Warren Mosler: Inflazioaz. AEB-ko gobernaren gastuaz

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Rethinking Rate Cuts: Are We Fueling Inflation Or Controlling It? | Warren Mosler

(https://www.youtube.com/watch?v=tGTDQUGeoyg)

In this episode, Warren Mosler joins the show to discuss the counterintuitive impact of that Federal Funds rate, the impact of government spending, and the economics of trade and tariffs. We also delve into the shifting duration of US debt, whether deficits matter, and much more. Enjoy!

Timestamps:

00:00 Introduction

01:41 Warren’s Macro Overview

06:19 Understanding The Neutral Rate

14:16 Fed Funds & Inflation

21:14 Rate Cuts Are Cooling Inflation

22:54 Ads

25:02 Rate Hikes Are Stimulative

27:32 Deficit Spending Is Money Printing

28:27 Taxes & Government Spending

31:56 The Effect Of Monetary Acronyms

34:29 The K-Shaped Economy

37:29 Zero Rate & Asset Bubbles

39:05 Politics & The Oil Market

41:29 Trump, Trade, & Tariffs

49:41 Taxes, Unemployment, & Financing More Stuff

56:38 Does The Deficit Matter?

58:42 Impact Of Shifting Debt Duration

01:01:14 The Bid For Duration

01:04:57 Warren’s Trading

Transkripzioa:

Introduction

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Inc view legal disclosures at kraken.com

1:39

legalises welcome back to another episode of Ford guidance and joining me today is Warren Mosler who is the

1:46

renowned Economist and originator Pioneer and the father of modern monetary Theory Warren we had you on the

1:53

show about a year ago during that time was when we saw you know higher interest rates than we’re at right now in terms

1:58

of the FED funds and during that time there’s a lot of discussion of okay you know the FED has increased rates

2:03

significantly one of the fastest baces that we’ve seen and there was concern about recession and these ideas and you

2:10

were on the opposite you know side of a lot of those mainstream discussions and and had the view that effectively the

2:15

opposite was occurring and that it was actually somewhat stimulative excited to get you on the show I I want to open it up to you and just hear about how you

2:22

think about the context of things these days we’ve had about 75 bips of um interest rate cut so far and looks like

2:28

another 25 coming up soon and and just wanted to get a overall perspective on how you’re thinking about things today

2:33

you know a year ago the forecasts were for probably recession I don’t even remember but certainly weakness Rising

2:39

unemployment that type of thing figuring that the monetary policy worked with this long and variable lag or whatever

2:45

and it just just hasn’t happened and we went into why it hadn’t happened and why

2:51

it wasn’t going to happen and why you can just say the FED had it backwards along with the rest of the financial community and that is the fiscal impact

2:59

of the higher interest rates was dominating uh anything that might be happening on the monetary side the

3:06

budget deficit was up to six or so percent of GDP and that’s continued to be the case

3:12

and the uh a large component of that was the interest expense maybe more than

3:18

half 60% we’re now running at an annual rate of maybe 1.2 trillion in interest

3:23

expense and that’s going to keep uh going up okay even though there have been rate cuts the uh interest expense

3:31

the increases in expense are are a little bit gradual because uh treasury Securities take a while to mature and

3:38

the interest rates still higher than um most of the maturities that are maturing

3:43

and getting refinanced at maybe a little bit lower rate than they might have but still higher than what’s maturing so we

3:49

the interest expense continues to climb and of course the size of the deficit is larger so there’s more interest paid on

3:55

that uh and the FED still has a substantial amount of reserves that

4:01

component of the public debt is uh uh pays at the current rate you know

4:07

interest rate okay um so I brought us up to date on a looking forward now on a

4:14

forward look here at what’s going on it’s more the same as the average yield

4:20

on treasuries outstanding continues to creep up it’s now close to three and a half percent even though fed funds are

4:26

over four now uh just like I said takes a while for that that to go up and it’ll

4:31

continue to go up until it gets to the funds rate now if the FED funds rate roughly gets down to the three and a

4:39

half or whatever then it’ll be kind of neutral we’ll stay where we are and and the size of the public debt won’t uh be

4:47

accelerating or growing relative to GDP it’ll be more constant okay but we’ve

4:53

also got a lot of other government programs that are involved in public debt we’ve got all the other EXP

4:59

expenditures that government has and there’s no sign of any of them slowing yet there’s a lot of talk about it next

5:05

year with the new Administration but so far if anything we see uh people who are there now want to make

5:12

sure they get their money before it’s taken away type of an attitude and so uh

5:18

it’s it looks to me like things are going to continue strong until there’s you know it’s like you don’t shoot until

5:23

you see the whites of their eyes you know we’ll see what uh you know wait for something to

5:28

actually change again we don’t we can’t reliably say what will happen in the next Administration we can say what

5:35

they’ve wanted to do but it still at least as of now has to get through Congress and you know we have to see

5:42

what comes out okay yeah I want to double click on a concept there that you brought up in terms of the weighted

5:47

average maturity of treasury debt and You’ say that you know it’s the the long-term weighted average maturity is about you know it’s about three 3.5%

5:54

versus um the FED funds is at 4.5% for those that aren’t aware of how you look at the economy and and markets and

6:01

policy overall is that how you derive what the the neutral rate or inflation should be

6:07

it’s based on that what you said is interesting the neutral rate so what is

6:13

that so right now the FED will say that’s the rate at which uh some spread above the inflation rate the CPI maybe

6:21

1% maybe 2% maybe a little more and at that rate it’s neither expansionary nor

6:28

contractionary so if the rates too low it’s expansionary and that’s pushing the economy making the economy stronger if

6:33

the rat’s too high it’s restrictive and the FED has the least stated at the last few meetings that they feel that the

6:40

interest rate that they’ve said has been restrictive and they want to reduce it back to some neutral level so where do

6:47

they get the idea that there is a neutral level that the policy rate is

6:52

restrictive or not restrictive based on a spread to inflation like where does that whole thing even come from okay

6:58

what are the the uh foundations you know the theoretical foundations for it and as it

7:05

turns out there aren’t any okay it’s an anachronism all the foundations for that

7:11

the theoretical foundations which were excellent came from the gold standard which applies to the gold standard and

7:17

other fixed exchange rates where there is in fact a neutral rate and that’s the

7:22

rate at which the uh government doesn’t gain or lose gold reserves the reserves

7:28

are stable so if you set the rate too low you’re going to have reserves flowing out and if you set the rate too

7:34

high reserves will be flowing in and um it’s based on um all kinds of

7:41

mathematical constructs and everything else the important thing to understand is that when you’re on a gold standard

7:48

the money the government spends can be converted into gold if the recipient of

7:54

the money wants to he has that option to convert it into gold and so if they engage in deficit spending like we are

8:00

today and flooding the market with you know almost $2 trillion do a year of deficit spending those people can all

8:06

convert it into gold there’s a risk that the treasury runs out or the Federal Reserve the government runs out of gold

8:12

and can’t maintain the gold standard can’t maintain convertibility so what they do is they offer treasury

8:18

Securities because if I take my convertible money and instead I buy a fiveyear treasury security I can’t

8:24

convert it to gold for five years I have to wait for it to mature so I defer my option so the treasury is competing with

8:33

the option to convert the treasury is competing for my convertible currency and they’re competing with my option to convert it into gold and there is an

8:39

interest rate uh where the market clears and that might be 3% 4% 5 perc and at

8:47

that rate I take my money and I buy treasury Securities because I’d rather have the Securities than the gold based

8:53

on that interest rate and that’s not a rate determined by the fed or the fomc or meetings or anything anything else

8:59

that’s purely Market determined and it’s the entire term structure of rates it’s not just the short-term rate because

9:06

there is a term structure of rates where you uh where all people with our the

9:11

ability to convert are saying no I’d rather have uh treasury Securities

9:16

rather than the gold okay and and out of that comes the concept of a neutral

9:23

rate and if the treasury again tries to set a higher or lower rate it’s going to have consequences on the gold Supply on

9:30

the economy on inflation now they also Defined inflation differently than we do

9:37

today with a fixed exchange rate with a gold standard uh it’s defined as the price of

9:42

everything relative to the price of gold and simply by doubling the gold supply

9:48

for example let’s say a lot of gold mines gold was discovered in San Francisco suddenly the treasury is

9:54

buying all this gold uh and paying for it with convertible currency they have

9:59

the gold to back it but there’s still twice as much of that currency out there and so relative value shifts prices go

10:06

up to adjust for the new level of gold that’s a one-time adjustment and they

10:11

would say that the value of gold has fallen relative to everything else it to

10:17

takes twice as much gold to buy the same amount of stuff because the gold Supply doubled so the gold Supply itself is

10:24

their measurement of inflation in the price level if a Spanish gallion sinks

10:31

and all that gold is lost it becomes a big deflationary event Gold’s a lot more valuable and so the money’s more

10:37

valuable prices are lower expressive more valuable so okay now today we’re

10:43

not on the gold standard officially we went off it 1971 internationally totally but we’ve

10:49

been off it functionally since really 1933 when uh during the Depression we

10:54

went off the gold standard to try and get out of it but anyway we’re we’ve been either way we’re off the standard

11:00

and so the money is not convertible into gold anymore you can’t take your dollars to the go to the fed and say hey there’s

11:06

a fixed price of $35 per ounce I want my gold or any price they’ll just tell you

11:11

go out and buy it from somebody else we you know we’re not involved in this anymore and so the treasury Securities

11:17

are not competing with my option to convert because there isn’t one and so there isn’t any the whole

11:23

idea that there’s some neutral rate where the gold Supply is stable this doesn’t apply it’s not applicable so all

11:29

that math all that arithmetic that’s applicable to a gold gold standard is not applicable to floating exchange

11:35

rates flexible exchange rate policy which we have now and to to come up with

11:40

a theory that where you arrive at something called a neutral rate nobody’s

11:47

done that all they’ve said is if you ask them what the neutral rate is I give you the definition it’s the rate at which uh

11:55

it’s neither expansionary nor contractionary but there is no like calculation to to determine what that rate is and they’ll tell you we don’t

12:00

know what it is so we just try different rates until we think we found it well there’s nothing to find there it doesn’t

12:07

have any basis in theory or fact with floating exchange rates they’ve changed the channel on the television set and

12:13

they’re using information from the previous channel to guide themselves through the next show that they’re

12:18

watching and there’s just no connection there and it’s kind of like

12:23

um I don’t know astounding that you’d have a federal reserve and hundreds of PhD and and central banks all over the

12:31

world all doing this and not having even asked the question of like how do we get

12:38

here to this place and and they have this enormous confirmation bias they

12:43

they do these regression analysis they call which they say okay over the last 20 years as rates have changed how much

12:49

has inflation changed how much has the economy changed can we detect where a neutral rate might be and they can’t

12:55

they keep looking for it they have probabilities and they’re Slim because they’ve got the wrong map for the for

13:02

the city they’re living in okay and it doesn’t quite fit you know there’s buildings and gas stations but this is

13:08

not overlapping and there’s about maybe some of it overlaps and uh and so right

13:14

now we’re in the midst of policy makers and I doing this and I I did a cartoon

13:20

on this back in 1996 where I had a car

13:25

going over driving over a cliff and the guy behind the steering wheel wheel was labeled Congress and his steering wheel

13:32

is fiscal policy raising taxes cutting spending increasing spending that those have real effects then there was a kid

13:39

in the car seat which at the time was a Fed chairman with his toy steering wheel and he’s playing with the steering wheel

13:46

got his hands on the wheel and the car is going over the cliff and everybody’s it was Alan Greenspan at the time he was

13:51

a Fed chairman and everybody’s going nice driving Allan you know you just took the car over the cliff you made the

13:56

wrong decision on monetary policy well that’s steing Wheels not connected to the economy now at the time there was no

14:03

there wasn’t a lot of data to back me up but 30 years later the data is more than

14:09

100% backed me up and in the last three years in particular it’s entirely backed it up there’s no other explanation of

14:15

course yeah I’m I’m I’m interested to hear a bit about um over the past three years and using a case study of of what

