February 13, 2023 • 63 mins
In this episode of Applied MMT, Adam and Ryan discuss:
- Edward Harrison's recent tweet on the expansionary effects of interest income
- The differences & similarities between today's rate hikes and the Volcker-era
- Credit growth despite rate hikes
- Joey Politano's recent thread on rate hikes
- Bank lending post-2008 vs. today
- In celebration of Superbowl Sunday, the institutional structure of the NFL and how it contributes to the league's success
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Disclaimer: The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and guests and do not necessarily reflect the official policy or position of any associated employers or organizations. Listeners should consider their financial circumstances and consult with a professional advisor before making any investment decisions
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Unknown (00:00):
The content of this podcast is for informational
(00:02):
purposes only and should not beconstrued as financial or
investment advice. The views andopinions expressed in this
podcast are those of the hostsand their guests. They do not
necessarily reflect a positionof any associated employers or
organizations.
Adam Rice (00:16):
Hello, everyone, and welcome to episode four of the
applied MMT podcast. In today'sepisode, Ryan and I discussed
the effects of the rate hikes interms of inflation and also bank
lending. As usual, thank you forlistening. And with that, we'll
get started. Alright, so I thinkso one of the things we want to
(00:39):
touch on today, there are twothreads in particular, on
Twitter that we thought wererelevant to discuss. The first
is it's actually just a tweet.
It's not a thread written byEdward Harrison, who is a senior
editor at Bloomberg Businessdoes a lot of good work on
economic commentary. Veryfamiliar with MMT. I don't think
(00:59):
he considers himself an MMT er,but Ryan, and I noticed this
tweet was on February 10. Hishandle is at Edward and H on
Twitter. But basically, it lookslike he's coming around the idea
that the interest rate hikesmight be stimulating the
economy. I know that heinterviewed Warren Mosler back
(01:19):
in 2019. And this was somethingthey disagreed on. So it's
interesting to see Harrison kindof changing his mind. I'm going
to read the note right now.
Basically, he says financialconditions are loose enough that
we may have to consider whetherthe interest income channel of
monetary policy transmission hasbecome dominant. Then he writes
(01:40):
and includes a paragraph that hewrote that morning, it says one
last mostly unnoticed monetarypolicy transmission channel, the
interest income channel is alsoadding stimulus to the economy.
If one breaks the economy intothree broad groups, the private
sector, the public sector andthe foreign sector, you can see
the public sector as a net pairof interest income to both of
(02:01):
foreign and private sectors.
This means that credit growthand credit access impeding
functions of rate hikes mustoverride the additional net
financial transfers to theprivate sector from higher rates
for the overall policy to berestrictive. But since long term
interest rates and creditspreads have on net declined
while the mortgage market hasstabilized, its possible
interest income is now thedominant policy transmission
(02:23):
channel, thus adding stimulus.
So very interesting. It soundslike he is kind of leaning, you
know, in the Mosler direction,saying that they're the rate
hikes are stimulating theeconomy. Ryan, do you have any
any thoughts on this?
Ryan Benincasa (02:41):
Well, Adam, my first thought is that we may be
out of a job soon. Yeah, I guesseveryone else is upon it.
Adam Rice (02:53):
It's coming around to this idea. Yeah,
Ryan Benincasa (02:55):
yeah, exactly.
No, I mean, that I think one ofthe critical distinctions in
today's economy versus in thepast with with rate rate hike.
programs implemented by the Fedis just that the the national
debt to GDP level is so highcompared to past periods. Right.
(03:20):
I mean, when when Volker tookrates up, you know, to to the
mid teens, and in the 80s, Ithink the US debt to GDP was
around 30%, or something likethat. Now, it's, you know, like
120%. So, so it's four times. Soit would be the equivalent of,
(03:40):
of, you know, Volker or takingrates up to like, 60%. In.
Right, because, you know, if youjust take four times. Yes,
exactly. So that is somethingthat is genuinely Oh, and the
other. The other thing is theinterest paid on reserves. It is
(04:04):
also a relatively newphenomenon. It's not something
that we had in the 80s. It wasenacted into law in 2008. After
it like we've talked about inthe past, after the you know,
the Clinton administration paiddown the national debt and all
(04:26):
of a sudden there's this fearthat the Fed wouldn't be able to
implement its monetary policy itbecause there'd be no more
treasuries. So we enacted intolaw, that the Fed could just set
the rate to the peers on reservebalances, which again, are like
deposits for banks held at theFed. And so you have these,
(04:49):
these genuinely novelconditions, high debt to GDP,
and interest paid on you know,ample reserve reserves. And so
the that is, to me what, youknow people talk about okay,
well, what's different thistime? Why would you know in the
past even if it's true that thatin the past, you know raising
(05:14):
rates tightening financialconditions? I'm not even
convinced that that's true butbut let's just assume for a
moment that that it is I thinkit's fair to say that that with
these new you know theseconditions is high debt to GDP
ratio and high reserve balancesand interest being paid on
(05:35):
reserves, that that that thosepresents those present novel
conditions that makes theinterest rate hikes much more
stimulative much faster than inpast periods. And I think that's
really what what's missing fromall the commentary and what
potentially, you know, officialsat the Fed investors, busy, you
(06:00):
know, you know, business people,policymakers, what, what a lot
of them are missing right now,is these novel conditions that
that you have, frankly, wehaven't really seen before.
Adam Rice (06:17):
Right, right. It's fine. I also saw a tweet from
Mike Norman. I don't know if yousaw this one. But he said, after
a year that saw eight rateincreases, which was rapid and
aggressive as anything since theVolcker period, bank loans have
increased by $1.1 trillion, byfar the biggest increase in
credit creation, recent memory.
Yeah, I mean, it's
Ryan Benincasa (06:41):
cool. It's all
Adam Rice (06:42):
out there. It just it seems like, you know, not many
people are noticing it. Butmaybe, you know, if Ed
Harrison's noticing it, andthere's other people on Twitter
noticing it, I wonder, you know,I wonder if popular opinion will
change soon.
Ryan Benincasa (06:56):
But Adam, I thought that this is but this is
tightening. Tightening. This isthis is why this is why again,
you know, we started talkingabout this in the fall, this is
why I was like everyone was sowrong on this, because anything
any sort of objective look at atthe data at credit growth,
(07:18):
right, the the stated, Thestated position of the Fed is
that it is trying to tightenmonetary conditions by raising
interest rates, tighteningmonetary conditions, I don't
know about you, but to me, thatmeans that would imply credit
growth, slowing, and or outrightcontracting. And all what we
(07:40):
were seeing in the databeginning last fall, is credit
growth expense expanding. Sothat to me, it's just not even,
it's just not even close. Andthat's why, you know, I felt so
strongly about this idea that,that, you know, the, the economy
(08:03):
is doing a lot better, and wasgoing to do a lot better than
than most were thinking becauseeveryone's thinking that, you
know, the rate hikes are goingto are going to slow credit
growth, but the data was wasclearly showing that was
expanding credit growth. And ifyou think about it, it actually
makes sense. The the higherinterest paid to the private
(08:24):
sector. Right, so the privatesector has more income banks
lend based on income. Right?
When anyone who's taken out aloan, you get a you get a
mortgage, you know, you get ayour commercial loan, what have
you, it's always the bank,underwrites it based on income,
(08:46):
because income reflects theborrower, the borrower's
capacity to repay that loan. Sowhen you so when you have higher
income being channeled to theprivate sector, that enables
higher credit growth, higherbank loan creation, because
(09:06):
there is because the borrowershave income that, you know,
creates capacity for them to, toborrow and service their debts.
So like, I'll have I'll have, Imean, a buddy of mine will send
me all this, you know, this doomand gloom about oh, you know,
consumer credit balances are atall time highs, it's like, well,
(09:32):
first of all, as a percent ofGDP, it's still pretty low. And,
and, and second of all, if ifconsumer credit growth is
growing, that that's going toreflect more spending and growth
and income for for, you know,the production sector that that
(09:52):
produces goods and servicessector that that you know, to
provide services. So, you know,higher consumer credit growth
means it means that you'reprobably gonna have more
consumer spending, which is,which is more income, which
creates even more credit growth.
(10:13):
So this is why, right, it's likethis whole, that's that's how
that's literally how thefinancial system works. That's
how our economy works. Soincreasing income to the private
sector, you know, the logicalconclusion is that that's going
to lead to increase creditgrowth.
Adam Rice (10:33):
Right. I mean, which makes total sense. And I think
just looking at the, you know,the total outstanding consumer
credit doesn't really tell youmuch. You know, the risk would
obviously be if that debt is notbeing serviced, but I think by
all indications it is, it's notlike a 2008 type situation, is
that right?
Ryan Benincasa (10:53):
Right. I mean, the, it? I mean, I think it was,
I think it was Brian Moynihan,who, CEO of Bank of America, who
recently said that, you know,average savings balances are
multiples of what they were preCOVID. Right, for US consumers.
Another thing, oh, I justremembered this. So I think I
(11:15):
sent you Did you Did you happento read that piece written by
Matt Klein, who is the author ofthe economics newsletter, the
overshoot? Now, I actuallyhaven't read it yet. So he makes
some, some really interestingpoints, because a lot of the
narrative has been that, thatconsumers have been spending
(11:38):
down their, their, you know,their COVID Savings balances,
essentially, and, and that's whythey're turning to, you know,
consumer lenders, you know, to,you know, they've spent down
their savings, now, they havestopped borrowing, and oh, my
gosh, this is a way all overagain, like, you know, consumers
(11:59):
are being stretched way toothin. And, you know, we're gonna
have this, this this depressionor recession, because, you know,
they're, they're borrowing toomuch, and they're not gonna be
able to pay it back. Well, firstof all, the, again, the, the
most important, and, like Italked to, I talked to
(12:20):
management teams at banks, andthey all agree, the most
important, and we do this towhen we when we underwrite, you
know, like, like a bond we'regoing to buy for our, for our
fund, the most important inputwhen, when considering, you
know, lending someone money istheir capacity to pay that debt
(12:45):
back. And the most importantdriver is income. So in the US,
you make income by generally byhaving a job. And so when you
have, so when you haveunemployment rates at 50, year
lows, and you have, you know,robust job creation, I mean, we
(13:06):
talked about last week, the theninth nonfarm payroll, you know,
blow out number. And that meansthat people have jobs, they have
incomes, that meet thoseincomes, can then support any
any debt that they're incurring.
So that's, that's what so that'swhy, like the I mean, the MMT
project is so important, ittalks about things like job
(13:28):
guarantees, or so forth. If youwant to have maximum output,
Max, you know, maximumefficiency, maximum, you know,
capacity utilization withinwithin an economy, it requires
ensuring that people have jobsthat they're making an income
off of, so that they can, youknow, so that that can spur
(13:51):
further credit growth. I mean,that that's just how that's how
it works. And so going back tomy what I was saying about the
about Matt clients piece, whathe talked about No, and there's
this narrative, right, peopleburning off their their x their
clinical excess savings. Itactually doesn't look like
(14:13):
that's what's happening. A lotof the the excess savings that
got paid off in 2022. was afunction of taxes paid. Yep.
