Episode 126 – An MMT Perspective: Interest Rates and Inflation with Warren Mosler

Macro N Cheese – Episode 126
An MMT Perspective: Interest Rates and Inflation with Warren Mosler
June 26, 2021

 

[00:00:02.610] – Warren Mosler [intro/music]

I’ve always said, if you can’t properly regulate the banks and keep them in line, then you shouldn’t have and you shouldn’t grant the first banking license until you know you have sufficient regulatory capacity to monitor. It’s just too dangerous. And second, third, and fourth, and 8000th bank license, you better make sure you have enough regulatory capacity before you let that wild animal on the loose on society.

[00:00:25.410] – Warren Mosler [intro/music]

What I proposed, the government would buy these homes at the lower going market price at auction or whatever, and then rent them to the owner at going rental rates which were lower also, and give that homeowner a two or three- year option to buy the house back over time. So once the economy recovered, once he got his job back, he could then buy the house back from the government at the price the government bought.

[00:01:35.220] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.050] – Steve Grumbine

Hey, this is Steve with Macro N Cheese and I’m bringing back the OG of MMT Warren Mosler. With the interest rates and inflation so heavily in the news these days, the confidence in the dollar, and our crypto friends talking about debasing the currency, I figured it was prime time to bring Warren Mosler back into the picture. Let’s take straight from The Fountainhead, if you will.

[00:02:13.710] – Warren Mosler

Horse’s mouth is OK.

[00:02:15.220] – Grumbine

You don’t want to be tied to Ayn Rand? [Laughter] Right from the horse’s mouth. OK, I’m with you. So, Warren, you were busting some chops a month or so ago, and I don’t even know if bustin chops is the right way of saying it, in your most gentlemanly way.

[00:02:35.230] – Mosler

I was making an appeal.

[00:02:36.940] – Grumbine

You’re appealing to our better minds in terms of focusing on the fact that when the Fed raises interest rates, that it, in fact, creates inflation. And that seems counterintuitive. But clearly, every time there’s a threat of inflation, they start talking about raising interest rates.

[00:02:56.930] – Mosler

Right.

[00:02:57.340] – Grumbine

And with the Biden administration having spent some money, the debt and deficit hawks are coming after their next favorite pet, which is inflation. And we’ve all been hiding in our homes for a year. The world has been largely shut down.

Tax receipts and everything else throughout the country have dropped in the states and the counties. And there’s been tons and tons of things that have slowed economic activity in different ways. And now people are starting to spread their wings. They want to go back to dinner. There’s all these things going on that are impacting the way people live, people rushing to get back out, some people rushing to stay home.

And this imbalance in terms of getting workers back into the workforce and an aggregate demand that had been held at bay for almost a year is now starting to seep into the economy. And I’m interested in understanding not only the role of interest rates, but people’s buying decisions that would create inflationary pressures, given that we’re now coming out of this pandemic state.

[00:04:11.360] – Mosler

Was that a question?

[00:04:12.410] – Grumbine

It was. It was. Warren, explain to me what the situation is and what are the implications of where we are today with people’s breaking back out of their homes and starting to spend some money.

[00:04:29.340] – Mosler

So if you could make $1,500, $2,000 a week right now being a waiter at a nice restaurant, would you quit this job and do that?

[00:04:36.810] – Grumbine

No.

[00:04:38.020] – Mosler

OK, kind of explains it all, right?

[00:04:40.830] – Grumbine

Absolutely.

[00:04:44.370] – Mosler

OK, so what we saw is, in the pandemic, two things. And I want to just throw in something important. Even though you didn’t ask me to do that, it’s not necessarily my area of expertise, but in the first moments of the pandemic, harmful emissions dropped by 50 percent or something like that, right, when you look at the charts.

[00:05:04.150] – Grumbine

Yeah.

[00:05:04.780] – Mosler

And they dropped by eliminating non-essentials. Now, after a year or so, as the economy has come back, now we’re starting to perform these nonessentials again. Emissions are back to where they were and we’re talking about massive new programs with real resources, funding multiple tens of trillions to stop emissions going up and maybe bring them down to where we got to the first week of the crisis by eliminating non-essentials. Does that tell you something?