14:23

the FED has done over the last four years so if we think about it obviously the FED has brought the FED funds from zero to over five and during that time

14:30

we have seen inflation come down so I I want to ask you is that more so just a spirous correlation and they got lucky

14:37

and there was other causal factors because at the same time we’ve seen nominal GDP be quite a bit above most

14:42

people’s forecast during the same time so are we just is it just a spous correlation and that’s it uh no so a

14:48

couple of things happened they voted to raise rates and they did they started raising rates and at the same time the

14:55

Ukraine war hit and uh the Saudis decided to allow the price of oil to go up for a while and it got up to 120 in

15:02

July of 22 and that D and if you look that in trace the path of oil prices

15:10

it’s identical to the prices going up you know around the world globally at

15:15

you know at the same time the whole inflation thing was a global thing that happened and at the same time you had um

15:21

all the supply side things people talked about you had excess demand from all the stimulus checks all the large deficit

15:28

spending which the FED attributed about I think a half a percent or something like that of increase each year annual

15:34

in CPI which is something you know so there was excess demand but it was it was largely the oil prices and then

15:40

after President Biden made some kind of deal with Saudi Arabia he went over there and talked to the prince and immediately agreed not to um prosecute

15:47

them for the murder of the journalist and replace their Russian weapons with us weapons and they came up with

15:53

something and all of a sudden the price of oil starts going down again it came back to about where it was before which

15:58

is what inflation the inflation rate did so there was this bulge and then it came

16:03

down as supplies side issues eased and came down and the patterns identical for

16:08

every country in the world regardless of monetary policy including Japan where they left interest rates at zero the

16:15

entire time now just anecdotally Japan’s inflation only got up maybe half as high

16:20

as ours did they had zero rates the whole time they didn’t do anything and others were somewhere in between and so

16:26

you can look and see how they did it and kind of fig figure out take a guess at how much of whatever they did had you

16:32

know how much interest rates contributed and it comes out it’s very hard to find that any of this is a function of

16:39

interest rates okay but it did happen at the same time it was coincidental and

16:44

you know I’m I’m you know that’s true so so what did the interest rates do so let’s look at what our inflation

16:51

indicators have done and I’ll call them inflation indicators because that’s all they are really they’re not actually inflation inflation is the change in a

16:59

general price level we don’t can’t even measure that we just have CPI which is an abstract index designed for political

17:06

purpose whether people are hurting or not and things like that it’s a cost of living it’s not an

17:11

inflation anyway so um it went up high I

17:17

don’t know 9% or something like that then when things collapsed it came back down overshot or not not really just

17:25

came back down and then leveled off and our cor C Pi has leveled off at something just shy of three and a half%

17:32

since July and it’s gone not not only sideways it’s been gra it’s been going higher and I’ll say it’s been

17:39

approaching the FED funds rate and that Plateau it’s been for the last four or five months is higher than it was before

17:46

the whole covid thing before the oil price spike where it was maybe around

17:51

2% and they and you heard up to mid year that inflation is coming down towards

17:58

our Target and so we’re going to be cutting rates you know as it does it because we think rates are restrictive and we don’t want

18:04

to overshoot because rates are too high and cause a depression because we left rates too high and they’re right you

18:11

know relying entirely on their model of neutral rate model but the inflation

18:16

indicators have not continued to come down now the internals and some of them have they’ll say oh the housing last

18:24

month is only 4% or 3.8 it’s down from 5. that’s fine and services have been

18:29

higher and goods came down and now Services have come down but goods are back up you know well when you’ve got a

18:36

general price level increase going it’s if it’s not one thing it’s another right

18:43

you know and so you can go to any any number any month and point to one that went up or one that didn’t or owner

18:49

equivalent rents or something like that but you know we used to include mortgage payments as part of the Consumer Price

18:54

Index and we don’t even count those anymore we substituted its owner equivalent rent what they saying is if we hadn’t done that the spike in

19:01

mortgage rates would have shown up as a huge increase in CPI so it’s actually quite interesting I’m I’m Canadian so up

19:06

here we do have that in the index here so by lowering they’ve been lowering rates and we’ve been seeing because of mortgage cost coming down inflation has

19:13

been coming down right right right and and now I see tobacco as part of it you know tobacco’s gone up by 7% so maybe

19:21

they shouldn’t include tobacco or whatever and I always said look I’ll give you any inflation rate you want if

19:26

you make me fed Sherman well how you going to do that I’ll just change it to tobacco tax you know if I add to the tobacco tax we’ll have more inflation if

19:32

I eliminate it we’ll have less if we pay people to smoke inflation will go way down you know so it’s all you got to

19:39

decide what you’re going to do what your tools are why you’re doing it and use the indicators you have and and make

19:44

sense of them and I’m not saying we shouldn’t have these indicators but you have to understand what they mean and act accordingly so uh you know it’s not

19:52

about being critical of the index I’ve talked to the people who’ve done that made the indexes and they’re very very

19:57

good they’re very good ad I’m not at all critical about what they’ve done they’ve got very good reasons for doing it and

20:03

it’s it’s always some further purpose for doing it and they’ve always had really I’d say Admiral you know I I

20:11

support their purposes for the changes they’ve made you know they they’re constructive they’ve always been constructive so if you just overlay the

20:17

price of oil against the changes in CPI it’s pretty close except oils come back down to where it was CPI hasn’t come all

20:23

the way back and underneath it we have it gravitating up towards the FED funds rate being supported by this deficit

20:30

spending for interest being supported by forward prices that are are function of

20:35

interest rates right and uh and so I think it’ll continue to gravitate

20:41

towards the FED funds rate If the Fed funds rate comes down to three and a half then that’ll no longer be a upward

20:48

bias on the inflation rate but it won’t be pushing it it’s not going to be pushing it higher they think the rate

20:54

cuts are pushing it higher I think the rate cuts are lowering the ceiling so we have had maybe a 5% five and a half

21:00

percent fed funds rate if they had left the rate there you know and not Ved to

21:05

lower it and so the inflation indicators I was saying we’re we’re drifting up towards five and a half so well now

21:11

they’re drifting up towards four and a quarter whatever the latest so if we if we extrapolate that assumption that you

21:17

know if we if we lower you know fed funds it’ll lower the ceiling of inflation would you surmise that they

21:24

are actually taking control of inflation right now by cutting or is it more so the power of the fiscal impulse that has

21:30

just been you mean do you mean deliber do you mean deliberately or do you mean it’s what’s I think I think it’s more

21:36

just it’s happening I don’t know if I’d call it deliberate yeah I wouldn’t I wouldn’t call it at all deliberate unless they’re lying yeah okay I think

21:43

theyve still got a backwards if you take them at their word right and uh and not that maybe look maybe they’ve seen my

21:49

interviews and they’ve decided they’re gonna have to lower race but they don’t want to talk about it so they’re given a cover story but they’re going to go to

21:55

zero because that would be the eliminate that source of inflation which is what I

22:00

would do eliminate 1.2 trillion a year ultimately of government deficit

22:05

spending which is much larger than the doggy commission is supposed to be cutting and it’s the lwh hanging fruit

22:12

and you know it’s much stronger fiscal uh consolidation than any of this

22:18

cutting soup kitchens or whatever they’re talking about doing extending the social security retirement yeah

22:23

that’s all whatever it is but here’s a big fat 1.2 trillion for year CBO would

22:29

score it probably as a 20 trillion reduction over you know 20 years of deficit spending okay but I I don’t

22:36

think they’re going they’re not saying that that’s what they’re going for and I but it seems to be like that would

22:41

that’s what could actually occur yeah and that could happen and that could happen and I hoping that it happens but

22:48

you know um you know be one of those better lucky than good type of things but yeah that it’ be nice if if we get

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24:58

basically interest expense um being stimulative I this is something I’ve been trying to figure out I haven’t

25:03

tried to quantify it or model it or anything but obviously you know the the traditional side of the equation is when

25:09

you when you increase fed funds which is you know Sofer is priced off that and then you know floating rate loans are

25:14

priced off that so as the increase rates borrowing costs do increase but the

25:20

assumption is that it is offset more than enough by the interest payments that come from you know from the

25:27

government towards indiv so in the private sector those increased costs you talked about get paid to somebody in the

25:33

private sector so it’s a transfer of income you know borrowers pay more

25:39

Savers get more the lender gets more okay now the argument is that but the lenders don’t spend a minute so all we

25:45

have is borrowers paying more and money’s just turning dead you know dying and not getting spent sitting in savings

25:51

accounts which could be the case I mean uh so you have to investigate that but on top of that the government is a net

25:58

payer of interest of 1.2 trillion a year so and it’s interesting so I think what

26:04

happened was in up you know maybe until recently the fed’s models have show have

26:11

assumed that interest income doesn’t get spent because they know one person’s getting it and another person’s losing

26:18

it so they just say the borrowers are paying more but the Savers are Pension funds foreigners I don’t know Social

26:23

Security somebody they’re not spending it and when they did that they got their

26:29

their forecast that said we’re going to be going into recession and so if

26:34

interest was not getting spent I would have been wrong my forecast would have been wrong you know and then we would

26:42

have gone into recession because that money’s not getting spent it was just being drained out of the active economy it’s dead money savings okay the fact

26:49

that we’ve gotten 3% of GDP real GDP growth tells me okay the interest is

26:56

getting spent now is it getting spent as fast as a $500 stimulus going check going to somebody who’s out of work

27:03

probably not but maybe the propensity to spend is 60% maybe it’s 40 maybe I don’t

27:09

know what it is but it’s enough to support this and if I had 200 phds working for me I’d have them do a

27:15

regression and tell me what percent is getting spent because they’ve got all the numbers in and the numbers out okay

27:20

but I don’t have those people working for me but there’s some percentage getting spent and it’s substantial and

27:27

it’s enough to support the economy at current levels otherwise we wouldn’t be at current levels is interest payments

27:32

money printing because when I think about it how does that how does that money come in defit spending all

27:38

government all government spending is done the treasury instructs the Federal Reserve to credit an appropriate account

27:45

at the FED now when you credit an account all you’re doing is changing a number from a lower number to a higher

27:51

number you’re not taking somebody’s tax money and jamming it into the computer and it comes out the other end or anything it’s just changing a number up

27:58

so in that sense all spending is printing money they’re not printing it

28:04

but they’re crediting accounts so to use the same language you could say all government spending is printing money

28:10

now when you tax you’re debiting accounts you’re reducing the balance in somebody’s account when they pay a tax you’re not getting anything there’s

28:16

nothing that there’s no bag full of money coming out that gets walked over to the treasury you’re just lowering the

28:22

number in someone’s account when they taxes get paid so you could call that unbrined money right yeah that’s how was

28:28

going to ask is like okay so if tax receipts come in but then it gets redistributed as interest paymentone distributed it’s separate

28:35

they taxes come in they don’t come in when T when your account money if you

28:41

have an account with $5,000 in it and you pay $3,000 tax the five turns into a two okay

28:48

nothing went in or out and that three it just got reduced that’s unpr money that

28:53

$3,000 was unprinted now when they credit somebody’s Social Security with 3 ,000 or to credit interest payment of

29:00

3,000 that’s printing so you have to look at the difference and the difference is a deficit spending that

29:07

makes sense okay more crediting accounts than debiting accounts okay and they

29:13

they can’t they they credit the accounts first and then they debit them now it

29:19

has the appearance to most people that first they subtract money from their your account and then they can go spend

29:26

that money with some else well it doesn’t work that way you cannot debit an account at the FED unless there’s

29:32

been a prior credit to that account you you can’t take anything out of a bag until after you put something in okay so

29:40

the Federal Reserve Bank is a bank all the member banks have accounts there the only way dollars get in their accounts

29:48

collectively is if they come from the FED adding dollar balances to their accounts it’s called Reserve ad they add

29:54

balances and that’s what treasury spending does it adds balances then taxes subtracts balances buying securi

30:02

subtracts balances well you have to add them before you can take them out look nobody thinks the football stadium has

30:08

to collect the tickets before it spends them I mean before it sells them it has to sell the ticket first before it can