Okay. So particularly, capitalgains taxes and interest at
(14:34):
lower than average interest anddividends received on financial
assets. Okay, those were thethose were the main contributors
to this sort of burning offexcess savings. Those savings
(14:55):
are gentle really are generallyassociated with higher higher
income earners, right, the lowerincome earners that depend that
whose income comes predominantlyfrom salaried employment was
actually fairly stable. So thesavings in 2022 from from in
(15:19):
that cohort, lower income whorelies predominantly on on, you
know, salaried employment, thatwas stable in 2022. So it was
just like, it was just people,you know, you had this one off
in 2021, you had this all sortsof crazy capital markets
(15:39):
activity, you know, the SPACBonanza, right? I mean, I mean,
I mean, I mean, you know, yeah,exactly. No, but puppets
particularly like, like the dealflow in 21. Yeah, it was nuts. I
mean, I talked to people, youknow, my buddy runs a equity
(16:03):
capital markets desk at atJeffrey's they had an absolute
blowout year, that year. And itwould they just knew that wasn't
going to be repeated, I don'tthink. And then in 2022, do you
activity just dried up? I mean,whether you're talking about the
high yield market, or the IPOmarket, I mean, Spax. I mean,
(16:24):
we're not seeing any longer in2022. So, that is, so you had
this all this capital marketsactivity 21, people had to pay a
lot of taxes on gains from thatin, in 2022. Right, we talked
about this how, you know, therewas a huge fiscal tightening in
(16:44):
2002. And in particular, inApril, last year, you had the
largest inflow of, of money tothe Treasury, ever, and in a
single month. So, again, one offrecord, fiscal tightening, that
primarily impacted higher incomeearners. So, um, so this
(17:10):
narrative that like that, youknow, it people are spending
beyond their means, and they'reburning off all of their
savings, and resorting to, youknow, consumer credit, you know,
they put all this money on theircredit cards, etc. That's not
(17:32):
really what that that's justinconsistent with what with what
the data is saying. Yeah,
Adam Rice (17:41):
yeah. Well, I think yeah, I mean, with with all this
stuff, I think it's alwaysimportant to go beyond the
headline numbers and look atkind of the distribution of, you
know, like the distribution ofthe debt or the distribution of
the assets or the savings. Andthat's something that is often
ignored. By, you know, likeheadline commentary.
Ryan Benincasa (18:03):
And I think that's a great point. Yeah.
Adam Rice (18:06):
And I think I think that brings us so there was a
second thread that you and Iwere talking about, written by
Joey Politano, handles at JosephPolitano. On Twitter. He writes
a news and economics newslettercalled a preset toss.io. I think
I think I'm pronouncing thatcorrectly. But basically, it's
(18:27):
great, by the way. Yeah, he'svery good. But basically, he
wrote a thread starts off hesays, Every few months, someone
asks, What if raising rates?
What if What if raising interestrates actually increases
inflation, just to get promptlydunked on by econ? Twitter? And
he actually has a screenshot ofStephanie Kelton responding to
Jason Furman where she says,Have you considered the
(18:50):
possibility that raisinginterest rates might move
inflation higher? And Furmanjust tersely responds, he just
says, No, that's, that's. Sothere's a lot of interesting
stuff.
Ryan Benincasa (19:04):
Just for the audience, who's Jason Furman.
Adam Rice (19:07):
Jason Furman is a Harvard economics professor, who
I think is also isn't he on thethe CEA, the Council of Economic
Advisers for the White House.
That sounds right. And he was abig, I believe he was a big
austerity advocate. He was onObama, CA. That's right. That's
right. Yeah, he's a he's aprofessor at Harvard. So I think
(19:30):
he informed a lot of Obama eraeconomic policy. He's also a guy
who, you know, in 2018, wassaying things like the Trump tax
cuts are going to limit thegovernment's ability to respond
to future crises. For somereason, he still gets a lot of
airtime and he's very popular onTwitter. So anyway, in this in
(19:51):
this Politano thread, he kind ofyou know, he talks about what or
how raising rates mightcontribute to growth or might
contribute to inflation? One ofthe things let's see here. So
one of the things that he saysis that, you know, one of the
theories, and this is what whatRyan and I always talk about, he
(20:13):
says, raising rates increasesthe income of the private sector
by increasing interest paymentson government debt. Ryan, do you
want to just briefly touch onwhat we were talking about?
Before we started recording whenyou said that there's, you know,
there's probably a lag betweenthe rate hikes and the interest
payments, and then the effectsof those payments on the
economy?
Ryan Benincasa (20:35):
Yeah, sure.
Well, it's just, I mean, it'svery simple, you know, the Fed
raises the interest rate, ittakes time for that interest to
then accrue and be paid to anybondholders, right. So so so for
people who own the securities,a, you know, you kind of have
(20:56):
this, this effect of okay, youknow, if the, you know, the
debt, the existing stock of debtrolls off as that matures, you
know, the, and they issue andthe Treasury issues, new debt,
the interest that is owed on onthe total stock of Outstanding,
outstanding debt getsincrementally more, but then it
(21:17):
takes time for the interest toaccrue and eventually be paid to
holders of that debt. So there'sessentially like a time lag
between the stated rate hikesand the actual impact on
interest income, and eventuallyspending in the economy. So
(21:38):
while while Joey, says that, youknow, it doesn't look like it's
had that much of an impact onthe budget deficit? My argument
would be that that's a verybackwards looking. Conclusion.
And it's, it's obviouslycorrect. I mean, the interest
(22:04):
paid on government debt was verylow for a very long time, it's
going to take time for the youknow, for you know, that those
bonds to and bills and, andnotes to to mature and get
replaced with higher yieldingpaper that then take time to
actually accrue the interest,that thing gets paid. So while
(22:28):
while he is correct, that ithasn't had that much of an
impact on the budget deficit todate, my argument would be that
the impact currently, and goingforward, is going to it is going
to move the needle meaningfullyin terms of the budget deficit,
Adam Rice (22:55):
right. I mean, I think so. I was looking at the
numbers the other day. And theseare gross numbers. But the
annualized rate of federalgovernment interest expenditures
in q4 was 853 billion. Andthat's going to go higher as the
Fed raises rates. So.
Ryan Benincasa (23:16):
So that's the current run rate. That's the
Adam Rice (23:19):
current run rate with the q4 run rate is 853. billion.
Wow. Which is, you know,substantially higher than then
defense spending.
Ryan Benincasa (23:29):
So what's, okay got?
Adam Rice (23:32):
Defense spending is let me see.
Ryan Benincasa (23:36):
So yeah, so that's 3% of GDP. Ish. A 50.
Yeah, yeah. Three 3% of GDP.
Huge. And what was it? And whatwas it a year ago?
Adam Rice (23:49):
So the run rate, the run rate in q4 of 21, was 600
billion. And QR or of 19 was 569billion. So it's, I mean, it's
substantial. It's substantialgrowth. I mean, even compared to
compared to 10 years ago,roughly. So q4 2010, it was only
(24:10):
400 billion. Right? Okay. Soit's a ton of interest income
that's coming to the economy,and it's gonna be in q1 of 23.
When those numbers come out,it's gonna be even larger,
because the, because rates arestill going up.
Ryan Benincasa (24:23):
Right. Right. So and it's also important to note
like the, it's not just it, Imean, it's accelerating, that
that is something that I alsodon't think is quite
appreciated. Like, this is likethis interest compounds. So as
it adds money to the privatesector, right. And then the
(24:47):
money that it adds to theprivate sector, itself accrues
more money, right? This is notsomething this is not something
that we really had for the lastdecade. plus, yeah, right.
That's why it just gets. Sothat's why I just get so shocked
to people talking about, youknow, higher rates as being
(25:11):
tightening. I'm like, I'm like,the money gets paid from the
government to the private sectorand it barely accrues any
interest, right? That is that istight. That is tight money. It's
where it's just like, it just,it just stays there. It doesn't
really accrue much. Now, anymoney that gets added to the
(25:31):
private sector, accrues likelike, you know, four to 5% more
money per annum. That is likethat, to characterize that as
tightening. It's just, it's justwrong. It's just insane in my
mind. And yeah, so what so we'resaying, you know, to the 250.
(25:54):
billion more in terms of runrate, you know, versus a year
ago, that's a, you know, 30 to40% increase on that on that
line. Right. So going from sixmonths. I mean, that, Adam,
that's huge.
Adam Rice (26:12):
Yeah, massive, massive.
Ryan Benincasa (26:16):
And that's why Yeah, no, go ahead. No, I'm just
saying that that's why I justthink that people are so
offsides with this, like, howcan you we're seeing that we're
taking this very, very largeline item on the government's,
you know, you know, I mean, Idon't want to call it an income
(26:39):
statement or p&l because it's amischaracterization. But you get
you get the point on their ontheir budget, and you're
increasing it by 30 to 40%.
Right. What do you mean, what do
Adam Rice (26:52):
you think would happen if social security
payments went up by 30 or 40%? Ayear?
Ryan Benincasa (26:56):
Exactly.
Adam Rice (26:59):
Which is the same, but this this kind of goes back
to the distributional questionwhere it's like, Who is that
money being paid to? And in thiscase, it's being it's being paid
to people who already havemoney, but that money is still
going to be spent or invested?
It's just it's it's all adistributional question.
Ryan Benincasa (27:18):
Right. It's a distributional question. And,
you know, to the extent that itgets spent, I think that is a
fair. That is a to me that thatis the most fair criticism of
our argument, which is thatyeah, sure. It's it's money, but
(27:39):
it's going to people who don'tspend it. So that doesn't
generate economic activitydoesn't cause inflation. It just
kind of accrues in people'ssavings accounts and, and just
sits there. I happen to thinkthat they're, you know, at this
(27:59):
in the past, you know, again,going back to like Volker 80s,
when the debt wasn't very highas a percent of GDP as it is
today. That was probably moretrue. But that today, you know,
you have, because of the becauseof how much this is as a percent
of total GDP, it's going to movein, it's going to have an impact
(28:24):
on on spending, I think spendingan economic activity. That's,
that's, you know, it offsetsthat, that sort of regressive
structure of of what interestrates are. So I think that's a
fair argument. But I think, youknow, just the sheer, just the
(28:47):
sheer size will offset it.
Adam Rice (28:50):
Yeah, I mean, it'd be kind of shocking if it didn't,
you know? Yeah. So the nextthing I wanted to touch on was
also the idea. You know, what wewere speaking about with, with
banks with a willingness tolend, given the higher interest
rates.
Ryan Benincasa (29:12):
So that was another point in Joey's thread.
Adam Rice (29:15):
Yeah, I think he said, trying to find the
specific tweet. Actually, Idon't know if that was in his
thread that you and I weretalking about it, though, just
about how banks will be morelikely to make loans given the
high Yeah,
Ryan Benincasa (29:31):
I think he said he talked about bank margins.
Adam Rice (29:38):
Oh, yeah, he did. He did. Yeah. So so the second
point here, he says, he says thesecond point that people you
know, like to make around higherrates contributing to inflation.
He says that raising ratessupposedly increases bank
margins, which increases bankswillingness to lend thereby
boosting inflation.
Ryan Benincasa (29:55):
What are your thoughts? And so this is
something that's that I mean, iscommonly accepted as truth, this
idea that bank margins gohigher, when interest rates are
higher, and I took a look, Imean, you can you can like go on
the Feds website and look andlook up name or net net interest
(30:16):
margin and look at the aggregatenumber for commercial banks,
United States, there's justthis, there's just no, there's
no correlation at all with thiswith this idea that higher rates
leads to higher net interestmargins for banks, it's just,
it's something that's like anaxiom, that's just not true.
Like so many other things.