[00:05:38.190] – Grumbine

Maybe we shouldn’t be doing those things.

[00:05:42.090] – Mosler

How important is this emissions thing? If we had it beat, we did 20 years of work in 15 minutes by conservation, which is something I talked about in previous shows that I hadn’t even thought about the pandemic saying we could easily eliminate 50 percent just through conservation, but we did it. And now we just threw it all away. So either we don’t want it that much or it’s just another incredible opportunity lost.

[00:06:06.770] – Grumbine

Um. Yeah.

[00:06:07.500] – Mosler

1. Anyway, sorry to be off topic here.

[00:06:09.320] – Grumbine

Oh, no, it’s actually right on topic.

[00:06:11.840] – Mosler

But of course, MMT doesn’t look at the real world, right?

[00:06:14.930] – Grumbine

[Laughter] Well, I think we do. So keep going.

[00:06:18.080] – Mosler

So if you look at what happened is consumption dropped dramatically and of course, non-essentials, but apart from that is consumption. And even though income rose, it’s the only recession we’ve ever had where income went up actually before the recession numbers came out and has been above pre-covid levels the entire time due to fiscal transfers, most of it federal unemployment compensation, but there were a lot of other things in there.

So how is that possible that income goes up and consumption goes down? It’s because a lot of consumption comes through private sector debt. And remember, now MMT doesn’t know anything about private sector debt. Right?

[00:06:59.280] – Grumbine

[Laughter] Only part of the sectoral balances.

[00:07:01.400] – Mosler

Yeah, right. So as I’ve been saying for a very long time, unspent income, ex-post, gets offset with private plus public sector debt, and private sector debt is procyclical. So we had a slowdown in private sector debt, stopped growing, and actually, the growth rates went down dramatically for particularly consumer debt.

And so people stopped borrowing to spend is one way to look at borrowing to buy cars, borrowing to buy homes, borrowing for home improvements, credit card debt, borrowing, credit card debt, all pile of accumulating credit card debt. I think it actually shrank quite a bit. So what we had was private sector debt shrinking pro-cyclically and public sector debt coming on counter-cyclically.

And it kind of balanced it out. It wasn’t that far off, as indicated by the consumption numbers, which slowly came back to where they were pre-covid. Now, there’s still a lot of pent-up demand, things that weren’t bought that may never be bought, but may also be bought going forward. But the latest numbers show personal consumption expenditures kind of back to where they were.

So it looks like the government, you could say, got it right. I’m not saying it wasn’t accidental, and the continuing incomes turned out to be the right move to keep consumption from totally collapsing without it rotting away. And the question is, where does it go from here, of course? But so far, so good from that point of view, and we didn’t get any real inflation, which is demand-driven inflation.

We’ve gotten some higher prices by the market allocating by price could say some one-time things where you get supply issues. Prices go up that can bring on new supply, and then the price comes back down. That’s how markets allocate by price. And we also have some permanent one-time shifts due to structural changes like the tariffs that increase costs across the board and supply chain changes that look to maybe increase costs.

And looking ahead, you know, we can speculate on where those structural changes may go with these one-time increases. And I call them one-time increases because to me, I see them right now as relative value changes, relative value story rather than inflation story, where it’s not a continuing spiral.

[00:09:23.370] – Grumbine

Can you describe relative value real quickly?

[00:09:25.680] – Mosler

Yeah. So like, if the peach crop fails and the price of peaches goes up, you have to pay more. That’s a supply-side issue. That’s a relative value story. Now, peaches are more valuable than apples because there are a lot fewer of them because of that crop.

OK, and that’s different than if everything just gets redenominated, let’s say, to higher levels where you have wages going up and prices going up and everything going up. You have the general price level or the general cost structure just moving up. It’s one thing versus another.

[00:09:56.440] – Grumbine

Gotcha.

[00:09:56.440] – Mosler

It’s called a relative value story. And all the mainstream economic models model relative values. That’s what we’re all about. And they see inflation changing from inflation expectations, which we have proven not to be the case, but that’s how they see it. And everything else is a relative value story.

