rise to prominence of mmt
5:24
where did this framework come from how
5:25
did it kind of Catch Fire what does it
5:28
offer us by way of you know giving us
5:31
new ways to think about some big things
5:34
especially the way we think about the
5:36
capacity of the government to spend
5:38
money the mechanics of government
5:40
Finance where does money come from how
5:42
does it all work um why do we pay taxes
5:45
and should we worry about things like
5:47
deficits and the debt this film
5:49
addresses all of those questions and
5:52
answers them in ways that really run
5:55
counter to just about everything we’ve
5:57
been taught to believe and so I think
5:59
it’s been exciting for audiences to sit
6:02
through this and sort of have their
6:03
minds blown but I think what they come
6:06
away with is almost a sense of well of
6:09
course right it seems so intuitive once
6:12
it’s laid out for you so that’s why I’m
6:15
here and I’m hoping that you know this
6:16
will advance the debate that we have
6:20
over you know what we can actually
6:22
afford to do as a nation in ways that
6:26
you know ship the conversation open up
6:28
some space for us to think more
6:30
ambitiously about what we’re capable of
6:33
and to stop having the wrong debate stop
6:35
arguing about the wrong things and get
6:37
focused on what really matters so we’re
6:39
not saying that there are no limits on
6:41
government spending no we’re not saying
6:43
there are no limits we’re saying the
6:44
limits are there and they’re real and we
6:46
have to pay attention to them we have to
6:48
respect the real limits capacity
6:50
constraints in our economy there’s
6:52
inflation that you have to worry about
6:54
their ecological and planetary
6:55
boundaries but the things we’ve been
6:57
taught to worry about the number that
6:59
pops out of the budget box at the end of
7:01
each year the size of the national debt
7:04
um those are kind of distractions from
7:07
the things that really matter and that’s
7:09
what the film tries to get across
7:11
there’s there is at least one famous
7:13
economist in the film who says that you
7:16
say um deficit spending can be a problem
7:19
because of the inflation constraint
7:21
because of the a real resource
7:22
constraint we say that deficit spending
7:25
is a problem because of issues to do
7:27
with what we call fiscal sustainab
7:29
ability and the ratio of the national
7:32
debt to GDP rising over time and those
7:35
two things get us to roughly the same
7:37
place so that the issue doesn’t really
7:38
matter now we we don’t agree with those
7:41
people why the person you’re referring
7:44
to has worried about deficits and debt
7:46
for a long time and in fact pushed uh
7:49
was part of the Obama Administration he
7:52
was an economic uh adviser to the
7:54
president and at the time was pushing
7:57
deficit reduction not because he was
7:59
worried about inflation but because he
8:01
was worried about the deficit per se and
8:04
so it doesn’t get you to roughly the
8:06
same place in fact where it got us was
8:08
to a long period where the government
8:11
was pursuing the administration a
8:13
Democratic president and his
8:15
administration were pursuing austerity
8:18
for the sake of trying to achieve a
8:21
smaller deficit not because they were
8:23
worried about inflation so I would argue
8:26
that we got really poor economic policy
8:30
during those years and that it cost us
8:33
in many ways it cost Society we had a
8:36
much more sluggish recovery from the
8:39
global financial crisis the Great
8:40
Recession we could have done so much
8:43
more to repair the damage that had been
8:46
done but instead we you know pivoted to
8:50
austerity and we had what basically
8:52
amounted to a lost decade and we had
8:55
much the same thing in Australia right
8:56
so you could tell precisely the same
8:58
story yeah
9:00
H um it’s no secret that you’ve signed
9:03
on to write another
9:04
book can you tell us anything about
9:07
about it at all or perhaps when we can
9:09
expect it to come out well I’m not
9:11
expecting you to tell us the title or
9:13
exactly what is it uh another addition
9:16
of the deficit myth or will it be
9:17
something different well it has to be
9:19
something different but it is in some
9:21
ways a continuation of that story and I
9:25
do kind of like the myth mythbusting I I
9:29
think there are still a lot of things
9:31
that we get wrong and some of the
9:33
lessons that uh unfortunately I think
9:35
have been learned in the wake of the
9:37
policy response to co need to be
9:40
addressed and straightened out um before
9:42
we get ourselves into real trouble so
9:45
the next book will take me probably a
9:47
year and a half to write I’ve just uh
9:50
signed a contract for publishing that
9:52
next book so I’ve got a lot of work to
9:54
do late 2025 maybe people can look for
9:57
that early 2026 Maybe
9:59
what we’re pushing for really is nothing
10:01