There's no evidence thatsupports the assertion that
(30:40):
higher rates increases. Banknames, because, and the reason
that is, is because banks, likewhat they're, you know, they
generate higher rates on their,their assets, right, their loan
and securities portfolios, butthey also have to pay out
(31:02):
interest on their liabilities.
So deposits and other fundingsources funding source, their
mean, is an accounting term,it's not an actual source of
funds. But that's why itdoesn't, it doesn't actually
(31:22):
work to increase margins, whatincreases bank margins is lower
credit losses. I mean, I was, Iliterally, I was looking at a
couple of different banks thatwe have made investments in,
(31:43):
and, you know, looking at theseus, you know, Wall Street sells,
I was looking at, like theGoldman guys model for this one
particular bank, and all of thetorque all of the leverage in
in, in the, in the banks in theearnings. Is is, is, is in the
(32:04):
credit losses, you know, theassumptions for credit losses,
right, if, you know, they'rethey're taken high charges, you
know, for future expected creditlosses today, right, based on
what their economists aremodeling and stuff. And so that,
(32:24):
I mean, it's a non cash chargethat, you know, depending on how
it actually shakes out, movesthe needle substantially in
terms of what their actualearnings end up being, right,
that's where the torque is, iscredit losses, and so the way,
right, right, it's like, it's,you know, the other the other
(32:49):
variables like interest onsecurities and interest on loans
and interest paid onliabilities, those are all
variable, right? The the torqueis in the credit loss. So, if
you want to have lower creditlosses, the way to minimize
credit losses is I think we werealready talking about this is to
(33:11):
have people to have income topay back their debt. So that's,
that's how you, that's how youminimize credit losses is to you
know, have people employed, sothat they can have so that they
can generate income, so thatthey can pay back their, their
(33:31):
credit card or their, their autoloan or their student loan or
their mortgage. Right, that ishow you you achieve that end is
by ensuring that people havejobs, that they're being
productive and getting paid forit. And therefore, using that
income to pay back their debtany any, you know, analyst or
(33:56):
loan officer who's any good atwhat they do is going to is
going to be focused on onincome, you know, for the
borrower, for the potentialborrower, and their, you know,
their capacity to repay. Now,capacity repay could also mean
that they have other othersources of credit, right. But
(34:20):
ultimately, all of that any sortof loan is that gets that gets
made, is made with an assumptionthat there is going to be income
to to support it to pay it back.
Right. Even even like a, youknow, a company with an asset,
asset backed loan, you know, fortheir for the inventories that
(34:45):
they like, like, the idea isthat they can sell their
inventories, generate income andpay back that loan, right. So
it's all based on income. So,again, you know, if if If the
government is paying more isspending more into the economy,
that spending is going togenerate income for the private
(35:07):
sector, and with the privatesector has more income, it's
going to be able to service itsdebt. So that's, that's why
that's the other reason why Ithink, you know, rate hikes are
potentially inflationary,especially, especially in
(35:29):
today's world, because it'sproviding income that then that
then leads to more creditcreation. And, and more credit
creation means more spending.
You know, we've already talkedabout this, but But yeah, so
that's the that's, that's,that's how that works. The other
(35:53):
thing I would say about, youknow, banks, business models and
stuff, if you can, so if youhave, if a bank is generating
interest on its reservebalances, which is something
that they didn't used to make,okay, it was reserves were
treated like cash. So theydidn't accrue any interest until
(36:14):
2008. So they're during intereston reserve balances, and also on
their securities portfolio. Thatinterest, right, and that's in
their securities portfolio, theyare basically risk free, like
Treasury securities and agencyMBs. And that sort of thing,
that interest, it, you know,increases the return on bank
(36:40):
equity capital, okay, so those,so the banks do generate higher
income higher from thosesources. So that earnings, that
higher earnings, accrues andhelps build up the capital, that
the bank's equity capitalsurplus. And so that creates
(37:03):
more of a cushion for potentialcredit losses. So to the extent
that it you know, it doesinfluence bank lending activity,
my argument would be that,you're, you're essentially
building up additional surplus,so that, you know, that like
(37:27):
that return, that retainedearnings balance is going to
grow, you know, in theshareholder equity portion of
the bank's balance sheet. Sothat creates an additional
capital surplus that can absorbpotential credit losses. So if
you have, the bank has more, hasa bigger buffer, they may be
(37:48):
comfortable going out and makingpotentially riskier loans and
generate a higher yield on thoseloans. Because they have space
to absorb potential creditlosses. So that's something that
I think, and now it is true thatthat the higher the higher rate
(38:12):
paid on on debt is going tocause the bank securities
portfolio, there are assets totake a mark to market loss,
that's going to that's going tolower the bank's equity capital,
right, you have to you have tomark those securities to market
and so that, that, you know thatthat is going to you know,
(38:39):
create a lowercapital surplus, but going
forward, right, you have lowerbook equity for a bank, any
higher and you're generatinghigher income, that means that
your return on equity is goingto be higher, and that is going
to help build the capitalsurplus. So again, this is sort
(39:01):
of like thinking about forwardlooking not just backward look,
it's like, okay, what, what isthe earnings profile of these
companies, you know, goingforward. And so my contention
is, especially if you don't haveas rapid of rate hikes in 23, as
we saw in 22, you've alreadysort of the banks have already
(39:22):
taken the charge to their, totheir book equity, in terms of
like the mark to market losseson their securities portfolio,
they've already taken thatcharge. So now it's just like,
okay, they're going to earnhigher and higher interest on
their securities and on theirreserve balances that accrues to
the to the return to theretained earnings balance. And
that helps build up that capitalsurplus that then, you know,
(39:46):
enables them to go out and andmake and make more loans. So
that's to me, that is how thisthis really worked. And there
was a lot of thought that, that,like the QE programs, post
financial crisis wouldaccomplish exactly what we what
(40:08):
I just described. So okay, youknow, the Fed is going to, is
going to pin rates low acrossthe curve. And so banks are
going to I, like I read this,this one thesis that like,
essentially, okay, that's goingto, you know, the banks are
going to realize, a one timesort of gain on their securities
(40:28):
portfolio. And, and, and that'sgoing to accrue to the, to the
capital surplus, and, andthey're going to be able to, you
know, build their balance sheetsback up where they can, where
they're in a position to makemore loans. The problem with
that is that incremental income,on their securities on their on
(40:50):
the asset side of their balancesheet is much lower, right, you
book what it's like a you book aone time sort of gain, because
the Fed lowered rates, so thatmeans higher prices for, for
Treasury securities, so and soyou sell that, you know, back
to, or you sell that to the Fed,right, because they were in the
(41:11):
market buying bonds, so, you getthe sort of one time capital
gain, but then your, yourincremental returns are lower,
because Because rates are low.
In this case, it's the, it's theopposite, you took a took a mark
to market charge and 2022. Andnow your incremental returns are
gonna be higher. And so it's tome, it's possible, if not
(41:35):
likely, that that's going tospur more credit growth.
Because, you know, the otherthing is, you know, we've
really, you know, the basilregulations and stuff have had
an impact on the, you know, theratio of, you know, assets to,
(41:56):
to, you know, bank equity, youknow, essentially, the banks
have to have to hold up, theyhad to have higher equity
balances than they than theyused to, I mean, the the
effective leverage ratios forsome banks, you know, before the
(42:17):
financial crisis was like, 40,or 50. To one, right, so, so
that just doesn't leave a lot ofroom, right? Like, you can
quickly become insolvent. If youget a you know, a big, I mean,
that's basically what happened,the financial crisis was, you
know, you got this sort of, youknow, these these banks took
(42:39):
this hit to their, to their loanbooks, and all of a sudden
they're insolvent, there's justone big margin call,
essentially, on the system thatrequired Congress to create
money to cure the the margincall essentially, the the
insolvency. That's basicallywhat happened. You know, so now
(43:05):
the banks have a much higher,you know, equity balances as a
as a percent of their totalassets. There's a lot more
cushion there. So there,there's, uh, you know, it's
amazing, I'm pretty sure I readthis the other day, like, I
don't think Bank of America lostmoney, you know, in during the
(43:26):
financial crisis. isn't reallyisn't that amazing? Yeah, I read
that. And then I, I sent it tomy coworker, and he was like, I
don't know if that's right. Thatthat might have been JP Morgan.
But, but it isn't that likeconcrete, like, incredible to
think about. You don't even likeyou have this, like global
(43:49):
financial crisis, and you don'teven lose money. I mean, it's a
it shows kind of like the, thehow the sort of the, the
institutional structure behindbanks is pretty strong in the
United States, that how much wesupport them. But, ya know, it's
(44:10):
just, it's just an amazing thingto consider, you know, for, for
companies that are supposedly,you know, cyclical, and, and,
you know, at the whims of, youknow, business cycles and stuff
like tonight and lose moneyduring that period. is amazing.
Adam Rice (44:29):
That is amazing.
That's, that's kind of crazy.
I'm so, you know, what just cameto mind is, you know, last week
when we were talking to Douglas,just about how, you know, we
were saying that now, it's justit's kind of like an empty petri
dish, like we're about to, youknow, we've seen a lot of things
that are confirming MMT. Andwill I think we'll continue to
(44:50):
see things that are confirmingthat MMT is right. What I'm
thinking about now is how kindof you know, after the oh eight
crisis when the government youknow, they did some stimulus,
then they basically pursuedausterity. They did quantitative
easing, they lowered interestrates to try to spur growth. And
credit growth was very slow. Andnow we're seeing them raising
(45:12):
interest rates to containgrowth, but we're seeing rapid
credit, as well. Like it'stotally backwards. And so, you
know, I think really like it allcomes down to what you're
saying, which is, after 2008.
The reason banks weren'tlending, I mean, interest rates
were basically zero the reasonthey weren't lending wasn't
because it had nothing to dowith interest rates. It's
(45:32):
because there weren't creditworthy borrowers out there. And
that's exactly. There are creditworthy borrowers out there. And
even though rates are increasingrapidly, loans are still
expanding, because it doesn'tmatter what the interest rate
is, it matters if there's creditworthy borrowers.
Ryan Benincasa (45:52):
Exactly, exactly. And you'll hear me hear
this thing like, like, oh, thesupply of credit, it's like,
Dude, there's no limit to thesupply of credit. There's only a
limit to credit worthyborrowers.
Adam Rice (46:04):
Exactly. That's, that's what it all comes down
to. Yeah, very interesting. Itreally isn't MMT petri dish,
like the last the last 15 years?
Yeah.
Ryan Benincasa (46:15):
Well, I mean, that's what's been so amazing to
me is like, when I startedlooking into MMT, and, you know,
they made they said that, oh,you know, QE is not going to do
anything. And you know, there'sgonna be a recession. But this
is back in the 90s, there'sgonna be a recession because of
(46:35):
the government paying down itsdebt. And, you know, QE is not
going to do anything for growth.
And no, the Bank of Japan cannotrun out of yen. And anyone
trying to short the end thinkingthat it can is going to lose a
lot of money. And it's like,these people literally gotten
every one of these calls, right,and everyone else has been
wrong. I'm like, why is it moreattention being paid here? These
(46:56):
macro calls and get told all thetime? Oh, no one knows. No one
understands. It's like, thesepeople have literally gotten
every call. Right. Oh, you know,the only risk, the only risk to
government increasing spendingis inflation. I mean, what has
dominated the headlines over thelast, you know, 12 months? It's
(47:17):
been it's been inflation afteryou know, I mean, it's just,
it's just, it's just remarkablehow prescient and how, right,
the, like the leaders of MMTpeople of the MMT movement have
been, and how, I guess, peopleempower, I guess, I guess, the
(47:39):
the Jason fermions of the world,just kind of like gaslight, the
public about the about about howthings actually work and say,
Oh, no, no, pay attention tothat. Like, like, Who are you
going to believe right, me oryour lying eyes like those
people have let they, you know,there's some cranks. I get told,
like, oh, you know, MMT is some?
