Everyone Else Admits We Were Right About Inflation

Mia once again talks with Steven Mann and John Michael Colón about the further expansion and spread of their inflation work and how mainstream economists steal from heterodox economists

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Episode Transcript

Speaker 1 (00:05):
Pod cast. It it's a podcast that you're listening to.
It's it could happen here. It's the the show where
things fall apart and so as you put them back
together again. And actually, okay, you know, I really should
have checked the calendar before I did it, before I
tried to do this introduction where I've referenced the thing
that I'm saying came out last week but might actually

(00:26):
have come out like no, no, no, okay, okay, I got
it right. I got it right. It should never have
doubted myself. Last week we did an episode about inflation,
and we told maybe half that story and the part
of it that we didn't tell. You know, we got
through the most of the part about like, you know

(00:47):
what this sort of theory of inflation that the people
are trangged better to fellows. We got through what it was.
What we didn't really talk about was what happened next,
which is a very very interesting set of sort of
maneuvers that happened where this theory started spreading through a
bunch of very disparate academic circles and you know, sort

(01:08):
of like economic circles and different political circles that usually
don't have anything to do with each other. But we're all,
I don't know, taking taking things in very interesting directions
and to talk about how how how this sort of
supply Chaine theory of inflation like spread through the world
and all of this very very interesting, somewhat bizarre stuff

(01:30):
that happened. Next, we once again have Steve Mann and
John Michael Cologne, who are co editors of Strange Matters. Yeah,
Steve jmc welcome back to the show.

Speaker 2 (01:39):
Thanks for having us.

Speaker 1 (01:42):
Yeah, I'm glad, glad glad we could have YouTube back,
and glad we get to talk about the really really interesting,
somewhat strange things that happened next, which was, Yeah, a
lot of people started picking up your theories and starting
to work with them.

Speaker 3 (02:01):
Yeah.

Speaker 1 (02:01):
I worrying if you talk a bit about I guess
like how that kind of first started and how people
first started sort of coming to you for stuff.

Speaker 3 (02:08):
Yeah, like last year. So last year when the first
of these pieces came out notes toward the theory of inflation,
we got like a really good response in general from it,
and it was kind of provoking discussions between groups of
economists and like readers of econ stuff on Twitter and

(02:33):
stuff like that. Who otherwise wouldn't have really been talking
to each other, but suddenly having a different theory of inflation,
one that was like a lot different than what sort
of like the people who thought it would be super
transitory or the people who thought it was like purely
a monetary phenomenon or something like that. Like having that

(02:53):
option sparked good conversations, and it eventually led to some
writers approaching us who are sort of inspired by those conversations,
and particularly a few of them really wanted to follow
up on like specific key like either points from the
paper or follow some of the implications as far as

(03:19):
they think they could take them. So one such paper.
Oh and by the way, just as a refresher, the
original theory that is laid out in part one of
this series that we're doing is essentially saying that inflation
has a tendency to propagate along supply chains first and

(03:40):
then through supply chain networks secondarily. And so it's it's
saying it's essentially that that's that's how it propagates. It
starts in supply chains. Things like bottlenecks along production processes
have give the price setters, who are people at companies
social acceptable reasons to eventually if they need to raise prices,

(04:04):
and but they but that generally pricing managers refrained from
raising prices unless that us like every other lever they've pulled,
essentially has not worked. So like people took that theory
and wanted to follow up on it, and so one
author who did that was Alex Vacolo who approached us,
and we essentially wanted to do an updated version of

(04:27):
the pricing manager survey that we found really helpful in
writing those initial pieces. So we like in my piece
and that sort of theory of inflation, I relied upon
like a wealth of pricing manager surveys that showed that
where they asked these pricing managers under what circumstances would

(04:49):
you raise prices? And they sort of went through each
scenario of that over the decades, starting in the thirties
and going into the nineties, and do that in order
to not have a replication crisis, Like we need more
and more studies, right, Like this is a that's phenomenon
across social sciences and elsewhere, So you want to have

(05:11):
good replication studies. One way to do that is to
have an updated pricing manager survey that talks to like
sort of modern corporations in the twenty twenties, So are
they still concerned about some of the same things, are
they not? Are there innovations and pricing that we should
know about? And so Alex Paccolo, who's a financial journalist

(05:32):
by trade, he went and interviewed some managers at Walmart
and other big companies and some smaller ones and found that, like,
broadly speaking, a lot of the same issues are at play.
So companies have cost plus market pricing as kind of

(05:53):
their bedrock, and from there they developed some innovations such
as like so called dynamic pricing, where they have the
like if you're a larger company who knows that they
are viewed as a price leader, you have some leeway

(06:14):
in responding to sales forecasts and changing your pricing, like
Walmart does what they have like everyday low prices, that
type of thing. And if you're a grocery store and
one of your competitors is Walmart, Serve on the flip side,
you might start developing indexes of prices set by Walmart

(06:34):
or like one of the other big like behemoth chains,
knowing how important they are to the overall supply chain network.
And knowing how important they are for the demand for groceries.
Like if wherever Walmart goes, many people have no choice
but to follow them in terms of their pricing schedules.
And so that's another thing that is going on, Like

(06:56):
people are developing just entire price indices of like Walmart
or Costco or Sam's Club or whoe have you.

Speaker 1 (07:04):
Yeah, that was something that's I think interesting in terms
of like the the difference between the way that like
economists think about sort of price, the difference between and
how it's actually getting set, which is like a lot
of it, a lot of it. Very much seems to
be like if you are if you are like the

(07:25):
largest company in a market, like if you are like Walmart, right,
you have this incredible ability to sort of like like
you have this ability to like like force people force
your like downstream or like I guess upstream suppliers to
like sell it to you at low at lower prices,
because you have this enormous sort of like you know,

(07:45):
amount of buying power that like, you know, if you're
like if you're like a smaller thing, you don't necessarily
like you know, like like the same company will charge
like another grocery store more for like the same thing,
because Walmart, Walmart has the ability to sell it a
lower price than if I'm remembering this right, I'm gonting,
I'm gonna I'm getting strange looks.

Speaker 2 (08:05):
Yeah, well it's it's it's important not to mix up
two separate things. One is Walmart's relationships to suppliers and
the other one is relationship to its competitors. Right, So
the supplier bit, you're totally right on the right track.
It's like, you know, like people who supply Walmart with
products because Walmart is such a big customer, you get
the Walmart contract and you're a small producer or a

(08:27):
medium sized producer, like you're set right because like you know,
then you can basically just like you know, they can
even be your only customer in many cases. But that
comes at a cost, which is that you sell at
the price that Walmart dictates. Otherwise they'll just tell you
to fuck off basically. And you know, it's not only price,
it's also the quality. You have to hit the standards.
And oftentimes what these firms that are like the big

(08:49):
important firms, so called nuclear firms in a supply chain
do is that they set those standards like very rigidly,
and you have to be certified with them. So McDonald's
does this for example, you know, like all those poultry
farmers or whatever who supply the chickens for the chicken
mc nuggets, they have to go through this extremely rigid
process in order to be able to qualify to be
a McDonald's certified supplier or whatever, because that's how they

(09:11):
keep the product standardized even though they're not in house.
And then the other thing that you were alluding to,
which is a vocalos piece, is the relationship to competitors.
So obviously Walmart's able to keep things cheap all the
time in their famous every day low prices beca because
basically those they have economies of scale. You know, there's
this notion, I think common sense for a lot of people,

(09:32):
especially those who don't have a lot of business experience,
is that the more that you make of something, the
more expensive it's going to be. But actually it's almost
the exact opposite. Any firm that has survived, like over
a period of time being able to make more and
more of something has generally found ways of making more
and more of the same thing using fewer inputs and

(09:54):
less labor like you know, and that's something that happens
through automation, but it's also something that happens through administers
rate of innovation and through and sometimes through less than
the nice things, right through through through you know, Amazon
warehouses where people aren't allowed to take bathroom breaks, or
through sort of like you know, coercive measures that they
can do because they've found a nice little spot in

(10:15):
the economy that lots of people are depending on them
and they can dictate terms. But whatever it is, you know,
as firms get bigger, it actually gets cheaper to make
more of their kind of thing. So people in a
bodega can't match Walmart's prices for everything from like hamburgers
to detergent right because for them, it's more expensive to
produce or to acquire. So what they do instead, knowing

(10:36):
this and they're able to survive, is that they do
Walmart's price, and then they do a markup over Walmart's price.
So in the same way that like by themselves they
would do a markup over their costs, Walmart's costs are
lower and they do a markup, so they do a
percentage over Walmart's markup. And as long as it basically
is something that's doable in terms of cost, they do that,

(10:57):
which means that they're basically advertising them selves to customers
as the slightly more expensive but more local you know,
more you know, more reliable or easier to get to
you can just walk to the corner store or whatever,
you know, whatever conveniences. They're kind of like justifying themselves
with to the customer base. And in cities, this can
be enough to keep you know, small to medium sized

(11:18):
you know sort of retailers in business, although in the
suburbs the competition is basically just all other all gobbalistic
firms on Walmart's scale, like you know, Wegman's, or in
Florida it will be something like Public's, you know, and
that kind of thing. So generally, uh Vacola was discovering,

(11:39):
was I want to just emphasize Steve's point about replication, Like,
you know, if if a lot of the supply chain
theory depends upon a story about prices that most economists
just don't believe in. Economists believe that supply and demand
are automatically adjusting based on changing prices, and that those
adjustments determine in turn how we spend and how we produce.