short of a paradigm shift in
10:03
macroeconomics and in framing Economic
10:06
Policy issues generally that’s not going
10:08
to be easy to bring about well no
10:11
there’s a lot of resistance a lot of
10:13
entrenched interests uh you know how the
10:16
academy Works economists are uh very
10:19
protective of their domain and the sort
10:22
of big boys like to have conversations
10:24
among themselves and often not invite
10:27
folks who have a very different way of
10:30
thinking about things to be part of the
10:32
conversation they prefer to interact
10:34
with people who differ at the margins
10:36
whereas we come essentially with a
10:38
completely different macroeconomic
10:41
framework a different Paradigm so it’s
10:43
more difficult in some ways to have
10:45
conversations with us because we see the
10:47
world so differently and so you have to
10:51
kind of elbow your way in to to have a a
10:55
place in some of these debates and I
10:57
think we’ve been pretty successful at
10:59
that so far but you you have to keep
11:01
going sometimes it’s two steps forward
11:02
one step back well you’ve been hugely
11:04
successful and the deficit myth was on
11:07
the New York Times best bestseller list
11:09
it must have been the bestselling
11:10
economics book in 2020 I’m very very
11:14
blessed to have seen that book do as
11:17
well as it did and you know it’s funny
11:19
because it’s been adopted not just uh by
11:22
economists there people who teach and
11:24
adopt the book and use it in their
11:25
classrooms and I love that but I get
11:27
emails from high school teach who use it
11:30
I get emails from history professors
11:32
sociology professors political science
11:34
professors social people who teach
11:36
social work and I show up with you know
11:38
in the zoom and I go meet with the
11:39
students if they’re uh using the book
11:42
but the the reward is not just that
11:45
which is hugely rewarding but just how
11:47
accessible the book has been to to lay
11:50
people with no background in economics
11:52
who you know you see a book with the
11:54
titled the deficit myth well who in the
11:56
world wants to read about budget
11:57
deficits but somehow people really want
12:00
to understand they want to understand
12:02
what it is that people are constantly
12:04
harping on about uh on television and
12:07
radio programs and so forth you know as
12:10
long as people are banging on about you
12:13
know debt deficits and all of that sort
12:16
of stuff people will be looking for a
12:18
book like that to help them make sense
12:20
of things well I know we were largely
12:22
ignored um or at least I was in
12:24
Australia until you came last time in
12:27
January 2020 and then the deficit myth
12:29
came out and then after that we got
12:33
invitations from commercial Banks and
12:35
investment Banks and Torrens were kind
12:38
enough to agree for for us to run this
12:41
program that book and your work
12:43
generally has been the biggest
12:46
inspiration for what we’ve been doing
12:49
and we’re very grateful and it’s great
12:51
that you’re an Adjunct professor or
12:53
honorary professor at torren and it’s
12:55
been terrific having you talk to our
12:57
students the last couple of years and
12:59
and I hope you’ll go on doing that in
13:00
the future I sure I sure will your
13:03
students are um among the most dedicated
13:06
that I’ve interacted with they’re here
13:08
and they know why they’re here they know
13:10
why they’re signing up for these courses
13:12
and so you have the luxury of getting to
13:14
teach to students who actually want to
13:16
be there every single day that they log
13:18
in and um I couldn’t wish you better
13:21
success and I know that the program is
13:23
just going to continue to attract more
13:25
and more students so hugely um proud of
13:29
what you’re you’re doing here thanks
13:31
very much Stephanie you’re welcome thank
13:38
you
oooooo
Il tema “saldi commerciali” è probabilmente il meno compreso e più frainteso sulla #MMT. Quanto conta come “sistema Paese” è: -cosa ottieni in cambio dell’export -come usi l’import (che poi sono la stessa cosa) cioè l’obiettivo deve essere ottimizzare le ragioni reali di scambio:
Bideoa: https://x.com/i/status/1881022194249261432
oooooo
I think you will enjoy this chat myself and Lynne Dougan had with Professor L. Randall Wray. We talk about where money comes from, standardising a unit of measurement, the destruction of taxes, understanding IOUs, balance sheet entries and more …
Bideoa: https://x.com/i/status/1873422019762733068
oooooo
Bitxikeria
@tobararbulu # mmt@tobararbulu
The Trillion Dollar Equation https://youtu.be/A5w-dEgIU1M?si=i-4DwyxP04YGHhlW
Honen bidez: @YouTube
ooo
The Trillion Dollar Equation
(https://www.youtube.com/watch?v=A5w-dEgIU1M)
How the Black-Scholes/Merton equation made trillions of dollars. Go to https://www.eightsleep.com/veritasium and use the code Veritasium for $200 off your Pod Cover.