So here’s the Fed looking at the data, trying to determine whether it’s going to be a relative value story where you have these one-time shifts and it might be a shift to higher levels, but from that point, inflation goes back to one to two percent, or it’s an inflation story where there’s something in here that’s causing a spiral where the one-time price increases of five or six percent are going to be continuous.

And we’ve reached a higher level of inflation due to a change in inflation expectations under their theory, which is not actually applicable. But they believe it is.

[00:10:46.860] – Grumbine

Let me ask you a quick question on the heels of that before you go further.

[00:10:50.500] – Mosler

Yeah.

[00:10:51.240] – Grumbine

One of the primary set of terms that you guys threw at me that really stuck that I feel like you describe a heck of a lot better. Well, everything you describe better than me, but in this particular case, you definitely describe better than me, and that is the concept of stocks and flows and the relationship of stocks and flows as it pertains to this inflation scenario. Can you just describe that for us?

[00:11:16.950] – Mosler

I’ve never use that terminology. So you must be talking about some other MMT proponents.

[00:11:21.960] – Grumbine

Well, yes, I’m sorry. So the idea of money being a stock and flow being spending in terms of what actually creates inflationary pressures is not the quantity of money in the system so much as it is the relative buying power of the masses.

[00:11:39.150] – Mosler

Yeah. That goes back to Keynes and before, which is called effective demand, which is spending. But and I’ll give everyone the benefit of the doubt. Every MMT proponent starts off any inflation discussion by pointing out the reminder that the currency is a public monopoly. Right?

[00:11:55.610] – Grumbine

Yes.

[00:11:56.320] – Mosler

OK.

[00:11:57.420] – Grumbine

The government being the price setter

[00:11:59.310] – Mosler

And therefore necessarily the information contained in the price level comes from the government to its institutional structure, through its agents, through its spending decisions. It comes from the government. The markets can only give you relative value. It can only value something versus something else. So we’re trading in dollars and something cost one dollar.

If we switched it to trade in yen, we changed it, everything would be one hundred and ten yen right now. If we changed the name of the yen to the dollar, now everything’s $110, right? Alright, let’s say we started trading everything in pennies called pennies dollars. Everything would be 100 times higher. The markets don’t care. We could all trade in yen and all the prices would be one hundred and ten times higher and nothing would change.

You just multiply everything times 110 and all the relative value stay the same. You know, wages are higher, prices are higher, savings is higher, stocks are higher. Everything just adjusts. And in fact, you can see that. Look at the GDP of some country expressed in their local currency, but the statistics will show it in dollars. They’re just multiplying it times the exchange rate.

So the markets will give you all the relative value information, they don’t care what the numeraire is, whether it’s the dollar, the euro, pound, just adjust for that, if you ask them. And so that information as to what a dollar’s worth in absolute terms, not just relative value, can only come from the government through its agents, through its institutional structure, as the monopoly supplier, the single supplier thing it requires for payment of taxes right back to Randy’s 1998 work.

And so when you start from there and you say, “Where does inflation come from?” Well, it comes from a continuous change in how the government’s defining the value of its currency, which is a continuous change in prices paid by the government. And that’s a decision of the monopolist.

[00:13:54.010] – Grumbine

Can I make a question statement?

[00:13:57.220] – Mosler

Um-hum.

[00:13:57.220] – Grumbine

When the government spends the first dollar right out the shoot to Northrop Grumman or Halliburton or whoever gets that first dollar right from the government, that dollar is the price that they’re willing to pay for this aggregate project. They don’t usually pay. I mean, they may when you break it down. But in the grand scheme of things, the price is set. I might have a $20 billion award.

[00:14:25.400] – Mosler

Let’s simplify it.

[00:14:27.010] – Grumbine

Go for it. Yeah, please.

[00:14:27.390] – Mosler

The money story starts with a tax liability, right?

[00:14:31.210] – Grumbine

Yes.

