Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Joining me now is a guy who wrote a great
column about something that is so insidious and so incredibly
mindnumbingly stupid at the same time that it almost sounds
like it's something made up, but it's not.
Speaker 2 (00:14):
So.
Speaker 1 (00:14):
Joining me now is Alexander Salter, who happens to be
the Georgie G. Snyder Professor of Economics in the Royals
College of Business at Texas Tech. He is one of
the co authors of this article from The Hill dot Com. Alexander,
Welcome to the show, Thanks Maddy. Let's talk about modern
(00:35):
monetary theory. What is it.
Speaker 2 (00:39):
All? The boy so? Mod monetary theory is a complete
topsy turvy approach to public finance. Basically, it says the
government should finance itself entirely by printing money, and the
only thing that we would do with taxes is raise
taxes if eventually we need to control inflation. Now, many
people who back modern monetary theory claim that that's a
(01:02):
very rare thing that would ever have to happen, because
if there's any quote unquote slack anywhere in the economy,
if there's any idle resources, prices won't go up when
you print money. So it's really impressive is that we
had a pretty clean test of this theory over the
past couple of years, and while we saw skyrocketing inflation.
So it's actually amazing that you had anybody who identified
(01:23):
as an economist who was willing to sign on with
this paradigm. And yet they did, and it's caused a
lot of problems for millions and millions of Americans.
Speaker 1 (01:32):
But in my view, and you can correct me if
I'm wrong, I think that too much of our monetary
policy is simply designed to enable more government spending. And
this is like a government spender's dream. I mean, you
can spend and spend and spend and not have any
negative replication repercussions. This is this is like big government's
you know nirvana here And how did this become so accepted?
(01:58):
Who started this nonsense and how did to gain steam
mainstream wise?
Speaker 2 (02:05):
It is absolutely a recipe for fiscal qualities and money mischief.
If you look back at what happened during and just
after COVID, you had blowout government spending, deficit spending. Now
that by itself would not have causedlation. What ultimately made
it inflationary was all those new bonds that appeared on
the market all the money that the government had to
borrow to finance that spending. Our central bank, the Federal Reserve,
(02:28):
then stepped in created money at usin air to buy
up all those new bonds. So it was an indirect process,
but nonetheless it was printing press finance. Again, the usual
way we think about these things is we should use money.
Monetary policy control the money supply to dampen down inflation,
and the government gets revenue via taxes. Modern monetary theory
(02:50):
turns that on its head. We only use taxes to
control inflation, and we print money to fund the government well,
with politicians and bureaucrats at the helm. That's a recipe
for printing too much money too fast, and of so,
of course prices go through the roof. Now, there are
many economists who are close to democratic policy makers, policy
makers and politicians and the Democratic Party who advocated these ideas.
(03:12):
From twenty twenty to twenty twenty two, it became de
facto policy and governed our COVID response, and as a result,
household were hit with crippling inflation. So this was every
bit as tragic as it was predictable.
Speaker 1 (03:25):
What sort of responsibility do you think the FED has
in terms of putting fiscal policy in place that is
good for the American people versus putting fiscal policy in
place that allows for a larger government through the sale
of government bonds.
Speaker 2 (03:43):
Well, it's a difficult question to really pin down exactly
how we want fiscal policy and monetary policy to work.
So usually the way that we think about these things
is that the government the treasury elected officials decide how
much to spend. That's fiscal policy, and then in the
background you have the FED Bank conducting monetary policy. Ultimately,
inflation is the federal reserves problem. The central bank in
(04:07):
the long run, determines the cost of living by controlling
how much money is in circulation. The reason that things
can get a little bit dicey is that when the
government needs to borrow a lot of money to finance
what it perceives to be emergency policy, that's going to
put upward pressure on interest rates. And the FED often
doesn't like seeing upward pressure on interest rates, so they
(04:30):
create new money to buy up government debt to keep
yields and hence interest rates down. So the problem here
is that irresponsible fiscal policy by politicians puts pressure on
the central banking bureaucrats to conduct monetary policy too loosely,
and again the predictable result of that is that prices
for everything are going to go up.
Speaker 1 (04:52):
So during the go go years of COVID, when we
were coming up with one giant stimulus program after another,
how much was the money supply expanded during that timeframe,
meaning how much more money did they throw into the
circulating money in the economy.