Transkripzioa:
0:00
– This single equation spawned four multi-trillion dollar industries and transformed everyone’s approach to risk.
0:07
Do you think that most people are aware of the size, scale, utility of derivatives?
0:13
– No. No idea. – But at its core, this equation comes from physics, from discovering atoms,
0:20
understanding how heat is transferred, and how to beat the casino at blackjack.
0:25
So maybe it shouldn’t be surprising that some of the best to beat the stock market were not veteran traders,
0:30
but physicists, scientists, and mathematicians. In 1988, a mathematics professor named Jim Simons
0:37
set up the Medallion Investment Fund, and every year for the next 30 years, the Medallion fund delivered higher returns
0:44
than the market average, and not just by a little bit, it returned 66% per year.
0:51
At that rate of growth, $100 invested in 1988 would be worth
0:56
$8.4 billion today. This made Jim Simons easily the richest
1:02
mathematician of all time. But being good at math doesn’t guarantee success in financial markets.
1:09
Just ask Isaac Newton. In 1720 Newton was 77 years old,
1:15
and he was rich. He had made a lot of money working as a professor at Cambridge for decades,
1:20
and he had a side hustle as the Master of the Royal Mint. His net worth was £30,000
1:27
the equivalent of $6 million today. Now, to grow his fortune, Newton invested in stocks.
1:34
One of his big bets was on the South Sea Company. Their business was shipping enslaved Africans across the Atlantic.
1:42
Business was booming and the share price grew rapidly. By April of 1720, the value of Newton’s shares had doubled.
1:49
So he sold his stock. But the stock price kept going up and by June, Newton bought back in
1:57
and he kept buying shares even as the price peaked. When the price started to fall, Newton didn’t sell.
2:03
He bought more shares thinking he was buying the dip. But there was no rebound,
2:09
and ultimately he lost around a third of his wealth. When asked why he didn’t see it coming, Newton responded,
2:16
“I can calculate the motions of the heavenly bodies, but not the madness of people.”
2:22
So what did Simons get right that Newton got wrong? Well, for one thing, Simons was able
2:29
to stand on the shoulders of giants. The pioneer of using math to model financial markets
2:35
was Louis Bachelier, born in 1870. Both of his parents died when he was 18
2:41
and he had to take over his father’s wine business. He sold the business a few years later and moved to Paris to study physics,
2:48
but he needed a job to support himself and his family and he found one at the Bourse, The Paris Stock Exchange.
2:54
And inside was Newton’s “madness of people” in its rawest form. Hundreds of traders screaming prices, making hand signals,
3:02
and doing deals. The thing that captured Bachelier’s interest were contracts known as options.
3:10
The earliest known options were bought around 600 BC by the Greek philosopher Thales of Miletus.
3:17
He believed that the coming summer would yield a bumper crop of olives. To make money off this idea,
3:22
he could have purchased olive presses, which if you were right, would be in great demand, but he didn’t have enough money to buy the machines.
3:29
So instead he went to all the existing olive press owners and paid them a little bit of money to secure the option
3:35
to rent their presses in the summer for a specified price. When the harvest came, Thales was right,
3:42
there were so many olives that the price of renting a press skyrocketed. Thales paid the press owners their pre-agreed price,
3:49
and then he rented out the machines at a higher rate and pocketed the difference. Thales had executed the first known call option.
3:58
A call option gives you the right, but not the obligation to buy something at a later date for a set price
4:04
known as the strike price. You can also buy a put option, which gives you the right, but not the obligation
4:10
to sell something at a later date for the strike price. Put options are useful if you expect the price to go down.
4:16
Call options are useful if you expect the price to go up. For example, let’s say the current price
4:21
of Apple stock is a hundred dollars, but you expect it to go up. You could buy a call option for $10
4:28
that gives you the right, but not the obligation to buy Apple stock in one year for a hundred dollars.
4:34
That is the strike price. Just a little side note, American options can be exercised on any date up to the expiry,
4:41
whereas European options must be exercised on the expiry date. To keep things simple, we’ll stick to European options.