(12:00):
You know, that's that's supposedly how everything works. They believe
in this thing called the price mechanism. The supply chain
theory depends upon a story where the vast majority of
prices in the economy are a markup over costs or
you know, beyond that some kind of strategic decision being
made in pursuit of a certain strategy. But like, you know,
if some studies had verified that, but then other studies

(12:23):
refuted it, then you would have a situation like psychology
where you know, the psychologists are always saying all human
beings really have a neck fetish. But then you know,
because some study of like some college students you know,
said this, and then six months later it'll be like, actually,
that failed to replicate this. It turns out that human
beings don't have a neck fetish. You know. And I'm

(12:44):
being rude to psychology, but this is a real crisis
that happened there, called the replication crisis. Now. Fred Lee
that the economists who kind of like started us along
this track in his famous book POSTKINSI and Price Theory,
found seventy one pricing studies and they form Appendix called
Appendix B in his book, which ought to be legendary,
but it's not, because all this stuff is very obscure.

(13:05):
The seventy one studies from very different book length studies
from very different people with very different like political and
economic commitments. Some of them are business school literature. Some
of them are empirical studies commissioned by states or by
corporations on how corporate management works. Some of them are
by like Marxist economists, some of them are by neoclassical economists
like and they all converge, no matter what the biases

(13:27):
of of the people involved, upon this same kind of
similar cost plus administered prices model. Vocolo writing now in
the present day, not in the period that Lee was
talking about, which is roughly from the thirties to roughly
the nineties, Like you know, he is talking about the
twenty twenties. He just went out and started talking to
pricing managers and capitalists and all this other stuff, and

(13:49):
lo and behold he found the exact same thing. So
the evidence base, the empirical evidence base, for the underlying
basis of the supply chain theory is very very sound.
The ball is in other people's court in mainstream economists
court who want to defend the supply and demand bullshit
and the price mechanism bullshit to to prove us wrong,

(14:12):
because frankly, the weight of the evidence is so strong
that they're the ones who have the who have to
prove their case, not the other way around. You know
that the what's it called when you when you've got
the you know, the the I think the burdensump the
burden of proof, thank you. The burden of proof is
on their side.

Speaker 3 (14:33):
Yeah.

Speaker 1 (14:33):
And so something also I think is really interesting from
the color pieces that like, you know, there is a
bit in there about firms that try to do this
sort of like like in real time reacting to supply
and demand stuff. And it's like Uber and if you
look at Uber's like, okay, so Uber has a couple
of things. One they don't have, like the thing that

(14:55):
they're like they don't really have the supply chain really,
a B. They don't make any money. They never make money,
They will never make money. And the third thing that's
really interesting about is that like that kind of pricing,
like you know, if if if you have some people
who go in ideologically and like we're gonna build an
algorithm to like try to have pricing respond to demand
or whatever it like. It fucking sucks and everyone hates

(15:17):
it because it means that, like, you know, suddenly, like
when you actually need a thing, it's unbelievably expensive, and
it pisses people off. Like most most people who have
to deal with actual like the normal things that a
business do don't do. And the only people who do
it are like the insane tech people who are like like,

(15:39):
I don't know it. I almost want to call it
like intensely ideological, and also assholes and also don't make
any money, which is just I don't know, it's it's
I think it's kind of a coincidence. But it is
just very funny to me that the people who actually
try to use the neoclassical like pricing theory, it sucks
and everyone hates them.

Speaker 3 (16:00):
Yeah, and uh, the Colo kind of summarizes like the
several different pricing procedures that he witnessed and to just say,
like on both on both determining your company's costs and
determining what market markup you should have, so the cost

(16:22):
plus markup you need to you need to figure out
both of those pieces. It's anything but automatic. Yeah, it's
a very manual process. And even I would I would
go so far as to say, like Walmart has teams
of tech people, Yes, but they're liaising heavily with the
finance department and sales and marketing to determine what is

(16:45):
an appropriate margin based on historical like in industry and
sub industry trends and like what is our historical cost
structure for each product down to the product level. And
they have so many different products that they might actually say, well,
because we're selling everything to everyone, maybe some things can
just be what are called lost leaders and have a

(17:06):
negative margin because they get people in the store and
then those people are there and they see other things
which have higher markups and then they buy those and
then overall they've made more of a profit because they
use something's a negative margin on them. And it's like
it's a really complex process. And even if an algorithm
is being developed by say by say Uber to like

(17:29):
dynamically priced things up and down based upon events like
a baseball game or something they're going on in a
city so you can get more revenue, that was still
a people. It was a group of people in a
room in a very extremely manual process. Coding is extremely
manual still, and like liasing with like sales, marketing, finance
people all at once.

Speaker 1 (17:51):
Yeah.

Speaker 2 (17:54):
And the other thing is that it's like supply and
demand is afraid that gets thrown around anytime that there's
any kind of interaction between like the amount of people
who want something and the amount of people and the
amount of stuff that there is, right, which is a

(18:16):
lot of different situations. But the specific supply demand price
theory that's at the core of neoclassical economics is this
price mechanism story whereby you know, companies basically all make
one thing. The price of that thing is not something
that is really under their control. It automatically fluctuates based

(18:36):
on demand, which I guess you can roughly measure as
sales and like the UH and in turn, like what
the price of that thing is determines how much they
produce and how much of it people buy, because people's
buying decisions are in some fixed functional way, and people's
production decisions in some fixed functional way are tied to

(18:57):
that price. Like if you want to create an algorithm
that includes as a consideration doing a discount when you
haven't yet sold all the seats in an airplane in
the hopes that you'll get some last minute sales, which,
by the way, statistically is shown to not actually help
that much. Those kinds of last minute sales and discounts.
I mean, I suppose in a flight where there's a

(19:19):
time limited thing, it might work better. But for a
typical product, it doesn't move the dial very much in
terms of sales, which is why Walmart pursues an every
day low prices strategy, just keeping prices down in general,
so you don't do sales and discounts which don't move
the dial much. But like you know, that's a strategic
pricing decision that you've chosen to make because you think
that it might move the dial in some way, and

(19:39):
you experiment it with it and see if it works
or whatever. That's not the automatic lawlike functional relationship that
is supposed to exist according to neoclassical theory between supply
demand and prices. People will say that the algorithm is
about supplying demand, but that's not really how it works.

(19:59):
That's it's it's not the same thing as the theory, right,
It's just a pricing system that takes into account among
many other variables and usually not as the primary thing
whether or not for example, there is available available slack
in the in the you know, in what you're producing
to be able to get some last minute sales if

(20:21):
you do a discount or something like that, like or
like Steve was saying, like, you know, there's a there's
a game today, so you can do surge pricing because
people are gonna you know that a bunch of people
are going to want to get in the game, So
you're basically just price gouging based on this opportunistically based
on this event that's happening or whatever, like like, yeah,
you can do that, and you can say that it's

(20:43):
pricing that tries to take into account supply and demand,
but it's not the supply demand price mechanism of neoclassical theory.
And also, as McColo like you know, finds out it
attempts to do this are very very mixed in their
success at best. You know. Basically, people who are trying

(21:03):
to do it are like, yeah, maybe it could work,
and then they try it, and nine times out of
ten it doesn't work very well. So they go back
to some variation on a cost plus model, you know,
or a price leadership model or something like that. You know,
the kinds of methods that Lee discusses.