Speaker 2 (05:10):
It grew really fast, really quick. Before COVID, the Federal
Reserve's balance sheet, which is a narrow measure of the
money supply, we sometimes call that the monetary base. The
total assets on by the Federal Reserve system that was
about four trillion. It's sent shot up to around eight trillion,
although it's falling now. It's slightly smaller than that now.
And that actually compounded to larger measures than the money
(05:31):
supply that grew even more so, this was a lot
of liquidity, a lot of new money created very quickly
and spent very quickly. Again, think about the COVID stimulus checks.
Right when everybody opened the mail and day and found
a seven hundred and fifty one thousand dollars check from
the Treasury Department. Now was that financed indirectly. It was
(05:51):
financed by the FED creating money and distributing it to
the financial system. And so it's not really a surprise
that when America and households get all this new money,
they needed to spend it on stuff. So as soon
as they could they did. They spent it on everything,
and as a result, everything got more expensive. What makes
this truly tragic is that the prices of goods and
(06:12):
services that households need, food, clothing, shelter that rose much
faster than wages is did. So if the things that
you need to buy to maintain your standard of rialting
are getting more expensive faster than your income, you're basically
taking a pay cut. And that's why I think Americans
were so hopping mad about this when they went to
the ballot box for the most recent election.
Speaker 1 (06:34):
So I agree with you on that. By the way,
I do think inflation was one of the main drivers
that drove Trump back into the White House. But I
want to ask you a question about that election, because
before you came on the show, we were talking about
the efforts by Elon Muskin to think Ramaswami to shape
five hundred billion dollars off of the budget, and what
(06:56):
would you think a contraction. Let's just say for this
sake of this conversation, they pull it off right, and
they shrink the size of the federal workforce, they shrink
the size of some of these departments, and that five
hundred billion comes out of the deficit spending. What does
that do to the economy overall? Does it force us
into recession in the short term? What would be the
(07:18):
most likely outcome of that kind of of contraction.
Speaker 2 (07:23):
Well, I don't think that there would actually be a recession.
When you shrink government spending, that frees up resources for
private parties who can then spend that money elsewhere. So
what that sort of a project would do, if they
actually accomplished, it would transfer resources resources that were previously
being spent by the government. Money that was previously being
spent by the government would then be back in private hands,
(07:45):
where there are much stronger incentives to use that funding,
to use that money more efficiently. So, if anything, you
might even see a very small optic in productivity, which
would of course mean that the economy is able to
produce new goods and services easier than it was before.
Now I think that that effect would actually be very slight.
(08:05):
You'd probably get a much more radical reduction and federal
expenditure and the size of the bureaucracy to get a
real big boost of productivity. It's worth remembering that five
hundred billion in the grand scheme of things really isn't
that much. Yeah, right now, the national debt stands at
roughly thirty trillion dollars, larger than the size of the
overall US economy, and it's just on a course to
(08:28):
grow and grow and grow. We need to get serious
about this now and be thinking about even more cuts.
Speaker 1 (08:33):
What does a debt crisis look like if we do
get to the point where we don't get serious about this,
and then we get to the point where no one
wants to buy our debt and they either have to
print money, which creates a hyperinflation situation, what would be
the outcome of us getting to that point.
Speaker 2 (08:50):
It's going to be ugly. What you really have to
worry about is investors no longer willing to buy US bonds,
like you just said, and in fact, if it becomes
if we ever get to the point where the US
is not able to meet it's that obligations we're actually
looking at a default that would be truly catastrophic. Remember,
the global financial system basically treats US treasury securities, government
(09:14):
debt as a quote unquote risk free asset. It's the
asset upon which all other assets and transactions and the
global financial system are built. If the value of those
things becomes comes called into question, you're basically pulling out
the bottom layer of a house of cards. The whole
thing is going to come crumbling down. Well, this, we
really need to make sure that Uncle Sam's fiscal houses
(09:37):
in order, otherwise we could be looking at something nasty.
Speaker 1 (09:40):
Alexander Salter, I wish I disagreed with you. I wish
that I could say no, I don't think that will happen.
I think my issue with the United States of America
right now is that we have this attitude of hey,
we're the USA, We're good for it. You know, we're
not going to run out of them. Who's going to
stop buying our bonds? But the reality is is that
when they're perceived to be a bad investment, people will
(10:00):
stop buying our minds, and then we get to the
point where we can't pay benefits. It's just the cascade
effect is something that I don't think Americans can even
imagine happening here.