4:48
So if in a year the price of Apple stock has gone up to $130, you can use the option to buy shares
4:55
for a hundred dollars and then immediately sell them for $130. After you take into account the $10 you paid
5:01
for the option, you’ve made a $20 profit. Alternatively, if in a year the stock prices dropped to $70,
5:08
you just wouldn’t use the option and you’ve lost the $10 you paid for it. So the profit and loss diagram looks like this.
5:16
If the stock price ends up below the strike price, you lose what you paid for the option. But if the stock price is higher than the strike price,
5:23
then you earn that difference minus the cost of the option.
5:28
There are at least three advantages of options. One is that it limits your downside.
5:34
If you had bought the stock instead of the option and it went down to $70, you would’ve lost $30.
5:39
And in theory, you could have lost a hundred if the stock went to zero. The second benefit is options provide leverage.
5:46
If you had bought the stock and it went up to $130, then your investment grew by 30%.
5:52
But if you had bought the option, you only had to put up $10. So your profit of $20 is actually
5:57
a 200% return on investment. On the downside, if you had owned the stock,
6:03
your investment would’ve only dropped by 30%, whereas with the option you lose all 100%.
6:09
So with options trading, there’s a chance to make much larger profits, but also much bigger losses.
6:16
The third benefit is you can use options as a hedge. – I think the original motivation for options
6:22
was to figure out a way to reduce risk. And then of course, once people decided they wanted to buy insurance,
6:28
that meant that there are other people out there that wanted to sell it or a profit, and that’s how markets get created.
6:36
– So options can be an incredibly useful investing tool, but what Bachelier saw on the trading floor was chaos,
6:43
especially when it came to the price of stock options. Even though they had been around for hundreds of years,
6:50
no one had found a good way to price them. Traders would just bargain to come to an agreement about what the price should be.
6:56
– Given the option to buy or sell something in the future, it seems like a very amorphous kind of a trade.
7:04
And so coming up with prices for these rather strange objects has been a challenge
7:10
that’s plagued a number of economists and business people for centuries.
7:15
– Now, Bachelier, already interested in probability, thought there had to be a mathematical solution
7:20
to this problem, and he proposed this as his PhD topic to his advisor Henri Poincaré.
7:26
Looking into the math of finance wasn’t really something people did back then, but to Bachelier’s surprise, Poincaré agreed.
7:34
To accurately price an option, first you need to know what happens to stock prices over time.
7:40
The price of a stock is basically set by a tug of war between buyers and sellers. When more people wanna buy a stock, the price goes up.
7:48
When more people wanna sell a stock, the price goes down. But the number of buyers and sellers
7:53
can be influenced by almost anything, like the weather, politics, new competitors, innovation and so on.
8:00
So Bachelier realized that it’s virtually impossible to predict all these factors accurately.
8:05
So the best you can do is assume that at any point in time the stock price is just as likely to go up as down
8:12
and therefore over the long term, stock prices follow a random walk, moving up and down as if their next move is determined
8:20
by the flip of a coin. – Randomness is a hallmark of an efficient market.
8:27
By efficient economists typically mean that you can’t make money by trading.
8:33
– The idea that you shouldn’t be able to buy an asset and sell it immediately for a profit is known
8:38
as the Efficient Market Hypothesis. – The more people try to make money by predicting the stock market
8:44
and then trading on those predictions, the less predictable those prices are. If you and I could predict
8:51
the stock market tomorrow, then we would do it. We would start trading today on stocks
8:56
that we thought were gonna go up tomorrow. Well, if we did that, then instead of going up tomorrow,
9:02
they would go up now as we bought more and more of the stock. So the very act of predicting actually affects the quality
9:10
of the future outcomes. And so in a totally efficient market, the prices tomorrow can’t possibly have any
9:18
predictive power. If they did, we would’ve taken advantage of it today.
9:24
– This is a galton board. It’s got rows of pegs arranged in a triangle and around 6,000 tiny ball bearings
9:31
that I can pour through the pegs. Now, each time a ball hits a peg, there’s a 50 50 chance it goes to the left or the right.
9:38
So each ball follows a random walk as it passes through these pegs, which makes it basically impossible
9:44
to predict the path of any individual ball. But if I flip this over, what you can see
9:50
is that all the balls together always create a predictable pattern. That is a collection of random walks
9:57
creates a normal distribution. It’s centered around the middle because the number of paths a ball could take
10:03
to get here is the greatest. And the further out you go, the fewer the paths a ball could take to get there. Like if you want to end up here, well the ball would have
10:10
to go left, left, left, left all the way down. So there’s only one way to get here,
10:15
but to get into the middle, there are thousands of paths that a ball could take. Now, Bachelier believed a stock price is
10:22
just like a ball going through a galton board. Each additional layer of pegs represents a time step.