Speaker 3 (21:21):
Yeah, I mean the customer good will that you kind
of put at risk with these more dynamic pricing models
is like often a little too risky, like even for
big companies like Uber, Like there's been a backlash against
Uber for doing that.

Speaker 2 (21:35):
Absolutely the only reason they can maybe get away with
it has been because they have access to infinite finance.

Speaker 1 (21:42):
But yeah, how long is that gonna last?

Speaker 3 (21:44):
Yeah?

Speaker 1 (21:44):
Like, and that's an everything's interesting, Like you know this
is this is to some extent like a different economic question,
but like you do at some point have to ask
the question, like to to what extent can you learn
things about the economy based on companies that don't have
a revenue model or the revenue model is they will
continue to be headed piles of money by like the

(22:06):
same seven billionaires they've conned. And that's like a I
think there's an interesting interplay of how dependent you are
on actually making like actually having revenue be the source
of like the continuing existence of your company, and how
ideological you can be about running do you have a gameshom.

Speaker 2 (22:26):
Yeah, Well, it's actually very funny that You say this
because one of the people that Vocolo talks to is
this guy Cohen. I can't find his first name right now,
and I don't want to scroll up. But somebody whose
last name is Cohen is quote unquote more skeptical of
the of the dynamical pricing, and he says, I think
it's a sexy idea, and probably it has a lot

(22:48):
of intellectually valuable pathways, except when it crashes into the
sensibility of the customer. He said, it could create a
universe of very inconsistent prices across categories in time, which
I don't think. Human beings to align to these dynamic
models need common sense judgment attached to them, which is
not always necessarily available. Now, this is a very diplomatic
statement by somebody who's formerly of Sears Canada. Now I

(23:11):
find this very funny because there's a kind of subtext here.
Vocola doesn't get into it, but Sears Canada obviously kind
of related to Sears. In the nineties, Sears had a
CEO who was like this ultra libertarian, you know. He
basically believed that the problem with the free market is
that it's not free enough. Right at the height of neoliberalism.

(23:33):
So he's really pissed off about the fact that inside
the corporation there's no free market. It's all a planned economy,
you know, which is true. There's no there's no market
exchanges in there, like, it's all allocations, Like, Okay, we
have this goal, so we're going to allocate these workers
to this place and blah blah blah blah. You know,
and and we're and and and you know, anything that

(23:54):
the company owns, they just use it to pursue their goals.
He wanted everything inside the company to have a bress
so that everything could just be you know. But and
this is kind of a mad scientist experiment done on
this like very old American corporation. But somehow, I guess
it was the nineties, you know, people were coked up
on this kind of thing. They tried it, and it

(24:16):
was a catastrophic failure that actually generally seen as contributing
to the end of Sears as a as a major
player in retail. And it's like like, so it shows
so I think that the fact that this person very
diplomatically from Sears is like this doesn't work, you know,
And that might be born of more experienced than than
than not.

Speaker 1 (24:35):
You know, yeah, okay, we have to go to an
advak Before we do that, I want to tell one
more insane nineties Like people in the nineties really really
had market brain in a way that's like difficult to
understand now. And you can even see this kind of
through Obama, Like they really have market brain. And like,
I think the most market brain thing anyone ever did
was the the I think it was the Army Joint

(24:56):
chiefs of Staff brought in like a group of aonomists
who were you know, like you were doing the whole
like okay, we like, how how can we make how
can we use the market to make the army run
more efficient? And the first polls that they put on
on the table is we're going to have each each
like like each like section like what's the tap time declartum.
We're gonna have each branch of the military bid for

(25:18):
control of who of who gets controlled the nuclear weapons.
And there's a bunch of just like five star generals
sitting at this table going like what the fuck are
you guys talking about? This kid about and that that
was the end of like but that was like like
peak absolute peak nineties brain of like these these people
thought you could solve terrorism by like having futures markets

(25:38):
on like where when terrorist attacks would happen, Like it
was these people were wild. None of this stuff worked,
Unlike the products and services that you're gonna you're gonna
now hear ads for and we're back from these fine

(26:02):
products and services. If you're if the thing you were
doing right now is you have your finger on the button.
We are about to message Sophie about the fact that
we have gold ads again, like please don't like please
leave Sophie alone. Oh my god. I think we we've
gotten We've gotten a little we've we've gotten sort of
into the weeds of I guess, like the kind of

(26:22):
research stuff it's been produced, but I wanted to move on,
I think to some of the some of the other
like kinds of like I don't know, kinds of discourse
and kinds of sort of work that's been produced out
of this.

Speaker 2 (26:35):
Yeah. Sova Cola's piece I think was was very, very accomplished,
and it adds to this proud tradition of pricing surveys
like you've been saying. But the piece that I would
say ended up having the biggest impact in the sense
that it really kind of started getting followed up on
by a lot of people and it got a lot
of attention, was Tim Dimetzio's piece, So a little bit him.

(27:00):
He's an economist based in Australia and I should remember
the name of his university, but it was the University
of Something and it starts with W and it's a
very long name there you go, University of Yeah, And
he's a political economist. He does a lot of stuff

(27:23):
pertaining to kind of like international relations type stuff, but
he also comes at economics from a particular perspective. So
we mentioned last time that there's these the orthodoxy and
economics is this one school called the Neoclassicals, who believe
in the supply and demand stuff and along with a
whole bunch of other dogmas. Then there's a bunch of
dissident heterodox schools. And there's a whole bunch of these,

(27:45):
and one of them is called the capital as Power school,
which is named after a book called Capitalist Power by
these two professors called Bickler and Nitsen, and it has
a lot of things to say about a lot of subjects.
But so Capital's power is a book that says a
lot of things and a lot of different subjects, but

(28:07):
at its core is the idea that what makes the
capitalist system tick is the process of capitalization, and that
that process of capitalization is controlled by certain people, and
their control over that process is the basis of the
entire economic system. That's very heavy stuff. It tends not

(28:32):
to have to do with what we're going to be
talking about, but it informs the perspective that Demutzio comes from. Now,
Demuzio saw Steve's brilliant essay on the splashing theory of inflation,
was very inspired by it because there are certain affinities
between the framework that we're coming from in this kind
of research and the capital's power framework. They don't agree
one hundred percent on everything, but there's a lot of
common ground there. So he basically hopped aboard to say, well,

(28:56):
why don't we talk about interest rates? Because remember the
main upshot of Steve's of Fred Lee's administrative crisis theory,
and then and then by extension, Steve's theory about inflation
is that inflation is not about money, it's about prices.
And in order to understand inflation, you have to understand
why people set the prices that they do, and why
prices across the economy will go up at any given

(29:17):
moment because it's people who set prices, not the market,
not the money supply, and not any of these other
sort of automatic general macroeconomic things. It's a microeconomic decision
made by particular people within particular institutions with the ability
to pull the lever on particular prices. Right, So the
interest rate is a price, you know, it's a very
important price too.

Speaker 1 (29:38):
Because we should look, we should we should back off
for a second and explain what when when you say
the interest rate, you should explain what that is, because well, yeah,
that's under explained.

Speaker 2 (29:48):
Yeah, that's that's totally exactly where I was going. Because
there's actually many interest rates out there in the economy.
When we talk about the interest rate, what we tend
to be talking about is the interest rate that is
set at the central bank of the country that control
like of the currency under discussion. Right. That is basically

(30:11):
an interest rate that sets the price for credit for
loans in the rest of the economy. And it's basically
you can see it as a supply chain, even though
it's not a physical one and it's basically the main
cost for banks that want to borrow, you know, and
they then have to set a markup over that cost

(30:32):
as the price for anyone who wants to borrow from them,
which includes other banks but also includes end consumers and firms.
So that's basically I mean, I'm oversimplifying and Sea probably
a more nuanced version of this, but that's the basics.

