July 8, 2024 • 50 mins
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.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3 (00:25):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:27):
Tracy, you know, there's that theory people say it from
time to time about in different contexts, different schools of thought,
and kind of gets dismissed as crankishness sometimes that higher
rates can be a contributor to inflation.
Speaker 4 (00:40):
Yes.
Speaker 3 (00:41):
Yes, And actually I'm hearing this more and more interestingly enough.
So you used to hear, 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 basic
idea here is there's always been some question about the
efficacy of interest rates in the current inflationary environment. So
(01:03):
if you think back to the twenty twenty period, the
idea that we had all these supply disruptions, lots of
snarls in transportation and logistics, what are interest rate hikes
really going to do in that context? Right? Yeah, And
some people even argue that higher interest rates are detrimental
for that kind of inflation, because you make it harder
(01:25):
for people to build out capacity. Yeah, but what's happening
more recently, and I think you're hearing more talk of
this is the idea that higher interest rates in and
of themselves can contribute to the inflationary impulse through the
interest income channel.
Speaker 4 (01:42):
Yeah.
Speaker 2 (01:42):
Absolutely 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 income into the economy, and
when you're fighting inflation, that's the more so. I think
that's one of the arguments for how higher rates can
be inflationary. But then there is this sort of like
there is the more are read upon view that you mentioned,
which is that higher rates can constrain investment and contribute
(02:06):
to less housing and that has an inflationary impulse in
a time of housing shortage. That seems to be a
little less controversial. The connection is clear, but I think regardless,
like I think, Okay, here we are in July twenty
twenty four. Inflation has come down a lot. There's still
many stories that could be told a lot about the
last four years, and I don't think there are any
(02:28):
really economists who have like nailed this cycle with some
theory or whatever that it's like, Yep, they explained how
it's all going to work. There are many this period.
Whatever we've experienced over the last four years will be
debated and argued about, and what role did higher rates
have and bringing down inflation or why the will be
debated by economists for like one hundred years.
Speaker 4 (02:47):
Probably.
Speaker 3 (02:47):
I find this aspect of our life right now simultaneously
exhilarating and terrifying. So it's great that we're learning about
how the world works. It's also terrifying that we still
aren't entirely sure how interest rates work and what impact
they actually have on the economy. But I am very,
very interested in digging into more of this argument the
(03:09):
interest income channel here and the actual like push and
pull of higher interest rates on inflation. I think we
should talk more about it totally.
Speaker 2 (03:17):
Well, I'm really excited. We do indeed have the perfect guest,
someone we've never had on the show before, but he's
someone who we get a lot of requests for on
Twitter on the Outlaws Discord, someone we probably should have
had a long time ago. We are going to be
speaking to a Warren Mosler. He's he's an economist, former
investment manager. He drives fast race cars in the Virgin Islands.
(03:41):
Currently he's on a bike trip in Croatia, a very
cool life. He is also the originator of what has
come to be known as modern monetary theory. So Warren,
thank you so much for coming on outlaws.
Speaker 4 (03:55):
Good to be here and enjoyed listening to the introduction.
How do we do at all?
Speaker 2 (03:58):
How do we okay, we're done here? Why do you
give us your Yeah? Thanks, that was great. What do
you give us your summary? So someone said, people, okay,
higher rates cause inflation. I think there's even you know,
there's like a new Fisherian school that I think the
Turkish president subscribes to. How would you des characterize what
(04:19):
that means or what's going on?
Speaker 4 (04:23):
Well, I look at what is okay, look to the numbers,
I look at the data, and I try and make
sense of it, just like everyone else. And my narrative
has been different from everyone else that's released up until
recently from listening to you, and it's nothing more than that.
Where to start? I wrote my first paper on this
and I think nineteen ninety seven called the natural rate
(04:45):
of Interest is zero. So it's not something new to
me and myself and my partner Cliff Viner. Back in
the nineteen eighties, we always used to muse about how
the best indicator of what M two growth would be
is live or because the interest rate itself determines the
money like growth as it was measured back then. You know,
(05:08):
there's been there's been institutional changes since, but this was
back in the eighties, and so the idea that, you know,
the interest rate itself was instrumental in how the price
level moves over time. I'll notice I'm going to avoid
using the word inflation rate. I may say inflation indicators
from time to time, but that is the whole word,
(05:32):
and term has gotten so confused by the way it's
been used. You know, if tomatoes go up, that's tomato
inflation or something, right, instead of just the price of
tomatoes going up. That I it's not informative the way
I like it to be, So excuse me for not
using that word. Maybe you know as much as you
all do. Yeah, So the interest rate itself has had
(05:54):
this effect on a price level, you know, for a
long time that I've observed. Okay, nineteen eighty that's forty
five years, right. Something interesting happened in this cycle compared
to prior cycles. Now in prior cycle is like in
two thousand and eight. I was saying back then that
the rate cuts, the BERNANKI rate cuts were probably not
(06:15):
going to do much for the economy, if anything, because
cutting the rates from five and a half to zero
or whatever it was a time removed something like four
hundred billion dollars a year of interest income from the economy,
lowered the deficit by four hundred billion from what it
otherwise would have been. And all that income and those
net financial assets were no longer being added. So I
(06:37):
was looking at a very sluggish recovery. I didn't see
the stimulus packages being large enough to cause a particular boom.
It was plenty large enough for decent growth, but not
any kind of a runaway inflationary boom or anything like that.
And I can recall being at the FED at a meeting,
private meeting with a guy named Dave Wilcox who was
(06:58):
talking about quantitative easy and how he didn't think would
be inflationary. I said, yeah, I'm not so much worried
about not being inflationary. But with the FED buying all
these securities, okay, they were buying securities that had higher yields,
they were paying for them with reserves, adding reserves, which
is fine. It was changing the duration of the government holdings.
(07:20):
But it went from you know, the Fed was now
earning the high interest rates and the market was earning
those zero percent or whatever they were paying on reserves.
At the time, it was very low. And I said,
you know, they're effectively taking ninety billion dollars a year
of interest in come out of the economy. That might
have been half a percent one percent of GDP at
the time. I thought, for that reason, quantitative easing would
probably slow down the economy at that point in time.
(07:43):
And you know, that's kind of what happened.
Speaker 3 (07:45):
So initially prove it, you kind of looked at it
from the opposite side of where we are today. So
the idea that que was sucking right, rather than higher
interest rates.
Speaker 4 (07:55):
Adding, and that it was based on the yield curve
at the time and the duration of government you know,
everything at the time, it was a and the data
seemed to play that. And I don't know if it's
just confirmation by some hypart, but it looked at me
like that's what happened, and we did have this sluggish economy,
and that was partially the reason that the depth SIT
wasn't large enough, partially because the interest Now I'm categorically
(08:16):
against using a positive interest rate policy to increase DEPSIT
spending to support an economy because it's so obscenely regressive.
When they raise rates, you know, the only thing they
do is pay interest to people who already have money
in proportion. I'mers, they already have, okay, and you increase
depths A spending that way.
Speaker 2 (08:35):
Just to be clear, you may say that lower rates
or CTE or whatever, that they're not particularly stimulative, but
that's very different than saying, oh that a good form
of stimulus would be higher rates.
Speaker 4 (08:49):
Yeah, I'd hather have low rates and a tax cut. Yeah,
you know, then high rates and attacks increase, right.
Speaker 2 (08:56):
Sure, So let's bring it to now.
Speaker 4 (08:58):
But back then, here's the point. Back then, the debt
to GDP held by the public was something like thirty
or thirty five percent, So a one percent rate hike
or in those cases, the rate cup but a one
percent change in rates, a rate hike would have added
maybe thirty five basis points of income to the you know,
percent of GDP to the economy. Because the debt to
GDP was like thirty or thirty five percent. This time
(09:20):
around it's one hundred percent roughly, you know, debt to
GDP held by the public. Yeah, so a one percent
increase in rates two and a half years ago ultimately
increased interest payments by a full one percent of GDP,
three times the impact of the prior cycle. So here
I am saying, look, if I thought this had an
impact before, now it's really has an impact. Okay, Now
(09:42):
it's three times larger than before. This is going to
be far different than anybody can imagine. And raising rates
this time around is going to have a strong supporting
effect on aggregate demand, you know, keeping unemployment down, you know,
total employment growing, that type of thing. And at the
time they increase the rate, the Fed was ranged with
(10:02):
criticism for engaging in policy that was going to cause
unemployment to go up to fight inflation. Remember that, Yeah,
of course. Well, and I'm going no, they've got it backwards.
This is going to bring unemployment down, This is going
to bring total employment up. This is going to cause
strong positive GDP growth, not a recession. Every forecast was
for recession for what years, right, they were just ignoring
(10:23):
this fiscal impact of this increase in depth at spending. Now,
the only thing I could rationalize why where they get
where they're getting this from is that they must have
had in their deep in their model somewhere, a zero
propensity to spend interest income. Right, no matter how high
you raise rais, no matter how much interest you pay, there,
nobody's going to spend a dime of it, and so
(10:43):
you don't have to worry about 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's all I could come up with this to why
they would ignore that.
Speaker 3 (10:54):
Champel, can we talk a little bit more about I
guess the consumption avenue of the interest income channel, because
(11:19):
I will fully admit that it was very nice in
circa twenty twenty two to finally earn positive interest on
my bank account. I'm an elder millennial, so that had
basically never happened to me before. However, I wouldn't necessarily
say that because I was earning, you know, two to
five percent on my savings that I went out and
(11:42):
bought a bunch of additional things, and of course a
lot of that was offset by the increased cost of living,
increased price level for not using the term inflation. So
how do you see that aspect of it playing out?
People are earning more income, but does that actually translate
into more demand?
Speaker 4 (12:00):
Yeah, and that's that's a good question, and that's a
micro question. You know what, you look at what all
the individuals who are getting it to pension funds get
treasury security, you know interest, How does that translate into
aggregate demand? Foreigners get a lot of interest, you know what?
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, borrow wars is going to dominate, and
that's going to take down the economy. And the answer
is you can only look at the data and see
what happens. We can both come up with a narrative
of what we think the propensities to consume a ount
of interest income, but we're not going to know until
after it happens. And I looked at in prior cycles,
(12:44):
the data was telling me that it's not zero, that
there's a substantial amount that directly or indirectly does get spent.