30:16

collect it you can’t collect the tickets first and then sell them the movie

30:21

theater doesn’t collect tickets first and then sell them they sell the ticket first and they collect them the source of the tickets has to provide them to

30:29

whoever is going to like then use them right the uh issuer has to provide them

30:35

to the user so the user can pay him back to the issuer so the sequences of events

30:41

is um the spending comes first before the taxes are paid now those that

30:47

spending can only take place if something’s offered for sale if there was never anything for sale the

30:53

government couldn’t spend so how do things get offered for sale well that’s where tax liabilities come in tax

31:00

requirements so the very first step is the government puts a tax requirement and for this example let’s say it’s a

31:06

retire requirement on your property your house so now you need government’s you

31:12

need dollars to be able to pay the taxes so you don’t lose your house the government’s the only source of dollars

31:18

that can pay taxes they have to spend them first and credit the accounts on their books those are the accounts that

31:24

taxes get paid out of once they’ve spent the money those accounts have positive balances now people can spend the money

31:31

and pay their taxes that’s that’s the sequence of events so when you understand that sequence it’s much easier if you try to

31:38

understand what was going on at a football game by saying first the stadium collects the tickets and then

31:43

they sell them to people it’s going to get hard to understand and confusing that’s why nobody can understand how the

31:49

government Finance Works they have the sequence backwards yeah right way around it you can understand it you know

31:55

three-year-old understand to that end while on this note it feels like you know the the the the broad Financial

32:01

world is obsessed with monetary acronyms you know QE QT reverse repo all these

32:06

acronyms um when you take into consideration the framework you just articulated setting aside psychological

32:12

impact is there any effect on the economy from these inflows outflows or whatever you want to call them of these

32:18

monetary acronyms you know so uh the short answer is no but to the extent

32:23

spending is an acum yeah when you when you spend and buy something from somebody you’ve established the

32:30

price okay if Government spends and doesn’t and can buy everything at the same price as it paid last year then

32:36

there’s no inflation there’s no price level going up if it looks out and it has to pay more so it pays more well now

32:43

it’s established prices at a higher level so prices paid is actually the key factor in the price level and not the

32:50

quantity it spends it can spend as much as it wants as long as it’s not enough to drive up prices and nobody would

32:56

particularly care about inflation or anything else because there wouldn’t be any when their activity is causing the

33:03

government to pay ever higher prices and that’s showing up as everybody else’s costs as well then it becomes a

33:10

political problem right and you lose your job and get thrown out of office which you could you know it’s not wrong

33:18

to say that was one of the reasons we had a change of regime here was because of the uh price increases right people a

33:25

lot of people got desperate because there’s a lot of distributional issues that go with price increases on average

33:31

everybody did fine except people on top who received interest income now who

33:36

received all the interest income by the way people who already have money if you don’t have money you don’t get interest

33:41

and they got it in in proportion to how much they already have so you’re talking about $1.2 trillion more than all the

33:47

stimulus checks that went out were just given out in new money new printing money deficit spending spending more

33:55

than was being debited for taxes only to people who had money and then you say well look on

34:01

average everybody did well well yeah Rolls-Royce sales were through the roof but sales of the lower end cars were not

34:08

and uh you know when food prices go up 30 or 40% the

34:15

people highend people have no problem because they were getting all the income okay and the traditional assumption was

34:21

that those asset owners their marginal propensity to consume was lower but we’re seeing that it’s actually not as

34:27

low as we thought they are still spending yeah yeah yeah and uh so I had

34:32

Charles goodhard who I got to know from the bank of England I was over there visiting once and uh I stayed at one of

34:38

the hotels and they have a separate faucet for hot and cold I don’t know if you ever been to England yeah so you go

34:43

to wash your hands and you turn on the hot and the cold I’m like you know what do you do you’re gonna burn yourself for

34:48

free I said Charles what’s this all about he says oh well we’re just trying to make the point about what averaging

34:54

actually means so that’s what we did with this economy

35:00

okay and people were getting burned and you know and enough to maybe cost the uh

35:08

the regime the election so employment’s high but there were a lot of people not making enough money and struggling to

35:13

weren’t happy even though they had jobs they weren’t they were a lot worse off than they were before and so uh so it’s

35:20

important okay so yes it was one of the best economies on average that we ever

35:26

had but you know the interest rate policy is obscenely regressive to pay

35:32

out that much money 4% of GDP only to people people who already have money

35:38

presumably to fight inflation what kind of a way to fight inflation is that to print up a 1.2 trillion of new money and

35:44

credit the accounts of people who already have money but you know the Federal Reserve does that unilaterally

35:49

because they think they’re fighting inflation the Democrats and Republicans in Congress nobody pointed that out and

35:55

said like what are we doing this is not what what our constituency wants you know nobody so this is yeah this is the

36:01

driver of the k-shape economy that everybody’s talking about yeah yeah yeah it’s certainly a contributing factor

36:06

there are other things in there but that’s a large contributing factor that’s just gone unnoticed yeah and

36:12

there’s huge political ramifications like you said that are that are occurring so how how do we reverse that

36:18

is it just setting rates at zero again yes but of course right now they’re looking at inflation numbers you know

36:25

they thought they were going towards their target now for months they’ve been going the wrong way now some of the internals are going towards their

36:30

targets the internals I mean individual categories but overall it’s not so we’ve got a meeting coming up next week

36:37

they’re expected to cut rates again even though inflation is not coming down and even though we have a three and a half percent 3.4% GDP forecast for this

36:45

quarter where they had been forecasting something like 2% Trend so they’re wrong

36:50

again of course and I think they’re going to be very wrong on unemployment they thought I think I read uh the last

36:56

forecast from November was 4.4 it’s not you know but they it’s because this weakness they all thought was going to

37:01

happen and of course even the unemployment number has only gone up because of new people entering the labor force not because of people losing jobs

37:08

so it’s not a sign of weakness as you’d normally have and you can look at the household survey for you know which is

37:16

problematic which normally gets dismissed but now it’s confirmation biased to people want to claim that

37:22

employment’s weak or something we’ve been hearing this Asos to The Establishment survey yeah then the last time around they got revised stop you

37:28

know so anyway I know yeah they’re quiet when the revisions are higher so you know obviously the criticism of that

37:34

approach is that you okay you know if we if we set rates at zero we’re going to blow up an asset bubble right that’s what people say is is the concern of

37:40

that what do you say to that Japan had zero rates for 30 years and they didn’t have an asset bubble they were still trying to fight deflation so it yeah you

37:48

can have asset bubbles but they’re coming from something else we have other institutional structure that does that and you’d have to get more specific as

37:54

to what’s doing it Europe had zero rates for about 10 years thinking even negative rates from ECB they didn’t have

37:59

an asset bubble and we didn’t have an asset bubble after we cut rates to zero either and uh you know those Obama years

38:07

with zero rates things languished we didn’t have that kind of thing so and so it’s not that’s what I said they go back

38:13

and do these regression analysis trying to see well what happened with rates at

38:19

you know this level that level the other level maybe we can find a pattern and set rates at the level that works as if

38:26

rates were causing any of that but they’re not causing any of that is what I’m saying they have no theoretical

38:32

reason to assume rates cause any of that except for what you touched on was a zero propensity to spend interest income

38:39

and that and we’ve seen in the last three years that can’t possibly be the case or those recession forecasts would

38:45

have been spoton and we would have been in serious trouble right so so once again getting into this notion of these

38:52

coincidental impacts if you look at like the covid response over the last few years people look at 2021 and say oh

38:57

there was an asset bubble because we cut rates to zero and did a whole bunch of QE but sounds like your argument would be it’s actually because of the fiscal

39:03

impulse not the monetary yeah yeah fiscal impost combined with the Saudis raising oil prices you know in with the

39:10

Ukraine war when they were working with Russia to make sure they had enough money to pay for it then Biden out bid

39:16

them somehow I don’t know what he said and uh prices came down and now that he’s gone we’ll see what happens next uh

39:24

you know if we’re going to have a policy for more oil d the last time that happened we had

39:30

president Trump threatening the Saudis with all kinds of nasty things if they

39:35

didn’t cut production to get the price of oil up because it had dropped during covid and it gotten so low that our oil

39:42

industry was threatened or shell producers were shutting down he wanted to price up to support the American

39:48

Business they went for the deal whatever was offered them at the time and

39:53

supported higher prices and prices went back up you know then when hit they went even higher so but I’m saying looking

40:01

ahead the way to get more drilling traditionally of your Market type

40:06

oriented U policy makers is to get the price up you get oil up to 100 you’re

40:11

going to have a lot more Drilling and a lot more production you let the price go down to 40 or 50 everybody’s going to be shutting down right so unless they’ve

40:18

got some other way to do this right now we don’t know what they’re going to do we don’t know what the price is but if they use price and decide $70 or $80 is

40:25

what we need for new drill growing and the price goes up to 70 or 80 well 70 today actually goes up another $80 we’re

40:32

going to see CPI headline creeping up and then everything is gets traced back

40:38

to oil and you’ll see lots of other things fertilizer and food and all kinds of things gravitating up towards this

40:43

new price of oil if if that happens so right now I can’t say I can’t forecast

40:50

what’s going to happen you know you have to give me some of these data points what’s going to happen to the price of

40:55

oil which are political decisions you’ve got to tell me if the politicians do

41:00

this what might happen because I just can’t second guess them right now I I don’t know what they’re going to do I

41:05

mean we don’t we’ll have to wait to see if there ever G if there’s ever going to be another election after January

41:11

because it’s been certainly strongly suggested that there might not be you

41:17

know including telling voters this is the last time you’re going to have to vote now maybe it was just campaign rhetoric but you just don’t know until

41:23

it happens right so we we’ll have to see what happens hopefully it was just campaign talk and none well uh speaking

41:31

of campaign rhetoric obviously a big one is is tariff talk um and in your paper of like the seven innocent frauds of of

41:38

Economics one of them had to do with the with trade deficits and and how there’s a misconception about them being a bad

41:43

thing you think they’re a net benefit Trump has fixated quite significantly on this idea of the US trade deficit being

41:50

a bad thing I want to get your take on how you’re starting to think about that at the moment yeah well look it’s

41:56

bipartisan and he calls us suckers for running a trade deficit because they’re

42:01

getting all our money and we’re getting their stuff but they’re getting all our money and so we’re losing now what is

42:09

all our money they have $1.2 trillion doll of Treasury Securities what do they

42:15

get for that oh they get a bank statement that says they have treasury Securities okay and we get the things

42:20

that we’re driving around you know the cars and the tennis rackets and everything else whatever else we’re importing all the te and so in E

42:28

economics I I like to say it’s the opposite of religion in economics it’s better to receive than to give and I

42:36

like to give the ex use the extremes to make the point and so let’s say we export if

42:43

exports are so good and the money is so good let’s say we exported everything and got paid for it and we got credits

42:49

on central banks all over the world and their currency so we had all their money and we exported everything we had what

42:55

would happen to us and the answer is we’d all die because we’ve exported all our food all our clothing all our

43:02

everything we built you know there’s nothing left we all die okay now let’s say we imported everything and didn’t

43:08

export anything then what happens well we have everything we don’t have to work okay so in the first instance we have to

43:14

go to work produce everything food clothing shelter and Export it all and we have nothing and we die in the second

43:20

one we have everything and we have we don’t even have to work we just get to use it and play with it so clearly

43:26

exports are economic terms real costs and imports are real benefits now there are strategic considerations and those

43:32

are critical considerations we don’t want to import you know critical

43:39

vaccines from people who might cut us off if we need them that’s just plain stupid we don’t want to import critical

43:45

products for our military if people were going to go to war with you know if we’re importing from them because we

43:51

might need them and then we lose the war so you have to these strategic considerations are critical they’re not

43:56

just just a side you know thought a passing thought you know incidental

44:02

thought these are real and so yes we have to look at what we’re importing and maybe we should producing it

44:08

domestically not because they’re getting our money or anything like that which are just tax credits really on our

44:14

Central bank’s books but because these have strategic importance and we’re putting ourselves at risk by not

44:21

building it ourselves and it’s going to cost us to do that because there’s something out there called productivity