10:29
So after a short time, the stock price could only move up or down a little, but after more time, a wider range of prices is possible.
10:37
According to Bachelier the expected future price of a stock is described by a normal distribution,
10:43
centered on the current price which spreads out over time. Bachelier realized he had rediscovered
10:50
the exact equation which describes how heat radiates from regions of high temperature
10:55
to regions of low temperature. This was first discovered by Joseph Fourier back in 1822.
11:02
So Bachelier called his discovery the radiation of probabilities.
11:07
Since he was writing about finance, the physics community didn’t take any notice, but the mathematics of the random walk would go on
11:14
to solve an almost century old mystery in physics.
11:20
In 1827, Scottish botanist Robert Brown was looking at pollen grains under the microscope,
11:25
and he noticed that the particles suspended in water on the microscope slide were moving around randomly.
11:31
Because he didn’t know whether it was something to do with the pollen being living material, He tested non-organic particles
11:37
such as dust from lava and meteorite rock. Again, he saw them moving around in the same way.
11:44
So Brown discovered that any particles, if they were small enough, exhibited this random movement,
11:50
which came to be known as Brownian motion. But what caused it remained a mystery.
11:58
80 years later in 1905, Einstein figured out the answer.
12:05
Over the previous couple hundred years, the idea that gases and liquids were made up of molecules became more and more popular.
12:11
But not everyone was convinced that molecules were real in a physical sense. Just that the theory explained a lot of observations.
12:18
The idea led Einstein to hypothesize that Brownian motion is caused by the trillions of molecules hitting the particle
12:25
from every direction, every instant. Occasionally, more will hit from one side than the other,
12:30
and the particle will momentarily jump. To derive the mathematics, Einstein supposed that as an observer we can’t see
12:38
or predict these collisions with any certainty. So at any time we have to assume that the particle is just as likely to move
12:44
in one direction as an another. So just like stock prices, microscopic particles move
12:50
like a ball falling down a galton board, the expected location of a particle is described by a normal distribution, which broadens with time.
12:59
It’s why even in completely still water, microscopic particles spread out.
13:04
This is diffusion. By solving the Brownian motion mystery.
13:09
Einstein had found definitive evidence that atoms and molecules exist. Of course, he had no idea
13:14
that Bachelier had uncovered the random walk five years earlier. By the time Bachelier finished his PhD,
13:21
he had finally figured out a mathematical way to price an option. Remember that with a call option,
13:27
if the future price of a stock is less than the strike price, then you lose the premium paid for the option.
13:33
But if the stock price is greater than the strike price, you pocket that difference and you make a net profit if the stock has gone up
13:39
by more than you paid for the option. So the probability that an option buyer makes a profit is the probability that the price
13:46
increases by more than the price paid for it, which is the green shaded area. And the probability that the seller makes money
13:53
is just the probability that the price stays low enough that the buyer doesn’t earn more than they paid for it. This is the red shaded area.
14:01
Multiplying the profit or loss by the probability of each outcome, Bachelier calculated the expected return of an option.
14:08
Now how much should it cost? If the price of an option is too high, no one will wanna buy it.
14:14
Conversely, if the price is too low, everyone will want to buy it. Bachelier argued that the fair price
14:20
is what makes the expected return for buyers and sellers equal. Both parties should stand to gain or lose the same amount.
14:28
That was Bachelier’s insight into how to accurately price an option.
14:33
When Bachelier finished his thesis, he had beaten Einstein to inventing the random walk and solved the problem that had eluded options traders
14:40
for hundreds of years. But no one noticed. The physicists were uninterested
14:45
and traders weren’t ready. The key thing missing was a way to make a ton of money.
14:52
Hey, so I’m not sure how stock traders sleep at night with billions of dollars riding on the madness of people,
14:57
but I have been sleeping just fine, thanks to the sponsor of this video, Eight Sleep. I’ve recently moved to Australia
15:03
and it has been really hot, but I’ve been keeping cool at night using the Eight Sleep Pod. It’s a smart mattress cover
15:09
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15:15
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15:22
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15:28
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15:34
And usually that means getting a couple of degrees cooler during the start of the night and then warming up in the morning to help you wake up.