Speaker 2 (10:12):
It is frightening, But there is a silver lining. The
silver lining is that we don't actually need to shrink
the national debt in order to get this problem under control.
All we need to do is mop out rate the
rate at which federal spending grows. As long as we
can get government spending growth at or below the rate
of overall economic growth, tax revenues to Uncle Sam are
(10:36):
naturally going to grow faster than the debt, and so
we're actually going to pay pay down the debt on
its own without having to actively try and reduce it.
And so really this is a sustainability question. If the economy,
in terms of actual goods and services that we produce,
is growing at say three percent per year, it's okay
for federal spending to grow, but it should grow at
(10:56):
no more than two point nine percent per year. Keep
real economic growth a heap of a head of government
spending growth, and after five, ten, fifteen years, our net
fiscal position is actually going to look stronger than it
is now.
Speaker 1 (11:11):
But is that kind of like paying the minimum payments
on your credit card? So it would take us seventy
k jillion years to actually pay off enough of that
debt to where we can maybe take a breath. Because
you know as well as I do, even if there's
great economic policy put in by one president, the next
president can come in and undo.
Speaker 2 (11:27):
All of that. Yes, that's the scary thing, right. You
need continuity across several policy regimes, across several presidential administrations
and legislators congresses. So as long as you don't have
a bipartisan consensus to keep federal spending growth below overall
economic growth, right, if the more profligate party comes back
(11:49):
into power and just floods things with spending, then we're
back off to the races. We haven't solved the fundamental problem.
And so that's silver lining, I think is our best
politically feasible hope for getting our fiscal house in order.
But there really does need to be a consensus between
the two parties that this is something that we have
to take seriously.
Speaker 1 (12:09):
From your lips to God's ears. But I've been watching
politics long enough to know that will never happen. Allexander
Salter is the Georgie E. Snyder Professor of Economics in
the Rolls College of Business at Texas Tech. The Mouthful's
worth it, great column, Alexander. I hope we can talk
about it again in the future.
Speaker 2 (12:28):
It was my pleasure. Thanks for having all right, Thank
you
Joining me now is a guy who wrote a great
column about something that is so insidious and so incredibly
mindnumbingly stupid at the same time that it almost sounds
like it's something made up, but it's not.
Speaker 2 (00:14):
So.
Speaker 1 (00:14):
Joining me now is Alexander Salter, who happens to be
the Georgie G. Snyder Professor of Economics in the Royals
College of Business at Texas Tech. He is one of
the co authors of this article from The Hill dot Com. Alexander,
Welcome to the show, Thanks Maddy. Let's talk about modern
(00:35):
monetary theory. What is it.
Speaker 2 (00:39):
All? The boy so? Mod monetary theory is a complete
topsy turvy approach to public finance. Basically, it says the
government should finance itself entirely by printing money, and the
only thing that we would do with taxes is raise
taxes if eventually we need to control inflation. Now, many
people who back modern monetary theory claim that that's a
(01:02):
very rare thing that would ever have to happen, because
if there's any quote unquote slack anywhere in the economy,
if there's any idle resources, prices won't go up when
you print money. So it's really impressive is that we
had a pretty clean test of this theory over the
past couple of years, and while we saw skyrocketing inflation.
So it's actually amazing that you had anybody who identified
(01:23):
as an economist who was willing to sign on with
this paradigm. And yet they did, and it's caused a
lot of problems for millions and millions of Americans.
Speaker 1 (01:32):
But in my view, and you can correct me if
I'm wrong, I think that too much of our monetary
policy is simply designed to enable more government spending. And
this is like a government spender's dream. I mean, you
can spend and spend and spend and not have any
negative replication repercussions. This is this is like big government's
you know nirvana here And how did this become so accepted?
(01:58):
Who started this nonsense and how did to gain steam
mainstream wise?
Speaker 2 (02:05):
It is absolutely a recipe for fiscal qualities and money mischief.
If you look back at what happened during and just
after COVID, you had blowout government spending, deficit spending. Now
that by itself would not have causedlation. What ultimately made
it inflationary was all those new bonds that appeared on
the market all the money that the government had to
borrow to finance that spending. Our central bank, the Federal Reserve,
(02:28):
then stepped in created money at usin air to buy
up all those new bonds. So it was an indirect process,
but nonetheless it was printing press finance. Again, the usual
way we think about these things is we should use money.