44:28

right and the idea that oh well we’re losing jobs uh and uh when we import well we

44:35

are but those jobs are getting replaced otherwise the unemployment rate wouldn’t be at 50-year lows at or near 50e lows

44:41

it would be much higher there was a time where we all had to like go out and grow food 90% of the people were in

44:47

agriculture or else we’d starve we couldn’t have this conversation because we’d have to go out the Harvest bringing

44:53

the you know or be canning food or something and today 1% of the population you know produces like 8,000

45:00

calories a day per capita so we can do other things like sit around on talk shows right and uh Pretend We’re

45:07

intellectuals okay so uh but we couldn’t do that’s we can only do this because

45:12

the productivity is so high it takes a fairly small amount of the population to take care of all all our needs we have

45:18

7% in manufacturing of our jobs something like that if we went to 8% or

45:24

9% the rooms we’re sitting in would be filled to the ceiling with junk and we couldn’t talk either we’d be choked out

45:30

okay and because our productivity is so high we don’t you know we can do other things so you want to make sure you

45:36

don’t undermine your productivity you always want to keep that as high as possible and in trade those are called your real terms of trade okay so and and

45:45

what we’re looking at and the and again the I give you the easiest way to understand this and the most this is a

45:53

model you should always call on when people talk about trade what is a real wealth as a country what is it okay it’s

46:01

our pile of stuff think of it as pile of stuff goods and services but let’s call it our pile of stuff for

46:07

short everything we produce domestically makes our pile of stuff larger the more

46:12

people working our pile of stuff is larger so if we have 10% unemployment

46:18

our pile of stuff is roughly 10% less than it would have been if we had everybody working now they’re not all

46:24

the most productive people I understand that so maybe it’s only be 8% larger but it’s going to be a lot larger you know

46:30

huge amount 8% of GDP is huge with everybody working so number one your

46:36

pile of stuff is your real wealth Imports when you bring something into your country it makes your pile larger

46:43

you have more stuff you now take whatever you’re producing domestically and you add all the cars and tennis

46:49

rackets and whatever else we’re importing to that pile of stuff exports

46:55

make your pile of stuff smaller you’re sending something off your pile to somebody else okay what’s called your

47:01

real terms of trade is how much stuff do I have to send to everybody else and how much am I getting back for it how much

47:08

am I making my pile smaller by exports how much am I making my pile larger by Imports am I benefiting from what’s my

47:14

real benefit from that that benefit that differential is are your real terms of

47:20

trade and you want to optimize that you want to be able to import the most for a given amount of exports and what that

47:26

comes down to simply is you want to get the highest price possible for your exports and you want to pay the lowest

47:32

price for your Imports and so what we had was President Trump his first time around decided that

47:38

can Canada wasn’t charging us enough for lumber okay and so they’re bad people

47:44

they’re taking advantage of us by not charging us for lumber do you want to send this guy out shopping for you I

47:50

don’t think so all right and so what are we going to do we’re going to put tariffs on Canadian Lumber President

47:56

Biden comes in they’re still not charging us enough so he increases the tariffs so I’m you know I’m not like

48:01

forcing this apolitical thing this is apolitical there is there’s you know bipartisan consensus that if absolutely

48:09

Canada doesn’t charge us enough for lumber they’re bad people it’s like no this is nuts well what are all the

48:15

people going to do who are cutting down trees well what are all the people do who are growing food which used to be 80% of us who 90% who don’t need to do

48:23

that anymore well we’re doing medical research for doctors we nurses we teaching school or public services or

48:30

Public Safety or public health you can’t have all that and have everybody growing food at the same time you have to labor

48:36

is a scarce resource there’s always more to do than there are people to do it you got to free up labor to do the other

48:43

things or else you don’t go anywhere how many research assistants would all these medical researchers like to be able to

48:49

find new cures and new treatments a lot what’s limiting them well funding right

48:56

but even with funding you can’t have everybody doing medical research people there are other things in the country that need to be done unless you can get

49:03

non-residents That’s What I Call foreigners they’re just people who don’t live here non-residents to do it for us

49:09

so with non-residents net sending us a trillion dollars a year of Imports on that that’s we import more than we

49:15

export we don’t have to do all that stuff we can have all these other high quality jobs or you know of course you

49:23

have to organize yourself to do it if you just leave if we just let unemployment go up to 20% yeah okay that

49:29

it’s just PL stupid but we don’t we redeploy these people into high quality software jobs and high quality other

49:35

stuff that’s why we’re the richest country in the world got a trillion dollars of imports adding to our pile of

49:41

stuff right and so correct me if I’m wrong but the underlying assumption there is okay so the goal is to have you

49:47

know to create wealth you have to have more stuff and a mass more stuff the traditional school of thought would be

49:52

okay the trade-off for that is we have to unless productivity increases we have to borrow more money to do that we have to increase our debt but the underlying

49:59

assumption is as you’ve explained in in through mmt is that that’s not the concern it should be so it’s worth it to

50:06

pursue the goal of more stuff right yeah now you know there are other issues with

50:11

more stuff if we’re doing more stuff and we’re gonna you know boil over as a planet in 20 years and you’re not really

50:18

getting you’re being pretty shortsighted about it so you want to do it you know

50:23

you have other strategic considerations so I I don’t want to like I said that before I emphasized I just want to

50:29

re-emphasize it because more stuff all of a sudden means we really don’t want more stuff but do we want more

50:35

performances for theaters do we want smaller classrooms so children can be learn more do we want you know longer

50:42

education for people so everybody can go to college this is all part of more stuff it doesn’t need to be at all

50:48

energy intensive okay and uh now in terms of the financing of that so now we

50:55

have to look at to make sure we separate the idea of government Finance from

51:02

private Finance okay as individuals we all know our constraints we have to get money first

51:10

before we can spend it we either have to have income from earning it income from

51:15

dividends or we have to borrow to be able to spend if we borrow we have Debt Service and we have to pay it back and

51:21

we have limits to what we can borrow our income limits what we borrow we are Revenue constraint we have to look at

51:28

our Revenue what’s coming in we’re income constrainted okay the government is the other way

51:34

around okay they start off with a tax liability okay but now everybody needs

51:40

their money to pay the tax and it comes from the government so they are constrained by what is offered for

51:48

sale okay they can buy it if it’s offered for sale if somebody’s trying to sell them a banana for a dollar they can

51:54

buy it a banana but it to be offered for a dollar if everybody has their bananas and the government says I want to buy them how many dollars it’s like we don’t

52:01

want your dollars they’re not for sale the government can’t buy it no matter how many dollars they have so the

52:06

government’s constrained not by how much it can credit your account there’s no limit to that but by how much it can

52:12

create that’s offered for sale it does that with tax requirements so taxing is

52:18

critical but not the revenue not the money the taxing has to cause things to

52:23

be offered for sale or the government can’t buy them so when we’re in an economy and we see

52:29

unemployment what is unemployment that’s people for sale people willing to work for $1,000 a week $800 a week 1,500

52:38

whatever it is they’re for sale the government can buy those it can employ those people and if they’re unemployed

52:44

and not productive uh our pile of stuff gets larger if

52:51

they’re employed productively whether it’s in public services uh to make the

52:57

legal system faster so we don’t have to wait in line so long for government services for Legal Services or if it’s

53:04

to cut taxes uh or increase transfer payments so that the private sector can

53:10

now hire these people okay so if we can get these people out of unemployment

53:16

employed okay now we have a chance for a pile of stuff to go higher if we don’t

53:23

you know we can’t do that now why could they possibly be unemployed how does that where does that come from that so

53:31

the government puts tax liabilities on right now let’s say it’s 5 trillion dollars or what the economy generates

53:37

and tax liabilities a lot of them are transactions taxes which are much more complicated but we all go into that now

53:42

economy needs $5 trillion dollar to pay the tax how do we know the economy needs any dollars to pay the tax because it’s

53:48

selling things to get dollars there’s no other use for the dollar either to pay your tax or not pay your tax and just

53:55

save it there’s only two re reasons the economy would want dollarss pay the tax or to not pay it and just hold the money

54:01

there’s only two things you can do once you’ve earned it if they’re willing to sell something to pay the tax yes if

54:06

they’re willing to sell something to just hold the money okay that’s a conscious decision to save there are savings desires out there we don’t know

54:13

how large they are so when we see unemployment we see people for sale

54:21

right and we know the money we pay them is either going to be used to pay taxes or to save

54:26

because it can’t go anywhere else that’s where government money goes tickets from the movie theater are used to go to the

54:32

movie or they’re held in savings they can’t do anything else tickets from the football stadium can go to the game but

54:39

they can’t you know Stadium nothing can’t do anything else with the stadium for okay for for the government once it

54:45

spends its dollars it credits your account you’re either GNA use them to pay taxes get subtracted from an account

54:50

or you’re not and they’re going to stay in your account that’s called the public debt right okay so unemployment is the

54:56

evidence that the government’s spending hasn’t been high enough to cover the need to pay taxes and the desires to

55:04

save that are created by government tax liabilities okay the unemployed are

55:10

there because the government put a tax liability on which created unemployment created people who need paid working

55:16

dollars to pay taxes or to save and then it didn’t spend enough to hire them the

55:22

unemployed are created by the government tax liability so the answer is either to cut taxes or to increase public spending

55:28

make a fiscal adjustment depending on your politics get them back in the private sector by cutting taxes get them in the

55:35

public sector if you think we need more Public Services you know which is I guess the country’s split 50/50 on that

55:41

so I won’t take sides right now okay but those are your two rational constructive

55:46

choices not be against deficit spending because you don’t understand you got the

55:52

the uh sequence backwards leave people unemployed leave your pile of stuff

55:57

smaller than would have always otherwise would have been you know destroy 10 or

56:03

15 million lives with the anxiety and Agony of being unemployed and family breakups and crime and everything else

56:11

you know over so anyway the only thing that’s preventing a smooth operation of

56:16

the system whether it’s for you know one partisan group or the other they’re all

56:22

in favor of you know having everybody working just one of them would like them in the private sector one in the public

56:27

sector but you know whoever wins gets their choice neither of them want the unemployment okay it’s the space between

56:34

our it’s causing neither one of them to be successful at their own agenda right

56:39

so with with that as context like when somebody like Scott Besson is coming in to be treasury SEC secretary who’s

56:45

talking about bringing deficits from 7% to say 3% of GDP how do you think about that does that concern you from say why

56:52

I say why one of the reasons why is well we got got to pay all this interest well

56:57

why all right let’s say you cut rates to zero like Japan has done for 30 years like the US did for 10 like Europe did

57:03

doesn’t cause any inflation or anything well then there’s no interest payments now why do you care if the deficits at 3% or 6% why does it matter it’s just to

57:11

assume that it matters it’s just assumed there’s a neutral rate that the fed’s looking for they’ve got all these

57:17

built-in assumptions in the rhetoric all these starting points that have no

57:23

foundation in today’s reality a floating exchange rate currency you know FIA

57:29

currency they might have had application on the gold standard we have to bring this deficit down otherwise we’re going

57:35

to lose our gold Supply okay but that’s not applicable anymore all the reasons they wanted to bring it down if he

57:42

thinking unemployment needs to go higher we want less inflation and somehow the

57:47

unemployment’s the cause of the inflation okay he’d have a coherent argument but he doesn’t have that either

57:53

it’s just the deficit per se is bad it’s a e word the devil word it’s evil and it

57:59

has to it has to go you know and uh once you’re at a zero rid policy like Japan

58:05

has been they’ve R much larger deficits than we have their debts of GDP is what 260% maybe 180 after intergovernmental

58:12

transfers or something like that and their inflation rates lower it was lower through the whole crisis and never got

58:17

over four something and uh with a deficit that was roughly double hour or

58:23

something like that okay so the deficit doesn’t you don’t even need need to publish the number if you’re at a zero rate policy it’s of no

58:30

consequence okay what’s the trade balance between New York and Connecticut it’s like nobody knows but if they

58:36

publish a number I’m sure there’d be a deficit on one side and somebody win office to do something about it because