15:40
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15:45
like an annoying phone sound. You know, I’ve been tracking my sleep before and after using the Pod, and I’ve found that I’ve been sleeping longer
15:52
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15:58
and thanks again to Eight Sleep for sponsoring this part of the video. In the 1950s,
16:04
a young physics graduate, Ed Thorpe, was doing his PhD in Los Angeles, but a few hours drive away,
16:10
Las Vegas was quickly becoming the gambling capital of the world, and Thorpe saw a way to make a fortune.
16:16
He headed to Vegas and sat down at the blackjack table, back then, the dealer only used a single deck of cards,
16:21
so Thorpe could keep a mental note of all the cards that had been played as he saw them.
16:27
This allowed him to work out if he had an advantage. He would bet a bigger portion of his funds when the odds were in his favor
16:33
and less when they weren’t. He had invented card counting. This is a remarkable innovation,
16:40
considering blackjack had been around in various forms for hundreds of years, and for a while this made him a lot of money.
16:48
But the casinos got wise to his strategy and they added more decks of cards to the game to reduce the benefit of card counting.
16:55
So Thorpe took his winnings to what he called the biggest casino on Earth:
17:00
the stock market. He started a hedge fund that would go on to make a 20% return every year
17:07
for 20 years, the best performance ever seen at that time. And he did it by transferring the skills he honed
17:13
at the blackjack table to the stock market. Thorpe pioneered a type of hedging, a way to protect against losses with balancing
17:20
or compensating transactions. – Thorpe did it mathematically. He looked at the odds of winning and losing
17:27
and decided that under certain conditions you can actually tilt the odds in your favor by using certain patterns
17:34
to be able to make bets. – Suppose Bob sells Alice a call option on a stock,
17:40
and let’s say the stock has gone up, so now it’s in the money for Alice. Well now for every additional $1, the stock price goes up,
17:47
Bob will lose $1, but he can eliminate this risk by owning one unit of stock.
17:54
Then if the price goes up, he would lose $1 from the option but gain that dollar back from the stock.
18:00
And if the stock drops back outta the money for Alice, he sells the stock so he doesn’t risk losing any money from that either.
18:07
This is called dynamic hedging. It means Bob can make a profit with minimal risk from fluctuating stock prices.
18:14
A hedge portfolio pi at any one time will offset the option V with some amount of stock delta.
18:21
– It basically means I can sell you something without having to take the opposite side of the trade.
18:28
And the way to think about it is I have synthetically manufactured an option for you.
18:36
I’ve created it out of nothing by doing dynamic trading. Dynamic hedging.
18:42
– As we saw with Bob’s example delta, the amount of stock he has to hold, changes depending on current prices.
18:48
Mathematically, it represents how much the current option price changes with a change in the stock price.
18:54
But Thorpe wasn’t satisfied with Bachelier’s model for pricing options. I mean, for one thing, stock prices aren’t entirely random.
19:01
They can increase over time if the business is doing well or fall if it isn’t. Bachelier’s model ignored this.
19:08
So Thorpe came up with a more accurate model for pricing options, which took this drift into account.
19:14
– I actually figured out what this model was back in
19:19
the middle of 1967, and I decided that I would just use it for myself
19:26
and then later I kept it quiet for my own investors. The idea was to basically make a lot
19:32
of money out of it for everybody. – His strategy was if the option was going cheap, according to his model, buy it.
19:38
If it was overvalued, short sell it, that is bet against it. And that way, more often than not,
19:43
he would end up on the winning side of the trade. This lasted until 1973.
19:50
In that year, Fischer Black and Myron Scholes came up with an equation that changed the industry.
19:56
Robert Merton independently published his own version, which was based on the mathematics of stochastic calculus,
20:01
so he is also credited. – I thought I’d have the field to myself, but unfortunately, Fischer Black
20:08
and Myron Scholes published the idea and they did a better job of the model than I did
20:14
because they had very tight mathematics behind their derivation – Like Bachelier,
20:19
they thought that option prices should offer a fair bet to both buyers and sellers, but their approach was totally new.
20:26
They said if it was possible to construct a risk-free portfolio of options and stocks just like Thorpe was doing
20:32
with his delta hedging, then in an efficient market, a fair market, this portfolio should return nothing more
20:38
than the risk-free rate, what the same money would earn if invested in the safest asset, US treasury bonds.
20:45
The assumption was that if you’re not taking on any additional risk, then it shouldn’t be possible to receive any extra returns.