[00:14:31.900] – Mosler

OK, so it’s all driven by tax liabilities. That’s the critical piece. And let’s say it’s a property tax on everybody’s house and it doesn’t even matter if it’s only on one or two, but it’s a property tax. That creates people now looking to sell goods and services to get those dollars so they don’t lose their house or their car or their factory. And the government sitting there with the ability to credit their accounts to give them the dollars they need to pay the tax.

And who’s setting the terms of exchange? Who’s pitching and who’s catching? They’re waiting for the government to tell them, “OK, what do we have to do to get these dollars?” The government says, “Well, you have to serve in the army for a year. If you serve in the Army, I’ll give you $50,000 a year. If you sell me this jet plane, I’ll give you $1.3 billion or something.” It’s setting terms of exchange for its otherwise worthless currency that is now valuable because it created a need.

[00:15:27.160] – Grumbine

Yes.

[00:15:27.970] – Mosler

And so its price is set. Now, that doesn’t mean that it’s good policy to lower the prices if you don’t want to have inflation. It could be incredibly disruptive. Yes, you’ll bring prices down, but could do more harm than good, right?

[00:15:40.840] – Grumbine

Bring wages down, too.

[00:15:42.550] – Mosler

Bring wages down. You know, government could say, “Alright, we want lower prices. We’re going to cut the wages of all government employees.” Fine. You know, you probably wind up getting your lower prices. It’ll filter through, but it’s incredibly disruptive and you’re probably going to lose the next election, right?

[00:15:57.860] – Grumbine

Right.

[00:15:58.540] – Mosler

Somebody who has more common sense than that or has a more constructive way to get to the same end. So don’t confuse the description of the price level with a prescription of what to do to change it.

[00:16:11.470] – Grumbine

Right.

[00:16:12.810] – Mosler

It might imply one prescription such as lower all your prices paid and you lower the price level, which will work, but it’s not to say that’s the only prescription or that it best serves public purpose, which is the whole point of government, presumably, which is to serve public purpose.

[00:16:28.520] – Grumbine

What role does the private lending play in terms of price setting, given that people are borrowing money and institutions are borrowing money?

[00:16:40.010] – Mosler

Well, first of all, the bank loans you money to buy a house and it allows you to pay a higher price. That’s not the private sector creating and allocating credit, that price going up. They’re doing it under strict guidelines of the federal regulators who tell them you have to have a 10 percent deposit. Who tell them you have to use an appraised value from a licensed appraiser who may be in cahoots with the lender to get you a higher price.

[00:17:05.240] – Grumbine

Right.

[00:17:06.320] – Mosler

All that regulation that controls that kind of thing or either directly or by default is through the government. So when you ask what private lending does, I wouldn’t include the banks as a private lender in this case, because they have government-insured deposits, they have no limits on their liabilities, and so they can do anything they want on the asset side, except for the fact that the asset side is strictly regulated by government.

Otherwise, the system doesn’t work. So they are government agents in that sense, in the sense of what they’re doing. It does set prices and it’s very influential in setting prices. But it is as agents of the government that probably grossly under regulates them. I’ve always said if you can’t properly regulate your banks and keep them in line, then you shouldn’t have them.

And you shouldn’t grant the first banking license until you know you have sufficient regulatory capacity monitoring. It’s just too dangerous. And the second, third and fourth, and the 8,000 and 8001 bank license, you better make sure you have enough regulatory capacity before you let that wild animal on the loose in society.

[00:18:16.780] – Grumbine

I’m so glad you said that. This is an important point. So the truth of the matter, that the government has all the power in the world that it needs to not only set prices but to contain inflation

[00:18:28.960] – Mosler

Yeah.

[00:18:28.960] – Grumbine

. . . through the tools that they have. However, it is highly contingent on properly regulating not only the banks but the other enforcement. It’s good to have a law on the books, but if you don’t have the apparatus to actually enforce that regulation, to stave off fraud, you end up getting what you get. So it doesn’t change the story. The story is still the same. The government has power.

[00:18:54.640] – Mosler

Yeah, it’s like when you get an administration in that’s in favor of deregulation and starts cutting back on banking regulation, they’re just opening up the avenues for all these counterproductive things to happen because it is a government entity to begin with if you look at it carefully. Functionally, for all practical purposes, it’s a government entity. It’s like deregulating the military. Do you really want that to happen?