58:41

we all know deficits are bad Warren on that point earlier in the show you provided a a anecdote about how you know

58:50

bonds and government bonds are this this hang up from the gold you know the the gold anchor era um that isn’t quite as

58:58

relevant these days you ran a fund for many years where you were trading fixed income securities and I want to ask you

59:04

about some of the the you know points of consideration that have been out for the last few years this idea of you know

59:10

what Janet Yellen has been doing in terms of changing the like Shifting the maturity structure of the government

59:16

debt and how that’s you know potentially a form of QE or you know just manipulating liquidity and these ideas

59:23

how do you think about just those priorities of maturity structure in government bonds which are a hang up for

59:29

this gold era yeah well look if you’re at a zero rate it’s kind of moot because the rates are zero in all of them anyway so it doesn’t matter you might as well

59:35

just leave it at three-month bills and go home and do something else you know put more whatever else treasury does run

59:42

the Secret Service or something sign the money but uh look I was at treasury

59:48

years ago and they said yeah we understand what you’re talking about but we’re

59:53

worried about being downgraded by the rating agency and our job is to not get downgraded they wanted a maturity of 4.2

1:00:00

years or something we’re 3.8 so we’re going to have to do longer term so there’s always these you know

1:00:05

inapplicable reasons for doing what they’re doing behind it and it’s the same thing you know this dur QE

1:00:13

shortened the duration dramatically right because it went all the QE just changed it to zero

1:00:19

duration it’s like so what well when rates were zero everybody was happy with it then rates went up and they say oh we should have turned it out and everything

1:00:26

just leave rates at zero you know that whole argument discussion goes away um

1:00:31

you know and why are rates not at zero it’s not like the market or inflation or

1:00:37

anything else will cause you to raise rates okay especially when you know that

1:00:42

when you raise rates it makes inflation worse once you understand that now now if you want to do something about

1:00:48

inflation you got to do something else because you know it doesn’t work by the way that’s in the new Keynesian models they have all these cash flows in there

1:00:54

they know that when the debt gets too high and as you raise rates it becomes inflationary it’s not a surprise for

1:01:00

them they were talking about that several years ago when they were warning about the debt getting too high once it

1:01:07

got to those levels they stopped talking about it so I I don’t know what’s going on there but I assure you it’s already

1:01:13

in their models yeah so I mean like as you say the solution like you say is yeah just High rates of zero but since

1:01:19

we’re not in that world right now I know um if like how do you see the material impact of changes of duration of Bond

1:01:26

issum on markets because you know sometimes you see where we get the qra announcement right every every quarter

1:01:31

and it’s like okay you know the percentage of of coupons versus Bills is increasing more duration on the market

1:01:37

that might compress Equity premiums like do you think that’s a valid line of thinking or is it invalid yeah it is

1:01:43

valid but it’s small right okay I remember when there were no 20y year no

1:01:49

bonds and they introduced a 20-year bond in that sector to y or the 15E actually first and it got 20 basis points cheaper

1:01:56

so there was a big gap in the yre but it was 20 basis points okay now that’s that was important to us trading it was a lot

1:02:02

of money and we could make good returns for investors betting on that and you know doing the math around that kind of

1:02:08

a structure but it’s you know in the scheme of things for Public Policy if the 20 years

1:02:15

20 basis points you know two two ten of a percent higher in yield it’s not that big a deal what happens is I think they

1:02:22

all worry that now that they have to term it out as they call it go from bills out to and let the portfolio run

1:02:29

off the fed’s doing QT that all these long bonds are going to cause the long

1:02:34

end to go up in yield it’s going to affect mortgages and everything else I have never seen that happen what I’ve

1:02:40

observed is all anybody can say is that the bid for duration has always been a lot larger than anybody’s always

1:02:47

imagined it’s like who are going to buy all these long bonds and they sell off 10 or 15 basis points and there’s a big

1:02:52

tail in the auction then two weeks later they 10 basis Point’s rich and nobody has any idea what happened right but you

1:03:00

know the bid for duration is enormous out there and long zeros 100e bonds

1:03:05

who’s going to invest 100 years well for one thing if you look at the convexity out there it’s you know at the long end

1:03:12

you get you know positive convexity relative to the shorter stuff and so the assit buyers it’s a huge boond you know

1:03:19

it’s a big what do you call it a benefit to them to have you know these cheaper the

1:03:25

BS are even cheaper than they look just on the curve when you convexly adjust them but anyway it the bid is huge and

1:03:32

they always wind up getting richer will it happen this time I think so I think it’s because of our retirement fund

1:03:38

structures where uh people you know the client I was a Bank Of Trust for a while in the 70s and all the major accounts

1:03:46

state of New York teachers retirement Pimco all these guys they would buy long bonds because it was Tuesday and they’d

1:03:52

get their balances at the end of Monday and they had 10 you know million dollars to buy log bonds and Tuesday morning

1:03:58

they’d call up to buy log bonds you could talk them about the fed or rates or inflation they really didn’t care it was Tuesday and they’re buying 10

1:04:05

million log which is a lot back then right I’m I’m sure it’s continuing today because it so people are buying because

1:04:11

of the cash flows in and anytime somebody has money withheld from their paycheck you know $100 it goes into some

1:04:19

fund you know 40% goes to bonds 60 20% goes to liquidity 40 goes to stocks

1:04:26

the bonds they’ve got a maturity ladder that they’ve dreamed of right and so much is going to go into 30-year bonds

1:04:32

they don’t even know what they are the GU who paycheck just deducted you know had his paycheck deducted for on your own and that bid for that

1:04:39

duration is like absolutely staggering to me and it’s you know I’m always like

1:04:46

you know relieved but can you know just like wow look at all look at how look at

1:04:51

how how’s it longan go to a premium all the time How does it go how does it do

1:04:56

that yeah so when you trade bonds do you just set aside your philosophical views

1:05:01

that Ray should be at zero and just play the game as you see it or like how do you square those two sides yeah you uh

1:05:08

and so I can’t I’m I don’t directional trade I just can’t do it because you

1:05:14

know if I see the forces at work I think the fed’s going to see this inflation number and it’s going to raise

1:05:20

rates and I bet on that and then behind the scenes the FED has been reading my stuff and they rates to zero and I lose

1:05:27

money I just don’t that would be hilar I don’t want to be there I don’t want to be there so I just can’t do it because I

1:05:33

I can’t bet on them doing the wrong thing you I I just never been able to do that so from the beginning I always did

1:05:39

relative value zero duration investing and in fact I think I kind of invented that space back in the early 1980s when

1:05:46

we started our fund I I don’t remember going to accounts to have having anybody competing for that space and it was just

1:05:53

a small portion of their assets but there were nothing asset so we grew nicely and we had about three and a half

1:05:58

billion in 1970 1998 when I turned 9 to 1997 when I

1:06:04

turned it over to my partners so I’ve been out of it for 20 over 25 years yeah you’re still racing cars too I stopped

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racing when I turned 50 but um I still into it and I my son’s and I’m in his

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shop right now so he’s got all the cars I sold company the pile of junk that was left in 2013 but he’s got got the good

1:06:25

stuff here so I love it yeah 10 out of 10 background well look Warren that was a ton of fun it it was an honor to get you on the show and hear about how

1:06:32

you’re thinking about things yeah anytime appreciate

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MMT’s Godfather Says the US Government Is Spending Like a Drunken Sailor | Odd Lots

(https://www.youtube.com/watch?v=GzXcTFvlHjE)

Modern Monetary Theory has gained prominence over the last several years by offering an alternative view on the constraints to fiscal policy. The basic gist is that the size of the deficit is not per se problematic. What matters are real resource constraints, and that if government spending gets too high — or is spent in unproductive ways — then inflation can materialize as too much money collides with insufficient supply. Another argument that some MMT adherents make is that the conventional path to fighting inflation (higher interest rates by the Federal Reserve) can actually be inflationary, because the coupon payments made by the government to Treasury holders constitute a form of government spending or fiscal expansion. In this episode of the Odd Lots podcast, we speak with Warren Mosler, the intellectual godfather of MMT, to explain the mechanisms at play and assess the current macro environment. Perhaps surprisingly, Mosler is concerned with the combination of high government debt loads, high deficits (which he characterizes as spending like a drunken sailor), and the orthodox approach the Fed is taking to fighting inflation. With debt as high as it is, the annual interest payments due to these rate hikes has gone up significantly, creating a situation that mainstream economists might call Fiscal Dominance. He explains how this environment is a recipe for consistently higher and sustained inflation in the years ahead. Bloomberg’s Joe Weisenthal and Tracy Alloway analyze the weird patterns, the complex issues and the newest market crazes.

Transkripzioa:

0:03

Bloomberg audio Studios podcasts radio

0:10

[Music]

0:20

news hello and welcome to another episode of the odd Lots podcast I’m Joe

0:25

wisenthal and I’m Tracy Alay Tracy you know there’s that theory people say it from time to time about uh in different

0:33

context different schools of thought and kind of gets dismissed as uh crank isness sometime that higher rates can be

0:39

a contributor to inflation yes yes and actually I’m hearing this more and more interestingly enough so you used to hear

0:46

you know little Rumblings of it every once in a while but I swear in the past two or three months a lot of people have been talking about this and I guess the

0:53

basic idea here is there’s always been some question about the efficacy of

0:59

interest rates

1:07

en0 Supply disruptions lots of snarls in transportation and Logistics what are

1:13

interest rate hikes really going to do in that context right yeah and some people even argue that higher interest

1:19

rates are detrimental for that kind of inflation because you uh make it harder

1:25

for people to build out capacity yeah but what’s happening more recently and I

1:30

think you’re hearing more talk of this is the idea that higher interest rates in and of themselves can contribute to

1:37

the inflationary impulse through the interest income Channel yeah absolutely

1:43

so right there’s a bunch of people that are on treasuries and then they get a payment I guess every month and that is

1:48

income into the economy and when you’re fighting inflation that’s the more sort I think that’s one of the arguments for

1:55

how higher rates can be inflationary but then there is the sort of like there is the more greed upon view that you

2:01

mentioned which is that higher rates can andrain investment and contribute to less housing and that has an

2:08

inflationary impulse in a time of uh housing shortage that seems to be a little less controversial the connection

2:14

is clear but I think regardless like I think okay here we are in July 2024

2:20

inflation has come down a lot there’s still many stories that could be told

2:25

lot about the last four years and I don’t think there are any really economists who have like this cycle with

2:31

some Theory or whatever that it’s like yep they explained how it’s all going to work there are many this period whatever

2:37

we’ve experienced over the last four years will be debated and argued about and what role did higher rates have in

2:43

bringing down inflation or why did the will be debated by Economist for like a 100 years probably I find this aspect of

2:49

our life right now simultaneously exhilarating and terrifying so it’s great that we’re learning about how the

2:55

world works it’s also terrifying that we still aren’t entirely sure how interest

3:00

rates work and what impact they actually have on the economy but I am very very interested in digging into more of this

3:08

argument the interest income channel here and the actual like push and pull of higher interest rates on inflation I

3:15

think we should talk more about it totally well I’m really excited we do indeed have the perfect guest someone

3:21

we’ve never had on the show before but he’s someone who we get a lot of requests for on Twitter on the outlaw

3:27

Discord someone we probably should have had on long time ago we are going to be speaking to a Warren Mosler he’s a he’s

3:34

an economist former investment manager he drives fast race cars in the Virgin

3:39

Islands currently he’s on a bike trip in Croatia a very cool life uh he is also

3:46

uh the originator of what has come to be known as modern monetary Theory so

3:52

Warren thank you so much for coming on Outlaw good to be here and enjoyed listening to the introduction how do we

3:58

do Set It Off how do we okay we’re done here why do you give us your yeah thanks that was great why do you

4:04

give us your summary so someone said people okay higher rates cause inflation

4:10

I think there’s even you know there’s like a Neo ferian school that I think the Turkish uh president subscribes to

4:16

how would you Des characterize what that means or what’s going

4:22

on well I I I look at what is okay I look at the numbers I look at the data

4:27

and I try and make sense of it just just like everyone else and uh my narrative

4:32

has been different from everyone else’s at least up until recently from listening to you and uh it’s nothing