(48:04):
You know, some it's likeacademics up in an ivory tower.
I'm like, what I mean, it wasliterally founded by a hedge
fund guy. What are you talkingabout? You know, and it's built
on the legacies of people likeHyman Minsky, Hyman Minsky was a
banker.
Adam Rice (48:21):
Yep. Yep. Yeah, it is. It is crazy. It is crazy.
All right. So I think last pointwe want to touch on today in
honor of recording on Super BowlSunday, not really MMT related
more kind of just politically,or political philosophy
Ryan Benincasa (48:39):
of JSON. It's a JSON, it's
Adam Rice (48:42):
a JSON. Ryan, do you want to? Do you want to go into
this into your thoughts on NFLversus the other leagues? Yeah,
Ryan Benincasa (48:49):
well, I just, it's just something that I've
thought about for a long time.
And, you know, especially, youknow, in today's world,
political, the political kind ofdebates have become much more
heated. And a lot of times I seethis sort of, like any, any sort
of public policy that getsproposed will be shut down by
people say like, oh, that'ssocialist. And it's like, first
(49:09):
of all, I mean, there are peoplewho generally say, like, oh,
that's socialist, like,generally, in my experience,
don't even came in tell you whatsocialism even is or what
capitalism. Capitalism even is.
But in general, I just thinkthis sort of tribal tension
between so called socialist andso called capitalist is, is
(49:32):
stupid and unproductive.
Especially in terms of how itframes public policy. And, you
know, this is sort of, to meexemplified and looking at the
NFL versus the other majorsports leagues in in the US,
including major league baseball,the NBA, the NHL, I mean, the
(49:56):
NFL dominates So I don't havethe specific numbers off top my
head, but in terms of ratings interms of revenues in terms of
how many, you know, the value ofthe actual franchises
themselves, like the NFL teams,I mean, it's just, it's just far
and it just commercially isn't,isn't a league of its own,
(50:16):
pardon the pun. And so, in myopinion, a lot of that is due to
the sort of institutional whatwe do, and I always have joke
about the institutionalstructure, right. And it's true,
the NFL, first of all, so Solet's back up for a second. I
(50:39):
was a football nerd as a kid. SoI have all this like kind of
useless knowledge. But but thehistory of the NFL, but
basically 1958, the BaltimoreColts beat the New York Giants
in overtime. In in the NFLchampionship game, it was a
first NFL game that wasbroadcasted nationally. And it
(51:00):
said, like, like, the ratingswere astronomical. And so you
know, the powers that be kind ofrealized, like, wow, we might we
kind of might have somethinghere in terms of commercial
opportunity with expanding thisthe sport in this league. So a
few years later, you hadactually a new league pop up the
(51:22):
American Football League. Soit's sort of like today, like, I
don't know if you remember theXFL it would be like the NFL
competing with the with the, youhad these two leagues NFL, and
at the time AFL, the first SuperBowl was the winner of the NFL
versus the it was nice six,seven, the winner of the NFL
(51:42):
Green Bay Packers versus thewinner of the AFL, which was the
chiefs. And the Chiefs obviouslyare are playing again tonight.
The one of the most famousliberals ever was a few years
later, Super Bowl three JohnNemeth, famously guaranteed
(52:03):
victory over the Colts and theywant the Jets one. A couple of
years after that there was amerger between the NFL and AFL
they now call him the NSC, theAFC during this whole time, like
Pete Roselle, in the 60s was acommissioner in the NFL, he was
very savvy with negotiatingcontracts with or, you know,
(52:24):
these sort of licensingcontracts with, with the, you
know, the national broadcast,right, like NBC, CBS. And so you
buy by sort of combining by byrather than by using all the
teams, as you're sort ofnegotiating leverage, rather
(52:46):
than the way that it's done theother leagues, they were able to
get better terms with with like,with these national broadcasters
and stuff, this is in directcontrast to how things work and
the other leagues, which isdominated by these, these
regional sports networks, right.
(53:07):
So they're called rsmeans. Youknow, they essentially, like a
regional sports network operatorwill essentially, you know,
share advertising revenues withthe actual team so so like the
Madison Square Garden,enterprise, the Dolan family,
(53:29):
they are actually their ownregional sports network
operator. And so you have allthese rsmeans kind of exists
around the country, contractsare negotiated one off, a huge
portfolio of them is actuallyowned by Diamond Sports Group,
which runs like the valleysports what's called Valley
(53:53):
Sports Network. And, I mean, weliterally we were pitched these
bonds, these these D sportbonds, diamond sports, they're
literally about to file forbankruptcy. Like it's in the
regional sports networks, ourmodel is in complete shambles.
Part of that is because of thechange from like cable and
(54:20):
distribution to streaming.
Right? You know, and who ownsit, you know, they haven't been
able to figure out, you know,who which, who's gonna own the
right the streaming rights, youknow, the direct to consumer
streaming, streaming rights,etc. So it's a complete mess and
meanwhile, the NFL justdominates the, with the RSN
model. Right? You You know,everything's done with that
(54:44):
local or regional. A team andnetworks and so, you have, you
know, the the team and thenetwork will split up or, you
know, whatever amount ofadvertising revenue they can
generate within that network. Sothis has the impact and at the
(55:07):
same time, like, like MLB teams,for example, do not have salary
caps the way that the NFL does.
The NFL, by contrast, actuallysplits evenly. The, the revenues
generated from from nationallyfrom from National Broadcasting.
(55:30):
So, so, you know, you could be,you know, I mean, the Dallas
Cowboys, I'm assuming are, Iassume are the most popular team
in the NFL, they make just asmuch money from the National
from national broadcast, as youknow, who was as the Browns do?
(55:51):
The Browns were okay this year.
So but, but but the point is,like, I mean, Dallas versus
Cleveland. I mean, Dallas is amajor, major metropolitan area
that has GDP, that's I'massuming much higher than
Cleveland, right? No offense toCleveland shirts of great place.
But but the point is, is that isthat the revenues are split
(56:13):
evenly, at the same time, theyhave these teams will have
salary caps. And so when youhave to work within a salary
cap, it's really hard toaccumulate a super team. Right?
You can't just you can't justpay people to, you know, just
because you have a, you have adeeper wallet, you can buy the
(56:34):
best players, et cetera, youcan't do that. And so this has
the effect, in my opinion, ofcreating a lot more parity in
the NFL. And so, I mean, acouple years ago, the Bengals
were like a joke. Now. They're,I mean, they're a real
contender. You know, and soessentially, these teams,
because they they split therevenues, because there are
(56:56):
salary caps. They're able to andand because you get the first
pick in the draft, if you're theworst team, right? That's,
that's different actually from,say the NBA, which does not only
the NBA and NHL also do the RSNmodel. But in the NBA, you you
(57:16):
get it's a lottery system.
Right? What is it like thebottom 10 teams, then then,
essentially, it's like a lotteryticket to get the first pick or
something? It's, it doesn't. Inthe in the NFL, it's worse if
you get ranked. And if it's,
Adam Rice (57:36):
I think in the NHL, it's if you're, if you're in the
last, you still only have abouta 25% chance of getting the
number one pick.
Ryan Benincasa (57:44):
That yeah, that sounds right. And so but the NFL
is, is explicit, like Nope, thatwe're gonna, you know, if you're
the worst team, you get thefirst pick. So all this is to
say like, and again, we're justhaving fun here. But like, if
somebody were to rank what,what, what is generally referred
to as, like, quote unquote,socialist versus clinical
(58:06):
capitalist, the NFL is on thatspectrum is far and away more
quote unquote, socialist thanthe other leagues, right. I
mean, I mean, think about, thinkabout the idea of like, a salary
cap, or, you know, splittingincomes completely evenly
amongst the 32 teams, or, youknow, punishing excellence by by
(58:31):
telling the Super Bowl winnerthat they get the last pick of
it, right, like all these allthese tropes, that that that
that we hear. Like the NFL, theNFL clearly leans more so called
left and yet, it's far and away.
The, the most successful of likethe numbers are just are just
(58:52):
off the charts compared to theother leagues, in terms of, you
know, advertising revenues, andtotal enterprise values of the
actual franchises and stuff. Solike the by by making those
sacrifices by Dallas, agreeing,you know, to, to allow Cleveland
to have an equal share in theadvertising pie. What that does
(59:17):
is it creates parity. So the soteams, so the competition's a
lot more even player or excuseme, fans are more engaged,
because every year theoreticallyyour like your like your team
has a shot. You know, thatresults in higher ticket sales
and merchandise sales. And thensalary caps kind of have a
(59:40):
similar impact. So my point whatwould what, you know, kind of
using this analogy, it's justlike, we shouldn't be thinking
of things in terms of oh, thisis socialist, or oh, this is
capitalist. I just think thatthat's a dumb it's a dumb way.
Have of, you know, addressingproblems, right? If we should
(01:00:04):
actually look at what are thewhat are the real world sort of
impacts that are going to happenfrom this type of policy? And
leave it at that. I also justthink in general that that a lot
of what a lot of what peoplecomplain about in terms of,
(01:00:24):
like, you know, they'll say,like, Oh, look at what happened
to Venezuela. A lot, what peoplecomplain about is really a
problem of concentrated powerstructures, rather than
specifically socialism versuscapitalism. Right. Like, like
the, the, the originallibertarian movement in like,
(01:00:45):
the early 20th century wasactually like, it was like an
antitrust movement, right, itwas anti corporate power. But
now like, like modern daylibertarian movement is very
much anti government procorporate power, right, it's
just sort of these arbitraryline second, that that have had
been drawn up. You know, the, Imean, we had to deal with the,
(01:01:07):
the baby formula shortage, youknow, our daughter was just a
few months old, and all of asudden, like, we're, you know,
this this national crisis ofshortage of baby formula,
because, because that market hasconsolidated so much. And, you
know, one of the major suppliersfailed, like a, I think it was
(01:01:28):
like, it was just like a what doyou call it, there was like
bacteria or something found intheir factories, they had to
shut down the factories, andthey couldn't supply. So all of
a sudden, you have a very, youhave concentrated power into
into a few hands. And thatresulted in I mean, we had to
(01:01:50):
take take state action, right,our military actually had to go
and source supply of babyformula, I think, from from
Europe, and bring it over. Soessentially, that I mean, you
could think of that as like a,like a public bailout of these,
you know, supposedly privatecorporations, right? So, in my
(01:02:11):
view, like having, like, that isno different from like, like,
like having just a, like, one ortwo, you know, suppliers for a
critical good, even if it evenif it's, you know, structured as
like a, you know, a corporationand it's supposedly capitalist
like that concentrated powerpresents huge social problems,
(01:02:34):
and is essentially no differentfrom, from the I mean, from
nationalizing something, right,yeah. I mean, it's effectively
nationalized at that point.
Right. So, so that's where,again, I have I have, like, I
mean, look, sometimes usinglabels is useful. And, you know,
(01:02:59):
sometimes it's just not and Ijust, I think, like, I think we
could all do a lot better interms of thinking of things. Not
so in this tribal sense of Oh,socialist versus capitalist and
more so just in terms of, ofAmericans and what you know,
what's best for the country?