[00:19:15.950] – Grumbine

Ted Bundy suddenly the first lieutenant of the . . .

[00:19:20.410] – Mosler

Yeah.

[00:19:20.660] – Grumbine

All right. So let’s get back to the inflation story, though. As people have come out of the pandemic, all the news is abuzz with inflation fears. And we’ve seen some really good pushback from our side. But in terms of owning the media and getting that media story out, we are absolutely outmanned and outgunned.

It’s a crushing deluge of poor reporting, bad media, poor understanding of the situation, not asking the people that do know, and asking the people that have clearly screwed the economy up for a generation or more. Let’s start with Congress and then we’ll go to the Fed. But if you were advising Congress what to do in the potentially short-term relative value story, possibly, or maybe there is some minor inflation, what is your advice to Congress?

[00:20:16.600] – Mosler

So Representative John Yarmuth, Democrat of Kentucky, just came out, he’s Budget Committee Chairman, and he just gave an interview, it’s on my Facebook page and I put it on Twitter and Stephanie Kelton put on Twitter.

And he’s got it right. He’s got it 100 percent right. So Stephanie has obviously gotten through. He recommended her book on the air on C-SPAN, strongly recommended it. And if he was on this discussion, he’d be giving you all the right answers.

[00:20:45.100] – Grumbine

Let’s bring him into the discussion momentarily while we’re here.

[00:20:49.200] – Mosler

This is a big breakthrough, I think. Stephanie’s broken through, so I don’t need to do this anymore, and this interview is over. Bye.

[00:20:54.420] – Grumbine

[Laughter] Let’s listen to what John Yarmuth said there real quick.

[00:20:59.130] – Reporter

Back with us this morning is the chair of the House Budget Committee, Congressman John Yarmuth, Democrat of Kentucky. Congressman, as you know, the president unveiled a $6 trillion budget request for fiscal year 2022. Chairman Yarmuth, how can we spend $6 trillion and all the other money that President Biden wants to spend? How can we afford it?

[00:21:22.980] – John Yarmuth

We can afford it because we determine how much money is in the system at the federal level. The federal government is not like any other user of currency, not like any household, any business, any state or local government. We issue our own currency and we can spend enough to meet the needs of the American people.

The only constraint being that we do have to worry about inflation from that spending. Now, so many people say, well, we’ve got so much debt and our grandchildren, it’s going to be on their backs and so forth. That’s not the way it works. And I think the American people need an education about how the monetary system does work.

I remember going back when Paul Ryan was chair of the Budget Committee and even before that and all of these forecasts of gloom and doom about, “Oh, we’re going to accumulate so much debt and interest rates are going to crowd out all other spending.” Well, we basically doubled the national debt from the recession in 2009 until last year before the pandemic.

And none of the things that people warned what happened, happened. We didn’t have inflation. We had record low interest rates rather than higher interest rates. And the dollar was trading within normal levels vis a vis other currencies. So I think a lot of economists now have begun to say, “Wait a minute. Maybe we’ve been thinking about debt in entirely the wrong way.”

And even the Fed chair, Jay Powell, has basically said we have the fiscal space to do what we need to do right now to make the investments we need to make to build the kind of economy for the future that we all hope we’ll have.

[00:22:56.730] – Reporter

Well, why are people wrong about this? And how should we be thinking about debt and deficits?

[00:23:02.670] – John Yarmuth

Well, I don’t get any royalties from this, but I would flag a book called “The Deficit Myth” by Stephanie Kelton, an economist and professor. And it’s become quite a bestseller, actually. And what she says is that if you look at the total national debt, $28 trillion right now, what we think of as the national debt, she said, “Don’t think of it as debt. Think of it as all the money that the federal government has invested in the country over our history, minus taxes.”

And that’s really what it is. I mean, those $28 trillion didn’t exist before the federal government issued them. So the federal government has the ability to create money, create financing, and that’s what we’ve been doing, will continue to do. The thing that I am so impressed about from the Biden administration is that they’re reversing decades and decades of our asking questions in the wrong order.