20:53
To describe how stock prices change over time, Black, Scholes, and Merton used an improved version
20:58
of Bachelier’s model just like Thorpe. This says that at any time we expect the stock price to move randomly,
21:04
plus a general trend up or down, the drift. By combining these two equations, Black, Scholes, and Merton
21:12
came up with the most famous equation in finance. It relates the price of any kind of contract to any asset,
21:19
stocks, bonds, you name it. The same year they published this equation, the Chicago Board Options Exchange was founded.
21:27
Why is that equation so important? Like for finance, how did that change the game?
21:32
– Well, because when you solve that partial differential equation, you get an explicit formula of the price of the option
21:39
as a function of a bunch of these input parameters. And for the very first time, you now have an explicit expression
21:46
where you plug in the parameters and out pops this number so that people can actually use it to trade on.
21:53
– This led to one of the fastest adoptions by industry of an academic idea in all of the social sciences.
21:59
– Within just a couple of years, the Black Scholes formula was adopted as the benchmark
22:05
for Wall Street for trading options. The exchange traded options market has exploded
22:11
and it’s now a multi-trillion dollar industry, the volume in this market has been doubling
22:17
roughly every five years. So this is the financial equivalent of Moore’s Law. There are other businesses
22:23
that have grown just as quickly, like credit default swaps market,
22:28
the OTC derivatives market, the securitized debt market. All of these are multi-trillion dollar industries
22:35
that in one form or another make use of the idea of Black Scholes Merton option pricing.
22:42
– This opened up a whole new way to hedge against anything, and not just for hedge funds.
22:48
Nowadays, pretty much every large company, governments, and even individual investors use options
22:53
to hedge against their own specific risks. Suppose you’re running an airline and you’re worried that an increase in oil prices
23:00
would eat into your profits. Well, using the Black Scholes Merton equation, there’s a way to accurately
23:06
and efficiently hedge that risk. You price an option to buy something that tracks the price of oil, and that option will pay off
23:13
if oil prices go up, and that will help compensate you for the higher cost of fuel you have to pay.
23:19
So Black Scholes Merton can help reduce risk, but it can also provide leverage.
23:24
– An ongoing battle between bullish day traders and hedge fund short sellers
23:29
that have bet against the stock, GameStop shares, have now risen some 700%.
23:35
– Well, GameStop is a really interesting example for all sorts of reasons, but options figured prominently in that example
23:41
because a small cadre of users on this Reddit sub-channel r/wallstreetbets
23:47
decided that the hedge fund managers that were shorting the stock and betting that the company would go out of business
23:53
needed to be punished. And so they bought shares of GameStop stock
23:59
to try to drive up price. Turns out that buying the stock was not enough, because with a dollar’s worth of cash,
24:06
you can buy a dollar’s worth of stock, but with a dollar’s worth of cash, you can buy options
24:11
that affected many more than a dollar’s worth of stock, perhaps in some cases $10
24:17
or $20 worth of stock for a dollar’s worth of options. And so there’s natural leverage embedded
24:23
in these securities. And so the combination of buying both the stock
24:28
and the options caused the prices to rise very quickly. And what that did was to cause these hedge fund managers
24:34
to lose a lot of money quickly. – How big is this market for derivatives? How big is this whole area that kind of
24:42
comes out of Black Scholes Merton? – There are estimates of how large derivatives markets are,
24:49
and first, let’s be clear what a derivative is. A derivative is a financial security whose value derived
24:55
from another financial security. So an option is an example of a derivative.
25:01
In general, the size of derivative markets globally is the on the order
25:06
of several hundred trillion dollars. – How does that compare to the size of the underlying securities they’re based on?
25:13
– It’s multiples of the underlying securities. – I just have to interrupt because it seems kind of crazy
25:20
that you have more money riding on the things that are based on the thing than the thing itself.
25:26
– That’s right. – So tell me how that makes any sense. – Because what options allow you to do is
25:33
to take the underlying thing and turn it into 5, 10, 20, 50 things.
25:39
So these pieces of paper that we call options and derivatives, they basically allow us to create many,
25:45
many different versions of the underlying asset, versions that individuals find more palatable
25:53
because of their own risk reward preferences. – Does this make the markets
25:59
and the global economy more stable, or less stable, or no effect?
26:05
– All three. So it turns out that during normal times,
26:11
these markets are a very significant source of liquidity and therefore stability.
26:16
During abnormal times, by that I mean when there are periods of market stress,
26:23
all of these securities can go in one direction, typically down,
26:28
and when they go down together, that creates a really big market crash.
26:34
So in those circumstances, derivatives markets can exacerbate these kinds
26:40
of market dislocations. – In 1997, Merton and Scholes were awarded the Nobel Prize in economics.