Yeah, for sure.
Adam Rice (01:03:21):
That was a great point. All right, I think I
think we can cut it there. Ilike that, that ending and
hopefully everyone enjoys theSuper Bowl tonight. I don't
think we'll be published by youknow, this will be published
after the game is over. Butthank you everyone for listening
and we will see you next time.
The content of this podcast is for informational
(00:02):
purposes only and should not beconstrued as financial or
investment advice. The views andopinions expressed in this
podcast are those of the hostsand their guests. They do not
necessarily reflect a positionof any associated employers or
organizations.
Adam Rice (00:16):
Hello, everyone, and welcome to episode four of the
applied MMT podcast. In today'sepisode, Ryan and I discussed
the effects of the rate hikes interms of inflation and also bank
lending. As usual, thank you forlistening. And with that, we'll
get started. Alright, so I thinkso one of the things we want to
(00:39):
touch on today, there are twothreads in particular, on
Twitter that we thought wererelevant to discuss. The first
is it's actually just a tweet.
It's not a thread written byEdward Harrison, who is a senior
editor at Bloomberg Businessdoes a lot of good work on
economic commentary. Veryfamiliar with MMT. I don't think
(00:59):
he considers himself an MMT er,but Ryan, and I noticed this
tweet was on February 10. Hishandle is at Edward and H on
Twitter. But basically, it lookslike he's coming around the idea
that the interest rate hikesmight be stimulating the
economy. I know that heinterviewed Warren Mosler back
(01:19):
in 2019. And this was somethingthey disagreed on. So it's
interesting to see Harrison kindof changing his mind. I'm going
to read the note right now.
Basically, he says financialconditions are loose enough that
we may have to consider whetherthe interest income channel of
monetary policy transmission hasbecome dominant. Then he writes
(01:40):
and includes a paragraph that hewrote that morning, it says one
last mostly unnoticed monetarypolicy transmission channel, the
interest income channel is alsoadding stimulus to the economy.
If one breaks the economy intothree broad groups, the private
sector, the public sector andthe foreign sector, you can see
the public sector as a net pairof interest income to both of
(02:01):
foreign and private sectors.
This means that credit growthand credit access impeding
functions of rate hikes mustoverride the additional net
financial transfers to theprivate sector from higher rates
for the overall policy to berestrictive. But since long term
interest rates and creditspreads have on net declined
while the mortgage market hasstabilized, its possible
interest income is now thedominant policy transmission
(02:23):
channel, thus adding stimulus.
So very interesting. It soundslike he is kind of leaning, you
know, in the Mosler direction,saying that they're the rate
hikes are stimulating theeconomy. Ryan, do you have any
any thoughts on this?
Ryan Benincasa (02:41):
Well, Adam, my first thought is that we may be
out of a job soon. Yeah, I guesseveryone else is upon it.
Adam Rice (02:53):
It's coming around to this idea. Yeah,
Ryan Benincasa (02:55):
yeah, exactly.
No, I mean, that I think one ofthe critical distinctions in
today's economy versus in thepast with with rate rate hike.
programs implemented by the Fedis just that the the national
debt to GDP level is so highcompared to past periods. Right.
(03:20):
I mean, when when Volker tookrates up, you know, to to the
mid teens, and in the 80s, Ithink the US debt to GDP was
around 30%, or something likethat. Now, it's, you know, like
120%. So, so it's four times. Soit would be the equivalent of,
(03:40):
of, you know, Volker or takingrates up to like, 60%. In.
Right, because, you know, if youjust take four times. Yes,
exactly. So that is somethingthat is genuinely Oh, and the
other. The other thing is theinterest paid on reserves. It is
(04:04):
also a relatively newphenomenon. It's not something
that we had in the 80s. It wasenacted into law in 2008. After
it like we've talked about inthe past, after the you know,
the Clinton administration paiddown the national debt and all
(04:26):
of a sudden there's this fearthat the Fed wouldn't be able to
implement its monetary policy itbecause there'd be no more
treasuries. So we enacted intolaw, that the Fed could just set
the rate to the peers on reservebalances, which again, are like
deposits for banks held at theFed. And so you have these,
(04:49):
these genuinely novelconditions, high debt to GDP,
and interest paid on you know,ample reserve reserves. And so
the that is, to me what, youknow people talk about okay,
well, what's different thistime? Why would you know in the
past even if it's true that thatin the past, you know raising
(05:14):
rates tightening financialconditions? I'm not even
convinced that that's true butbut let's just assume for a
moment that that it is I thinkit's fair to say that that with
these new you know theseconditions is high debt to GDP
ratio and high reserve balancesand interest being paid on
(05:35):
reserves, that that that thosepresents those present novel
conditions that makes theinterest rate hikes much more
stimulative much faster than inpast periods. And I think that's
really what what's missing fromall the commentary and what
potentially, you know, officialsat the Fed investors, busy, you
(06:00):
know, you know, business people,policymakers, what, what a lot
of them are missing right now,is these novel conditions that
that you have, frankly, wehaven't really seen before.
Adam Rice (06:17):
Right, right. It's fine. I also saw a tweet from
Mike Norman. I don't know if yousaw this one. But he said, after
a year that saw eight rateincreases, which was rapid and
aggressive as anything since theVolcker period, bank loans have
increased by $1.1 trillion, byfar the biggest increase in
credit creation, recent memory.
Yeah, I mean, it's
Ryan Benincasa (06:41):
cool. It's all
Adam Rice (06:42):
out there. It just it seems like, you know, not many
people are noticing it. Butmaybe, you know, if Ed
Harrison's noticing it, andthere's other people on Twitter
noticing it, I wonder, you know,I wonder if popular opinion will
change soon.
Ryan Benincasa (06:56):
But Adam, I thought that this is but this is
tightening. Tightening. This isthis is why this is why again,
you know, we started talkingabout this in the fall, this is
why I was like everyone was sowrong on this, because anything
any sort of objective look at atthe data at credit growth,
(07:18):
right, the the stated, Thestated position of the Fed is
that it is trying to tightenmonetary conditions by raising
interest rates, tighteningmonetary conditions, I don't
know about you, but to me, thatmeans that would imply credit
growth, slowing, and or outrightcontracting. And all what we
(07:40):
were seeing in the databeginning last fall, is credit
growth expense expanding. Sothat to me, it's just not even,
it's just not even close. Andthat's why, you know, I felt so
strongly about this idea that,that, you know, the, the economy
(08:03):
is doing a lot better, and wasgoing to do a lot better than
than most were thinking becauseeveryone's thinking that, you
know, the rate hikes are goingto are going to slow credit
growth, but the data was wasclearly showing that was
expanding credit growth. And ifyou think about it, it actually
makes sense. The the higherinterest paid to the private
(08:24):
sector. Right, so the privatesector has more income banks
lend based on income. Right?
When anyone who's taken out aloan, you get a you get a
mortgage, you know, you get ayour commercial loan, what have
you, it's always the bank,underwrites it based on income,
(08:46):
because income reflects theborrower, the borrower's
capacity to repay that loan. Sowhen you so when you have higher
income being channeled to theprivate sector, that enables
higher credit growth, higherbank loan creation, because
(09:06):
there is because the borrowershave income that, you know,
creates capacity for them to, toborrow and service their debts.
So like, I'll have I'll have, Imean, a buddy of mine will send
me all this, you know, this doomand gloom about oh, you know,
consumer credit balances are atall time highs, it's like, well,
(09:32):
first of all, as a percent ofGDP, it's still pretty low. And,
and, and second of all, if ifconsumer credit growth is
growing, that that's going toreflect more spending and growth
and income for for, you know,the production sector that that
(09:52):
produces goods and servicessector that that you know, to
provide services. So, you know,higher consumer credit growth
means it means that you'reprobably gonna have more
consumer spending, which is,which is more income, which
creates even more credit growth.
(10:13):
So this is why, right, it's likethis whole, that's that's how
that's literally how thefinancial system works. That's
how our economy works. Soincreasing income to the private
sector, you know, the logicalconclusion is that that's going
to lead to increase creditgrowth.
Adam Rice (10:33):
Right. I mean, which makes total sense. And I think
just looking at the, you know,the total outstanding consumer
credit doesn't really tell youmuch. You know, the risk would
obviously be if that debt is notbeing serviced, but I think by
all indications it is, it's notlike a 2008 type situation, is
that right?
Ryan Benincasa (10:53):
Right. I mean, the, it? I mean, I think it was,
I think it was Brian Moynihan,who, CEO of Bank of America, who
recently said that, you know,average savings balances are
multiples of what they were preCOVID. Right, for US consumers.
Another thing, oh, I justremembered this. So I think I
(11:15):
sent you Did you Did you happento read that piece written by
Matt Klein, who is the author ofthe economics newsletter, the
overshoot? Now, I actuallyhaven't read it yet. So he makes
some, some really interestingpoints, because a lot of the
narrative has been that, thatconsumers have been spending
(11:38):
down their, their, you know,their COVID Savings balances,
essentially, and, and that's whythey're turning to, you know,
consumer lenders, you know, to,you know, they've spent down
their savings, now, they havestopped borrowing, and oh, my
gosh, this is a way all overagain, like, you know, consumers
(11:59):
are being stretched way toothin. And, you know, we're gonna
have this, this this depressionor recession, because, you know,
they're, they're borrowing toomuch, and they're not gonna be
able to pay it back. Well, firstof all, the, again, the, the
most important, and, like Italked to, I talked to
(12:20):
management teams at banks, andthey all agree, the most
important, and we do this towhen we when we underwrite, you
know, like, like a bond we'regoing to buy for our, for our
fund, the most important inputwhen, when considering, you
know, lending someone money istheir capacity to pay that debt
(12:45):
back. And the most importantdriver is income. So in the US,
you make income by generally byhaving a job. And so when you
have, so when you haveunemployment rates at 50, year
lows, and you have, you know,robust job creation, I mean, we
(13:06):
talked about last week, the theninth nonfarm payroll, you know,
blow out number. And that meansthat people have jobs, they have
incomes, that meet thoseincomes, can then support any
any debt that they're incurring.
So that's, that's what so that'swhy, like the I mean, the MMT
project is so important, ittalks about things like job
(13:28):
guarantees, or so forth. If youwant to have maximum output,
Max, you know, maximumefficiency, maximum, you know,
capacity utilization withinwithin an economy, it requires
ensuring that people have jobsthat they're making an income
off of, so that they can, youknow, so that that can spur
(13:51):
further credit growth. I mean,that that's just how that's how
it works. And so going back tomy what I was saying about the
about Matt clients piece, whathe talked about No, and there's
this narrative, right, peopleburning off their their x their
clinical excess savings. Itactually doesn't look like
(14:13):
that's what's happening. A lotof the the excess savings that
got paid off in 2022. was afunction of taxes paid. Yep.