Speaker 3 (30:50):
Yeah, Banks, just like any company, need to determine both
their cost structure to except that they are able to
themselves and their markup and markup is they like banks
have costs just like anyone. One of their principal costs
is the rate of interest that they pay on deposits
of their customers in order to get them to get

(31:13):
new customers in Like, that's one of their main services
that they provide is checking checking accounts and savings accounts
and like, so how much interest are you is a
bank willing to set on its savings account is like
an important decision that's like part of its cost structure.
But where people if the Federal Reserve were to raise

(31:35):
its federal it's the federal funds rate, it's a principal
policy rate up to what they have now five and
a half percent or so, when it was less than
one percent only a year ago. In order to compete
with all of the other products which are based upon

(31:58):
this so called risk free rate of return that the
central bank offers that governments used to like set the
rate of things like treasury treasury bills and stuff like. Eventually,
if you're a bank, you have to start charging higher
and higher interest rates. Sorry, you have to start offering
higher and higher interest rates on your savings accounts. And likewise,

(32:23):
you need to, like, you need to start charging higher
interest rates on the products that are your actual money makers,
like mortgages and home equity, lines of credit and that
sort of thing, and so like the cost so the
cost structure of a bank will shift as the Federal

(32:44):
Reserve is changing its policy rate, and so too will
its margin over time as it competes with other banks
for like a narrowing pool of qualified mortgage applicants, and
also for people who are willing to shop around for
where to keep their deposits in a way that they

(33:05):
previously they weren't because there was no sort of differential
in interest rates at all. It was just being held steady.

Speaker 2 (33:13):
Yeah, absolutely, So the key thing to understand, and by
the way, up to now, Steve and I have been
describing what we regard as the real world. Like everything
that we've just described, we can see it in action
like in the world right Like if the FED raises
this interest rate effectively, what that means is that this
whole supply chain of people lending to other people, who

(33:36):
lend to other people, who lend to other people, the
cost of lending has essentially increased, which will eventually lead
to a rise in the cost and the cost of
lending to people downstream until for end consumers, which is
basically like firms and households trying to get a loan
from the bank, those loans are going to be more expensive.
And conversely, if the Fed's interest rate goes down, those

(33:57):
prices will tend to go down as well.

Speaker 3 (34:00):
If you like. Crucially, none of it is just automatic.

Speaker 2 (34:03):
That's Y's absolutely true.

Speaker 3 (34:05):
There's even just just because it's a bank doesn't mean
it's any different than the story that Facola was laying
out for retailers.

Speaker 2 (34:14):
Mm hmm, that's exactly right. The Fed's rate is a
very important rate because it's basically the first, the first
one in this chain, and it's a cost for pretty
much everybody who's doing business and dollars. But that doesn't
mean that it in some simple way just controls everything else.
You can hope that it controls if you're the central banker.

(34:36):
But of course all these firms are making their own
decisions based on their own reasons, so you know, they
can make all sorts of decisions based on their priorities
and based on like like, all sorts of things. Now,
by the way, if you want the more detailed version
of this story that actually talks about the different agents
at each step of this process in much more detail,

(34:57):
you should check out Perry Merling's work on this. And
there's even online online lectures that kind of get into
the nitty gritty which I have absorbed and then since
completely forgotten the details of, so I would need to
watch them again to actually be able to name the names.
But the point is that so far, so real. Right. Now,
here's where things get a little bs.

Speaker 4 (35:19):
Remember that the mainstream theories of inflation are all basically
descended in their DNA, even though they've been moving further
and further away from.

Speaker 2 (35:30):
It from the old school quantity theory of money. The
idea that the amount of money in the economy basically
determines the price level. More money that there is circulating,
the less that money is worth because there's too much
of it, so the price of it goes down, and
the price of money basically determines like how much your
money is able to buy. Now. People have been moving

(35:52):
away from that towards theories that get more realistic, but
still retain the basic structure where the money supplies the
main thing that matters, and they'll say, for example, that
it's the amount of money circulating in people's pockets relative
to the amount of goods being produced, such that if
too much money is chasing too few goods, like there

(36:13):
isn't enough supply to meet the demand, and that causes something,
although people disagree on what, that causes prices to be
bid upwards, and that's called the demand poll theory. It's
the dominant theory that most economists, classical mainstream economists that
you talk to today will will will pedal to you. The
ones who are not orthodox monitorists, they still believe in this,

(36:37):
which means that they still think that you have to
when there's an inflationary event, you have to attack the
money supply now from them. From their point of view,
it doesn't have to do with the absolute amount of
money circulating. It has to do with the amount of
money in people's pockets relative to the amount of stuff
that can be bought. So, if there's too much money
in people's pockets, how do people use their money? They
spend it on goods and services that are produced by firms.

(37:01):
So if you reduce that amount of money, that basically
the only way that you can do it is by
putting people out of work, right, you know you by
because then they don't get the wages which they would
have spent on stuff that you know, the factory is
in Walmart and everything else, the agriculture and whatever, all
the stuff that gets made, the goods and services. Now

(37:25):
they think that if you raise the interest rate, it
makes the cost of finance more expensive. Some firms are
depending on finance, so if that cost increases for them,
they're going to go under. And when they go under,
people get unemployed. When people get unemployed, they have less
money in their pockets, which means that they're spending less,
which means that some other firms go out of business,

(37:46):
and then those people go unemployed. Now, the full version
of this is like the crash of two thousand and
eight or nineteen twenty nine, where suddenly a whole bunch
of people are unemployed and a whole bunch of companies
are empty. They don't want to go all the way
with that, but they want to kind of get part
of the way to that. They want to put the
squeeze on the economy and get some companies put out

(38:06):
of business and some people unemployed on the dole so
that people don't have money in their pockets, so that
the supposed pressure of too many people spending money on
goods that are not being produced enough to meet that demand,
the demand pressure goes down, so therefore it equilibrates and
inflation prices. Inflation ceases because prices go down too, because

(38:31):
the idea is that there's a law like relationship between
demand and prices such that if demand goes down, the
price will go down. The actual explanation for this is
will vary depending on the thing. They basically accept it
as a religious orthodoxy, and then different economists justified in
different ways. But that's why they're trying to raise interest

(38:51):
rates so that basically people get thrown out of work
and that'll cause prices magically to go down. Now, as
we discussed, the actual cause of the inflation was an
exogenous shock based on like the chip shortage, the labor shortage,
and key things like agriculture, the container shortage and the
war in Ukraine causing increases and grain prices that have

(39:14):
cost cost increases. That firms tried to hold off price
increases as long as they could, but then they couldn't,
and then they traveled down the supply chain and a
whole bunch of prices across the economy went up. So
we know that because we have looked at the news
stories that you know, and talk to people at these
different companies. By we, I don't mean strange matters. I

(39:35):
mean like you know, journalists or whatever, and like you know,
that's what they say. And yet nevertheless they're trying to
make the interest rates go up to throw people out
of work and partially induce a recession in the hopes
that that will drive prices down.

Speaker 3 (39:50):
But they can't even get that, right.

Speaker 2 (39:52):
That's right, they haven't.

Speaker 3 (39:53):
Actually they haven't been able to get unemployment up either.
So it's.

Speaker 2 (39:58):
Exactly well, and what's really funny is that Demucio basically says, Okay,
why do people believe this? They believe it for a
lot of reasons, but they think that it worked in
the seventies. That's the myth. Right. You asked Larry Summers,
why do you think this shit will work? And Larry
Summers will say, well, you might not like it. And
I think he actually said things like this, like a
couple of weeks ago, you might not like it, but

(40:19):
this is how we got out of the crisis of
the seventies. If we hadn't done the vulgar shock, which
is basically the same thing, they raised interest rates through
up the yazoo, you know, like like we and hadn't
induced that unemployment or whatever, prices would never have come down.
But you see, Demucio did something that you're not supposed
to do, which is that he actually checked up on
the relationship between between interest rates and prices. And what

(40:43):
he found was that basically, there's either that I believe
that I explained his essay is that there's a strong
version of his argument and there's a weak version. The
week version is definitely true. The strong version is speculative.
So he charted it and you found that there is
absolutely no inverse relationship between interest rates and prices. They

(41:06):
raise interest rates, they raise interest rates, the prices keep
going up. Then they're not coming down, right, And the
prices don't start to go down until oil because remember
the oil shock caused by the war in the Middle
East between Israel and Weal and UH and Egypt and
a whole bunch of other places caused OPEK to raise
their prices in order.

Speaker 1 (41:26):
Yeah, it's I'm gonna, I'm gonna, I'm gonna, I'm gonna
point in a thing, which is that the actual story
behind that is slightly more complicated, which is that, like, okay, so,
to be completely one hundred percent accurate about this, OPIK
had a meeting where they decided to raise prices, and
then the war started, and then like like two weeks afterwards,

(41:47):
and then they kind of tacked their explanation on to
the back of the price increase they'd already decided on.

Speaker 2 (41:55):
Oh okay, but.