Historically, what we’ve always done is said, “What can we afford to do?” And that’s not the right question. The right question is what do the American people need us to do? And that question becomes the first question. Once you’ve answered that, then you say, “How do you resource that need?” And that’s not just money, that’s also capacity.

So, for instance, there’s a $225 billion investment in child care in the American Families Plan, but you can’t just say we’re going to give $225 billion to people to pay for their child care because there’s not enough capacity. So what you do is you’d make a false promise to the people and then you would drive the price of existing childcare even higher.

So what you have to do is spend part of that money on building capacity so that there’s enough child care to actually service the people who need it. So, again, they’re just very different ways of thinking about money. And I understand why most people don’t understand this concept because they think of it in their own framework, which is their household, which is you can’t borrow so much money that you can’t pay back. But that’s not the position that the federal government’s in.

[00:25:02.010] – Reporter

Congressman, are you saying we can just print more money and there’s no consequences?

[00:25:06.600] – John Yarmuth

There could be consequences if there is too much inflation. So let me give you a hypothetical. We could say that we’re going to give every American family a $200,000 voucher to buy a house. We could create the money to do that. But what would happen? Well, there’s not enough housing. So the prices of existing houses would go through the roof, no pun intended.

And again, you’d be creating a false promise. But meanwhile, you drive up the housing market to unsustainable levels. So there is a limit as to how much money we can inject into the economy. The thing about the rescue plan, and here’s where I think Kevin Hearn makes a mistake, is he said $6 trillion, American Families Plan and job plan.

It’s not quite that much, but that’s over eight to10 years. So the $6 trillion budget that the president proposed actually would have been $5.7 trillion if you had had no American Jobs Plan or American Rescue Plan, because only $300 billion of that is in fiscal year 2022.

So, again, you’ve got to realize these are numbers that are very large, of course, but they’re spread out over a number of years. And that’s why I think the Fed chair and others have said we have the fiscal space to do this because injecting this over a period of time will not cause the kind of inflation that is dangerous.

[00:26:24.620] – Grumbine

There you go. What do you know? That’s the first time I’ve ever heard any congressperson ever say something like that in my life anyway.

[00:26:33.500] – Mosler

Yeah, but his grasp of it in the Q&A is even better.

[00:26:37.790] – Grumbine

That is just absolutely amazing.

[00:26:41.360] – Mosler

Look. It can’t be just him because none of these people will do this if they’re alone. I had this conversation with Senator Richard Blumenthal years ago when he first got elected because I had met him in 2010 when I was running for Senate in Connecticut. I was running against him actually. We met for three hours at a friend of mines house. We went through the whole thing. He goes, “Oh, yeah, that’s just like they taught me in the 60s at Harvard or something like that.”

And then I visit him in his office at the Senate afterwards. And he says, “Is there anybody else talking like this? Because I can’t just do this by myself.” So, if it’s Yarmuth, it’s like a lot of them, and so I’m glad to see it happen. But basically, he’s got it all right. He’s got the sequence correct and he’s off and running. And it’s somebody I would support based on this. Now, maybe he’s got some position on guns or something I don’t like, but based on the economics here, I would vote for this guy.

[00:27:32.620] – Grumbine

Yeah, I’ve never heard a single one. Even as much as people were celebrating AOC. I never heard her say anything close to this.

[00:27:41.150] – Mosler

No, no. He’s leapfrogged her. He’s way beyond.

[00:27:43.910] – Grumbine

Absolutely.

[00:27:44.990] – Mosler

And that, to me was a real AOC weakness, combined with a few other things. But he’s done. He’s out front and he’s a first and he’s head of the Budget Committee.

[00:27:53.480] – Grumbine

I saw that. I guess looking back at Bernie Sanders being in that role and him never taking this on.

[00:28:01.460] – Mosler

To Bernie Sanders’ credit, the first step called the chess move, was to have Stephanie Kelton come on as the economist for the committee.

[00:28:09.530] – Grumbine

Absolutely.