Okay. So particularly, capitalgains taxes and interest at
(14:34):
lower than average interest anddividends received on financial
assets. Okay, those were thethose were the main contributors
to this sort of burning offexcess savings. Those savings
(14:55):
are gentle really are generallyassociated with higher higher
income earners, right, the lowerincome earners that depend that
whose income comes predominantlyfrom salaried employment was
actually fairly stable. So thesavings in 2022 from from in
(15:19):
that cohort, lower income whorelies predominantly on on, you
know, salaried employment, thatwas stable in 2022. So it was
just like, it was just people,you know, you had this one off
in 2021, you had this all sortsof crazy capital markets
(15:39):
activity, you know, the SPACBonanza, right? I mean, I mean,
I mean, I mean, you know, yeah,exactly. No, but puppets
particularly like, like the dealflow in 21. Yeah, it was nuts. I
mean, I talked to people, youknow, my buddy runs a equity
(16:03):
capital markets desk at atJeffrey's they had an absolute
blowout year, that year. And itwould they just knew that wasn't
going to be repeated, I don'tthink. And then in 2022, do you
activity just dried up? I mean,whether you're talking about the
high yield market, or the IPOmarket, I mean, Spax. I mean,
(16:24):
we're not seeing any longer in2022. So, that is, so you had
this all this capital marketsactivity 21, people had to pay a
lot of taxes on gains from thatin, in 2022. Right, we talked
about this how, you know, therewas a huge fiscal tightening in
(16:44):
2002. And in particular, inApril, last year, you had the
largest inflow of, of money tothe Treasury, ever, and in a
single month. So, again, one offrecord, fiscal tightening, that
primarily impacted higher incomeearners. So, um, so this
(17:10):
narrative that like that, youknow, it people are spending
beyond their means, and they'reburning off all of their
savings, and resorting to, youknow, consumer credit, you know,
they put all this money on theircredit cards, etc. That's not
(17:32):
really what that that's justinconsistent with what with what
the data is saying. Yeah,
Adam Rice (17:41):
yeah. Well, I think yeah, I mean, with with all this
stuff, I think it's alwaysimportant to go beyond the
headline numbers and look atkind of the distribution of, you
know, like the distribution ofthe debt or the distribution of
the assets or the savings. Andthat's something that is often
ignored. By, you know, likeheadline commentary.
Ryan Benincasa (18:03):
And I think that's a great point. Yeah.
Adam Rice (18:06):
And I think I think that brings us so there was a
second thread that you and Iwere talking about, written by
Joey Politano, handles at JosephPolitano. On Twitter. He writes
a news and economics newslettercalled a preset toss.io. I think
I think I'm pronouncing thatcorrectly. But basically, it's
(18:27):
great, by the way. Yeah, he'svery good. But basically, he
wrote a thread starts off hesays, Every few months, someone
asks, What if raising rates?
What if What if raising interestrates actually increases
inflation, just to get promptlydunked on by econ? Twitter? And
he actually has a screenshot ofStephanie Kelton responding to
Jason Furman where she says,Have you considered the
(18:50):
possibility that raisinginterest rates might move
inflation higher? And Furmanjust tersely responds, he just
says, No, that's, that's. Sothere's a lot of interesting
stuff.
Ryan Benincasa (19:04):
Just for the audience, who's Jason Furman.
Adam Rice (19:07):
Jason Furman is a Harvard economics professor, who
I think is also isn't he on thethe CEA, the Council of Economic
Advisers for the White House.
That sounds right. And he was abig, I believe he was a big
austerity advocate. He was onObama, CA. That's right. That's
right. Yeah, he's a he's aprofessor at Harvard. So I think
(19:30):
he informed a lot of Obama eraeconomic policy. He's also a guy
who, you know, in 2018, wassaying things like the Trump tax
cuts are going to limit thegovernment's ability to respond
to future crises. For somereason, he still gets a lot of
airtime and he's very popular onTwitter. So anyway, in this in
(19:51):
this Politano thread, he kind ofyou know, he talks about what or
how raising rates mightcontribute to growth or might
contribute to inflation? One ofthe things let's see here. So
one of the things that he saysis that, you know, one of the
theories, and this is what whatRyan and I always talk about, he
(20:13):
says, raising rates increasesthe income of the private sector
by increasing interest paymentson government debt. Ryan, do you
want to just briefly touch onwhat we were talking about?
Before we started recording whenyou said that there's, you know,
there's probably a lag betweenthe rate hikes and the interest
payments, and then the effectsof those payments on the
economy?
Ryan Benincasa (20:35):
Yeah, sure.
Well, it's just, I mean, it'svery simple, you know, the Fed
raises the interest rate, ittakes time for that interest to
then accrue and be paid to anybondholders, right. So so so for
people who own the securities,a, you know, you kind of have
(20:56):
this, this effect of okay, youknow, if the, you know, the
debt, the existing stock of debtrolls off as that matures, you
know, the, and they issue andthe Treasury issues, new debt,
the interest that is owed on onthe total stock of Outstanding,
outstanding debt getsincrementally more, but then it
(21:17):
takes time for the interest toaccrue and eventually be paid to
holders of that debt. So there'sessentially like a time lag
between the stated rate hikesand the actual impact on
interest income, and eventuallyspending in the economy. So
(21:38):
while while Joey, says that, youknow, it doesn't look like it's
had that much of an impact onthe budget deficit? My argument
would be that that's a verybackwards looking. Conclusion.
And it's, it's obviouslycorrect. I mean, the interest
(22:04):
paid on government debt was verylow for a very long time, it's
going to take time for the youknow, for you know, that those
bonds to and bills and, andnotes to to mature and get
replaced with higher yieldingpaper that then take time to
actually accrue the interest,that thing gets paid. So while
(22:28):
while he is correct, that ithasn't had that much of an
impact on the budget deficit todate, my argument would be that
the impact currently, and goingforward, is going to it is going
to move the needle meaningfullyin terms of the budget deficit,
Adam Rice (22:55):
right. I mean, I think so. I was looking at the
numbers the other day. And theseare gross numbers. But the
annualized rate of federalgovernment interest expenditures
in q4 was 853 billion. Andthat's going to go higher as the
Fed raises rates. So.
Ryan Benincasa (23:16):
So that's the current run rate. That's the
Adam Rice (23:19):
current run rate with the q4 run rate is 853. billion.
Wow. Which is, you know,substantially higher than then
defense spending.
Ryan Benincasa (23:29):
So what's, okay got?
Adam Rice (23:32):
Defense spending is let me see.
Ryan Benincasa (23:36):
So yeah, so that's 3% of GDP. Ish. A 50.
Yeah, yeah. Three 3% of GDP.
Huge. And what was it? And whatwas it a year ago?
Adam Rice (23:49):
So the run rate, the run rate in q4 of 21, was 600
billion. And QR or of 19 was 569billion. So it's, I mean, it's
substantial. It's substantialgrowth. I mean, even compared to
compared to 10 years ago,roughly. So q4 2010, it was only
(24:10):
400 billion. Right? Okay. Soit's a ton of interest income
that's coming to the economy,and it's gonna be in q1 of 23.
When those numbers come out,it's gonna be even larger,
because the, because rates arestill going up.
Ryan Benincasa (24:23):
Right. Right. So and it's also important to note
like the, it's not just it, Imean, it's accelerating, that
that is something that I alsodon't think is quite
appreciated. Like, this is likethis interest compounds. So as
it adds money to the privatesector, right. And then the
(24:47):
money that it adds to theprivate sector, itself accrues
more money, right? This is notsomething this is not something
that we really had for the lastdecade. plus, yeah, right.
That's why it just gets. Sothat's why I just get so shocked
to people talking about, youknow, higher rates as being
(25:11):
tightening. I'm like, I'm like,the money gets paid from the
government to the private sectorand it barely accrues any
interest, right? That is that istight. That is tight money. It's
where it's just like, it just,it just stays there. It doesn't
really accrue much. Now, anymoney that gets added to the
(25:31):
private sector, accrues likelike, you know, four to 5% more
money per annum. That is likethat, to characterize that as
tightening. It's just, it's justwrong. It's just insane in my
mind. And yeah, so what so we'resaying, you know, to the 250.
(25:54):
billion more in terms of runrate, you know, versus a year
ago, that's a, you know, 30 to40% increase on that on that
line. Right. So going from sixmonths. I mean, that, Adam,
that's huge.
Adam Rice (26:12):
Yeah, massive, massive.
Ryan Benincasa (26:16):
And that's why Yeah, no, go ahead. No, I'm just
saying that that's why I justthink that people are so
offsides with this, like, howcan you we're seeing that we're
taking this very, very largeline item on the government's,
you know, you know, I mean, Idon't want to call it an income
(26:39):
statement or p&l because it's amischaracterization. But you get
you get the point on their ontheir budget, and you're
increasing it by 30 to 40%.
Right. What do you mean, what do
Adam Rice (26:52):
you think would happen if social security
payments went up by 30 or 40%? Ayear?
Ryan Benincasa (26:56):
Exactly.
Adam Rice (26:59):
Which is the same, but this this kind of goes back
to the distributional questionwhere it's like, Who is that
money being paid to? And in thiscase, it's being it's being paid
to people who already havemoney, but that money is still
going to be spent or invested?
It's just it's it's all adistributional question.
Ryan Benincasa (27:18):
Right. It's a distributional question. And,
you know, to the extent that itgets spent, I think that is a
fair. That is a to me that thatis the most fair criticism of
our argument, which is thatyeah, sure. It's it's money, but
(27:39):
it's going to people who don'tspend it. So that doesn't
generate economic activitydoesn't cause inflation. It just
kind of accrues in people'ssavings accounts and, and just
sits there. I happen to thinkthat they're, you know, at this
(27:59):
in the past, you know, again,going back to like Volker 80s,
when the debt wasn't very highas a percent of GDP as it is
today. That was probably moretrue. But that today, you know,
you have, because of the becauseof how much this is as a percent
of total GDP, it's going to movein, it's going to have an impact
(28:24):
on on spending, I think spendingan economic activity. That's,
that's, you know, it offsetsthat, that sort of regressive
structure of of what interestrates are. So I think that's a
fair argument. But I think, youknow, just the sheer, just the
(28:47):
sheer size will offset it.
Adam Rice (28:50):
Yeah, I mean, it'd be kind of shocking if it didn't,
you know? Yeah. So the nextthing I wanted to touch on was
also the idea. You know, what wewere speaking about with, with
banks with a willingness tolend, given the higher interest
rates.
Ryan Benincasa (29:12):
So that was another point in Joey's thread.
Adam Rice (29:15):
Yeah, I think he said, trying to find the
specific tweet. Actually, Idon't know if that was in his
thread that you and I weretalking about it, though, just
about how banks will be morelikely to make loans given the
high Yeah,
Ryan Benincasa (29:31):
I think he said he talked about bank margins.
Adam Rice (29:38):
Oh, yeah, he did. He did. Yeah. So so the second
point here, he says, he says thesecond point that people you
know, like to make around higherrates contributing to inflation.
He says that raising ratessupposedly increases bank
margins, which increases bankswillingness to lend thereby
boosting inflation.
Ryan Benincasa (29:55):
What are your thoughts? And so this is
something that's that I mean, iscommonly accepted as truth, this
idea that bank margins gohigher, when interest rates are
higher, and I took a look, Imean, you can you can like go on
the Feds website and look andlook up name or net net interest
(30:16):
margin and look at the aggregatenumber for commercial banks,
United States, there's justthis, there's just no, there's
no correlation at all with thiswith this idea that higher rates
leads to higher net interestmargins for banks, it's just,
it's something that's like anaxiom, that's just not true.
Like so many other things.
There's no evidence thatsupports the assertion that
(30:40):
higher rates increases. Banknames, because, and the reason
that is, is because banks, likewhat they're, you know, they
generate higher rates on their,their assets, right, their loan
and securities portfolios, butthey also have to pay out
(31:02):
interest on their liabilities.