Monetary policy control the money supply to dampen down inflation,
and the government gets revenue via taxes. Modern monetary theory
(02:50):
turns that on its head. We only use taxes to
control inflation, and we print money to fund the government well,
with politicians and bureaucrats at the helm. That's a recipe
for printing too much money too fast, and of so,
of course prices go through the roof. Now, there are
many economists who are close to democratic policy makers, policy
makers and politicians and the Democratic Party who advocated these ideas.
(03:12):
From twenty twenty to twenty twenty two, it became de
facto policy and governed our COVID response, and as a result,
household were hit with crippling inflation. So this was every
bit as tragic as it was predictable.
Speaker 1 (03:25):
What sort of responsibility do you think the FED has
in terms of putting fiscal policy in place that is
good for the American people versus putting fiscal policy in
place that allows for a larger government through the sale
of government bonds.
Speaker 2 (03:43):
Well, it's a difficult question to really pin down exactly
how we want fiscal policy and monetary policy to work.
So usually the way that we think about these things
is that the government the treasury elected officials decide how
much to spend. That's fiscal policy, and then in the
background you have the FED Bank conducting monetary policy. Ultimately,
inflation is the federal reserves problem. The central bank in
(04:07):
the long run, determines the cost of living by controlling
how much money is in circulation. The reason that things
can get a little bit dicey is that when the
government needs to borrow a lot of money to finance
what it perceives to be emergency policy, that's going to
put upward pressure on interest rates. And the FED often
doesn't like seeing upward pressure on interest rates, so they
(04:30):
create new money to buy up government debt to keep
yields and hence interest rates down. So the problem here
is that irresponsible fiscal policy by politicians puts pressure on
the central banking bureaucrats to conduct monetary policy too loosely,
and again the predictable result of that is that prices
for everything are going to go up.
Speaker 1 (04:52):
So during the go go years of COVID, when we
were coming up with one giant stimulus program after another,
how much was the money supply expanded during that timeframe,
meaning how much more money did they throw into the
circulating money in the economy.
Speaker 2 (05:10):
It grew really fast, really quick. Before COVID, the Federal
Reserve's balance sheet, which is a narrow measure of the
money supply, we sometimes call that the monetary base. The
total assets on by the Federal Reserve system that was
about four trillion. It's sent shot up to around eight trillion,
although it's falling now. It's slightly smaller than that now.
And that actually compounded to larger measures than the money
(05:31):
supply that grew even more so, this was a lot
of liquidity, a lot of new money created very quickly
and spent very quickly. Again, think about the COVID stimulus checks.
Right when everybody opened the mail and day and found
a seven hundred and fifty one thousand dollars check from
the Treasury Department. Now was that financed indirectly. It was
(05:51):
financed by the FED creating money and distributing it to
the financial system. And so it's not really a surprise
that when America and households get all this new money,
they needed to spend it on stuff. So as soon
as they could they did. They spent it on everything,
and as a result, everything got more expensive. What makes
this truly tragic is that the prices of goods and
(06:12):
services that households need, food, clothing, shelter that rose much
faster than wages is did. So if the things that
you need to buy to maintain your standard of rialting
are getting more expensive faster than your income, you're basically
taking a pay cut. And that's why I think Americans
were so hopping mad about this when they went to
the ballot box for the most recent election.
Speaker 1 (06:34):
So I agree with you on that. By the way,
I do think inflation was one of the main drivers
that drove Trump back into the White House. But I
want to ask you a question about that election, because
before you came on the show, we were talking about
the efforts by Elon Muskin to think Ramaswami to shape
five hundred billion dollars off of the budget, and what
(06:56):
would you think a contraction. Let's just say for this
sake of this conversation, they pull it off right, and
they shrink the size of the federal workforce, they shrink
the size of some of these departments, and that five
hundred billion comes out of the deficit spending. What does
that do to the economy overall? Does it force us
into recession in the short term? What would be the
(07:18):
most likely outcome of that kind of of contraction.
Speaker 2 (07:23):
Well, I don't think that there would actually be a recession.