[00:28:10.610] – Mosler

And so that opened the door, so to speak. That got MMT’s foot in the door, and then it’s just been pried open from there. And the next step would be to have the actual chairman come out with it. Now, Sanders could have been that, but he wasn’t. But Yarmuth would not have done this if Sanders hadn’t opened the door.

[00:28:26.690] – Grumbine

I couldn’t agree more. But the one thing that I think is troubling based on that and I want to get back to inflation here in a second, but one of the things that was really troubling, though, recently Bernie had said that he was going to not vote for the Biden infrastructure bill.

[00:28:42.980] – Mosler

Yeah.

[00:28:42.980] – Grumbine

And whether that bill is a good bill, a bad bill, I could have accepted any answer for why he wouldn’t support it other than the one that he gave.

[00:28:52.142] – Mosler

Yeah.

[00:28:52.520] – Grumbine

And that was that he couldn’t take the way that it wasn’t being progressively paid for.

[00:28:57.730] – Mosler

Right. Right.

[00:28:58.370] – Grumbine

And when he said that my heart sunk down to the bottoms of the ocean for about 15 seconds.

[00:29:03.530] – Mosler

Yeah.

[00:29:03.530] – Grumbine

And I got back up and moved on. But it’s those kinds of unforced errors that he does

[00:29:09.401] – Mosler

Yeah.

[00:29:10.130] – Grumbine

. . .that just hurt probably more than any of them just because I know he has to know better at this point. I can’t imagine him not knowing better.

[00:29:17.060] – Mosler

Yeah, but look, that’s his nature and it’s always been his nature from the beginning. We’ve talked about this for years and it’s on. You know, even if he’d said the opposite, it’s been his nature long enough. You know, he did his part, which was to bring in Stephanie Kelton.

[00:29:32.420] – Grumbine

Right.

[00:29:32.960] – Mosler

Which is like Biden did his part, which is to defeat Trump. And you can’t take that away from him. Trump did his part, which was to keep the Clintons out, you know, and so on and so on.

[00:29:45.130] – Grumbine

OK, all right.

[00:29:46.130] – Mosler

Do they have any merits beyond those things? Maybe not, but probably not. Important steps along the way to get this change to Modern Monetary Theory. And Bernie Sanders brought in Stephanie Kelton, whether he did any more than that or not or whether he worked against it or not. And that alone opened the door to what we’re seeing now, which is widespread acceptance.

[00:30:08.210] – Grumbine

Absolutely.

[00:30:09.710] – Mosler

Moses never got into the promised land, right?

[00:30:13.190] – Grumbine

I use this analogy way too often, Warren.

[00:30:15.710] – Mosler

Yeah.

[00:30:17.030] – Grumbine

That’s absolutely spot on.

[00:30:19.250] – Mosler

Certain people made certain contributions, even though they might not have even liked the agenda, but they did make contributions to it.

[00:30:26.330] – Grumbine

Absolutely.

[00:30:27.500] – Mosler

Now, let’s get back to inflation. Number one, we have the MMT Money Story which explains the whole thing. Put a tax and then tell you what you have to do to get it. That gives the marketplace information on the value for that money. What you have to do to get it from the source. It’s like, what’s the value of gold?

Well, number one, how much does it cost to mine it, right, and that has a bearing on the price of gold. If there’s a shortage, it’ll be some premium over that. If it goes to some discount to that, it’s not going to last very long because the miners are going to crank it up. It’s going to come back to that price. So what you have to do to get something is where markets get their source of value.

And with the dollars that are needed to pay taxes, it’s what you have to do to get it from the government or from its agents, in this case, commercial banks acting as its agents. And so no one else understands that. There is not another school of thought that has it empty is overturned. I’d say three things. One of them is the whole price level inflation story.

We’re the only ones that have it right at this point. It’s what you have to do to get it at the margin from the source. What you have to do to get that next ounce of gold from the gold miners, what that marginal cost is the information the market has to determine the price. Does that mean it’ll always trade at that price? No.

A lot of times it’ll trade at a premium, times it will trade at a discount. But that is the information the market has that leads to that discount or that premium from the price, whatever it takes to get it. So the government setting what you have to do to get it and then the market through relative value will value everything. And then discounts or premiums to what you have to do to get it from time to time.