4:39

more than that where to start I wrote my first paper on this in I think 1997 called the natural rate of interest is

4:45

zero so it’s not something new to me and myself and my partner uh Cliff Viner

4:51

back in the 1980s we always used to Muse about how the best uh indicator of what

4:57

M2 growth would be is because the interest rate itself

5:03

determines the money supply growth as it was measured back then you know there’s been there have been institutional

5:09

changes since then but this was back in the 80s and so the idea that uh you know

5:15

the interest rate itself was instrumental in how the price level

5:20

moves over time now notice I’m going to avoid using the word inflation rate okay

5:25

Al I may say inflation indicators from time to time but that is the whole word

5:32

and term has gotten so confused by the way it’s been used you know if if Tomatoes go up that’s tomato inflation

5:38

or something right instead of just a price of tomatoes going up that I I um I it’s not informative the way I’d like it

5:46

to be so uh excuse me for not using that word maybe you know as much as you all do yeah so the interest rate itself has

5:54

had this effect on a price level you know for a long time that I that I’ve observed okay okay it’s 1980 that’s 45

6:01

years right something interesting happened in this cycle compared to Prior Cycles now in Prior Cycles like in 2008

6:09

I was saying back then that the um rate cuts the Bernan rate Cuts were probably

6:15

not going to do much for the economy if anything because cutting the rates from

6:20

five and a half to zero whatever it was at the time remove something like $400 billion do a year of interest income

6:27

from the economy it lowered the deficit by 400 billion from what it otherwise would have been and all that income and

6:33

those net Financial assets were no longer being added so I was looking at a very sluggish recovery I I didn’t see

6:40

the stimulus package as being large enough to cause a particular boom it was

6:45

plenty large enough for you know decent growth but not not any kind of a runaway inflationary boom or anything like that

6:51

and I can recall being at the FED at a meeting private meeting with a guy named

6:56

Dave Wilcox who was talking about quanti easing and how he didn’t think it would be inflationary and I said yeah I’m not

7:02

so much worried about not being inflationary but with the FED buying all these

7:10

Securities okay they were buying Securities that had higher yields they were paying for them with reserves

7:15

adding reserves which is fine it was changing the duration of the government Holdings but it went from you know the

7:21

Fed was now earning the high interest rates and the market was earning the 0% or whatever they were paying on Reserves

7:27

at the time was very low and I said you know they’re effectively taking 90 billion a year of interest income out of

7:33

the economy that might have been half a percent 1% of GDP at the time I thought for that reason quantitative easing

7:39

would probably slow down the economy at that point in time oh that’s interesting you know that’s kind of what happened so

7:45

initially you can’t prove it you kind of looked at it from the opposite side of where we are today so the idea that QE

7:52

was sucking out income rather than higher interest rates adding to it and that was based on the yield curve at the

7:58

time and duration of government debt you know everything at the time it was a and the data seemed to play that now I don’t know if it’s just confirmation bias on

8:05

my part but it looked to me like that’s what happened and we did have the sluggish economy and that was partially

8:10

the reason that the deficit wasn’t large enough partially because the interest now I’m categorically against using a

8:18

positive interest rate policy to increase deficit spending to support an economy because it it’s so obscenely

8:25

regressive when they raise rates you know the only thing they do is pay interest to people who already have money in proportion how much say already

8:31

have okay and you increase deficit spendings that way just to be clear you

8:37

may say that lower rates or Q or whatever that they’re not particularly stimulative but that’s very different

8:44

than saying oh that a good form of stimulus would be higher rates yeah I

8:50

I’d rather have low rates and a tax cut yeah you know then High rates and a tax increase right sure so let’s bring it to

8:57

now but back then here’s the point back then the debt to GDP held by the public

9:03

was something like 30 or 35% so a 1% rate hike or in those cases rate cup but

9:08

a 1% change in rates a rate hike would have added maybe 35 basis points of income to the E you know percent of GDP

9:15

to the economy because the debt to GDP was like 30 or 35% this time around it’s

9:21

100% roughly you know debt to GDP held by the public yeah so a 1% increase in

9:26

rates two and a half years ago ultimately increased interest payments by a full 1% of GDP three times the

9:33

impact of the prior cycle so here I am saying look if I thought this had an

9:38

impact before now it’s really has an impact okay now it’s three times larger

9:43

than before this is going to be far different than anybody can imagine and raising rates this time around is going

9:49

to have a strong supporting effect on aggregate demand you know keeping unemployment down you know total

9:55

employment growing that type of thing and at the at the time they increase the rates the Fed was reigned you know with

10:02

criticism for um engaging in policy that was going to cause unemployment to go up to fight inflation remember that yeah of

10:09

course well I’m going no they’ve got it backwards this is going to bring unemployment down this is going to bring

10:14

total employment up this is going to cause strong positive GDP growth not a recession every forecast was for a

10:21

recession for what years right they were just ignoring this fiscal impact of this increase in deficit spending now the

10:26

only thing I could rationalize why where do they get where they getting this from is that they must have had in their deep

10:33

in their model somewhere a zero propensity to spend interest income right no matter how high you raise rates

10:39

no matter how much interest you pay there nobody’s going to spend a dime of it and so you don’t have to worry about

10:44

it and that’s why they look at the primary deficit when they talk about Emerging Markets they don’t even count the interest income expense right that

10:51

that’s all I could come up with this to why they would ignore that channel [Music]

11:11

can we talk a little bit more about I guess the the consumption Avenue of the

11:17

interest income Channel because I will fully admit that uh it was very nice in

11:23

Circa 2022 to finally earn positive interest on my bank account I’m an Elder

11:29

Millennial so that had basically never happened to me before however I wouldn’t

11:34

necessarily say that because I was earning you know 2 to 5% on my savings

11:41

that I went out and bought a bunch of additional things and of course a lot of that was offset by The increased cost of

11:48

living increased price level if we’re not using the term inflation so how do you see that aspect of it playing out

11:55

people are earning more income but does that actually translate into more demand yeah and that’s that’s a good

12:02

question and that’s a micro question you know what you look at what all the individuals who are getting it do

12:07

Pension funds get treasury security you know interest how do does that translate into aggregate demand foreigners get a

12:14

lot of interest you know I hear all this that look none of this interest is going to get spent and so it doesn’t matter

12:21

you’re wrong we’re going into recession the interest rate effects on you know Borrowers is going to dominate and

12:26

that’s going to take down the economy and the answer is you can only look at

12:31

the data and see what happens we can both come up with a narrative of what we think the propensities to consume out of

12:37

interest income but we’re not going to know until after it happens and I had looked at in Prior Cycles the data was

12:44

telling me that it’s not zero that there’s a substantial amount that directly or indirectly does get spent

12:51

but that’s all it is it’s a view looking at the macro data looking at what GDP did versus what it was expected to do

12:57

looking at how the rate Cuts helped the economy or didn’t help the economy uh you know based on what their models

13:05

expected right in the same way those rate Cuts didn’t help the economy as expected uh back in uh 200 you know Nish

13:13

is telling me it was that 400 billion a year of in you know income that was cut out was having a dampening effect on

13:20

spending goes back to under Bush in U 2000 2001 when we hit that recession

13:26

they dropped interest rates to 1% and nothing happened it didn’t help and

13:32

I was actually in a meeting with uh Andy card Andrew Card who was chief of staff at the White House in 2002 February

13:39

March and I got in that meeting because in my car company two of the people on

13:45

the board of directors were ex Engineers one General Motors one Ford they knew card personally he was an engineer at GM

13:52

and when I talked to him about the interest income thing the same way I’m talking about it to you they said you got to talk to Andy and set up this

13:58

meeting you know went to the White House the meeting was in the west wing and the first thing I did was just what I said

14:03

to you and what it look in the economy itself when when they lowered interest

14:09

rates okay it helped borrowers but it hurt Savers you know into the penny for

14:14

every dollar saved there’s a dollar borrowed in the economy banks have loans

14:19

and deposits and they’re equal or somebody made an arithmetic mistake you know assets and liabilities and so you

14:25

know when you lower rates you’re just shifting income from one entity to another and the only way that can have an effect

14:32

is if there are differences in the propensities to spend interest income of those two but at the macro level because

14:37

of the public debt when you lower rates you’re cutting the size of the deficit you’re cutting total interest income in

14:43

the economy I said I think that effect dominates and looking at what happened in the last year in 2002 I you know I wouldn’t expect rates

14:51

to do anything and C looks at it he goes he says yeah why would anybody think that’s going to work he says and he goes

14:58

oh like what does work then I explained the fiscal side where when you spend more than you tax that is a direct ad of

15:05

you know income and net Financial assets and when you increase deficit spending

15:12

proactively any Economist who pays to be right it’s going to revise his forecast upward for the economy and he says well

15:19

how much do we need I said well I think it’s probably 700 billion annually back then which was maybe about 5% of GDP he

15:26

says well we don’t have much time do we I said no he says well you better get started it was got a nice note back from was very nice a week later the president

15:33

was asked about the deficit and he said look I don’t look at numbers on a piece of paper I will get jobs which came

15:39

right out of our meeting and after that I don’t know if you remember those days but they passed every tax cut you could

15:47

imagine including retroactive tax cut something we never had before people were getting tax refunds from from you

15:53

know taxes from previous years and they passed every spending bill that could get through Congress trying to get this

15:59

deficit up to save the economy and they that included prescription drugs for Medicare so I I’ll take personal

16:06

responsibility even though that wasn’t discussed in the meeting for you know for the government spending all that

16:11

money on prescription drugs the deficit got up to 200 billion by the third quarter which was about my R Target

16:18

number you know 700 billion for the year the economy turned around and it didn’t cost him the election so you know I’ve

16:24

been on this for a while so and it’s all been from a narrative and and then watching the data so TR mainstream

16:33

macroeconomists have this concept that they call fiscal dominance and yeah that

16:40

sounds like what you’re describing where and and a little bit Yeah Yeah Yeah so basically close enough yeah so close

16:46

enough so I actually like I maybe I’ll try to get you in trouble with some of your mmt friends here but it sounds to

16:54

me that from a policy like look if if if debt to GDP currently at 10% right now

17:00

very very very low and you raise rates that you have some constraining effect

17:06

on borrowers and yes you do have this interest uh increase in the interest income Channel but it’s not that big of

17:13

a deal because there just aren’t many coupon payments at all that are going out relative to the size of account exactly right but where we are right now

17:20

is it safe to say that the size of the debt is a problem that we are in fiscal

17:26

uh dominance and that the size of the debt constrains the ability of monetary policy to be a balancing force in a time

17:33

of inflation more than that it made it backwards it takes it away now I had had

17:39

a um discussion with Paul Krugman a few years ago and that’s when he and Stephanie Kelton were going at it with

17:45

back you know dueling editor remember that yeah yeah of course and I said to him I said what’s you know what’s wrong

17:50

with the job guarantee you know and he says well if you deficit spend for the job guarantee the deficit could get so

17:58

large that if the FED tried to raise you know if we get inflation the FED won’t be

18:04

able to use interest rates as a tool because the interest in you know expense will be so high that that itself would

18:10

cause inflation now he was using that as an argument against the job guarantee and he made my argument and I said to

18:16

him yeah I agree with you I said but I think we’re already there for all practical purposes and and the debt to

18:21

GDP was lower than but you know it was at least neutral that that interest rates were tool and he disagreed with me

18:28

and that’s fine and I said in any case you know I support as you know a permanent zero rate in which case it’s

18:33

move you know you could def spend for job guarantee without worrying about whether rate raising rates is going to

18:39

do anything or not because you’re not going to do it you’re going to just leave them at zero but the point was he that was his new canian the position out

18:46

of the new canian model and it was a standard new canian position years you know not that long ago you remember them

18:51

all talking about anti-deficit talk and how the interest payments are you know unsustainable and all this stuff by

18:57

unsustainable they always mean inflationary right they don’t say it in their first phrase but that’s if you if

19:04

you drill down on them that’s what they get to but in the last couple of years when I asked him again two years ago I