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, looking at how the rate
cuts help the economy or didn't help the economy, you know,
based on what their models expected, right, and the same
(13:07):
way those rate cuts didn't help the economy as expected
back in two thousand and nine, Ish is telling me
it was that four hundred billion a year of you know,
income that was cut out was having a dampening effect
on spending. Goes back to under Bush in two thousand,
two thousand and one, when we hit that recession, they
(13:27):
dropped interest rates to one percent and nothing happened. It
didn't help. And I was actually in a meeting with
Andy Carr Andrew Card, who was chief of staff at
the White House in two thousand and two February March.
And I'd gotten that meeting because in my car company,
two of the people on the board of directors were
(13:47):
ex engineers, one General Motors, one for a New Card personally,
he was an engineer at GM, and when I talked
to him about the interest income than the same way
I'm talking about it to you. They said, you got
to talk to Andy and set up this meeting. You know,
I went to the White House. Meeting was in the
West wing, and the first thing I did was just
what I said to you, and what look in the
economy itself when when they lowered interest rates. Okay, it
(14:10):
helped borrowers, but it hurts savers. You know, into the
penny for every dollar saved, there's a dollar borrowed in
the economy. Banks have loans and deposits and their equal
or somebody made an arithmetic mistake, you know, I assets
and liabilities, and so you know, when you lower rates,
you're just shifting income from one eneity to another. And
the only way that can have an effect is that
(14:32):
if there are differences in the propensities to spend interesting
income of those two. But at the macro level, because
of the public debt, when you lower rates, you're cutting
the size of the depths that you're cutting total interest
income in the economy. I said, I think that effect dominates,
and looking at what happened in the last year in
two thousand and two, you know, I wouldn't expect Race
to do anything. And Carter looks at it. He goes,
(14:54):
He says, yeah, why would anybody think that's going to work?
And he says and he goes, oh, look what does work?
Then I explained fiscal side, where when you spend more
than the tax that is a direct ad of income
and financial assets. And when you increase deficit spending proactively,
any economist who pays to be right it's going to
(15:15):
revise his forecast upward for the economy. And he says, well,
how much do we need? I said, well, I think
it's probably seven hundred billion annually back then, which was
maybe about five percent of GDP. He says, well, we
don't have much time doing it, and he said, oh,
you better get started. It was got a nice note
back from it was very nice. A week later, the
President was asked about the deficit and he said, look,
(15:36):
I don't look at numbers on a piece of paper.
I look at jobs which came 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 imagine, including
retroactive tax something we never had before. People were getting
tax refunds from taxes from previous years. And they passed
every spending bill. They could get through Congress trying to
(15:58):
get this deficit off to save the economy, and that
included prescription drugs for medicare. So I'll take personal responsibility,
even though that wasn't disgusting meeting or you know, for
good government, spending all that money on prescription drugs definitely
got up to two hundred billion by the third quarter,
which was about my reign target number, you know, seven
(16:19):
hundred million for the year. The economy turned around, and
it didn't cost him the election. So you know, I've
been on this for a while, so it's all been
from a narrative and then watching the data.
Speaker 2 (16:30):
So true, mainstream macro economists have this concept that they
call fiscal dominance, and yeah, that sounds like what you're describing.
Speaker 4 (16:42):
We're a little bit yeah yeah h.
Speaker 2 (16:44):
So basically yeah, so close enough. So I actually like,
maybe I'll try to get you in trouble with some
of your MMT friends here. But it sounds to me
that from a policy like look, if dead to GDP
were currently at ten percent right now, very very low,
and you raise rates that you have some constraining effect
(17:06):
on borrowers, and yes, you do have this interest increase
in the interest income channel. But it's not that big
of a deal because there just aren't many coupon payments
at all that are going.
Speaker 4 (17:16):
Out right, exactly right.
Speaker 2 (17:18):
But where we are right now, is it safe to
say that the size of the debt is a problem
that we are in fiscal dominance, and that the size
of the debt constrains the ability of monetary policy to
be a balancing force in a time of inflation.
Speaker 4 (17:35):
More than that, I've made it backwards. It takes it
away now. I had had a discussion with Paul Krugman
a few years ago, and that's when he and Stephanie
Calton were going at it with back in dueling editor.
Remember that, Yeah, yeah, And I said to him, I said,
what's you know, what's wrong with the job guarantee? You know?
And he says, well, if you deficit spend for the
(17:55):
job guarantee, the deficit could get so large that if
the FED tried to raise you know, if we get inflation,
the FED won't be able to use interest rates as
a tool because the interest in you know, expense will
be so high that that itself would cause inflation. Now,
he was using that as an argument against the job
guarantee and he made my argument and I said to him, yeah,
(18:16):
I agree with you, I said, but I think we're
already there for all practical purposes. And the debts GP
was lower than but you know, it was at least neutral,
that that interest rates were a tool. And he disagreed
with me, and that's fine, And I said, in any case,
you know, I support, as you know, at permanent zero rate,
in which case it's moot. You know, you could spend
for job guarantee without worrying about whether rate raising rates
(18:39):
is going to do anything. And now, because you're not
going to do it, you're going to just leave him
at zero. But the point was he that was his
new Keynesian the position out of the new Keynesian model,
and it was a standard Nukenesian position yours, you know,
not that long ago. You remember them all talking about
anti deficit talk and how the interest payments are, you know,
are unsustainable and all this stuff. By unsustainable, they always
mean inflation shared, right, you know, say it in their
(19:01):
first phrase. But that's if you drill down on them,
that's what they get to. But in the last couple
of years, when I asked them again two years ago.
It's like, no, I don't think we're at that level.
I still think that FED can raise rates to fight inflation.
I said, okay, you know, we'll see. So this is
this is in the new Canesian model. You know, it's
(19:23):
just arithmetic that at some point the deficit gets high enough,
the public deck gets high enough so that when you
raise rates and pay more interest, you do call the
interest itself cause inflation. Now, let's look at how high
the deficit spending is. CBO's latest number shows seven percent
of GDP, right, yeah, and I think that's just treasury.
I don't think that includes FEDERI mints. So maybe it's
(19:44):
seven and a half or something. Okay, Now, have we
ever had anything anywhere near a seven percent budget deficit
during an expansion? With the unemployment it's like four percent,
you know, kind of record low levels. No, the only
time we've gotten anywhere near this highest countercyclically when you
have a collapse and then tax revenues fall off and
(20:06):
transfer payments kicking kick in because unemployment's high. You know.
Then we got to eight or nine percent in two
thousand and nine, and we got to I don't know
what the number was of COVID maybe fifteen percent, but normally,
if you look at eight the budget DEFs, it was
down to something like one percent of GDP, and that
was low enough to allow the high price of oil
(20:29):
and the other catalysts to trigger, you know, a major
collapse in the financial sector, not a seven percent deps.
Seven percent is like drunken sale or level of government spending.
And out of that four percent is the interest expense.
It's over one point two trillion, I think annually. We
just passed one hundred billion for the month.
Speaker 3 (20:48):
So yeah, go ahead, Oh no, sorry, go on.
Speaker 4 (20:53):
Yeah. So look, we're right now that the depth sit
seven percent in GDP, four percent of which is interest expense.
Without the interest expense, if they left rates at zero
would have been trending towards zero and the depicit would
have been down at you know, two three four percent
something still high, but not like it is now. And
that to me is like it's it's unthinkable that that's
(21:15):
not going to support a strong economy. Now, what's interesting
is in the last month we've there's been a little
bit of a bump in the numbers. Right the Fed
Atlanta is down to one point seven percent GDP, growth's
still not a reception or anything, and everybody's now looking
for this collapse and FED rate cuts and everything else.
And I'm sitting here, going, how can this be with
a seven percent pro cyclical budget depicit? It doesn't It
(21:39):
seems like an absurd assumption that we could have any
kind of substantial weakness or really any kind of a
sustained weakness in the price level. So but you know,
for the last few weeks, maybe a month's, a couple
of months. You know, it's certainly been plenty of indicators
around the edges that things a week in and it
(22:00):
may turn out, you know, I'm completely wrong, we have
a total economic collapse with a seven percent deficit, and
I can I'm seventy five this year. You'll never hear
from me again, right, Well, see what happens.
Speaker 2 (22:12):
A good hedge, the age hedge in the long run?
Speaker 4 (22:15):
Where right? Right?
Speaker 2 (22:17):
In the short run? Out answer for any Yeah, I.
Speaker 4 (22:23):
Don't know what's going to happen, but I'll bet I'll
be the first one to tell you that I'm just
totally caught out by a recession with a seven percent deficit.
You know, unless we get one hundred and fifty dollars
oil or something like that. But as in some other shock,
you know, I don't see how that much could be
spent without GDP being strongly positive, unemployment being very low,
(22:45):
and price pressures. Now, the other interesting thing is this
one hundred billion a month only translates into about a
three and a half percent of the Treasury debt as
interest payment, whereas FED fundraise five and a half five
and three a's, which means and T bills are somewhere
around there five and a quarter five and three a's,
which means that as rollovers continue, as time goes by,
(23:06):
the depthit expands, that number is going up. Okay, even
if they just leave rates alone, it will get to
five three a's, you know, asseptotically, but it'll get there.
And so that we're getting more and more of this,
and the CBO's deficit forecasts are showing deficits higher than
six percent. Put it to the future like this is
(23:28):
like going to be interesting. That to me is at
least six seven percent nominal growth. And if you think,
you know, price level is going to be I don't
know what you want to use PCE or something two
and a half. That's that's four and a half real, Right,
that's a pretty strong number. More likely you will get
two to three reel and the rest will be you know,
(23:49):
price level changes just one of the channels where the
interest rate normally are. Over time, I've just noticed over
fifty years they're changing the price level. The rate of
inflation gravitates towards the Fed's policy rate. Over time they converge,
and so with the five and a half percent rate,
five and three's rate, you'll see CPI gravitating towards that
(24:12):
interest rate, you know, towards that number five five and
a half. Not in day one, you can go once
without it, but over a longer periods of time, and
you can think of that something like a stock split,
you know, or a stock dividend where if you just
pay all more shares you're getting, you know, all is
equal to the value of this of an individual share goes
(24:34):
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 paying out five and a
half percent a year on the public debt, which is
the net financial assets in the economy called the net
money supply in the economy, you're expanding it at five
and a half percent a year through a payment of interest.
There's nothing on the supply side, it's just a distribution. Then.
(24:57):
I've just observed that over time price level gravitates upward
by about that amount, and there's you know, plus or minus.
So those are my expectations going forward. And if you
notice CPI has leveled off at about three, you know,
a quarter percent or something. It went up with COVID,
it came down and then sort of leveled off. It's
(25:17):
been going sideways here and that's about at the interest rate.