Speaker 1 (41:56):
Yeah, so this this this is the thing that like,
I don't know, there was a there was an oil
historian who went back and like spent a bunch of
time looking through the records of OPEC and shit and
trying to figure out what the actual sequence of events was.
But it it is true that like one of the
things behind keeping Opek together so that it could increase
the price of oil was like the like what was

(42:20):
their sort of solid aarity and they faced the opposition
of the war. But also it's slightly more complicated than that,
and I want to I want to I want to
put that on the record, just because the oil knowers
will get mad at us. We Yeah, yeah, so that's
the version of it that like like ninety nine percent
of accounts will give you. It's just slightly not quite

(42:40):
exactly what was happening.

Speaker 2 (42:42):
Yeah, I gotta wrote that book.

Speaker 1 (42:43):
Yeah, I think it was, God, I don't remember what
book I think it was in. I think it was
in Carbon Democracy, maybe like eighty percent.

Speaker 2 (42:52):
Sure.

Speaker 1 (42:53):
Sorry, I read like four books about oil and coal
in like incredibly rapid succession, like several years ago, and
sometimes I have trouble remembering exactly which one which thing
is from. But yeah, although I want to say sorry,
I guess I want to say one other kind of
interesting thing about that that makes specifically trying to use
the interest rates arguments about like I think it is

(43:17):
it is pretty clear that raising the interest rates directly
would like did not immediately did wasn't the thing that
brought down prices. I think there's like an interesting there's
like a weird thing going on there too, because the
like almost all like when when economists tend to look
at this, what they tend to look at what the
interest rate rises was what was happening to the US
economy and the other the other thing that the vocal

(43:41):
shock did was it raised the interest rates on It
raised raised the interest rates in all of these adjustable
rate loans that like all of these countries like all
over the world had and those economies got fucking obliterated.
And that actually I think, I think actually that there
there is an argument that like my my argument would be,
I think it kind of probably prevented prices maybe from

(44:03):
going up more, But it did that because it prevented
any more opex fromforming and just like absolutely annihilated any
kind of political movement to like have pricing be set
by like raw material producers rather than by like countries
that do production. And this is a kind of like
separate thing, but like this is I think, I think
the moral of my story with this before we get

(44:24):
back to sort of like the I don't know, the
the other arguments about this is that like that moment
was such a fucking shit show. There were so many
things going on. It's so complicated. It is absolutely nuts
to try to base literally your entire theory about how
you stop inflation by raising interest rates on one event

(44:44):
in like probably the most complicated economic crisis, and it
like we've ever had. And yeah, because like it did,
like the Volker shock did a lot of things that
weren't what Volker or not even not not what Vocal
were trying to do, but it did a lot of
things that aren't what economists talk about when they talk
about what the Volcan shock did. Like it had all

(45:07):
of these incredibly like powerful political ramifications that they just
don't put in the equations because it doesn't feel like
how do you mathematically model like the collapse of the
like like the collapse of the non online movement and
like the Third World movement, Like you can't, right, And

(45:27):
so they just sort of like wave their hands and
pretend that it was just like directly it caused more unemployment,
the unemployment prot inflation rydown.

Speaker 3 (45:36):
Yeah, it's interesting to think of the global effects of
the Vulcar's shock. It's like you have countries who are
dependent upon USD finance suddenly are facing a much stronger dollar.
So if they didn't already have dollars, that's a huge problem.

Speaker 1 (45:53):
Yeah and again, yeah and again. Also just like like
just literally the interest rates on their loans like increased
by like twenty percent. And that's like, you know, like
you're it doesn't really matter what your economy is. You can't,
I don't know, it's it's unbelievably difficult to survive them
like that.

Speaker 3 (46:09):
Yeah, on the four x dimension and just on regular
lending terms, in dollar lending anyway, it's going to get
way tougher. They even domestically, like to de Mitiu, superimposes
the oil price onto the inflation and like the the
inflationary crises of the seventies and early eighties, it was
a double it was a double victim, if you remember.

(46:32):
And so like the first time the FED chairman who
proceeded Paul Voker was blamed for not raising interest rates
during an inflationary crisis because of the emerging theory, said
that maybe that would be a good idea, and so
like the monitorists had like their one moment after that
to say like they were, they became more than simply

(46:56):
an academic movement and became like briefly hegemonic. With with
the the vulgar interest rate arise that happened to like
in set in nineteen seventy five or so, when the
oil price was about fifteen dollars per barrel. That's when
inflation and the oil price start to move closely in

(47:17):
conjunction with each other, going into nineteen eighty, which is
also when the interest rates are being raised more like
give or take nine to eighteen months or so, and
the economic historians, the neoclassical economic historians, will forget about

(47:38):
the supply chain pressures like the oil price, which has
nothing to do with the FED, and like that happened
in this inflationary when oil prices were up to like
one ten. During our current inflationary crisis, this exact debase
debate was taking place again. Yeah, which like where it's like,
I mean, there's like all of the prices that the

(47:59):
FED has no control over. It's like, well, if you
ignore those ones, then actually our theory is like kind
of getting close to being right.

Speaker 2 (48:07):
And the worst part, the worst part is that the
interest rate correlates positively with prices.

Speaker 5 (48:16):
This is so like so like so like the interest
rate when it's high, theory expects that prices will be low,
but actually and and and and like even.

Speaker 2 (48:28):
If you adjust for like a delay where maybe like
the prices get low afterwards, like no, that's not what happens.
It's like the interest rate goes up and prices go
up to prices go down, and the interest rate goes
you know, like like like.

Speaker 3 (48:45):
It's like yeah and like and Demucio is like it
when he eventually he super imposes old price, fed funds,
thorough funds, rate, and inflation all in one chart. It's
just like this epic wave of all three going up
at once, like almost in lock step. And then oil
goes back down, and then interest rates go back down,

(49:05):
and then prices go back down.

Speaker 2 (49:07):
Yeah, I can't think prices first before interest rate. Let
me see.

Speaker 3 (49:12):
Oh yeah yeah like inplation, Chris, like yeah, somewhat concurrently
with the federal funds and then the uh, the oil
price eventually falls like like shortly thereafter.

Speaker 1 (49:25):
Yeah, and then and this this just gives you a disaster,
right because you like, okay, so the you will get
neoclassical economists who are like, oh my god, oh no,
all these idiots are saying that increasing the increasing the
interest rate actually increases prices. It's not what happening. It's
like you get into this mess. You have to figure
out the new classical explanation, right, is that like, okay, well,

(49:45):
the reason it looks like the fund rate increasing increases
prices is because you do that in response to the
inflation happening. Right, But like you can also just very
easily look at this as like a panic index basically
like where you know, it's like, okay, well, prices go up,
and then the Fed panics and so they raise their
it doesn't, and you know, like it's it's this is

(50:06):
one of those things where like the neoclassical economists have
invented a mechanism that like allows them to explain their
own actions in a way that's plausible enough that they
can call anyone that they've they've gotten a fagiblity that
could say anyone who says they're wrong is just like nuts, right, right,

(50:27):
And also it's it's it's entirely possible that not only
are they not right, they're literally perfectly exactly wrong.

Speaker 3 (50:35):
Yeah, and that yeah, they tried out the like the
the econometric jargon long and variable lags when people say,
when our interest rate's gonna cause unemployments arise, when our
interest rate's gonna cut down on inflation by themselves and
not some other supply chain phenomenon, And they say like, well,
the monetary transmission mechanism has long and variable lags, which

(50:57):
means that like nine to eighteen months from now, it'll
settle down and then we'll know it's from interest rates.
Trust us, right, And.

Speaker 2 (51:04):
Even their purported explanations are demonstrably false. So theoretically, the
mechanism by which this happens is that the monetary that
the money supply will go down. Well, yeah, M two
is our best estimate for the monetary for the money supply,
and it's not even a perfect one. You know, interest
rates go up, interest rates go down, M two keeps
going up. And this is over the course of like

(51:27):
from the seventies to the nineties, you know, like like, yes,
another graph of the mussios.

Speaker 3 (51:32):
That's another important point that like the money, it doesn't
even get the money supply down.