When you shrink government spending, that frees up resources for
private parties who can then spend that money elsewhere. So
what that sort of a project would do, if they
actually accomplished, it would transfer resources resources that were previously
being spent by the government. Money that was previously being
spent by the government would then be back in private hands,
(07:45):
where there are much stronger incentives to use that funding,
to use that money more efficiently. So, if anything, you
might even see a very small optic in productivity, which
would of course mean that the economy is able to
produce new goods and services easier than it was before.
Now I think that that effect would actually be very slight.
(08:05):
You'd probably get a much more radical reduction and federal
expenditure and the size of the bureaucracy to get a
real big boost of productivity. It's worth remembering that five
hundred billion in the grand scheme of things really isn't
that much. Yeah, right now, the national debt stands at
roughly thirty trillion dollars, larger than the size of the
overall US economy, and it's just on a course to
(08:28):
grow and grow and grow. We need to get serious
about this now and be thinking about even more cuts.
Speaker 1 (08:33):
What does a debt crisis look like if we do
get to the point where we don't get serious about this,
and then we get to the point where no one
wants to buy our debt and they either have to
print money, which creates a hyperinflation situation, what would be
the outcome of us getting to that point.
Speaker 2 (08:50):
It's going to be ugly. What you really have to
worry about is investors no longer willing to buy US bonds,
like you just said, and in fact, if it becomes
if we ever get to the point where the US
is not able to meet it's that obligations we're actually
looking at a default that would be truly catastrophic. Remember,
the global financial system basically treats US treasury securities, government
(09:14):
debt as a quote unquote risk free asset. It's the
asset upon which all other assets and transactions and the
global financial system are built. If the value of those
things becomes comes called into question, you're basically pulling out
the bottom layer of a house of cards. The whole
thing is going to come crumbling down. Well, this, we
really need to make sure that Uncle Sam's fiscal houses
(09:37):
in order, otherwise we could be looking at something nasty.
Speaker 1 (09:40):
Alexander Salter, I wish I disagreed with you. I wish
that I could say no, I don't think that will happen.
I think my issue with the United States of America
right now is that we have this attitude of hey,
we're the USA, We're good for it. You know, we're
not going to run out of them. Who's going to
stop buying our bonds? But the reality is is that
when they're perceived to be a bad investment, people will
(10:00):
stop buying our minds, and then we get to the
point where we can't pay benefits. It's just the cascade
effect is something that I don't think Americans can even
imagine happening here.
Speaker 2 (10:12):
It is frightening, But there is a silver lining. The
silver lining is that we don't actually need to shrink
the national debt in order to get this problem under control.
All we need to do is mop out rate the
rate at which federal spending grows. As long as we
can get government spending growth at or below the rate
of overall economic growth, tax revenues to Uncle Sam are
(10:36):
naturally going to grow faster than the debt, and so
we're actually going to pay pay down the debt on
its own without having to actively try and reduce it.
And so really this is a sustainability question. If the economy,
in terms of actual goods and services that we produce,
is growing at say three percent per year, it's okay
for federal spending to grow, but it should grow at
(10:56):
no more than two point nine percent per year. Keep
real economic growth a heap of a head of government
spending growth, and after five, ten, fifteen years, our net
fiscal position is actually going to look stronger than it
is now.
Speaker 1 (11:11):
But is that kind of like paying the minimum payments
on your credit card? So it would take us seventy
k jillion years to actually pay off enough of that
debt to where we can maybe take a breath. Because
you know as well as I do, even if there's
great economic policy put in by one president, the next
president can come in and undo.
Speaker 2 (11:27):
All of that. Yes, that's the scary thing, right. You
need continuity across several policy regimes, across several presidential administrations
and legislators congresses. So as long as you don't have
a bipartisan consensus to keep federal spending growth below overall
economic growth, right, if the more profligate party comes back
(11:49):
into power and just floods things with spending, then we're
back off to the races. We haven't solved the fundamental problem.
And so that's silver lining, I think is our best
politically feasible hope for getting our fiscal house in order.
But there really does need to be a consensus between
the two parties that this is something that we have
to take seriously.
Speaker 1 (12:09):
From your lips to God's ears. But I've been watching
politics long enough to know that will never happen. Allexander
Salter is the Georgie E. Snyder Professor of Economics in
the Rolls College of Business at Texas Tech. The Mouthful's
worth it, great column, Alexander. I hope we can talk
about it again in the future.
Speaker 2 (12:28):
It was my pleasure. Thanks for having all right, Thank
you
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