You know, the effective rate on treasuries last year 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 happen. It could have been different, you know,
But it's kind of like the midpoint of my expectations
as to what's going to happen with the price level. Now.
PCE is a different thing, right, that includes substitution. If
(25:39):
the price of stake goes up until people eat chicken
instead but spend the same amount, you know, then there
hasn't been any increase in the PCE.
Speaker 3 (26:04):
Just to be clear, we're recording this on a day
that I've incurred something of a substantial head injury, and
I was in the emergency room until late at night.
But did I just hear the godfather of MMT say
that large deficits can be a problem. Is that what
(26:25):
you just said? I feel like I might be hallucinating that.
Speaker 4 (26:27):
Well, the deficit itself is just an accounting residual. But this,
you know what the spending in any given year, Any
spending has consequences. You know, if they decided to spend
trillion dollars to buy eggs, they're going to drive up
the price of eggs. Right. So if the government's spending
on a you know, our government spends on a quantity
constrained basis, Let's say they decide what they want to
(26:49):
buy and then pay whatever they have to to buy it.
That that can drive up It does drive up prices
or down price. You know, all the time. That's constantly
changing relative value in the act of all kinds of things.
You know, there's no way about that. And we have
course of taxation, right and the tax structure affects prices
and affects things. So if we have right now major
(27:11):
tax credits for solar for example, I think I get
a forty percent tax credit for installing solar, So I'm
putting solar panels in the USVII. The electricity is forty
five cents to kill one, so it's pretty easy calculation,
you know, so that I want to put in without
that tax inteative from the government. So I figure it's
probably not just me. So I talk to people at
(27:34):
accounting firms, major accounting firms. Are you seeing tax time
people doing this? They go, oh, yeah, We've got our
own partnerships and structures where you can put money in
and participate in this solar tax credit. You know. So
who knows how large is open end tax credits getting
and what it's affecting. So, yes, governments spending, but government
fiscal policy is entirely distributional between tax liabilities and spending.
(27:59):
It's pushing and pulling, you know, everything everywhere. It's it's
it's a major determined it's it's a it's a large
part of the command economy, and it's a command economy,
you know, to the extent that it's there. If the
government decides it wants jet planes, it's going to get
jet planes right right through the tax structure to the
(28:19):
spending structure. The pre market would not be producing jet
planes without the government ordering. Right. It's everything caters to
these you 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 recognizing them and what
they do.
Speaker 2 (28:35):
It sounds like, so you did you use the term
drunken sailor which you think you could. Yeah, I'll go
at the headline of this episode. It sounds like the
issue is so a lot of spending. Yes, that creates
a lot of The more spending, the more demand, prices
go up. And then it's.
Speaker 4 (28:54):
Sound spend if you spend that market price. If you spend,
you spend based on a at a fixed price. If
you say, look, I'm going to spend this much for labor,
you can't drive prices. You might not get any but
you're not going to drive prices up that might get
the government order.
Speaker 2 (29:09):
The government orders tanks and jets, and it also guarantees
uh social security recipients a certain a certain fixed level
of inflation or price level adjusted consumption.
Speaker 4 (29:23):
And then we become agents. We become agents because I
guess SoC security of the government. You know, with no
restrictions on what we do when we spend it.
Speaker 2 (29:30):
But it basically yeah, but it basically sounds like it's
that mix of sort of conventional macro thinking in which
high rates is uh deflate disinflationary plus the high levels
of government spending that seems to be the cocktail for
both higher upward pressure on the price level. And it
(29:54):
sounds like over time worsening higher price level because there's
a compounding effect.
Speaker 4 (30:00):
Yeah, and that's the situation at the moment. It doesn't
have to be that way, but that's what I see
happening right.
Speaker 3 (30:06):
Now in that context. And you sort of touched on
this before, but I would love to hear a sort
of like play by play guide here, But what should
the Central Bank be doing in the current environment where
we do have high fiscal deficits that might end up,
you know, constraining them.
Speaker 4 (30:27):
So if they cut raise to zero tomorrow, then the
CBO would scored as like twenty trillion of reduced you know,
fiscal spending, budget cutting or whatever over twenty over ten years,
probably you know, like the largest spending cut in the
history of America at times ten, just by cutting rais
to zero, all right, And that's got to have a
(30:50):
well unless you assume none of that's kind of get
nobody's going to change their spending because of the one
point two trillion of income has been taken away. But
you know, looking at the numbers I'm looking at, that's
going to have a massive deflationary bias to it. It's
going to be taking away all that income and all
those next financial assets from the economy. It's going to
be a staggering like creation of fiscal space. Let's say,
(31:12):
I don't know how you want to put it, but
just a major deflationary event. And that's not even under consideration.
That's it would be considered a major inflationary event. Right.
That's why I look at all the people that have
looked at Japan with there's zero rates and forecasts like
hyperinflation or the end went through one sixty big deal, Right,
The inflation rates are lower than ours and it didn't
(31:33):
go up and they kept zero race the whole time,
but they're so forecasting hyperinflation, so they've got this bias
that the low rates are going to a rate cut
like that would be inflationary when it's the opposite.
Speaker 2 (31:45):
Well, actually, did you brought up Japan, you know, for
all you know, I started really paying attention to this
stuff in the mid two thousand. Yeah, you know, I
heard all the tales of the widow maker trade and
everyone betting on that hyperinflation and how it never happened.
In recent years, Japan has seemed like the rest of
the world, if for a substantial inflationary impulse, still low
by international standards, but the side the stock of the
(32:08):
national debt in Japan is very high, as we all know.
And now they actually for the first time and forever,
have actually seen inflation again, not that high, but again
historically by Japanese standards. Is there a pump mix right
now for Japan? Is there a risk that I don't
know about hyper inflation? Kind of seems unrealistic that actually,
(32:29):
if they follow conventional macro thinking and could hold rates
up or move rates up to fight this inflation, that
some of these disaster scenarios might actually emerge with the
size of the.
Speaker 4 (32:39):
Debt ironically, ironically, they entirely embrace conventional macro theory, and
the reason they're keeping rates down is they're worried that
they might not actually be out of deflation, and so
they've got to keep rates down to ensure that the
inflation stays. You know, somewhere towards two. They just had it,
you know, numbers from Tokyo or something that showed to
(33:01):
lower rate and they're all panicking about a deflation. So yeah,
they're there for the wrong reason, so to speak. But
they're there, so we have the data. But yeah, okay,
does that answer your question?
Speaker 2 (33:13):
But if they were to raise at some point there's like, oh, no,
the inflation is not you know, if they were to raise,
could that create some real unfortunate dynamic feedback loops given
the stock of the.
Speaker 4 (33:25):
Yeah, if they ever decided to raise rates to do
something with their debt to GDP, you know, they'd be
throwing gasoline on the fire the way we have, except
you twice as much. Yeah.
Speaker 3 (33:35):
Wait, can we talk a little bit more. So we've
obviously been focused on the interest income channel for good reason,
but can we talk a little bit about the credit channel?
Speaker 2 (33:45):
Yeah, this is important.
Speaker 3 (33:46):
Yeah, and the impact of higher rates there because the
standard economic theory is that rates go up and that
makes the cost of credit. That increases the cost of
credit for businesses, and so they cut back on their
spending and investment. How do you view that component of
interest rate function?
Speaker 4 (34:06):
Well, their clients of the businesses are getting flooded with
interesting and come and buying their output at whatever price
they need, which includes what you need to you know,
for investment, to keep up your output right and to
train your personnel and do whatever else you need. You know,
their prices are at levels where they're sustainable, where they
can pay interest expens if they need to. And so
(34:28):
we're seeing you know, three it's not this quarter, but
we've seen you know, three and four percent GDP numbers.
Now first and second quarter seems to be a little
bit weak. I don't know if there's something in the
seasonals that aren't quite fully sorted out, but and might
prove me wrong, but I think, you know, the first
quarter was one point four right due to inventory selling
(34:50):
off inventories 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 in the
second quarter. But anyway, so that's a narrative you had,
but the data hasn't. It hasn't played out because the
income of their clients has been high enough to buy
their output at a price that they like, you know,
(35:10):
that they're comfortable with. They've had good pricing power and
covers these added expenses from the interest expenses and interest
related expenses that you were talking about. But like it,
so if you're spending enough, is throwing enough gasoline on
the fire. Yeah, you're it's going to burn.
Speaker 2 (35:28):
But like so just on the private sector side a
little bit more like as you know, one of the
key themes that you talk about is these are distributional
questions or the effects of a lot of these policies
are distributional. And you mentioned maybe economists think there's no
propensity to consume interest income, and maybe there's some good
reasons for that because it's you know, most the wealthy
(35:50):
people own the treasuries and banks and stuff like that.
But in there's consumer credit, there's cars. We know that
housing has slowed down. It does. Housing has slowed down substantially.
It does seem like there are many parts of the
US economy.
Speaker 4 (36:06):
Yes, yes, they have there a loss that they.
Speaker 2 (36:09):
Have responded to these higher rates by.
Speaker 4 (36:12):
Yes, fishing their activity. Yes, there are winners and losers.
If you just look at the losers, you could maybe
conclude by projection or confirmation bias, that the whole country
is losing. But it's not. It's just shifting to different areas.
You know. Rolls Royce has like a I don't know,
two three four year backlog of sales, right, yeah you would, yeah, yeah,
(36:35):
I read it in the Wall Street Journal. I yeah,
in bloom I'm in Bloomberg. I read it on Bloomberg.
Speaker 3 (36:44):
Yeah, thank you.
Speaker 2 (36:44):
What are you driving these days?
Speaker 4 (36:46):
What? What?
Speaker 2 (36:47):
What race car are you in driving these days?
Speaker 4 (36:50):
I've been driving a twenty fifteen Nissan Leaf for electric
car for a while, you know, because on the island
you can't thirty five mile hour speed limit. And uh,
but what do you drive on the track. I haven't
been on the track since I turned us for the
last since I turned fifty two, I think, okay, so
(37:11):
you know I haven't. I don't race on the track anymore,
got it. But I used to drive things at burn guests.
I have my own cars, you know. I had the
Mosler Empty nine hundred, which I would run on track days.
I never ran it real races. I used professional drivers,
you know, but in amateur racing I would drive it,
and I would drive our consotly ers. I used to say,
these cars can win races even with me driving.
Speaker 2 (37:34):
We should another episode, can we Would you ever come
back to talk about when you had a race car
your car company? Sure, Oh yeah, that'd be fun, that'd
be really This looks like a sweet the Mosler empty.