Speaker 2 (51:38):
Yeah, So like it's quite questionable whether this interest rate
adjustment thing even works at all on its own terms,
because all the evidence says that there's at least and
this is what I mean by the weak version of
the Vicis argument, that all the evidence shows that there's
at least no relationship between interest rates and the price level,
that there is like no relation ship whatsoever. It basically

(52:01):
just is useless for controlling prices one way or the other.
The uh. Now, the strong version of argument is he
takes the he takes the the the fact that interest
rates track prices very seriously, and he's like, well, what
if making finance more expensive actually raises business costs and

(52:22):
businesses choose to respond to it by raising their prices?
You know, what if you what if you actually, by
raising the interest rate, are contributing to inflation. Now, this
is this is kind of how we framed the whole
article in our title editors make titles, not not not
not writers do interest rate hikes worsen inflation? And I

(52:44):
remember showing this to some of my friends who were
financed bros. And they were like, what what are you
talking about? This is a crazy idea, But like it
makes a lot of sense because if you look at
things as a supply chain. At the very least, rising
financially rising cost of loans would be a higher cost
for some businesses. Theoretically they could respond to that by
raising their prices. Now, in actual fact, it probably at

(53:07):
least my solo opinion is this is a small effect,
if it exists at all, it's much more plausible that
there is simply no relationship. Yeah, and the general price.

Speaker 1 (53:16):
Yeah, and that and that and that and that, Like
the fact that they're correlated is just it's just a
panic index on the on the on the on behalf
of the fed that they just get scared and do
this thing and it doesn't it has no effect, but
like you know, they've got to press the panic button.

Speaker 3 (53:31):
Yeah. I think I'm for a variety of reasons, I
think I'm a weak form demusiist on this point. I think, like, like,
especially these days, there's so many other like a relatively
small percentage of commercial and business credit is variable right
to begin with, These days, more of it is fixed rate,

(53:54):
and like especially for more well certainly for mortgages, like
it's it's like eighty percent plus approaching eighty five percent
even fixed rate, which will not be affected. And then
businesses have other so many other means of liquidity other
than loans these days, particularly the like medium large scale businesses,

(54:16):
like the you know, you can go to the capital markets,
private equity or the stock market and get the funding
you need. That I'm in ways that don't don't depend
upon what the federal funds rate is doing or only
weekly depend upon it. So it's just like there's so
many other liquidity sources, especially like in the last thirty

(54:37):
years or so, like well since since the Vulcar Shock.
Basically they've like all of these like private equity and
other capital markets methods for liquid you have opened up,
and a good deal of the debt, a good deal
more of the debt, that's a percentage of total debt
is fixed rate. So like on that basis, I'm like,
all right, well, maybe it doesn't maybe it doesn't increase prices,

(55:00):
but there is at the very least it's like non correlated.

Speaker 2 (55:14):
This caught a lot of people's attention, Like once Stevens,
you put this paper out there, this is one of
our most successful essays because it got picked up by
a bunch of folks. I mean, Investipedia cited it as
a source Economy called this a blog and not a magazine,
you know, like like it ended up being taken up
by another capital as Power influenced economists Blair Fix, who

(55:37):
found yet more empirical evidence that there is no relationship
whatsoever between interest rates and like the general price level,
you know, and to the extent that there is, it's
only because you induce a recession, you know, that that
that puts people out of work, in which case you've basically,
you know, you've in order to deal with a paper cut,

(55:59):
you've cut off your hand, right and even then, like
they can't they can't reliably get unemployment up, you know,
by raising rates. So like what like what use is
that even if you accept that mechanism. So they found
more evidence and they got even more attention. Cory Doctoro,
the science fiction writer and futurist and kind of left
wing all around public intellectual, he found both Demusia's study

(56:23):
and Blair Fix's study and was like really excited about it.
And after that it really took off. It started getting
debated all over the place. There's a heterodoxy economics international
organization called Rethink Economics, which is all about like, you know,
inciting pluralism and the discipline, and in their Australian blog
because they're all over the world, an economist called Matthew Harris,

(56:43):
you know, took up took up the controversy and basically
sided with with Demusio like and JW. Mason writing in
Baron's also basically sided with us in an essay called
the Fed Can't Fine Tune the Economy. JW. Mason's a
very important hederodox economists who's often on the cutting edge
of a lot of these kind of theoretical developments. Interestingly,

(57:05):
the first fellow though, Matthew Harris at Rethink Economics, he
actually found a study which I was not aware of,
which is why I love these. When we started all
these conversations all over the place, people dug up stuff
that we didn't even know about. There was a study
done by the National Bureau of Economic Research by two
professors from the University of Chicago, but notably they were

(57:26):
not University of Chicago economists. They were in the University
of Chicago Business school. And as many people have pointed out,
you know, capitalists started business schools because economists are basically
just propaganda. But like you actually also need people who
know how the world actually works in order to run
your companies. So that's why economics and business schools are
two separate schools.

Speaker 1 (57:48):
This is like a real like I remember this on campus.
This is like, this is a real thing, where like
if you're so the business school, if I'm remembering correctly,
the business school is like is most I think it's
I think I only be a grad school for han
sot me let me look this up. Yeah that was
my memory of it.

Speaker 2 (58:04):
Yeah.

Speaker 1 (58:05):
So so this is a real thing because because the University
Chicago doesn't have an undergrad business program, you get people
who want to do business who go into ECON, and
the ECON people fucking hate them because they see them
as like like they see them as sort of like
like these like inferior like fly by night people who

(58:26):
don't care about like the sort of deep like the
deep math and like the deep sort of like you know,
like intellectual like political pursuit of economics. They just want
to like go be a business person. And this has
really interesting effects because it means that like you know,
like the business school. I say, it's not like the

(58:47):
business school is like a bastion of leftist or whatever.
But they don't agree on stuff a lot because they're
like like the University of Chicago Economics program. It it
produces basically two things. It produces like a bunch of
people who go on to be investment bankers where you
don't actually need to know how a firm works at all,

(59:09):
and then it goes on to produce a bunch of
people who become economists. And so like it's it's actual
sort of ideological purpose is is specifically it's it's a
school that trains other economists, right, it's a school that
teaches like the ruling class what to think, whereas the
business school is like the school that teach And this
is like this is a very very very explicit It's

(59:30):
it's something that like when you're there you can like
watch like in practice, the fact that these aren't the
same thing and the fact that like you know, they're
they're they're they're going to produce different conclusions because you know,
the the like because like because their actual like purpose
is different. One is ideological, the other one is like

(59:51):
making money.

Speaker 2 (59:53):
Yes, and and and this is a great case study
of it because these folks at the Business school their
names are Nil's, Nils Gormson and Killian Huber, they actually
went and asked companies what they do when credit gets
more expensive. Now, according to the theory, and this is

(01:00:14):
the most sophisticated theory the theory that people at the
FED will tell you, which is, you know, you might
need to put a few drinks into them first, but
you know, it's like we have to induce a partial
recession in order to make it so that people have
less spending money in their pockets and prices get bidded down.

Speaker 3 (01:00:26):
Right.

Speaker 2 (01:00:27):
Theoretically, the mechanism by which this works at the individual
firm is that the firm sees that the cost of
capital goes up and they invest less, you know, or
just outright go out of business. Right, But in fact
future investment is only weekly correlated to the cost of
capital because of the limited transition into discount rates, you know.
In other words, like basically, there's no real effect. So yeah,

(01:00:51):
they go around and do business service.

Speaker 3 (01:00:54):
Sorry, go ahead, companies. Yeah, they do a good amount,
if not perhaps most, of their capital investment from cash
on hand before going before seeking out finance.

Speaker 1 (01:01:13):
Yeah, and that and that, like and that means that
it doesn't have an effect.

Speaker 3 (01:01:17):
And then even if you need financing their non debt finance.
So there's like equity finance, either private or republic that
you have as an option site alongside the debt options.

Speaker 2 (01:01:28):
Exactly. So we go from like a situation where we
publish this article in twenty twenty two, right, and it's
got a title that for a mainstream economist, even a
very sophisticated one, is unthinkable, like do interest rates hikes,
you know, cause inflation to get worse or even just

(01:01:48):
don't matter for inflation. But then suddenly, like you have
a bunch once it gets taken up by a larger discussion,
you have a bunch of quite reputable people saying the
exact same thing, citing this directly, and even in one case,
six months after our article comes out, Lo and behold
that a certain little known economist rights in the Guardian.