19:11

was like no I don’t think we’re at that level I still think the FED can uh raise rates to fight inflation I said okay you

19:17

know we’ll see so this is this is in the new Keynesian model you know it’s just

19:23

arithmetic that at some point the deficit gets high enough the public debt gets high enough so that when you raise

19:29

rates and pay more interest you do c the interest itself causes inflation now let’s look at how high the deficit

19:34

spending is cbo’s latest number shows 7% of GDP right yeah and I think that’s

19:41

just treasury I don’t think that includes Fed remittances so maybe it’s s and a half or something okay now have we ever had

19:49

anything anywhere near a 7% budget deficit during an expansion with unemployment at like 4% you know

19:56

kind of record low levels no the only time we’ve gotten anywhere near this high is counter cyclically when you

20:03

have a collapse and then tax revenues fall off and transfer payments kick kick

20:09

in because unemployment’s High you know then we got to eight or nine% in 2009

20:14

and we got to I don’t know what the number was covid maybe 15% but normally if you look at 08 the budget deficit was

20:21

down to something like 1% of GDP when and that was low enough to uh allow the high price of

20:28

foil and the other Catalyst to trigger you know a major collapse in the financial sector not not a 7% deficit 7%

20:37

is like drunken sale or level of government spending and out of that 4% is the interest expense it’s over 1.2

20:43

trillion I think annually we just passed 100 billion for the month so yeah go ahead oh no sorry go

20:52

on yeah so look we right now the the deficit 7% of GDP 4% of which is

20:58

interest expense so without the interest expense if they had left rates at zero it would have been trending toward zero and the deficit would have been down at

21:05

you know two 3 four% something still high but not like it is now and that to

21:12

me is like it’s it’s Unthinkable that that’s not going to support a strong economy now what’s interesting is in the

21:18

last month we’ve there’s been a little bit of a bump in the numbers right uh the FED Atlanta’s down to 1.7% GDP

21:25

growth still not a recession or anything and everybody’s look now looking for this collapse and Fed rate cuts and

21:31

everything else and I’m sitting here going how how can this be with a 7% Pro cyclical budget deficit it doesn’t it

21:39

seems like a absurd assumption that we could have any kind of substantial

21:44

weakness or really any kind of a sustained weakness in um in the price

21:50

level so uh but you know for the last few weeks maybe months couple of month

21:55

you know it’s certainly been plenty of indicators around the edges that things are weakening and it may turn out you

22:01

know I’m completely wrong we have a total economic collapse with a 7% deficit and I can I’m 75 this year

22:08

you’ll never hear from me again right so we’ll we’ll see what happens that’s a good hedge the the age hedge in in the

22:15

long run we’re all dead right in the short run I’ll be dead before I have to answer for anything I say wait look I

22:23

don’t I don’t know what’s GNA happen but I’ll beet I’ll be the first one to tell you

22:28

that I’ve just totally caught out by a recession with a 7% deficit you know unless we get $150 oil or something like

22:34

that but abs and some other shock you know I I don’t see how that much could be spent without GDP being strongly

22:43

positive unemployment being very low and uh price pressures now the other

22:48

interesting thing is this 100 billion a month only translates into about a three and a half% of the treasury debt as

22:54

interest payment whereas fed funds rates five and a half five and 38 which means

23:00

and T bills are somewhere around there 5 and a quarter 5 and 38 which means that as rollovers continue as time goes by

23:06

the deficit expands that number is going up okay even if they just leave rates

23:12

alone it will get to five and 38 you know ASM totically but it’ll get there

23:17

and so that we’re getting more and more of this and the cbo’s deficit forecast are showing deficits higher than 6% out it

23:26

to the Future like this is like going to be interesting that to me is at least 6

23:31

7% nominal growth and if you thinking you know price level is going to be I

23:37

don’t know what you want to use PC or something at two and a half that’s that’s four and a half real right that’s

23:43

a pretty strong number more likely you will get two to three reel and the rest will be you know price level changes

23:50

which is one of the channels where the interest rate normally or over time I’ve just noticed over 50 years the change in

23:57

the price levels the rate of inflation gravitates towards the fed’s policy rate

24:03

over time they converge and so with a 5 and a half percent rate 5 and 38 rate

24:08

you’ll see CPI gravitating towards that interest rate you know towards that

24:14

number five five and a half not in day one you can go months without it but over a longer periods of time and you

24:20

can think of that something like a stock split you know or a stock dividend where

24:26

if you just pay out more shares you’re getting you know all else equal the value of this of an individual share

24:34

goes down by that amount right so if you have a two for one stock split the price of the stock Falls in half if you’re

24:40

paying out five and a half perent a year on the public debt which is the net Financial Assets in the economy called

24:46

the net money supply in the economy you’re expanding it at 5 and a half% a year through payment of Interest there’s

24:52

nothing on a supply side it’s just a distribution then I’ve just observed

24:58

that over time the price level gravitates upward by about that amount

25:03

and there’s you know plus or minus so those are my expectations going forward

25:09

and if you notice CPI has leveled off at about three and a quar percent or something uh it went up with covid it

25:16

came down and then sort of leveled off it’s been going sideways here and that’s about at the interest rate you know the effective rate on treasuries last year

25:22

was about three and a half whatever it was so to me that’s not a coincidence it’s not a surprise it doesn’t have to

25:28

happen it could have been a different you know but it’s kind of like the midpoint of my expectations as to what’s

25:34

going to happen with the price level now pce is a different thing right that that includes substitution if the price of

25:39

steak goes up and so people eat chicken instead but spend the same amount you know then there hasn’t been any increase

25:45

in the PC [Music]

26:04

just to be clear we’re recording this on a day that I’ve incurred something of a

26:10

um substantial head injury and I was in the emergency room until late at night but but did I just hear the Godfather of

26:20

mmt say that large deficits can be a problem is that what you just said I

26:26

feel like I might be hallucinating that well I the deficit itself is just an accounting residual but this you know

26:32

what the spending in any given year any spending has consequences you know if they decided to spend trillion dollars

26:39

to buy eggs they’re going to drive up the price of eggs right so if the government’s spending on a uh you know

26:45

our government spends on a quantity constrainted basis let’s say they decide what they want to buy and then pay whatever they have to to buy it yeah

26:52

that that can drive up it does drive up prices or down price you know all the time that’s constantly changing changing

26:58

relative value in the economy of all kinds of things you know there’s no way about that and we have coercive taxation

27:04

right and the tax structure affects prices and affects uh things so if we

27:10

have right now major tax credits for solar for example I think I get a 40%

27:16

tax credit for installing solar so I’m putting solar panels in USVI the uh

27:22

electricity is 45 cents a kilowatt so it’s a pretty easy calculation you know so I that I wouldn’t have put in without

27:27

that tax incentive from the government so I figure it’s probably not just me so I talk to people at accounting firms

27:35

major accounting firms are you seeing tax time people doing this they go oh yeah we’ve got our own Partnerships and

27:42

structures where you can put money in and participate in this solar tax credit you know so who knows how large this

27:48

open-end tax credit is getting and what it’s affecting so yes government spending but government fiscal policy is

27:54

entirely distributional between tax liability and spending it’s pushing and

28:00

pulling you know everything everywhere it’s it’s it’s a major determin it’s it’s a it’s a large part of the command

28:08

economy and it’s a command economy you know to the extent that it’s there if the government decides it wants jet

28:15

planes it’s going to get jet planes right right through the tax structure to the spending structure the free market

28:21

would not be producing jet planes without the government ordering right it’s a everything caters to these you

28:27

know forces of government that are just on us all the time so it’s not that I’m in favor of them but I’m just

28:33

recognizing them and what they do it’s sounds like so you did you use the term

28:38

drunken sailor which thank you because maybe that’ll go that headline of this uh episode it sounds like the issue is

28:45

so a a lot of spending yes that creates a lot of De the more spending the more

28:51

demand prices go up and then it sounds like spend if you spend at market prices

28:56

if SP you spend based on a at a fixed price if you say look I’m only going to spend this much for labor you can’t

29:02

drive prices up right you might not get any but you’re not going to drive prices up yeah that makes the government ERS

29:09

the government orders tanks and jets and it also guarantees uh Social Security

29:14

recipients a certain uh a certain fixed level of inflation or price level

29:21

adjusted consumption uh capacity and then we become agents we become agents because I get Social Security of the

29:26

government right you know with no restrictions on what we do when we spend it but it basically yeah but it

29:32

basically sounds like it’s that mix of sort of conventional macro thinking in

29:39

which high rates is uh defl disinflationary um plus the high levels

29:46

of government spending that seems to be the cocktail for both higher up upward

29:51

pressure on the price level and it sounds like over time worsening higher price level because there’s a

29:58

compounding effect yeah and that’s the situation at the moment it doesn’t have to be that way but that’s what I see

30:04

happening yeah like right now in that context and you sort of

30:10

touched on this before but I would love to hear a sort of like play byplay um guide here but what should the Central

30:17

Bank be doing in the current environment where we do have high fiscal deficits

30:23

that might end up you know constraining them so if they raised to zero

30:29

tomorrow then the CBO would scored as like 20 trillion of reduced you know

30:35

fiscal spending budget cutting or whatever over 20 over 10 years probably

30:40

you know like the the largest spending cut in the history of America times 10

30:45

just by cutting rates to zero all right and and that’s got to have a well unless

30:50

you assume none of that’s going to get uh nobody’s going to change their spending because of 1.2 trillion of

30:56

income has been taken away but you know looking at the numbers I’m looking at that’s going to have a massive

31:02

deflationary bias to it it’s going to be taking away all that income and all those net Financial assets from the

31:07

economy going to be a staggering like uh creation of fiscal space let’s say I don’t know how you want to put it but

31:14

but just a major deflationary event and it’s not even under consideration that’s it would be considered a major

31:19

inflationary event right that’s why look at all the people that have looked at Japan with their zero rates and

31:24

forecasts like hyperinflation oh the Yen went through 60 big deal right your

31:30

inflation rates lower than ours it didn’t go up and they kept zero rates the whole time but they’re still forecasting hyperinflation so they’ve

31:38

got this bias that the low rates are going to a rate cut like that would be inflationary when it’s the opposite well

31:45

actually since you brought up Japan you know for all you know I started really paying attention to this stuff in the mid 2000s and you know I heard all the

31:52

tales of the Widowmaker trade and everyone betting on that hyperinflation how it never happens in recent years

31:57

Japan has seen like the rest of the World Air a substantial inflationary impulse still low by International

32:05

standards but the size the stock of the national debt in Japan is very high as

32:11

we all know and now they actually For the First Time and Forever have actually seen uh inflation again not that high

32:18

but again historically by Japanese standards is there a poent mix in right

32:23

now for Japan is there a risk that I don’t know about hyperinflation kind of unrealistic that actually if they follow

32:30

conventional macro thinking and hold rates up or move rates up to fight this

32:35

inflation that some of these disaster scenarios might actually emerge with the size of the Deb ironically ironically

32:42

they entirely Embrace conventional macro Theory and the reason they’re keeping

32:47

rates down is they’re worried that they might not actually be out of deflation

32:52

yeah and so they’ve got to keep rates down to ensure that the inflation stays you know somewhere towards two they just

32:59

had you know numbers from Tokyo or something that showed a lower rate and they’re all panicking about a deflation

33:04

so yeah they’re there for the wrong reason so to speak but they’re there so we have the data you know but uh yeah okay does that

33:12

answer your question but but if they were to raise if some point there like oh no the inflation’s not you know if they were to raise could that create

33:19

some real uh unfortunate Dynamic feedback loops given the stock of the Japanese debt yeah if they ever decided

33:26

to raise rates to do something with their debts of GDP you know they’d be throwing gasoline on the fire the way we

33:32

have except you know twice as much yeah wait could we talk a little bit more so we’ve obviously been focused on the

33:39

interest income channel for for good reason but can we talk a little bit about the credit Channel and impct this

33:45

isimportant yeah and the impact of higher rates there because the standard economic theory is that rates go up and

33:52

that makes the cost of credit that increases the cost of credit for businesses and so they cut back on