This is beautiful.
Speaker 4 (37:46):
How many of them?
Speaker 2 (37:47):
This is a beautiful car.
Speaker 4 (37:49):
There were fifty or sixty and you know I stopped
making the empty nine hundreds in I don't know, ten
fifteen years ago. But so there's still racing, So I
can the Spanish GT and the British GAT. They're still
winning races, you know, against the latest and greatest, and
you know the car is twenty years old, so there's
still a top performance car in the world where they
(38:09):
let them run.
Speaker 3 (38:12):
So just going back to interest rates for a second.
Speaker 2 (38:15):
Moving away, it seems way more boring now than I know.
Speaker 3 (38:19):
I know this question is inevitably going to like fall flat,
but it does feel like we're sort of talking about
the economy is not a monolith. So you have these
interest rate sensitive portions of the economy like housing, yes,
that that are affected by rate rises, and then you
have pockets that are more insensitive and maybe we don't
(38:43):
have the balance of those two things exactly right, or
maybe traditional economics hasn't done a good job of taking
like those individual portions of the economy and netting them
out into a cohesive picture of the actual effect of
interest rates on them.
Speaker 1 (39:00):
How do you like?
Speaker 3 (39:02):
I guess this has always been sort of a criticism
of MMT, But how do you take those disparate ideas
and sort of make them into a useful theory of economics?
Does that make sense?
Speaker 4 (39:14):
Yeah? Well, look, the whole composition of GDP changes all
the time, and it's driven, as I touched on before
quite a bit, by fiscal policy deciding what the government wants.
So if the government wants more solar panels, puts a
big tax credit, unlimited tax credit, we'll see how large
that is, you know, when it's smoke clears. But I
think it's gonna be a lot larger than anybody realized.
(39:36):
If you notice government revenues have been flat in a
booming economy, that's never happened. It's got to be tax
credits of some sort of you know, working out there.
So the composition is going to follow the money. And
if the money's going to those you know, earning interest,
then that's where the composition is going to go. And
you'll see more high end purchases, You'll see more things
(39:58):
that sort that group of people. There'll be you know,
all kinds of investments in that direction, and that's what
we're seeing. So again, it's about following the money, and
the government policy directs to a large extent, where the
money goes. And right now we've got over a trillion
dollars a year going to interesting, which is more than
(40:19):
defense and more than Social security and everything else.
Speaker 2 (40:22):
Right, I just have one last question, and this is
more in the category of Warren Mosler lore rather than
it is in interest rates. But we're in the studio
right now, and I looked up and I saw on
Fox Biz, which we have on TV, Art laugherers on there.
Isn't it true like you were like friends with him?
Isn't there some story with you and Art where like
(40:42):
you had some important insight that led you to MMT
thinking from a chat with Art.
Speaker 4 (40:46):
Well, I was looking for somebody to write up what
became soft currency economics interesting. I wrote. This was in
nineteen ninety three, and I went to my ex boss
an that Janata from William Blair, and he sent me
over to Rummy. Don Rumsfeldt was his nineteen fifty four
Princeton roommate. They were on a football team and wrestling
(41:10):
team something together, and they'd been good friends. So I
had a meeting. I called his office and he was
real busy. The only time he had was an hour
in the steamroom at the Racket Club in Chicago, so
I went out and met him there. So we're sitting
in our towels in the steamroom going through softcurt see economics,
and he then gave me a list of his economists
(41:31):
that he thought would be a good place for me
to go. And our Laugher was on that list, and
his guys were like Paul McCracken and Samuelson. I mean,
these were not anybody on my rollodecks. And I contacted
a few of them, and Laugher agreed to do it
in exchange for twenty five thousand dollars would help me
write this thing, and he assigned Mark McNairy. So I
got to know Art a little bit, and because we
(41:52):
talked quite a bit on these things, and it turns
out he's an ex university a Chicago professor, and he
knew all this stuff. He knew learner and functional finance,
and you know, long before I met any of the
academic and you know, he agreed with it. He signed
Tom Nugent to cover me because he was always looking
to do business. I went to a little conference where
he was and he got up to talk and he said,
(42:13):
I'm going to give the talk on money, and I'm
going to tell the money story. He says, And Tom
and Warren and he points to us disagree with me,
he said, and they're right, and I'm wrong, but this
is the way I tell it. And he went and
told the story about how banks take in deposits and
make loans, you know, completely backwards. And then hesus a
talk and look at him, like what was that. He says, well,
(42:34):
you know I told everybody you were right and I
was 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 the problem with the laughter
curve was it only worked at the very extremes. So
he was very like, you know, reasonable about everything. You know,
he's a very easy guy to talk to, and you
(42:56):
know self deprecating in many ways, and you know, you know, yeah,
it worked out well. Mark was very good and he
wrote and I edited, He wrote and I edited. Did it.
We came up with the soft currency economics thing, and
it didn't help. I thought having Laughter's name on it
and whatnot might give it more attention, more media attention.
But I don't think it made any difference. But you know,
(43:18):
they say you have to kiss a lot of frogs,
and that was just one of those, one of those times.
Speaker 2 (43:24):
Lauren Mosler, so great to have you on. I swear
we will. I would honestly love to do an episode
just about Mosler Automotive and just talking about the business.
Speaker 3 (43:33):
I just want to hear a day in the life
of Yah.
Speaker 4 (43:36):
Well, okay, so Joe, I mean got in my FOD.
We met at a dinner UMKC maybe or some.
Speaker 2 (43:43):
Yeah, I was, I was at UMKC.
Speaker 4 (43:45):
Okay.
Speaker 2 (43:45):
I think it was twenty fifteen. No, it couldn't have
been twenty fifteen, twenty twelve or twenty thirteen.
Speaker 4 (43:51):
That sounds right. Yeah, it's long ago. I don't remember.
Speaker 2 (43:54):
Those were fun days. Yeah, so great to finally have
you on the podcast and enjoy Sure you're going to
be vacationing neck.
Speaker 4 (44:03):
Okay, thanks, take care.
Speaker 2 (44:19):
Tracy, the godfather of MMT, says the government is spending
like drunken sailors and that it's created it's contributing to inflation.
Speaker 3 (44:27):
I'm still not entirely convinced that this isn't like a
hallucinary output from your forehead from my head injury. But wow, okay,
I mean, I do think it is not hard for
me to envision a world in which companies pass on
higher interest rate costs to consumers. We've talked on the
(44:48):
show about companies passing on higher input costs and things
like that. So that part of it I can believe.
And the other part that does seem intuitive to me
right now is this idea of a tiered economy where
people who do have a lot of financial assets and
are earning a lot of income on those financial assets
(45:09):
do spend on certain things like, as Warren mentioned, luxury
items like a lot of that makes intuitive sense.
Speaker 2 (45:17):
So definitely, And look here's where like I think I
would need more exploration. So there are aspects of it,
like clearly interest income is a real thing, more deficit spending,
which more interest income entails is on the net, going
to be stimulative at the margin. But rich people or
(45:40):
people with financial assets also just care about the price
of their financial assets.
Speaker 3 (45:45):
Oh yeah.
Speaker 2 (45:46):
And so when we did see, you know, they really
jacked up rates aggressively in twenty twenty two, and stocks
did decline, And I think stock prices probably influence real
estate prices. They've certainly, you know, we haven't had a
housing crash, but real estate in many realms has been stagnant,
or if you're in multifamily or commercial real estate, then
(46:08):
you probably have seen some price declines in the And
so I do think that like that is an offsetting factor.
And then I also think that while it's certainly true
probably that the propensity to spend interest income is not zero,
it is probably somewhat low, given that we're talking about
people who already have a lot of money and income,
Whereas the propensity to spend among people who are paying
(46:31):
high interest rates, either through car payments or credit card payments,
et cetera, is probably much higher and therefore impaired by
higher rates. So while I certainly get the theory and
I think there's probably something to it, I still like
would need more a little bit more convincing that the
distributional effect of this change in spending is on net inflationary.
(46:55):
But it's interesting ideas.
Speaker 3 (46:56):
Absolutely, I think that's a really fair assessment. And I
think like the composition of wealth matters. So you can
say that there are all these treasuries in the world.
I can't remember the exact number, but like thirty trillion
dollars or something like that, and people earn income on
those treasuries, but each individual person is probably not holding
(47:20):
a pure treasury portfolio, as you say, like personal wealth
will be comprised of real estate, which is affected by
higher interest rates, stocks which also go up and down
depending on interest rates. And so yeah, it seems like
there's there's a sort of like net or sorry, there's
a compositional complexity there that we still need to work out.
Speaker 2 (47:42):
And speaking of financial assets that go down, the treasuries themselves,
Oh yeah, because you learn the first day you joined
Bloomberg when rates go up, price goes down.
Speaker 3 (47:52):
That's right. We should start adding that into all of
our news stories again, like we used to, just to
hammer the second.
Speaker 2 (48:00):
Yields up price it done. I also just really like
I I do want to do an episode on Warren
Mosler lore because he kind of seems like a really
cool guy who has a fun life.
Speaker 3 (48:10):
We should we should go to the island, and go
to the island.
Speaker 2 (48:15):
Those the mostly Mt nine hundred looks absolutely sick. Have
you not look at that?
Speaker 4 (48:20):
Up?
Speaker 2 (48:22):
I'm not a car, but that's a sick looking car
that you built. Yeah, yeah, there's no joke like that
is a sick looking car.
Speaker 3 (48:28):
The one on Wikipedia is a very bright greer.
Speaker 4 (48:31):
It's beautiful.
Speaker 3 (48:33):
Okay? Should we leave it there? Should we stop admiring
the cars and leave it there?
Speaker 4 (48:39):
Let's leave it there? All right?
Speaker 3 (48:40):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (48:46):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman Arman dash Ol
Bennett at Dashbot and Keil Brooks at Keil Brooks. Thank
you to our producer Moses on Them. For more odd
Lots content, go to Bloomberg Odd Lots, where we have
transcripts of blog and a newsletter and you can chat
about all of these topics. Twenty four to seven in
(49:07):
our discord a lot of MMT fans in there, so
it'll be interesting to see how they react. Go to
discord dot gg slash out Lots and if.
Speaker 3 (49:14):
You enjoy odd Lots. If you like it when we
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(49:36):
and follow the instructions there. Thanks for listening. Eight
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3 (00:25):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:27):
Tracy, you know, there's that theory people say it from
time to time about in different contexts, different schools of thought,
and kind of gets dismissed as crankishness sometimes that higher
rates can be a contributor to inflation.