So deposits and other fundingsources funding source, their
mean, is an accounting term,it's not an actual source of
funds. But that's why itdoesn't, it doesn't actually
(31:22):
work to increase margins, whatincreases bank margins is lower
credit losses. I mean, I was, Iliterally, I was looking at a
couple of different banks thatwe have made investments in,
(31:43):
and, you know, looking at theseus, you know, Wall Street sells,
I was looking at, like theGoldman guys model for this one
particular bank, and all of thetorque all of the leverage in
in, in the, in the banks in theearnings. Is is, is, is in the
(32:04):
credit losses, you know, theassumptions for credit losses,
right, if, you know, they'rethey're taken high charges, you
know, for future expected creditlosses today, right, based on
what their economists aremodeling and stuff. And so that,
(32:24):
I mean, it's a non cash chargethat, you know, depending on how
it actually shakes out, movesthe needle substantially in
terms of what their actualearnings end up being, right,
that's where the torque is, iscredit losses, and so the way,
right, right, it's like, it's,you know, the other the other
(32:49):
variables like interest onsecurities and interest on loans
and interest paid onliabilities, those are all
variable, right? The the torqueis in the credit loss. So, if
you want to have lower creditlosses, the way to minimize
credit losses is I think we werealready talking about this is to
(33:11):
have people to have income topay back their debt. So that's,
that's how you, that's how youminimize credit losses is to you
know, have people employed, sothat they can have so that they
can generate income, so thatthey can pay back their, their
(33:31):
credit card or their, their autoloan or their student loan or
their mortgage. Right, that ishow you you achieve that end is
by ensuring that people havejobs, that they're being
productive and getting paid forit. And therefore, using that
income to pay back their debtany any, you know, analyst or
(33:56):
loan officer who's any good atwhat they do is going to is
going to be focused on onincome, you know, for the
borrower, for the potentialborrower, and their, you know,
their capacity to repay. Now,capacity repay could also mean
that they have other othersources of credit, right. But
(34:20):
ultimately, all of that any sortof loan is that gets that gets
made, is made with an assumptionthat there is going to be income
to to support it to pay it back.
Right. Even even like a, youknow, a company with an asset,
asset backed loan, you know, fortheir for the inventories that
(34:45):
they like, like, the idea isthat they can sell their
inventories, generate income andpay back that loan, right. So
it's all based on income. So,again, you know, if if If the
government is paying more isspending more into the economy,
that spending is going togenerate income for the private
(35:07):
sector, and with the privatesector has more income, it's
going to be able to service itsdebt. So that's, that's why
that's the other reason why Ithink, you know, rate hikes are
potentially inflationary,especially, especially in
(35:29):
today's world, because it'sproviding income that then that
then leads to more creditcreation. And, and more credit
creation means more spending.
You know, we've already talkedabout this, but But yeah, so
that's the that's, that's,that's how that works. The other
(35:53):
thing I would say about, youknow, banks, business models and
stuff, if you can, so if youhave, if a bank is generating
interest on its reservebalances, which is something
that they didn't used to make,okay, it was reserves were
treated like cash. So theydidn't accrue any interest until
(36:14):
2008. So they're during intereston reserve balances, and also on
their securities portfolio. Thatinterest, right, and that's in
their securities portfolio, theyare basically risk free, like
Treasury securities and agencyMBs. And that sort of thing,
that interest, it, you know,increases the return on bank
(36:40):
equity capital, okay, so those,so the banks do generate higher
income higher from thosesources. So that earnings, that
higher earnings, accrues andhelps build up the capital, that
the bank's equity capitalsurplus. And so that creates
(37:03):
more of a cushion for potentialcredit losses. So to the extent
that it you know, it doesinfluence bank lending activity,
my argument would be that,you're, you're essentially
building up additional surplus,so that, you know, that like
(37:27):
that return, that retainedearnings balance is going to
grow, you know, in theshareholder equity portion of
the bank's balance sheet. Sothat creates an additional
capital surplus that can absorbpotential credit losses. So if
you have, the bank has more, hasa bigger buffer, they may be
(37:48):
comfortable going out and makingpotentially riskier loans and
generate a higher yield on thoseloans. Because they have space
to absorb potential creditlosses. So that's something that
I think, and now it is true thatthat the higher the higher rate
(38:12):
paid on on debt is going tocause the bank securities
portfolio, there are assets totake a mark to market loss,
that's going to that's going tolower the bank's equity capital,
right, you have to you have tomark those securities to market
and so that, that, you know thatthat is going to you know,
(38:39):
create a lowercapital surplus, but going
forward, right, you have lowerbook equity for a bank, any
higher and you're generatinghigher income, that means that
your return on equity is goingto be higher, and that is going
to help build the capitalsurplus. So again, this is sort
(39:01):
of like thinking about forwardlooking not just backward look,
it's like, okay, what, what isthe earnings profile of these
companies, you know, goingforward. And so my contention
is, especially if you don't haveas rapid of rate hikes in 23, as
we saw in 22, you've alreadysort of the banks have already
(39:22):
taken the charge to their, totheir book equity, in terms of
like the mark to market losseson their securities portfolio,
they've already taken thatcharge. So now it's just like,
okay, they're going to earnhigher and higher interest on
their securities and on theirreserve balances that accrues to
the to the return to theretained earnings balance. And
that helps build up that capitalsurplus that then, you know,
(39:46):
enables them to go out and andmake and make more loans. So
that's to me, that is how thisthis really worked. And there
was a lot of thought that, that,like the QE programs, post
financial crisis wouldaccomplish exactly what we what
(40:08):
I just described. So okay, youknow, the Fed is going to, is
going to pin rates low acrossthe curve. And so banks are
going to I, like I read this,this one thesis that like,
essentially, okay, that's goingto, you know, the banks are
going to realize, a one timesort of gain on their securities
(40:28):
portfolio. And, and, and that'sgoing to accrue to the, to the
capital surplus, and, andthey're going to be able to, you
know, build their balance sheetsback up where they can, where
they're in a position to makemore loans. The problem with
that is that incremental income,on their securities on their on
(40:50):
the asset side of their balancesheet is much lower, right, you
book what it's like a you book aone time sort of gain, because
the Fed lowered rates, so thatmeans higher prices for, for
Treasury securities, so and soyou sell that, you know, back
to, or you sell that to the Fed,right, because they were in the
(41:11):
market buying bonds, so, you getthe sort of one time capital
gain, but then your, yourincremental returns are lower,
because Because rates are low.
In this case, it's the, it's theopposite, you took a took a mark
to market charge and 2022. Andnow your incremental returns are
gonna be higher. And so it's tome, it's possible, if not
(41:35):
likely, that that's going tospur more credit growth.
Because, you know, the otherthing is, you know, we've
really, you know, the basilregulations and stuff have had
an impact on the, you know, theratio of, you know, assets to,
(41:56):
to, you know, bank equity, youknow, essentially, the banks
have to have to hold up, theyhad to have higher equity
balances than they than theyused to, I mean, the the
effective leverage ratios forsome banks, you know, before the
(42:17):
financial crisis was like, 40,or 50. To one, right, so, so
that just doesn't leave a lot ofroom, right? Like, you can
quickly become insolvent. If youget a you know, a big, I mean,
that's basically what happened,the financial crisis was, you
know, you got this sort of, youknow, these these banks took
(42:39):
this hit to their, to their loanbooks, and all of a sudden
they're insolvent, there's justone big margin call,
essentially, on the system thatrequired Congress to create
money to cure the the margincall essentially, the the
insolvency. That's basicallywhat happened. You know, so now
(43:05):
the banks have a much higher,you know, equity balances as a
as a percent of their totalassets. There's a lot more
cushion there. So there,there's, uh, you know, it's
amazing, I'm pretty sure I readthis the other day, like, I
don't think Bank of America lostmoney, you know, in during the
(43:26):
financial crisis. isn't reallyisn't that amazing? Yeah, I read
that. And then I, I sent it tomy coworker, and he was like, I
don't know if that's right. Thatthat might have been JP Morgan.
But, but it isn't that likeconcrete, like, incredible to
think about. You don't even likeyou have this, like global
(43:49):
financial crisis, and you don'teven lose money. I mean, it's a
it shows kind of like the, thehow the sort of the, the
institutional structure behindbanks is pretty strong in the
United States, that how much wesupport them. But, ya know, it's
(44:10):
just, it's just an amazing thingto consider, you know, for, for
companies that are supposedly,you know, cyclical, and, and,
you know, at the whims of, youknow, business cycles and stuff
like tonight and lose moneyduring that period. is amazing.
Adam Rice (44:29):
That is amazing.
That's, that's kind of crazy.
I'm so, you know, what just cameto mind is, you know, last week
when we were talking to Douglas,just about how, you know, we
were saying that now, it's justit's kind of like an empty petri
dish, like we're about to, youknow, we've seen a lot of things
that are confirming MMT. Andwill I think we'll continue to
(44:50):
see things that are confirmingthat MMT is right. What I'm
thinking about now is how kindof you know, after the oh eight
crisis when the government youknow, they did some stimulus,
then they basically pursuedausterity. They did quantitative
easing, they lowered interestrates to try to spur growth. And
credit growth was very slow. Andnow we're seeing them raising
(45:12):
interest rates to containgrowth, but we're seeing rapid
credit, as well. Like it'stotally backwards. And so, you
know, I think really like it allcomes down to what you're
saying, which is, after 2008.
The reason banks weren'tlending, I mean, interest rates
were basically zero the reasonthey weren't lending wasn't
because it had nothing to dowith interest rates. It's
(45:32):
because there weren't creditworthy borrowers out there. And
that's exactly. There are creditworthy borrowers out there. And
even though rates are increasingrapidly, loans are still
expanding, because it doesn'tmatter what the interest rate
is, it matters if there's creditworthy borrowers.
Ryan Benincasa (45:52):
Exactly, exactly. And you'll hear me hear
this thing like, like, oh, thesupply of credit, it's like,
Dude, there's no limit to thesupply of credit. There's only a
limit to credit worthyborrowers.
Adam Rice (46:04):
Exactly. That's, that's what it all comes down
to. Yeah, very interesting. Itreally isn't MMT petri dish,
like the last the last 15 years?
Yeah.
Ryan Benincasa (46:15):
Well, I mean, that's what's been so amazing to
me is like, when I startedlooking into MMT, and, you know,
they made they said that, oh,you know, QE is not going to do
anything. And you know, there'sgonna be a recession. But this
is back in the 90s, there'sgonna be a recession because of
(46:35):
the government paying down itsdebt. And, you know, QE is not
going to do anything for growth.
And no, the Bank of Japan cannotrun out of yen. And anyone
trying to short the end thinkingthat it can is going to lose a
lot of money. And it's like,these people literally gotten
every one of these calls, right,and everyone else has been
wrong. I'm like, why is it moreattention being paid here? These
(46:56):
macro calls and get told all thetime? Oh, no one knows. No one
understands. It's like, thesepeople have literally gotten
every call. Right. Oh, you know,the only risk, the only risk to
government increasing spendingis inflation. I mean, what has
dominated the headlines over thelast, you know, 12 months? It's
(47:17):
been it's been inflation afteryou know, I mean, it's just,
it's just, it's just remarkablehow prescient and how, right,
the, like the leaders of MMTpeople of the MMT movement have
been, and how, I guess, peopleempower, I guess, I guess, the
(47:39):
the Jason fermions of the world,just kind of like gaslight, the
public about the about about howthings actually work and say,
Oh, no, no, pay attention tothat. Like, like, Who are you
going to believe right, me oryour lying eyes like those
people have let they, you know,there's some cranks. I get told,
like, oh, you know, MMT is some?