26:47
Black was acknowledged for his contributions, but unfortunately he had passed away just two years earlier.
26:53
– We were gonna make a lot of money in options, but now Black and Shoals have told everybody what the secret is.
26:59
– With the option pricing formula now out for everyone to see hedge funds would need to discover better ways
27:04
to find market inefficiencies. Enter Jim Simons. Before Simons had any exposure to the stock market,
27:12
he was a mathematician. His work on Riemann geometry was instrumental in many areas of mathematics and physics, including knot theory,
27:19
quantum field theory, and quantum computing Chern Simon’s theory laid the mathematical foundation
27:25
for string theory. In 1976, the American Mathematical Society presented him with the Oswald Veblen Prize in geometry.
27:33
But at the top of his academic career, Simons went looking for a new challenge.
27:39
When he founded Renaissance Technologies in 1978, his strategy was to use machine learning to find patterns in the stock market.
27:46
Patterns provide opportunities to make money. – The real thing was to gather a tremendous amount of data
27:52
and we had to get it by hand in the early days, we went down to the Federal Reserve
27:57
and copied interest rate histories and stuff like that ’cause it didn’t exist on computers.
28:03
– His rationale was that the market is far too complex for anyone to be able to make predictions with certainty.
28:08
But Simons had worked for the US Institute for Defense Analysis during the Cold War, breaking Russian codes
28:14
by extracting patterns from masses of data. Simons was convinced that a similar approach could beat the market.
28:21
He then used his academic contacts to hire a bunch of the best scientists he could find. – What was your employment criteria then?
28:28
If they knew nothing about finance, what were you looking for in them? Someone with a PhD in physics and who’d had five years out
28:35
and had written a few good papers and was obviously a smart guy or in astronomy
28:40
or in mathematics or in statistics. Someone who had done science and done it well.
28:48
– It’s not surprising that mathematicians and physicists are involved in this field. First of all, finance pays a lot better than, you know,
28:56
being an assistant professor of mathematics. And for a number of mathematicians, the beauty
29:02
of option pricing is equally compelling to anything else that they’re doing in their professions.
29:07
– One of these was Leonard Baum, a pioneer of Hidden Markov models. Just as Einstein realized that
29:13
although we can’t directly observe atoms, we can infer their existence through their effect on pollen grains,
29:18
Hidden Markov models aim to find factors that are not directly observable, but do have an effect on what we can observe.
29:25
And soon after that, Renaissance launched their now-famous Medallion fund. Using hidden Markov models
29:32
and other data driven strategies, The Medallion fund became the highest returning investment fund of all time.
29:38
This led Bradford Cornell of UCLA, in his paper Medallion Fund: The Ultimate Counterexample?
29:44
to conclude that maybe the efficient market hypothesis itself is wrong.
29:49
– In 1988, I published a paper testing it, the US Stock Market, and what I found was that the hypothesis is false.
29:58
You can actually reject the hypothesis in the data. And so there are predictabilities
30:03
in the stock market. – So it’s possible to beat the market is what you’re saying.
30:10
– It’s possible to beat the market if you have the right models, the right training,
30:16
the resources, the computational power, and so on and so forth, yes.
30:22
– The people who have found the patterns in the stock market, and the randomness for that matter, have often been physicists and mathematicians,
30:30
but their impact has gone beyond just making them rich. By modeling market dynamics,
30:35
they’ve provided new insight into risk and opened up whole new markets.
30:41
They’ve determined what the accurate price of derivatives should be, and in doing so,
30:46
they have helped eliminate market inefficiencies. Ironically, if we are ever able
30:51
to discover all the patterns in the stock market, knowing what they are will allow us to eliminate them.
30:57
Then we will finally have a perfectly efficient market where all price movements are truly random.
oooooo
Warren Mosler: The nazional debt, zor nazionala
Zor nazionala: Mosler eta zor nazionala
(https://dailycaller.com/2021/10/22/mosler-alarm-national-debt-is-misguided/)
Editor’s note: We endeavor to bring you the top voices on current events representing a range of perspectives. Below is a column arguing that concerns about the U.S. national debt are misguided. You can find a counterpoint here, where Marc Joffe of the Reason Foundation argues that the debt is a threat to the economic stability of the country.
“ The US public debt is nothing more than the dollars spent by the federal government that have not yet been used to pay taxes.”
(Warren Mosler-ek zor publikoaz)
Warren Mosler
(Oharra: Amerikar trilioi bat = europar bilioi bat.)