Speaker 4 (00:40):
Yes.
Speaker 3 (00:41):
Yes, And actually I'm hearing this more and more interestingly enough.
So you used to hear, 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 basic
idea here is there's always been some question about the
efficacy of interest rates in the current inflationary environment. So
(01:03):
if you think back to the twenty twenty period, the
idea that we had all these supply disruptions, lots of
snarls in transportation and logistics, what are interest rate hikes
really going to do in that context? Right? Yeah, And
some people even argue that higher interest rates are detrimental
for that kind of inflation, because you make it harder
(01:25):
for people to build out capacity. Yeah, but what's happening
more recently, and I think you're hearing more talk of
this is the idea that higher interest rates in and
of themselves can contribute to the inflationary impulse through the
interest income channel.
Speaker 4 (01:42):
Yeah.
Speaker 2 (01:42):
Absolutely 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 income into the economy, and
when you're fighting inflation, that's the more so. I think
that's one of the arguments for how higher rates can
be inflationary. But then there is this sort of like
there is the more are read upon view that you mentioned,
which is that higher rates can constrain investment and contribute
(02:06):
to less housing and that has an inflationary impulse in
a time of housing shortage. That seems to be a
little less controversial. The connection is clear, but I think regardless,
like I think, Okay, here we are in July twenty
twenty four. Inflation has come down a lot. There's still
many stories that could be told a lot about the
last four years, and I don't think there are any
(02:28):
really economists who have like nailed this cycle with some
theory or whatever that it's like, Yep, they explained how
it's all going to work. There are many this period.
Whatever we've experienced over the last four years will be
debated and argued about, and what role did higher rates
have and bringing down inflation or why the will be
debated by economists for like one hundred years.
Speaker 4 (02:47):
Probably.
Speaker 3 (02:47):
I find this aspect of our life right now simultaneously
exhilarating and terrifying. So it's great that we're learning about
how the world works. It's also terrifying that we still
aren't entirely sure how interest rates work and what impact
they actually have on the economy. But I am very,
very interested in digging into more of this argument the
(03:09):
interest income channel here and the actual like push and
pull of higher interest rates on inflation. I think we
should talk more about it totally.
Speaker 2 (03:17):
Well, I'm really excited. We do indeed have the perfect guest,
someone we've never had on the show before, but he's
someone who we get a lot of requests for on
Twitter on the Outlaws Discord, someone we probably should have
had a long time ago. We are going to be
speaking to a Warren Mosler. He's he's an economist, former
investment manager. He drives fast race cars in the Virgin Islands.
(03:41):
Currently he's on a bike trip in Croatia, a very
cool life. He is also the originator of what has
come to be known as modern monetary theory. So Warren,
thank you so much for coming on outlaws.
Speaker 4 (03:55):
Good to be here and enjoyed listening to the introduction.
How do we do at all?
Speaker 2 (03:58):
How do we okay, we're done here? Why do you
give us your Yeah? Thanks, that was great. What do
you give us your summary? So someone said, people, okay,
higher rates cause inflation. I think there's even you know,
there's like a new Fisherian school that I think the
Turkish president subscribes to. How would you des characterize what
(04:19):
that means or what's going on?
Speaker 4 (04:23):
Well, I look at what is okay, look to the numbers,
I look at the data, and I try and make
sense of it, just like everyone else. And my narrative
has been different from everyone else that's released up until
recently from listening to you, and it's nothing more than that.
Where to start? I wrote my first paper on this
and I think nineteen ninety seven called the natural rate
(04:45):
of Interest is zero. So it's not something new to
me and myself and my partner Cliff Viner. Back in
the nineteen eighties, we always used to muse about how
the best indicator of what M two growth would be
is live or because the interest rate itself determines the
money like growth as it was measured back then. You know,
(05:08):
there's been there's been institutional changes since, but this was
back in the eighties, and so the idea that, you know,
the interest rate itself was instrumental in how the price
level moves over time. I'll notice I'm going to avoid
using the word inflation rate. I may say inflation indicators
from time to time, but that is the whole word,
(05:32):
and term has gotten so confused by the way it's
been used. You know, if tomatoes go up, that's tomato
inflation or something, right, instead of just the price of
tomatoes going up. That I it's not informative the way
I like it to be, So excuse me for not
using that word. Maybe you know as much as you
all do. Yeah, So the interest rate itself has had
(05:54):
this effect on a price level, you know, for a
long time that I've observed. Okay, nineteen eighty that's forty
five years, right. Something interesting happened in this cycle compared
to prior cycles. Now in prior cycle is like in
two thousand and eight. I was saying back then that
the rate cuts, the BERNANKI rate cuts were probably not
(06:15):
going to do much for the economy, if anything, because
cutting the rates from five and a half to zero
or whatever it was a time removed something like four
hundred billion dollars a year of interest income from the economy,
lowered the deficit by four hundred billion from what it
otherwise would have been. And all that income and those
net financial assets were no longer being added. So I
(06:37):
was looking at a very sluggish recovery. I didn't see
the stimulus packages being large enough to cause a particular boom.
It was plenty large enough for decent growth, but not
any kind of a runaway inflationary boom or anything like that.
And I can recall being at the FED at a meeting,
private meeting with a guy named Dave Wilcox who was
(06:58):
talking about quantitative easy and how he didn't think would
be inflationary. I said, yeah, I'm not so much worried
about not being inflationary. But with the FED buying all
these securities, okay, they were buying securities that had higher yields,
they were paying for them with reserves, adding reserves, which
is fine. It was changing the duration of the government holdings.
(07:20):
But it went from you know, the Fed was now
earning the high interest rates and the market was earning
those zero percent or whatever they were paying on reserves.
At the time, it was very low. And I said,
you know, they're effectively taking ninety billion dollars a year
of interest in come out of the economy. That might
have been half a percent one percent of GDP at
the time. I thought, for that reason, quantitative easing would
probably slow down the economy at that point in time.
(07:43):
And you know, that's kind of what happened.
Speaker 3 (07:45):
So initially prove it, you kind of looked at it
from the opposite side of where we are today. So
the idea that que was sucking right, rather than higher
interest rates.
Speaker 4 (07:55):
Adding, and that it was based on the yield curve
at the time and the duration of government you know,
everything at the time, it was a and the data
seemed to play that. And I don't know if it's
just confirmation by some hypart, but it looked at me
like that's what happened, and we did have this sluggish economy,
and that was partially the reason that the depth SIT
wasn't large enough, partially because the interest Now I'm categorically
(08:16):
against using a positive interest rate policy to increase DEPSIT
spending to support an economy because it's so obscenely regressive.
When they raise rates, you know, the only thing they
do is pay interest to people who already have money
in proportion. I'mers, they already have, okay, and you increase
depths A spending that way.
Speaker 2 (08:35):
Just to be clear, you may say that lower rates
or CTE or whatever, that they're not particularly stimulative, but
that's very different than saying, oh that a good form
of stimulus would be higher rates.
Speaker 4 (08:49):
Yeah, I'd hather have low rates and a tax cut. Yeah,
you know, then high rates and attacks increase, right.
Speaker 2 (08:56):
Sure, So let's bring it to now.
Speaker 4 (08:58):
But back then, here's the point. Back then, the debt
to GDP held by the public was something like thirty
or thirty five percent, So a one percent rate hike
or in those cases, the rate cup but a one
percent change in rates, a rate hike would have added
maybe thirty five basis points of income to the you know,
percent of GDP to the economy. Because the debt to
GDP was like thirty or thirty five percent. This time
(09:20):
around it's one hundred percent roughly, you know, debt to
GDP held by the public. Yeah, so a one percent
increase in rates two and a half years ago ultimately
increased interest payments by a full one percent of GDP,
three times the impact of the prior cycle. So here
I am saying, look, if I thought this had an
impact before, now it's really has an impact. Okay, Now
(09:42):
it's three times larger than before. This is going to
be far different than anybody can imagine. And raising rates
this time around is going to have a strong supporting
effect on aggregate demand, you know, keeping unemployment down, you know,
total employment growing, that type of thing. And at the
time they increase the rate, the Fed was ranged with
(10:02):
criticism for engaging in policy that was going to cause
unemployment to go up to fight inflation. Remember that, Yeah,
of course. Well, and I'm going no, they've got it backwards.
This is going to bring unemployment down, This is going
to bring total employment up. This is going to cause
strong positive GDP growth, not a recession. Every forecast was
for recession for what years, right, they were just ignoring
(10:23):
this fiscal impact of this increase in depth at spending. Now,
the only thing I could rationalize why where they get
where they're getting this from is that they must have
had in their deep in their model somewhere, a zero
propensity to spend interest income. Right, no matter how high
you raise rais, no matter how much interest you pay, there,
nobody's going to spend a dime of it, and so
(10:43):
you don't have to worry about 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's all I could come up with this to why
they would ignore that.
Speaker 3 (10:54):
Champel, can we talk a little bit more about I
guess the consumption avenue of the interest income channel, because
(11:19):
I will fully admit that it was very nice in
circa twenty twenty two to finally earn positive interest on
my bank account. I'm an elder millennial, so that had
basically never happened to me before. However, I wouldn't necessarily
say that because I was earning, you know, two to
five percent on my savings that I went out and
(11:42):
bought a bunch of additional things, and of course a
lot of that was offset by the increased cost of living,
increased price level for not using the term inflation. So
how do you see that aspect of it playing out?
People are earning more income, but does that actually translate
into more demand?
Speaker 4 (12:00):
Yeah, and that's that's a good question, and that's a
micro question. You know what, you look at what all
the individuals who are getting it to pension funds get
treasury security, you know interest, How does that translate into
aggregate demand? Foreigners get a lot of interest, you know what?
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, borrow wars is going to dominate, and
that's going to take down the economy. And the answer
is you can only look at the data and see
what happens. We can both come up with a narrative
of what we think the propensities to consume a ount
of interest income, but we're not going to know until
after it happens. And I looked at in prior cycles,
(12:44):
the data was telling me that it's not zero, that
there's a substantial amount that directly or indirectly does get spent.
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, looking at how the rate
cuts help the economy or didn't help the economy, you know,
based on what their models expected, right, and the same
(13:07):
way those rate cuts didn't help the economy as expected
back in two thousand and nine, Ish is telling me
it was that four hundred billion a year of you know,
income that was cut out was having a dampening effect
on spending. Goes back to under Bush in two thousand,
two thousand and one, when we hit that recession, they
(13:27):
dropped interest rates to one percent and nothing happened. It
didn't help. And I was actually in a meeting with
Andy Carr Andrew Card, who was chief of staff at
the White House in two thousand and two February March.