(48:04):
You know, some it's likeacademics up in an ivory tower.
I'm like, what I mean, it wasliterally founded by a hedge
fund guy. What are you talkingabout? You know, and it's built
on the legacies of people likeHyman Minsky, Hyman Minsky was a
banker.
Adam Rice (48:21):
Yep. Yep. Yeah, it is. It is crazy. It is crazy.
All right. So I think last pointwe want to touch on today in
honor of recording on Super BowlSunday, not really MMT related
more kind of just politically,or political philosophy
Ryan Benincasa (48:39):
of JSON. It's a JSON, it's
Adam Rice (48:42):
a JSON. Ryan, do you want to? Do you want to go into
this into your thoughts on NFLversus the other leagues? Yeah,
Ryan Benincasa (48:49):
well, I just, it's just something that I've
thought about for a long time.
And, you know, especially, youknow, in today's world,
political, the political kind ofdebates have become much more
heated. And a lot of times I seethis sort of, like any, any sort
of public policy that getsproposed will be shut down by
people say like, oh, that'ssocialist. And it's like, first
(49:09):
of all, I mean, there are peoplewho generally say, like, oh,
that's socialist, like,generally, in my experience,
don't even came in tell you whatsocialism even is or what
capitalism. Capitalism even is.
But in general, I just thinkthis sort of tribal tension
between so called socialist andso called capitalist is, is
(49:32):
stupid and unproductive.
Especially in terms of how itframes public policy. And, you
know, this is sort of, to meexemplified and looking at the
NFL versus the other majorsports leagues in in the US,
including major league baseball,the NBA, the NHL, I mean, the
(49:56):
NFL dominates So I don't havethe specific numbers off top my
head, but in terms of ratings interms of revenues in terms of
how many, you know, the value ofthe actual franchises
themselves, like the NFL teams,I mean, it's just, it's just far
and it just commercially isn't,isn't a league of its own,
(50:16):
pardon the pun. And so, in myopinion, a lot of that is due to
the sort of institutional whatwe do, and I always have joke
about the institutionalstructure, right. And it's true,
the NFL, first of all, so Solet's back up for a second. I
(50:39):
was a football nerd as a kid. SoI have all this like kind of
useless knowledge. But but thehistory of the NFL, but
basically 1958, the BaltimoreColts beat the New York Giants
in overtime. In in the NFLchampionship game, it was a
first NFL game that wasbroadcasted nationally. And it
(51:00):
said, like, like, the ratingswere astronomical. And so you
know, the powers that be kind ofrealized, like, wow, we might we
kind of might have somethinghere in terms of commercial
opportunity with expanding thisthe sport in this league. So a
few years later, you hadactually a new league pop up the
(51:22):
American Football League. Soit's sort of like today, like, I
don't know if you remember theXFL it would be like the NFL
competing with the with the, youhad these two leagues NFL, and
at the time AFL, the first SuperBowl was the winner of the NFL
versus the it was nice six,seven, the winner of the NFL
(51:42):
Green Bay Packers versus thewinner of the AFL, which was the
chiefs. And the Chiefs obviouslyare are playing again tonight.
The one of the most famousliberals ever was a few years
later, Super Bowl three JohnNemeth, famously guaranteed
(52:03):
victory over the Colts and theywant the Jets one. A couple of
years after that there was amerger between the NFL and AFL
they now call him the NSC, theAFC during this whole time, like
Pete Roselle, in the 60s was acommissioner in the NFL, he was
very savvy with negotiatingcontracts with or, you know,
(52:24):
these sort of licensingcontracts with, with the, you
know, the national broadcast,right, like NBC, CBS. And so you
buy by sort of combining by byrather than by using all the
teams, as you're sort ofnegotiating leverage, rather
(52:46):
than the way that it's done theother leagues, they were able to
get better terms with with like,with these national broadcasters
and stuff, this is in directcontrast to how things work and
the other leagues, which isdominated by these, these
regional sports networks, right.
(53:07):
So they're called rsmeans. Youknow, they essentially, like a
regional sports network operatorwill essentially, you know,
share advertising revenues withthe actual team so so like the
Madison Square Garden,enterprise, the Dolan family,
(53:29):
they are actually their ownregional sports network
operator. And so you have allthese rsmeans kind of exists
around the country, contractsare negotiated one off, a huge
portfolio of them is actuallyowned by Diamond Sports Group,
which runs like the valleysports what's called Valley
(53:53):
Sports Network. And, I mean, weliterally we were pitched these
bonds, these these D sportbonds, diamond sports, they're
literally about to file forbankruptcy. Like it's in the
regional sports networks, ourmodel is in complete shambles.
Part of that is because of thechange from like cable and
(54:20):
distribution to streaming.
Right? You know, and who ownsit, you know, they haven't been
able to figure out, you know,who which, who's gonna own the
right the streaming rights, youknow, the direct to consumer
streaming, streaming rights,etc. So it's a complete mess and
meanwhile, the NFL justdominates the, with the RSN
model. Right? You You know,everything's done with that
(54:44):
local or regional. A team andnetworks and so, you have, you
know, the the team and thenetwork will split up or, you
know, whatever amount ofadvertising revenue they can
generate within that network. Sothis has the impact and at the
(55:07):
same time, like, like MLB teams,for example, do not have salary
caps the way that the NFL does.
The NFL, by contrast, actuallysplits evenly. The, the revenues
generated from from nationallyfrom from National Broadcasting.
(55:30):
So, so, you know, you could be,you know, I mean, the Dallas
Cowboys, I'm assuming are, Iassume are the most popular team
in the NFL, they make just asmuch money from the National
from national broadcast, as youknow, who was as the Browns do?
(55:51):
The Browns were okay this year.
So but, but but the point is,like, I mean, Dallas versus
Cleveland. I mean, Dallas is amajor, major metropolitan area
that has GDP, that's I'massuming much higher than
Cleveland, right? No offense toCleveland shirts of great place.
But but the point is, is that isthat the revenues are split
(56:13):
evenly, at the same time, theyhave these teams will have
salary caps. And so when youhave to work within a salary
cap, it's really hard toaccumulate a super team. Right?
You can't just you can't justpay people to, you know, just
because you have a, you have adeeper wallet, you can buy the
(56:34):
best players, et cetera, youcan't do that. And so this has
the effect, in my opinion, ofcreating a lot more parity in
the NFL. And so, I mean, acouple years ago, the Bengals
were like a joke. Now. They're,I mean, they're a real
contender. You know, and soessentially, these teams,
because they they split therevenues, because there are
(56:56):
salary caps. They're able to andand because you get the first
pick in the draft, if you're theworst team, right? That's,
that's different actually from,say the NBA, which does not only
the NBA and NHL also do the RSNmodel. But in the NBA, you you
(57:16):
get it's a lottery system.
Right? What is it like thebottom 10 teams, then then,
essentially, it's like a lotteryticket to get the first pick or
something? It's, it doesn't. Inthe in the NFL, it's worse if
you get ranked. And if it's,
Adam Rice (57:36):
I think in the NHL, it's if you're, if you're in the
last, you still only have abouta 25% chance of getting the
number one pick.
Ryan Benincasa (57:44):
That yeah, that sounds right. And so but the NFL
is, is explicit, like Nope, thatwe're gonna, you know, if you're
the worst team, you get thefirst pick. So all this is to
say like, and again, we're justhaving fun here. But like, if
somebody were to rank what,what, what is generally referred
to as, like, quote unquote,socialist versus clinical
(58:06):
capitalist, the NFL is on thatspectrum is far and away more
quote unquote, socialist thanthe other leagues, right. I
mean, I mean, think about, thinkabout the idea of like, a salary
cap, or, you know, splittingincomes completely evenly
amongst the 32 teams, or, youknow, punishing excellence by by
(58:31):
telling the Super Bowl winnerthat they get the last pick of
it, right, like all these allthese tropes, that that that
that we hear. Like the NFL, theNFL clearly leans more so called
left and yet, it's far and away.
The, the most successful of likethe numbers are just are just
(58:52):
off the charts compared to theother leagues, in terms of, you
know, advertising revenues, andtotal enterprise values of the
actual franchises and stuff. Solike the by by making those
sacrifices by Dallas, agreeing,you know, to, to allow Cleveland
to have an equal share in theadvertising pie. What that does
(59:17):
is it creates parity. So the soteams, so the competition's a
lot more even player or excuseme, fans are more engaged,
because every year theoreticallyyour like your like your team
has a shot. You know, thatresults in higher ticket sales
and merchandise sales. And thensalary caps kind of have a
(59:40):
similar impact. So my point whatwould what, you know, kind of
using this analogy, it's justlike, we shouldn't be thinking
of things in terms of oh, thisis socialist, or oh, this is
capitalist. I just think thatthat's a dumb it's a dumb way.
Have of, you know, addressingproblems, right? If we should
(01:00:04):
actually look at what are thewhat are the real world sort of
impacts that are going to happenfrom this type of policy? And
leave it at that. I also justthink in general that that a lot
of what a lot of what peoplecomplain about in terms of,
(01:00:24):
like, you know, they'll say,like, Oh, look at what happened
to Venezuela. A lot, what peoplecomplain about is really a
problem of concentrated powerstructures, rather than
specifically socialism versuscapitalism. Right. Like, like
the, the, the originallibertarian movement in like,
(01:00:45):
the early 20th century wasactually like, it was like an
antitrust movement, right, itwas anti corporate power. But
now like, like modern daylibertarian movement is very
much anti government procorporate power, right, it's
just sort of these arbitraryline second, that that have had
been drawn up. You know, the, Imean, we had to deal with the,
(01:01:07):
the baby formula shortage, youknow, our daughter was just a
few months old, and all of asudden, like, we're, you know,
this this national crisis ofshortage of baby formula,
because, because that market hasconsolidated so much. And, you
know, one of the major suppliersfailed, like a, I think it was
(01:01:28):
like, it was just like a what doyou call it, there was like
bacteria or something found intheir factories, they had to
shut down the factories, andthey couldn't supply. So all of
a sudden, you have a very, youhave concentrated power into
into a few hands. And thatresulted in I mean, we had to
(01:01:50):
take take state action, right,our military actually had to go
and source supply of babyformula, I think, from from
Europe, and bring it over. Soessentially, that I mean, you
could think of that as like a,like a public bailout of these,
you know, supposedly privatecorporations, right? So, in my
(01:02:11):
view, like having, like, that isno different from like, like,
like having just a, like, one ortwo, you know, suppliers for a
critical good, even if it evenif it's, you know, structured as
like a, you know, a corporationand it's supposedly capitalist
like that concentrated powerpresents huge social problems,
(01:02:34):
and is essentially no differentfrom, from the I mean, from
nationalizing something, right,yeah. I mean, it's effectively
nationalized at that point.
Right. So, so that's where,again, I have I have, like, I
mean, look, sometimes usinglabels is useful. And, you know,
(01:02:59):
sometimes it's just not and Ijust, I think, like, I think we
could all do a lot better interms of thinking of things. Not
so in this tribal sense of Oh,socialist versus capitalist and
more so just in terms of, ofAmericans and what you know,
what's best for the country?
Yeah, for sure.
Adam Rice (01:03:21):
That was a great point. All right, I think I
think we can cut it there. Ilike that, that ending and
hopefully everyone enjoys theSuper Bowl tonight. I don't
think we'll be published by youknow, this will be published
after the game is over. Butthank you everyone for listening
and we will see you next time.
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