(01:02:13):
In fact, raising interest rates could do more harm than
good by making it more expensive for firms to invest
in solutions to the current supply constraints the US federal reserves.
Monetary tightening has already curtailed housing construction, even though more
supply is precisely what is needed to bring down one
of the biggest sources of inflation housing costs. Moreover, many
price setters in the housing market may now pass the

(01:02:34):
costs of doing business onto renters. You know. So in
other words, like maybe higher interest rates can actually induce
price increases as the higher interest rates, and do businesses
to write down the future value of lost customers relatives
to the benefit of higher prices to be sure, a
deep recession you know, parenthesis like the kind of they're
trying to induce. That's my parenthesis. Back to the quote,
a deeper session would tame inflation. But why would we

(01:02:57):
invite that, you know her own Powell and his colleague
seemed to relish cheering against the economy. Meanwhile, they're friends
in commercial banking are making out like bandits now that
the Fed is paying four point four percent interests on
more than three trillion dollars a bankers or balances. Blah
blah blah blah. Now, this little known economist writing for
The Guardian is Joseph Stiglitz, who won the Nobel Prize

(01:03:18):
in economics. Now does he cite our article who's talking
points he's basically going through point by point? No, does
he cite any of the better known places that cited
us that are header box. No, he basically presents it
as if it's his own idea. Now, maybe he did
have this idea six months after we started.

Speaker 1 (01:03:38):
Extension in like Stingletz has not had a single idea
in like fifteen years. Like that man, Oh, that man
is a transpe parent medium through which the stuff that
he reads appears on a page. I'm going to be made.
I'm I'm sick of doing this bullshit.

Speaker 2 (01:03:57):
And you know the worst part is, like, you know this,
this is something that happens a lot. There's an orthodoxy
that says certain things that are nonsense. The heterodoxy goes
through the hard work of like figuring out the reasons
why it's not true and presenting an alternative model. It's
denied at first, but then increasingly it's just plagiarized, you know,

(01:04:18):
perhaps accidentally, probably not, you know, like like and that
it's presented as if actually, this is what the theory
has always been all along, you know, and like, how
can anyone think differently? And it's this, it's this unfortunate
thing because since the neoclassicals control the discipline, they control
advancement through the ranks of the economists, so they're always

(01:04:40):
wrong and never right, but they're never punished for it,
and they control all the leavers of who gets to
be an economist. So it's this sort of like continual sad,
unfortunate thing. But on the bright side, we were right.
We were right early A bunch of people picked it up,
and our talking points ended up making it too very
very distant and well regarded places to the point where

(01:05:01):
now it's it's a viable alternative that exists out there
in the world in terms of like, you know, why
keep raising rates. It's not doing any good. It could
even do bad. And that's the talking point that I
don't think would have existed if it hadn't been for
Democillo's research, which depended entirely upon the supply chain theory
of inflation framework that Steve developed out of Fred Lee's work,

(01:05:22):
which is basically a research program that now the magazine
has put out there in the world that and it
is continuing to build up on that. That actually makes
it make more sense.

Speaker 1 (01:05:33):
Yeah, And I want to just sort of like take
a second to highlight like how impressive it is had
this happened, because like again like like a year and
a half even like like like even like even like
a year ago, right for the entire time I have
been alive. If you tried to say that raising interest
rates raises inflation, like people would have thrown bananas at you,

(01:05:56):
like like volleys of tomatoes, like they would have like
you would you would have gotten sixteen contracts to be
a professional clown Like this. This was a thing that
like you could not you couldn't even like suggest this,
and you know, like within a pretty rapid span, suddenly
like Stinglets is being like, ah, what this is really
really maybe this is a plausible thing. It's like, oh my,

(01:06:18):
like I don't know, I think it's I think it's
it's really it's really impressive watching how fast I don't know,
like how fast the combinations of like reality and having
an explanation of reality that actually like lines up with
it has been able to change, like has been able
to actually just sort of like change what the discourse

(01:06:40):
at like the highest levels of power and sort of
like what what has actually been happening in the economy
like has shifted. And that's wild, Like I would not
have guessed that that that was a thing that was
even remotely possible, And and yet we are now here.

Speaker 3 (01:06:57):
Yeah, at the Overton windows has shifted so far that
like the idea that interest rates just don't seem to
have any discernible effect upon the price level is kind
of like becoming the base case.

Speaker 2 (01:07:10):
Yeah.

Speaker 3 (01:07:11):
Yeah, so like the entire yeah, the entire spectrum has shifted, like, yeah,
it could be a strong form and have like I'm
starting to use that phrase now by the way, and okay,
people won't be throwing a ton of They'll still throw
some things at you, but like it's it's like manageable now.

Speaker 2 (01:07:35):
I mean, you can always point to that argument from authority,
but Stitz says it might be so yeah, so you know,
it's like.

Speaker 1 (01:07:43):
Question he won the Nobel Prize prize too.

Speaker 3 (01:07:57):
This is a whole.

Speaker 2 (01:08:01):
The so called Nobel price in economics is not actually
the Nobel Prize in economics. It's that there's Nobel prices
in science and you know, literature and all this stuff
that's administered by the Alfred Nobel Organization and the and
the fund that he left and whatever. This started in

(01:08:22):
the sixties, like I think some seventy years after the
Nobel started or something like that, and it was started
by the Swedish Central Bank to imitate the Nobel Prize.
So technically it's the Nobel Memorial Prize in economics, you see,
and it's and it's just it's basically like peeling off
the skin of the face of the Nobel Prize and
then wearing it, you know, and saying, where we have
a Nobel price too. Totally basically it's not and you know,

(01:08:49):
it puts the loution on its skin or else it
gets the hose again, you know. And they did this specifically.
There's a historian of of economics. Oh my god, what
the hell is his name? The it's it's the it's
the more heat than like guy. He's Oh my goodness,

(01:09:12):
I cite him in the Friendly thing and I can't. Morowski.
That's the guy. Yeah, okay. So he actually like went
and like studied the origins of it, and it turns
out that they specifically did it as a scheme to
only give the Nobel Prize to people who are basically
like neoclassical economists, and they mostly have so sometimes they've diversed,
but mostly they've done it to very reactionary economists in

(01:09:34):
order to promote neoclassical economists in Europe. Because it was
stronger in America than it was in Europe. And in
order to promote the idea of central bank independence, which
is a fancy term for uh, you know, a central
bank should not need to operate under a political, uh
a democratically controlled you know, legislature that says, actually, we

(01:09:58):
don't want more unemployed because that would be bad, so
don't do that. Like, instead, they should have independence, the
independence that allows them to technocratically decide that it's time
for people to get out of work, you know, and
and and that kind of thing. So you know, that's
that's the story of the so called Nobel Prize. It's
really the fake Nobel, yeah, which is I just call
it the fake Nobel yeah, which is.

Speaker 1 (01:10:19):
Also really funny if you talk to other people, like specifically,
one of the things that happened to me when I
was in the university was like I knew a bunch
of people who were like really really good at math.
Like one of my friends was like like like actual
genuine prodigy was doing like like was doing like like
graduate level like math in high school. And if you
talk to these people and you talk to like math

(01:10:40):
professors about the Nobel Prizes, they like, they will like
yell about it for like twenty minutes because the math
is so bullshit. It's like, yeah, this guy like the
like the math involved in these Nobel prizes are like
they figured out too plus two weekos four and they
gave them like this fucking fake Nobel prize. You look
at like the fields metal and it's like, I don't know,
like it's it's, it's, it's it's it's really nonsense. All

(01:11:02):
the math people are really mad about the fact that
the econ people think that they know math because they don't.
And the consequence of this is you get these like that,
you get people handing out Nobel prices for saying shit
like the economy can't miss like the market can't miss price,
like in like assets that are like the price of houses,
and then the entire housing market immediately implosed because it
was all miss priced. It's it's it's a disaster. It

(01:11:23):
has been. I don't know. We should everyone at all
times should be doing anti fake Nobel price propaganda against
the economics Nobel price because it's it's it's fake and
bad and we should all say it more.

Speaker 3 (01:11:37):
Uh, you know, there's on the heterodox side of things.
There's some really promising uses of mathematical economics to create
like input output matrices. Yeah, and to model, like do
an io model of the economy that the math is
very much subservient to empirical data that is coming in

(01:11:58):
that trains the model. And then like like to so
much of economics is well, data fits, data fits the model.
Data fits the model, like over and over again when
it should be the other way around.

Speaker 2 (01:12:10):
Yeah, absolutely, does the model fit the data, because if
it doesn't, then you got to throw it out. Like
this whole like raising interest rates is going to control prices? Bullshit?
When has that even happened? Theoretically happened in the seventies.
But then you look at it and yeah, it doesn't
tell you that story, so you know, do they throw
it out?