And I'd gotten that meeting because in my car company,
two of the people on the board of directors were
(13:47):
ex engineers, one General Motors, one for a New Card personally,
he was an engineer at GM, and when I talked
to him about the interest income than the same way
I'm talking about it to you. They said, you got
to talk to Andy and set up this meeting. You know,
I went to the White House. Meeting was in the
West wing, and the first thing I did was just
what I said to you, and what look in the
economy itself when when they lowered interest rates. Okay, it
(14:10):
helped borrowers, but it hurts savers. You know, into the
penny for every dollar saved, there's a dollar borrowed in
the economy. Banks have loans and deposits and their equal
or somebody made an arithmetic mistake, you know, I assets
and liabilities, and so you know, when you lower rates,
you're just shifting income from one eneity to another. And
the only way that can have an effect is that
(14:32):
if there are differences in the propensities to spend interesting
income of those two. But at the macro level, because
of the public debt, when you lower rates, you're cutting
the size of the depths that you're cutting total interest
income in the economy. I said, I think that effect dominates,
and looking at what happened in the last year in
two thousand and two, you know, I wouldn't expect Race
to do anything. And Carter looks at it. He goes,
(14:54):
He says, yeah, why would anybody think that's going to work?
And he says and he goes, oh, look what does work?
Then I explained fiscal side, where when you spend more
than the tax that is a direct ad of income
and financial assets. And when you increase deficit spending proactively,
any economist who pays to be right it's going to
(15:15):
revise his forecast upward for the economy. And he says, well,
how much do we need? I said, well, I think
it's probably seven hundred billion annually back then, which was
maybe about five percent of GDP. He says, well, we
don't have much time doing it, and he said, oh,
you better get started. It was got a nice note
back from it was very nice. A week later, the
President was asked about the deficit and he said, look,
(15:36):
I don't look at numbers on a piece of paper.
I look at jobs which came 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 imagine, including
retroactive tax something we never had before. People were getting
tax refunds from taxes from previous years. And they passed
every spending bill. They could get through Congress trying to
(15:58):
get this deficit off to save the economy, and that
included prescription drugs for medicare. So I'll take personal responsibility,
even though that wasn't disgusting meeting or you know, for
good government, spending all that money on prescription drugs definitely
got up to two hundred billion by the third quarter,
which was about my reign target number, you know, seven
(16:19):
hundred million for the year. The economy turned around, and
it didn't cost him the election. So you know, I've
been on this for a while, so it's all been
from a narrative and then watching the data.
Speaker 2 (16:30):
So true, mainstream macro economists have this concept that they
call fiscal dominance, and yeah, that sounds like what you're describing.
Speaker 4 (16:42):
We're a little bit yeah yeah h.
Speaker 2 (16:44):
So basically yeah, so close enough. So I actually like,
maybe I'll try to get you in trouble with some
of your MMT friends here. But it sounds to me
that from a policy like look, if dead to GDP
were currently at ten percent right now, very very low,
and you raise rates that you have some constraining effect
(17:06):
on borrowers, and yes, you do have this interest increase
in the interest income channel. But it's not that big
of a deal because there just aren't many coupon payments
at all that are going.
Speaker 4 (17:16):
Out right, exactly right.
Speaker 2 (17:18):
But where we are right now, is it safe to
say that the size of the debt is a problem
that we are in fiscal dominance, and that the size
of the debt constrains the ability of monetary policy to
be a balancing force in a time of inflation.
Speaker 4 (17:35):
More than that, I've made it backwards. It takes it
away now. I had had a discussion with Paul Krugman
a few years ago, and that's when he and Stephanie
Calton were going at it with back in dueling editor.
Remember that, Yeah, yeah, And I said to him, I said,
what's you know, what's wrong with the job guarantee? You know?
And he says, well, if you deficit spend for the
(17:55):
job guarantee, the deficit could get so large that if
the FED tried to raise you know, if we get inflation,
the FED won't be able to use interest rates as
a tool because the interest in you know, expense will
be so high that that itself would cause inflation. Now,
he was using that as an argument against the job
guarantee and he made my argument and I said to him, yeah,
(18:16):
I agree with you, I said, but I think we're
already there for all practical purposes. And the debts GP
was lower than but you know, it was at least neutral,
that that interest rates were a tool. And he disagreed
with me, and that's fine, And I said, in any case,
you know, I support, as you know, at permanent zero rate,
in which case it's moot. You know, you could spend
for job guarantee without worrying about whether rate raising rates
(18:39):
is going to do anything. And now, because you're not
going to do it, you're going to just leave him
at zero. But the point was he that was his
new Keynesian the position out of the new Keynesian model,
and it was a standard Nukenesian position yours, you know,
not that long ago. You remember them all talking about
anti deficit talk and how the interest payments are, you know,
are unsustainable and all this stuff. By unsustainable, they always
mean inflation shared, right, you know, say it in their
(19:01):
first phrase. But that's if you drill down on them,
that's what they get to. But in the last couple
of years, when I asked them again two years ago.
It's like, no, I don't think we're at that level.
I still think that FED can raise rates to fight inflation.
I said, okay, you know, we'll see. So this is
this is in the new Canesian model. You know, it's
(19:23):
just arithmetic that at some point the deficit gets high enough,
the public deck gets high enough so that when you
raise rates and pay more interest, you do call the
interest itself cause inflation. Now, let's look at how high
the deficit spending is. CBO's latest number shows seven percent
of GDP, right, yeah, and I think that's just treasury.
I don't think that includes FEDERI mints. So maybe it's
(19:44):
seven and a half or something. Okay, Now, have we
ever had anything anywhere near a seven percent budget deficit
during an expansion? With the unemployment it's like four percent,
you know, kind of record low levels. No, the only
time we've gotten anywhere near this highest countercyclically when you
have a collapse and then tax revenues fall off and
(20:06):
transfer payments kicking kick in because unemployment's high. You know.
Then we got to eight or nine percent in two
thousand and nine, and we got to I don't know
what the number was of COVID maybe fifteen percent, but normally,
if you look at eight the budget DEFs, it was
down to something like one percent of GDP, and that
was low enough to allow the high price of oil
(20:29):
and the other catalysts to trigger, you know, a major
collapse in the financial sector, not a seven percent deps.
Seven percent is like drunken sale or level of government spending.
And out of that four percent is the interest expense.
It's over one point two trillion, I think annually. We
just passed one hundred billion for the month.
Speaker 3 (20:48):
So yeah, go ahead, Oh no, sorry, go on.
Speaker 4 (20:53):
Yeah. So look, we're right now that the depth sit
seven percent in GDP, four percent of which is interest expense.
Without the interest expense, if they left rates at zero
would have been trending towards zero and the depicit would
have been down at you know, two three four percent
something still high, but not like it is now. And
that to me is like it's it's unthinkable that that's
(21:15):
not going to support a strong economy. Now, what's interesting
is in the last month we've there's been a little
bit of a bump in the numbers. Right the Fed
Atlanta is down to one point seven percent GDP, growth's
still not a reception or anything, and everybody's now looking
for this collapse and FED rate cuts and everything else.
And I'm sitting here, going, how can this be with
a seven percent pro cyclical budget depicit? It doesn't It
(21:39):
seems like an absurd assumption that we could have any
kind of substantial weakness or really any kind of a
sustained weakness in the price level. So but you know,
for the last few weeks, maybe a month's, a couple
of months. You know, it's certainly been plenty of indicators
around the edges that things a week in and it
(22:00):
may turn out, you know, I'm completely wrong, we have
a total economic collapse with a seven percent deficit, and
I can I'm seventy five this year. You'll never hear
from me again, right, Well, see what happens.
Speaker 2 (22:12):
A good hedge, the age hedge in the long run?
Speaker 4 (22:15):
Where right? Right?
Speaker 2 (22:17):
In the short run? Out answer for any Yeah, I.
Speaker 4 (22:23):
Don't know what's going to happen, but I'll bet I'll
be the first one to tell you that I'm just
totally caught out by a recession with a seven percent deficit.
You know, unless we get one hundred and fifty dollars
oil or something like that. But as in some other shock,
you know, I don't see how that much could be
spent without GDP being strongly positive, unemployment being very low,
(22:45):
and price pressures. Now, the other interesting thing is this
one hundred billion a month only translates into about a
three and a half percent of the Treasury debt as
interest payment, whereas FED fundraise five and a half five
and three a's, which means and T bills are somewhere
around there five and a quarter five and three a's,
which means that as rollovers continue, as time goes by,
(23:06):
the depthit expands, that number is going up. Okay, even
if they just leave rates alone, it will get to
five three a's, you know, asseptotically, but it'll get there.
And so that we're getting more and more of this,
and the CBO's deficit forecasts are showing deficits higher than
six percent. Put it to the future like this is
(23:28):
like going to be interesting. That to me is at
least six seven percent nominal growth. And if you think,
you know, price level is going to be I don't
know what you want to use PCE or something two
and a half. That's that's four and a half real, Right,
that's a pretty strong number. More likely you will get
two to three reel and the rest will be you know,
(23:49):
price level changes just one of the channels where the
interest rate normally are. Over time, I've just noticed over
fifty years they're changing the price level. The rate of
inflation gravitates towards the Fed's policy rate. Over time they converge,
and so with the five and a half percent rate,
five and three's rate, you'll see CPI gravitating towards that
(24:12):
interest rate, you know, towards that number five five and
a half. Not in day one, you can go once
without it, but over a longer periods of time, and
you can think of that something like a stock split,
you know, or a stock dividend where if you just
pay all more shares you're getting, you know, all is
equal to the value of this of an individual share goes
(24:34):
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 paying out five and a
half percent a year on the public debt, which is
the net financial assets in the economy called the net
money supply in the economy, you're expanding it at five
and a half percent a year through a payment of interest.
There's nothing on the supply side, it's just a distribution. Then.
(24:57):
I've just observed that over time price level gravitates upward
by about that amount, and there's you know, plus or minus.
So those are my expectations going forward. And if you
notice CPI has leveled off at about three, you know,
a quarter percent or something. It went up with COVID,
it came down and then sort of leveled off. It's
(25:17):
been going sideways here and that's about at the interest rate.
You know, the effective rate on treasuries last year 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 happen. It could have been different, you know,
But it's kind of like the midpoint of my expectations
as to what's going to happen with the price level. Now.