33:58

their spending and investment and investment how do you view that component of interest rate

34:05

function well their clients of the businesses are getting flooded with interest income and buying their output

34:12

at whatever price they need which includes what you need to you know for investment to keep up your output right

34:19

and to train your personnel do whatever else you need you know their prices are at levels where they’re sustainable

34:24

where they can pay interest expense if they need to and so we’re seeing you know three it’s not not this quarter but

34:31

we’ve seen you know three and four% GDP numbers now first and second quarter seem to be a little bit weak I don’t

34:37

know if there’s something in the seasonals that aren’t quite fully sorted out but uh and might Prov me wrong but I

34:44

think uh you know the first quarter was 1.4 right due to uh inventory selling off inventories

34:50

because they believe the economy wasn’t going to be strong so they didn’t replace their inventories now they have to replace them we’ll see what happens

34:56

in the second quarter but anyway um so that’s a narrative that you had but the data hasn’t it hasn’t played out because

35:04

the income of their clients has been high enough to buy their output at a price that they like you know that

35:11

they’re comfortable with they’ve had good pricing power and uh covers these added expenses from the uh interest

35:17

expenses and interest related expenses that you were talking about but like so if you’re spending enough you’re

35:23

throwing enough gasoline on the fire yeah you’re it’s going to burn but like so just on the private sector

35:31

side a little bit more like as you you know one of the key themes that you talk about is these are distributional

35:36

questions or the effects of a lot of these policies are distributional and you mentioned maybe economists think

35:43

there’s no propensity to consume interest income and maybe there are some good reasons for that because it’s you

35:48

know most uh the wealthy people own the treasuries and Banks and stuff like that

35:53

but in there’s Consumer Credit there’s cars we know that housing has slowed

35:58

down it does seem housing has slowed down substantially it does seem like there are many parts of the US economy

36:06

at least that have that they have responded to these higher rates by

36:12

diminishing their activity yes there are winners and losers if you just look at the losers you could maybe conclude by

36:19

projection or confirmation bias that the whole country is losing but it’s not it’s just shifting to different areas

36:25

you know Rolls-Royce has like I don’t know two three four year backlog of sales right

36:32

andate yeah yeah I read it in a Wall Street

36:37

Journal I I um yeah in blo I’m in Bloomberg I read

36:43

it on Bloomberg oh thank you what are you driving these days what uh what uh what race car are you in driving these

36:49

days I I’ve been driving a 2015 Nissan Leaf electric car oh for a while

36:55

you know because on the island you can’t 35 M hour speed limit and uh but what do you drive on the

37:02

track I I haven’t been on the track since I turned H for the last since I turned 52

37:09

I think oh okay so I you know I haven’t I don’t race on the track anymore got it but I I used to drive things that burn

37:16

gasoline I had my own cars you know I had the Mosler mt900 which I would run on track days I never ran it real races

37:22

I use professional drivers you know but um in amateur racing I would drive it

37:27

and I would drive our console I used to say these cars can win races even with me driving we should

37:34

another episode can we would you ever come back to talk about when you had a race car your uh your car company sure

37:40

yeah that’d be fun that’d be really fun the oh this looks like a sweet car the mler M2 this is beautiful how many of

37:46

them made that’s a beautiful car they were 50 or 60 and you know I stopped making the mt900s in I don’t know 10 15

37:54

years ago but um so they’re still racing so I can the Spanish GT and the British GT they’re still winning races uh you

38:01

know against the latest and greatest and you know the cars 20 20 years old so

38:07

there it’s still the top performance car in the world if they where they let them run so just going back to interest rates

38:14

for a second moving away that seems way more boring now than looking at race cars I know I this question is

38:21

inevitably going to like fall flat but it does feel like we’re sort of talking

38:27

about the economy is not a monolith so you have these interest rate sensitive

38:32

portions of the economy like housing yes that that are affected by rate Rises and

38:38

then you have pockets that are more insensitive and maybe we don’t have the

38:43

balance of those two things exactly right or maybe traditional economics hasn’t done a good job of taking like

38:51

those individual portions of the economy and netting them out into a cohesive

38:56

picture of the actual ual effect of interest rates on them how do you like I

39:02

guess this has always been sort of a criticism of mmt but how do you take those disperate ideas and sort of make

39:09

them into a useful theory of Economics does that make sense yeah well look the

39:15

whole composition of GDP changes all the time and it’s driven as I touched on

39:21

before quite a bit by fiscal policy deciding what the government wants so if the government wants more solar panels

39:27

it puts a big tax credit unlimited tax credit we’ll see how large that is you know when the Smoke Clears but I think

39:34

it’s going to be a lot larger anybody realized if you notice government revenues have been flat in a booming

39:39

economy that’s never happened it’s got to be tax credits of some sort you know

39:44

working out there so the composition is going to follow the money and if the money’s going to those you know earning

39:51

interest then that’s where the composition is going to go and you’ll see more high-end purchases you’ll see

39:57

more things that sort that group of people uh there’ll be uh you know all kinds of

40:03

investments in that direction and that’s what we’re seeing so again it’s about following the money and the government

40:11

policy directs to a large extent where the money goes and right now we’ve got over a trillion dollars a year going to

40:17

interest income which is more than defense and more than Social Security and everything else right I just have

40:22

one last question and this is more in the category of Warren Mosler lore rather than it is in interest rates but

40:29

we’re in the studio right now and I looked up and I saw on Fox Biz which we

40:34

have on TV art laugher is on there isn’t it true like you were like friends with him isn’t there some story with you and

40:41

art where like you had some important Insight that led you to mmt thinking from a chat with art well I was looking

40:47

for somebody to um write up my what became soft currency economics the first thing I wrote this was in

40:54

1993 and I went to my uh ex boss Ned janata from William Blair and he sent me

41:01

over to Romy Don rumfelt was his 1954 Princeton you know roommate they

41:08

were on a football team or wrestling team something together and they they had been good friends so I I had a

41:13

meeting I called his office and he was real busy the only time he had was an hour in the steam room at the Racket

41:19

Club in Chicago so I went out and met him there so we’re sitting in our towels in the steam room going through soft

41:25

Cary economics and uh he then gave me a list of his economists that he thought

41:32

would be good place for me to go and art laugher was on that list and his guys were like Paul McCracken and samuelon I

41:38

mean these were not anybody on my rooll of decks and I contacted a few of them and laugher agreed to do it in exchange

41:45

for $25,000 would help me write this thing and he assigned mark McNary so I got to know our a little bit and because

41:52

we talk quite a bit on these things and it turns out he’s an ex like University Chicago professor and he knew all the

41:59

stuff he knew learner and functional Finance you know long before I met any of the academic community and you know

42:05

he he agreed with it he assigned Tom Nan to cover me because he was always looking to do business I went to a little conference where he was and he

42:12

got up to talk and he said I’m gonna give the talk on money and I’m going to tell the money story he says and Tom and

42:18

Warren and he points to us disagree with he said and they’re right and I’m wrong but this is the way I tell it and he

42:24

went and told the story about how Banks take in deposit to make loans you know completely backwards and then he

42:30

finishes the talk we look at him like what was that he says well you know I told everybody you were right and I was

42:36

wrong he said like what do you want it’s like okay so I don’t know what’s going on with our laugher but he did say the

42:44

the problem with the laugher Curve was it only worked at the very extremes so he was very like you know reasonable

42:50

about every you know he’s a very uh you know easy guy to talk to and uh um you

42:56

know self deprecating in many ways and you know you know it worked out well

43:01

Mark was very good and we he wrote and I edited and he wrote and I edited did it we came up with the soft currency

43:07

economics thing and it didn’t help I thought having laugher name on it and whatnot might give it more attention

43:13

more media attention but I I don’t think it made any difference but you know as they say you have to kiss a lot of frogs

43:19

and that was just one of those uh one of those times Warren Mosler so great to have you

43:26

on I swear we will I would honestly love to do an episode just about um Mosler automotive and just talking about the

43:33

business I just want to hear a day in the life of War as well okay so Jo let

43:38

me go in my fog we met at a dinner UMKC maybe or yeah I was I was at UMKC in I

43:45

think it was 2015 no couldn’t have been 2015 2012 or 2013 that sounds right yeah

43:51

it’s long ago right don’t remember what those were fun days but uh so great to

43:57

finally have you on the podcast and enjoy wherever you’re going to be vacationing next okay thanks take

44:06

[Music]

44:18

care Tracy The Godfather of mmt says the government is spending like drunken

44:23

Sailors and that it’s create it’s contributing to inflation I’m still not entirely convinced that

44:29

this isn’t like a

44:35

hallucino okay I mean I do think it is not hard for me to Envision a world in

44:43

which companies pass on higher interest rate costs to Consumers we’ve talked on

44:48

the show about companies um passing on higher input costs and things like that

44:54

so that part of it I can believe and the other part that does seem intuitive to

44:59

me right now is this idea of a tiered economy where people who do have a lot of financial assets and are earning a

45:06

lot of income on those financial assets do spend on certain things like as

45:12

Warren mentioned luxury items like a lot of that makes intuitive sense so

45:18

definitely and look there here’s where like I think I would need more

45:23

exploration so there are aspects of it like clearly interest income is a real

45:29

thing more deficit spending which more interest income entails is on the net

45:35

going to be stimulative at the margin but rich people or people with financial

45:41

assets also just care about the price of their financial assets oh yeah and so when we did see you know they really

45:48

jacked up rates aggressively in 2022 and stocks did Decline and I think stock

45:55

prices probably influence real estate prices they’ve certainly you know we haven’t had a housing crash but real

46:02

estate in many Realms has been stagnant or if you’re in multif family or commercial real estate then you probably

46:08

have seen some price declines in the and so I do think that like that is an offsetting factor and then I also think

46:16

that while it’s certainly true probably that the propensity to spend interest

46:21

income is not zero it is probably somewhat low given that we’re talking about people who already have a lot of

46:27

money and income whereas the propensity to spend among people who are paying high interest rates either through car

46:33

payments or credit card payments Etc is probably much higher and therefore impaired by higher rates so while I

46:41

certainly get the theory and I think there’s probably something to it I still like would need more a little bit more

46:48

convincing that the distributional effect of this change in spending is on net

46:54

inflationary but it’s interesting ideas absolutely I think that’s a really fair assessment um and I think like the

47:01

composition of wealth matters so you can say that there are all these treasuries

47:07

in the world I can’t remember the exact number but like what $30 trillion or

47:13

something like that and people earn income on those treasuries but each individual person is probably not

47:19

holding a pure treasury portfolio as you say like personal wealth will be

47:24

comprised of real estate which is affected by higher interest rates stocks which also go up and down depending on

47:31

interest rates and so yeah it seems like there’s there’s a sort of like net uh or

47:37

sorry there’s a compositional complexity there that I we still need to work out

47:42

and speaking of financial assets that go down the treasuries themselves oh yeah and as you learn the first day you join

47:49

Bloomberg when rates go up price goes down that’s right we should start adding

47:54

that into all of our new stories again like we used to just to hammer the price

48:00

yields up price it down uh I also just really like I I do want to do an episode on Warren Mosler lore because he kind of

48:08

seems like a really cool guy who has a fun life we uh we should go to the island and hang go to the island those

48:15

the mular mt900 looks absolutely sick have you not looked look look at that up

48:21

that’s a I mean I’m not a car guy but that’s a sick looking car that he built isn’t it je yeah yeah no joke like that

48:27

is a sick looking car the one on Wikipedia is a very bright green it’s

48:32

beautiful okay shall we leave it there uh should we stop admiring race cars and

48:38

leave it there let’s leave it there all right this has been another episode of the odd Lots podcast I’m Tracy Alay you

48:44

can follow me at Tracy Alaway and I’m Joe weisenthal you can follow me at the stalwart follow our producers kman

48:50

Rodriguez at kman Armen dashel Bennett at dashbot and Kell Brooks at Kell Brooks thank you to our producer Moses

48:57

andam for more Odd Lots content go to bloomberg.com odls where we have transcripts a Blog and a newsletter and

49:03

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49:09

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49:17

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49:57

oh [Music]

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