Speaker 3 (01:12:28):
No, Like brief brief callback to Fred Lee's table table
b was it?

Speaker 2 (01:12:39):
Oh?

Speaker 3 (01:12:41):
Yeah, is the Blinder study in there? I forget, Yes,
yes it is. That's like an instance. That's an instance
where Alan Blinder is neoclassical economists who like he messed
up and did real science and what he found was
was the administrative price theory.

Speaker 2 (01:13:00):
Yeah, he made a terrible mistake of thinking that his
bullshit theory would be vindicated, and then it turns out
that it was not.

Speaker 3 (01:13:08):
Yeah, there's just like the history of intellectual thought for
economics is like replete with examples where they kind of
like they screw up and they actually do real science
for a change, and like find things like cost plus
markups happening, and he.

Speaker 2 (01:13:24):
Tries so hard to explain it away, you know, he's like, well,
supply and demand exists. It's just that these prices are
sticky because the cost of changing the price on the
menu is actually too expensive, so they choose not to
and that's why prices are sticky. They can't they can't
change the stickers. You know, it's completely insane.

Speaker 3 (01:13:46):
It's like the cost of admit, there's a cost to
administering prices themselves, and that's why they don't change prices.
Like the price mechanism for neo classical economics would suggests.

Speaker 2 (01:13:59):
Look for the stickers, and he couldn't find it. You
couldn't find the costs. So he's like, well, I guess
it's not sticky because of menu costs. It's like, I
wonder what it could be. What a mystery?

Speaker 1 (01:14:14):
Okay, so we should we should start wrapping up because
this has been this has been a very long episode already,
but I wanted to ask before we go, what what what,
what are you all doing next? And what other incredibly
funny economics discourses can we expect to have giant like
creators punched into in the next couple of years.

Speaker 3 (01:14:33):
So one thing we've started to work on, and we've
discussed a little bit on this podcast, I believe, Yeah, Well,
Beck was the importance of for X foreign exchange for
all sorts of microeconomic things, like inflation being one of them.
Like if you're a small country that that does not

(01:14:56):
have hegemonic monetary authority like the US do is to
get people to use its currency and you have to
go out and import things and some other currency, how
does that affect your ability to socially provision yourself as
a nation state and like do development work. And we're
developing a theory of for X essentially that is it's

(01:15:18):
a it's an extension of the chartlist framework that informs MMT,
but with some important criticisms about how like the central
MMT insights sort of is like you can create if
you're the sovereign issuer of your own fiat currency. You

(01:15:39):
can always provision enough of it to you can always
spend as much of it into existence as you need
to to do productive things. And yes, that's true. You
can create infinity of your own money, but your own
not other people's money. Yeah, So other currencies like if you're.

Speaker 1 (01:15:58):
Like, uh, really Sri Lanka for example.

Speaker 3 (01:16:06):
Problem if you're Sri Lanka or Mexico or whoever, most
of most of the world, basically you need to maintain
and augment your balance of like the trading the major
trading currencies US dollars, yen, the euro, to name three,

(01:16:26):
and have balances of those. You need to maintain your
balance of payments and your balances of specific currencies in
order to meet the biophysical obligations that your whatever your
development strategy necessitates, because in most instances, not all, but most,

(01:16:49):
you're going to need to Like no one's going if
you're Sri Lanka, no one's going to want to to
transact in your currency for major purchases of like staple goods,
You're going to need to use like dollars or euros
or end or are you on perhaps you know who
knows exactly one of the major trading currencies, and this.

Speaker 2 (01:17:10):
Also raises the question of how it currency becomes a
major trading currency, and that almost invariably takes you in
two directions. One is which countries are powerful and able
to industrialize and make capital goods that nobody else has
that everybody wants a piece of. And two, which are
the powerful imperialist great powers. And it turns out that
those are the nexus that's created between imperialism, development, and

(01:17:34):
the balance of payments. Those three things can't even be
discussed independently of each other. And the politics of what
is going to be used as the what Steve and
I are tentatively calling the international means of payment, in
other words, what you can use in international transactions across
a whole region or across the entire planet. That is

(01:17:55):
a hugely political question that all the major great powers
in their interimperial conflict or constantly fighting over. So right
now it appears that China is attempting to make a
bid for a global UoN. First they tried to do
it through the digital UoN. Now they're seemingly trying to
do it through bricks by getting the other bricks countries
to agree to a kind of EUON gold standard, mirroring

(01:18:15):
the Breton Woods Agreement that was basically the dollar piggybacking
off of gold to reach global pre eminence. Will it work,
will it not? Nobody really knows. It's a total mess.
But in theory, that could be one way that you
could suddenly have, like the YUON, at least in a
certain currency zone, be used as the main way of

(01:18:36):
doing imports. And if the US suddenly needs an import
from that zone, which hypothetically, if it existed right, they
couldn't use dollars anymore, or or maybe dollars would be
at a high disadvantage, you know, in the exchange rate
between dollars and that currency at that point, or maybe
they would just be banned entirely from using dollars. They
have to get it in that currency, which means is

(01:18:57):
suddenly the US, which has basically been able to print
for X, to print the international means of payment for
some fifty years now, would suddenly have to actually hold
reserves of this thing. Now, if we have to hold
reserves of it, that means that we have to sell
something to the people who issue that currency. That means
that we suddenly have to worry about which firms are
the most profitable exporters. And I bet you anything that

(01:19:20):
none of our listeners know what the most important company
in America would become if that situation happened. Is it Luber?

Speaker 4 (01:19:31):
Is it?

Speaker 2 (01:19:32):
Is it Amazon? Is it? Is it? All these like
Fortune five hundred companies and whatever?

Speaker 4 (01:19:37):
No?

Speaker 2 (01:19:37):
No, I mean, it's one of the Fortune five hundred,
but it's not like towards the top of that list.
It's Boeing. Boeing is by far our single greatest exporter firm.
It would be, in a situation like this, the national champion,
so to speak, to use language that's usually reserved for
less developed countries than the US. And this is exactly

(01:19:58):
the kind of like thinking that is important because you know, obviously,
the other thing that would happen if dollar hegemony ended
is that it would be a huge economic crash in
the US, Like suddenly the import the costs of importing
anything that we're in that zone would skyrocket, and it
would mess up, you know, our balance of payments, and
it would cause inflation. Depending on how quickly it happens
and how how little, how much or how little time

(01:20:21):
firms have to adjust their supply chains and stuff like that.
So it's, uh, this is exactly what you need in
order to understand everything from the decline and fall of
the Roman Empire to current geopolitics today. And and and
I'm hoping that that Steve and I, through developing the theory,
will create a general framework that can be used to
tie discussions that people usually have in purely political terms

(01:20:43):
about interimperial conflict into economic questions so that there's no
longer a kind of division of labor between between economics
which denies the existence of imperialism. And then the people
who study imperialism as historians or political scientists or whatever.

Speaker 1 (01:20:58):
The stage stay tuned for more theories dropping at some
point in the future.

Speaker 2 (01:21:06):
Oh and we should do our marketing pitch. If you
like the stuff that you hear, you should seriously consider
checking out the magazine which is at Strange Matters dot
co op. And also please consider if you have the
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it really it really helps because all the money that
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(01:21:28):
for basically like you know, paying for the services that
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All of it goes to our writers, and we try
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the other kind of stuff poetry that we publish, definitely
please consider.

Speaker 1 (01:21:50):
Yeah, well we'll we'll put we'll put a link to
the magazine and the description. Yeah, Steve gen C, thank
you so much for thank you so much for being
on the show and for yelling at the Econobo priced
with me.

Speaker 3 (01:22:06):
It's been a pleasure.

Speaker 2 (01:22:07):
It's been great mana thank you.

Speaker 1 (01:22:09):
Yeah, and you can find us at it could Happen here,
What that Happened here pod on Twitter and Instagram. Yeah,
we have a website where you post our sources. It's
cool Onmedia dot com. There's other stuff there. You should
go there, and yeah, go into the world and make
life worse for mainstream economists. It could happen here as

(01:22:34):
a production of cool Zone Media.

Speaker 2 (01:22:35):
For more podcasts from cool Zone Media, visit our website
cool Zonemedia dot com, or check us out on the
iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts.

Speaker 1 (01:22:44):
You can find sources for it could happen here.

Speaker 2 (01:22:46):
Updated monthly at cool zonemedia dot com, slash sources.

Speaker 3 (01:22:50):
Thanks for listening,