PCE is a different thing, right, that includes substitution. If
(25:39):
the price of stake goes up until people eat chicken
instead but spend the same amount, you know, then there
hasn't been any increase in the PCE.
Speaker 3 (26:04):
Just to be clear, we're recording this on a day
that I've incurred something of a substantial head injury, and
I was in the emergency room until late at night.
But did I just hear the godfather of MMT say
that large deficits can be a problem. Is that what
(26:25):
you just said? I feel like I might be hallucinating that.
Speaker 4 (26:27):
Well, the deficit itself is just an accounting residual. But this,
you know what the spending in any given year, Any
spending has consequences. You know, if they decided to spend
trillion dollars to buy eggs, they're going to drive up
the price of eggs. Right. So if the government's spending
on a you know, our government spends on a quantity
constrained basis, Let's say they decide what they want to
(26:49):
buy and then pay whatever they have to to buy it.
That that can drive up It does drive up prices
or down price. You know, all the time. That's constantly
changing relative value in the act of all kinds of things.
You know, there's no way about that. And we have
course of taxation, right and the tax structure affects prices
and affects things. So if we have right now major
(27:11):
tax credits for solar for example, I think I get
a forty percent tax credit for installing solar, So I'm
putting solar panels in the USVII. The electricity is forty
five cents to kill one, so it's pretty easy calculation,
you know, so that I want to put in without
that tax inteative from the government. So I figure it's
probably not just me. So I talk to people at
(27:34):
accounting firms, major accounting firms. Are you seeing tax time
people doing this? They go, oh, yeah, We've got our
own partnerships and structures where you can put money in
and participate in this solar tax credit. You know. So
who knows how large is open end tax credits getting
and what it's affecting. So, yes, governments spending, but government
fiscal policy is entirely distributional between tax liabilities and spending.
(27:59):
It's pushing and pulling, you know, everything everywhere. It's it's
it's a major determined it's it's a it's a large
part of the command economy, and it's a command economy,
you know, to the extent that it's there. If the
government decides it wants jet planes, it's going to get
jet planes right right through the tax structure to the
(28:19):
spending structure. The pre market would not be producing jet
planes without the government ordering. Right. It's everything caters to
these you 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 recognizing them and what
they do.
Speaker 2 (28:35):
It sounds like, so you did you use the term
drunken sailor which you think you could. Yeah, I'll go
at the headline of this episode. It sounds like the
issue is so a lot of spending. Yes, that creates
a lot of The more spending, the more demand, prices
go up. And then it's.
Speaker 4 (28:54):
Sound spend if you spend that market price. If you spend,
you spend based on a at a fixed price. If
you say, look, I'm going to spend this much for labor,
you can't drive prices. You might not get any but
you're not going to drive prices up that might get
the government order.
Speaker 2 (29:09):
The government orders tanks and jets, and it also guarantees
uh social security recipients a certain a certain fixed level
of inflation or price level adjusted consumption.
Speaker 4 (29:23):
And then we become agents. We become agents because I
guess SoC security of the government. You know, with no
restrictions on what we do when we spend it.
Speaker 2 (29:30):
But it basically yeah, but it basically sounds like it's
that mix of sort of conventional macro thinking in which
high rates is uh deflate disinflationary plus the high levels
of government spending that seems to be the cocktail for
both higher upward pressure on the price level. And it
(29:54):
sounds like over time worsening higher price level because there's
a compounding effect.
Speaker 4 (30:00):
Yeah, and that's the situation at the moment. It doesn't
have to be that way, but that's what I see
happening right.
Speaker 3 (30:06):
Now in that context. And you sort of touched on
this before, but I would love to hear a sort
of like play by play guide here, But what should
the Central Bank be doing in the current environment where
we do have high fiscal deficits that might end up,
you know, constraining them.
Speaker 4 (30:27):
So if they cut raise to zero tomorrow, then the
CBO would scored as like twenty trillion of reduced you know,
fiscal spending, budget cutting or whatever over twenty over ten years,
probably you know, like the largest spending cut in the
history of America at times ten, just by cutting rais
to zero, all right, And that's got to have a
(30:50):
well unless you assume none of that's kind of get
nobody's going to change their spending because of the one
point two trillion of income has been taken away. But
you know, looking at the numbers I'm looking at, that's
going to have a massive deflationary bias to it. It's
going to be taking away all that income and all
those next financial assets from the economy. It's going to
be a staggering like creation of fiscal space. Let's say,
(31:12):
I don't know how you want to put it, but
just a major deflationary event. And that's not even under consideration.
That's it would be considered a major inflationary event. Right.
That's why I look at all the people that have
looked at Japan with there's zero rates and forecasts like
hyperinflation or the end went through one sixty big deal, Right,
The inflation rates are lower than ours and it didn't
(31:33):
go up and they kept zero race the whole time,
but they're so forecasting hyperinflation, so they've got this bias
that the low rates are going to a rate cut
like that would be inflationary when it's the opposite.
Speaker 2 (31:45):
Well, actually, did you brought up Japan, you know, for
all you know, I started really paying attention to this
stuff in the mid two thousand. Yeah, you know, I
heard all the tales of the widow maker trade and
everyone betting on that hyperinflation and how it never happened.
In recent years, Japan has seemed like the rest of
the world, if for a substantial inflationary impulse, still low
by international standards, but the side the stock of the
(32:08):
national debt in Japan is very high, as we all know.
And now they actually for the first time and forever,
have actually seen inflation again, not that high, but again
historically by Japanese standards. Is there a pump mix right
now for Japan? Is there a risk that I don't
know about hyper inflation? Kind of seems unrealistic that actually,
(32:29):
if they follow conventional macro thinking and could hold rates
up or move rates up to fight this inflation, that
some of these disaster scenarios might actually emerge with the
size of the.
Speaker 4 (32:39):
Debt ironically, ironically, they entirely embrace conventional macro theory, and
the reason they're keeping rates down is they're worried that
they might not actually be out of deflation, and so
they've got to keep rates down to ensure that the
inflation stays. You know, somewhere towards two. They just had it,
you know, numbers from Tokyo or something that showed to
(33:01):
lower rate and they're all panicking about a deflation. So yeah,
they're there for the wrong reason, so to speak. But
they're there, so we have the data. But yeah, okay,
does that answer your question?
Speaker 2 (33:13):
But if they were to raise at some point there's like, oh, no,
the inflation is not you know, if they were to raise,
could that create some real unfortunate dynamic feedback loops given
the stock of the.
Speaker 4 (33:25):
Yeah, if they ever decided to raise rates to do
something with their debt to GDP, you know, they'd be
throwing gasoline on the fire the way we have, except
you twice as much. Yeah.
Speaker 3 (33:35):
Wait, can we talk a little bit more. So we've
obviously been focused on the interest income channel for good reason,
but can we talk a little bit about the credit channel?
Speaker 2 (33:45):
Yeah, this is important.
Speaker 3 (33:46):
Yeah, and the impact of higher rates there because the
standard economic theory is that rates go up and that
makes the cost of credit. That increases the cost of
credit for businesses, and so they cut back on their
spending and investment. How do you view that component of
interest rate function?
Speaker 4 (34:06):
Well, their clients of the businesses are getting flooded with
interesting and come and buying their output at whatever price
they need, which includes what you need to you know,
for investment, to keep up your output right and to
train your personnel and do whatever else you need. You know,
their prices are at levels where they're sustainable, where they
can pay interest expens if they need to. And so
(34:28):
we're seeing you know, three it's not this quarter, but
we've seen you know, three and four percent GDP numbers.
Now first and second quarter seems to be a little
bit weak. I don't know if there's something in the
seasonals that aren't quite fully sorted out, but and might
prove me wrong, but I think, you know, the first
quarter was one point four right due to inventory selling
(34:50):
off inventories 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 in the
second quarter. But anyway, so that's a narrative you had,
but the data hasn't. It hasn't played out because the
income of their clients has been high enough to buy
their output at a price that they like, you know,
(35:10):
that they're comfortable with. They've had good pricing power and
covers these added expenses from the interest expenses and interest
related expenses that you were talking about. But like it,
so if you're spending enough, is throwing enough gasoline on
the fire. Yeah, you're it's going to burn.
Speaker 2 (35:28):
But like so just on the private sector side a
little bit more like as you know, one of the
key themes that you talk about is these are distributional
questions or the effects of a lot of these policies
are distributional. And you mentioned maybe economists think there's no
propensity to consume interest income, and maybe there's some good
reasons for that because it's you know, most the wealthy
(35:50):
people own the treasuries and banks and stuff like that.
But in there's consumer credit, there's cars. We know that
housing has slowed down. It does. Housing has slowed down substantially.
It does seem like there are many parts of the
US economy.
Speaker 4 (36:06):
Yes, yes, they have there a loss that they.
Speaker 2 (36:09):
Have responded to these higher rates by.
Speaker 4 (36:12):
Yes, fishing their activity. Yes, there are winners and losers.
If you just look at the losers, you could maybe
conclude by projection or confirmation bias, that the whole country
is losing. But it's not. It's just shifting to different areas.
You know. Rolls Royce has like a I don't know,
two three four year backlog of sales, right, yeah you would, yeah, yeah,
(36:35):
I read it in the Wall Street Journal. I yeah,
in bloom I'm in Bloomberg. I read it on Bloomberg.
Speaker 3 (36:44):
Yeah, thank you.
Speaker 2 (36:44):
What are you driving these days?
Speaker 4 (36:46):
What? What?
Speaker 2 (36:47):
What race car are you in driving these days?
Speaker 4 (36:50):
I've been driving a twenty fifteen Nissan Leaf for electric
car for a while, you know, because on the island
you can't thirty five mile hour speed limit. And uh,
but what do you drive on the track. I haven't
been on the track since I turned us for the
last since I turned fifty two, I think, okay, so
(37:11):
you know I haven't. I don't race on the track anymore,
got it. But I used to drive things at burn guests.
I have my own cars, you know. I had the
Mosler Empty nine hundred, which I would run on track days.
I never ran it real races. I used professional drivers,
you know, but in amateur racing I would drive it,
and I would drive our consotly ers. I used to say,
these cars can win races even with me driving.
Speaker 2 (37:34):
We should another episode, can we Would you ever come
back to talk about when you had a race car
your car company? Sure, Oh yeah, that'd be fun, that'd
be really This looks like a sweet the Mosler empty.
This is beautiful.
Speaker 4 (37:46):
How many of them?
Speaker 2 (37:47):
This is a beautiful car.
Speaker 4 (37:49):
There were fifty or sixty and you know I stopped
making the empty nine hundreds in I don't know, ten
fifteen years ago. But so there's still racing, So I
can the Spanish GT and the British GAT. They're still
winning races, you know, against the latest and greatest, and
you know the car is twenty years old, so there's
still a top performance car in the world where they
(38:09):
let them run.
Speaker 3 (38:12):
So just going back to interest rates for a second.
Speaker 2 (38:15):
Moving away, it seems way more boring now than I know.
Speaker 3 (38:19):
I know this question is inevitably going to like fall flat,
but it does feel like we're sort of talking about
the economy is not a monolith. So you have these
interest rate sensitive portions of the economy like housing, yes,
that that are affected by rate rises, and then you
have pockets that are more insensitive and maybe we don't
(38:43):
have the balance of those two things exactly right, or
maybe traditional economics hasn't done a good job of taking
like those individual portions of the economy and netting them
out into a cohesive picture of the actual effect of
interest rates on them.
Speaker 1 (39:00):
How do you like?
Speaker 3 (39:02):
I guess this has always been sort of a criticism
of MMT, But how do you take those disparate ideas
and sort of make them into a useful theory of economics?
Does that make sense?
Speaker 4 (39:14):
Yeah? Well, look, the whole composition of GDP changes all
the time, and it's driven, as I touched on before
quite a bit, by fiscal policy deciding what the government wants.
So if the government wants more solar panels, puts a
big tax credit, unlimited tax credit, we'll see how large
that is, you know, when it's smoke clears. But I
think it's gonna be a lot larger than anybody realized.
(39:36):
If you notice government revenues have been flat in a
booming economy, that's never happened. It's got to be tax
credits of some sort of you know, working out there.
So the composition is going to follow the money. And
if the money's going to those you know, earning interest,
then that's where the composition is going to go. And
you'll see more high end purchases, You'll see more things
(39:58):
that sort that group of people. There'll be you know,
all kinds of investments in that direction, and that's what
we're seeing. So again, it's about following the money, and
the government policy directs to a large extent, where the
money goes. And right now we've got over a trillion
dollars a year going to interesting, which is more than
(40:19):
defense and more than Social security and everything else.
Speaker 2 (40:22):
Right, I just have one last question, and this is
more in the category of Warren Mosler lore rather than
it is in interest rates. But we're in the studio
right now, and I looked up and I saw on
Fox Biz, which we have on TV, Art laugherers on there.
Isn't it true like you were like friends with him?
Isn't there some story with you and Art where like
(40:42):
you had some important insight that led you to MMT
thinking from a chat with Art.
Speaker 4 (40:46):
Well, I was looking for somebody to write up what
became soft currency economics interesting. I wrote. This was in
nineteen ninety three, and I went to my ex boss
an that Janata from William Blair, and he sent me
over to Rummy. Don Rumsfeldt was his nineteen fifty four
Princeton roommate. They were on a football team and wrestling
(41:10):
team something together, and they'd been good friends. So I
had a meeting. I called his office and he was
real busy. The only time he had was an hour
in the steamroom at the Racket Club in Chicago, so
I went out and met him there. So we're sitting
in our towels in the steamroom going through softcurt see economics,
and he then gave me a list of his economists
(41:31):
that he thought would be a good place for me
to go. And our Laugher was on that list, and
his guys were like Paul McCracken and Samuelson. I mean,
these were not anybody on my rollodecks. And I contacted
a few of them, and Laugher agreed to do it
in exchange for twenty five thousand dollars would help me
write this thing, and he assigned Mark McNairy. So I
got to know Art a little bit, and because we
(41:52):
talked quite a bit on these things, and it turns
out he's an ex university a Chicago professor, and he
knew all this stuff. He knew learner and functional finance,
and you know, long before I met any of the
academic and you know, he agreed with it. He signed
Tom Nugent to cover me because he was always looking
to do business. I went to a little conference where
he was and he got up to talk and he said,
(42:13):
I'm going to give the talk on money, and I'm
going to tell the money story. He says, And Tom
and Warren and he points to us disagree with me,
he said, and they're right, and I'm wrong, but this
is the way I tell it. And he went and
told the story about how banks take in deposits and
make loans, you know, completely backwards. And then hesus a
talk and look at him, like what was that. He says, well,
(42:34):
you know I told everybody you were right and I
was 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 the problem with the laughter
curve was it only worked at the very extremes. So
he was very like, you know, reasonable about everything. You know,
he's a very easy guy to talk to, and you
(42:56):
know self deprecating in many ways, and you know, you know, yeah,
it worked out well. Mark was very good and he
wrote and I edited, He wrote and I edited. Did it.
We came up with the soft currency economics thing, and
it didn't help. I thought having Laughter's name on it
and whatnot might give it more attention, more media attention.
But I don't think it made any difference. But you know,
(43:18):
they say you have to kiss a lot of frogs,
and that was just one of those, one of those times.
Speaker 2 (43:24):
Lauren Mosler, so great to have you on. I swear
we will. I would honestly love to do an episode
just about Mosler Automotive and just talking about the business.
Speaker 3 (43:33):
I just want to hear a day in the life
of Yah.
Speaker 4 (43:36):
Well, okay, so Joe, I mean got in my FOD.
We met at a dinner UMKC maybe or some.
Speaker 2 (43:43):
Yeah, I was, I was at UMKC.
Speaker 4 (43:45):
Okay.
Speaker 2 (43:45):
I think it was twenty fifteen. No, it couldn't have
been twenty fifteen, twenty twelve or twenty thirteen.
Speaker 4 (43:51):
That sounds right. Yeah, it's long ago. I don't remember.
Speaker 2 (43:54):
Those were fun days. Yeah, so great to finally have
you on the podcast and enjoy Sure you're going to
be vacationing neck.
Speaker 4 (44:03):
Okay, thanks, take care.
Speaker 2 (44:19):
Tracy, the godfather of MMT, says the government is spending
like drunken sailors and that it's created it's contributing to inflation.
Speaker 3 (44:27):
I'm still not entirely convinced that this isn't like a
hallucinary output from your forehead from my head injury. But wow, okay,
I mean, I do think it is not hard for
me to envision a world in which companies pass on
higher interest rate costs to consumers. We've talked on the
(44:48):
show about companies passing on higher input costs and things
like that. So that part of it I can believe.
And the other part that does seem intuitive to me
right now is this idea of a tiered economy where
people who do have a lot of financial assets and
are earning a lot of income on those financial assets
(45:09):
do spend on certain things like, as Warren mentioned, luxury
items like a lot of that makes intuitive sense.
Speaker 2 (45:17):
So definitely, And look here's where like I think I
would need more exploration. So there are aspects of it,
like clearly interest income is a real thing, more deficit spending,
which more interest income entails is on the net, going
to be stimulative at the margin. But rich people or
(45:40):
people with financial assets also just care about the price
of their financial assets.
Speaker 3 (45:45):
Oh yeah.
Speaker 2 (45:46):
And so when we did see, you know, they really
jacked up rates aggressively in twenty twenty two, and stocks
did decline, And I think stock prices probably influence real
estate prices. They've certainly, you know, we haven't had a
housing crash, but real estate in many realms has been stagnant,
or if you're in multifamily or commercial real estate, then
(46:08):
you probably have seen some price declines in the And
so I do think that like that is an offsetting factor.
And then I also think that while it's certainly true
probably that the propensity to spend interest income is not zero,
it is probably somewhat low, given that we're talking about
people who already have a lot of money and income,
Whereas the propensity to spend among people who are paying
(46:31):
high interest rates, either through car payments or credit card payments,
et cetera, is probably much higher and therefore impaired by
higher rates. So while I certainly get the theory and
I think there's probably something to it, I still like
would need more a little bit more convincing that the
distributional effect of this change in spending is on net inflationary.
(46:55):
But it's interesting ideas.
Speaker 3 (46:56):
Absolutely, I think that's a really fair assessment. And I
think like the composition of wealth matters. So you can
say that there are all these treasuries in the world.
I can't remember the exact number, but like thirty trillion
dollars or something like that, and people earn income on
those treasuries, but each individual person is probably not holding
(47:20):
a pure treasury portfolio, as you say, like personal wealth
will be comprised of real estate, which is affected by
higher interest rates, stocks which also go up and down
depending on interest rates. And so yeah, it seems like
there's there's a sort of like net or sorry, there's
a compositional complexity there that we still need to work out.
Speaker 2 (47:42):
And speaking of financial assets that go down, the treasuries themselves,
Oh yeah, because you learn the first day you joined
Bloomberg when rates go up, price goes down.
Speaker 3 (47:52):
That's right. We should start adding that into all of
our news stories again, like we used to, just to
hammer the second.
Speaker 2 (48:00):
Yields up price it done. I also just really like
I I do want to do an episode on Warren
Mosler lore because he kind of seems like a really
cool guy who has a fun life.
Speaker 3 (48:10):
We should we should go to the island, and go
to the island.
Speaker 2 (48:15):
Those the mostly Mt nine hundred looks absolutely sick. Have
you not look at that?
Speaker 4 (48:20):
Up?
Speaker 2 (48:22):
I'm not a car, but that's a sick looking car
that you built. Yeah, yeah, there's no joke like that
is a sick looking car.
Speaker 3 (48:28):
The one on Wikipedia is a very bright greer.
Speaker 4 (48:31):
It's beautiful.
Speaker 3 (48:33):
Okay? Should we leave it there? Should we stop admiring
the cars and leave it there?
Speaker 4 (48:39):
Let's leave it there? All right?
Speaker 3 (48:40):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (48:46):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman Arman dash Ol
Bennett at Dashbot and Keil Brooks at Keil Brooks. Thank
you to our producer Moses on Them. For more odd
Lots content, go to Bloomberg Odd Lots, where we have
transcripts of blog and a newsletter and you can chat
about all of these topics. Twenty four to seven in
(49:07):
our discord a lot of MMT fans in there, so
it'll be interesting to see how they react. Go to
discord dot gg slash out Lots and if.
Speaker 3 (49:14):
You enjoy odd Lots. If you like it when we
talk heterodox economics, then please leave us a positive review
on your favorite podcast platform. And remember, if you are
a Bloomberg subscriber, you can listen to all of our
episodes absolutely ad free. All you need to do is
connect your Bloomberg account with Apple Podcasts. In order to
do that, just find the Bloomberg channel on Apple Podcasts
(49:36):
and follow the instructions there. Thanks for listening. Eight
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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