But the government’s still the source. It’s the only source of information as to what you have to do to get it from the source because it’s the source of the dollars that are used to pay taxes. Is that understandable the way I said that?

[00:32:16.690] – Grumbine

Absolutely.

[00:32:18.010] – Mosler

OK, so that’s the source of the information, period. There’s no other possibility, there’s no dispute to that. There’s no other source of that information. Nobody ever come up with because you can’t. It’s a simple single supplier. That’s why the Fed sets the interest rate by a vote.

It’s not the market, or the bond vigilantes, or the inflation, or anything else. They have to sit down and vote. And when Powell says we’re not going to change rates for a year and a half, if you can hold him to his word by law where if he lies, it’s perjury or something like that.

[00:32:46.770] – Grumbine

Right.

[00:32:47.610] – Mosler

Then, you know, rates aren’t going to change. His inflation as measured by CPI, whatever that means at five percent, whatever that means, year to year from cover lows, all that fine. But that doesn’t change interest rates. It’s the vote at the Fed. It’s called the Fed’s reaction function, and the Fed is an agent of Congress and they vote on this silly thing.

So you got two prices they’re voting on the interest rate, which is how money trades for itself and how it exchanges for other goods and services, the price level. And so we know that ultimately the prices government decides to pay, it could decide to pay a lot less if it wants to and deflate the economy horribly with high unemployment and high everything else, not by cutting spending per se, but by just saying we’re going to pay half as much for everything.

It would be an economic disaster. But the economy needs those dollars. It’s going to lower prices till it’s willing to sell goods and services and labor and materials at the Treasury prices, government’s prices, or else it’s going to fail to pay its taxes and lose its house and its cars anyway, so it will deflate. The penalty is severe enough to cause that kind of deflation.

Again, it’s absurd public policy to do that, but it explains the idea of where the price level comes from. Likewise, if the government decides to automatically increase every price it pays every year by 10 percent, you’re going to see a continuous 10 percent increase in the price level of that information that the government is giving to the markets to use to sort out relative value.

And that will over time translate into a 10 percent inflation rate. So looking at the economy now, the government does not have in its institutional structure any kind of an indexing system. I shouldn’t say any kind. Let’s look at what it has in its structure to index things so that, let’s say, a five percent increase in prices due to relative value shifts and supply chains, lumber got scarce, went up to sixteen hundred, and then it got more plentiful or whatever.

Now it’s back to the 900s, up from 400 originally. But if the cost structure has deteriorated due to covid, the tariffs added a lot to costs to the supply chains. Insecurity added a lot of costs to supply chains. If the supply structure causes prices to go up, does the government have any indexation built into the institutional structure? And the answer is yes. It’s got some.

Social Security payments are based on some kind of CPI measure, right? Government wages are indexed to CPI. And to the extent that those feedbacks increase beyond productivity increases in the economy, you start getting demand pressures which cause those pressures to spread and cause the CPI to go up further, causing wages to go up further, causing the CPI to go up further, causing, in this case, government wages and Social Security to go further, you can have an inflation spiral created that way.

And all the Latin American inflation, the big ones, have been traced to an economist named Prebisch, indexation. The exchange rate would go down due to corruption usually. Insiders borrowing money through the banking system, no pretense of ever paying it back, selling the pesos to buy dollars, a Swiss franc or whatever was around at the time, pounds.

And that caused imported prices to go up, and so government wages are indexed to imported prices so that the government would pay more for that process just continued. And you had these inflationary spirals just ran away, driven by this internal corruption of what’s called creating new pesos for insiders that were sold for foreign exchange for their personal account.

And you can look up corruption in Venezuela and you can see this going on there today. Some guy in Miami is caught with $2 billion of real estate where he had gotten the money somehow out of the banking system as an insider and sold the Bolivars or whatever they have for dollars and bought property in Miami. OK, that’s one guy.

This stuff goes on in massive scale and causes the currency to drop in value. Is the government redefining its currency role every time it pays more for the same thing? It just indexes it into oblivion. However, the country still functions in Bolivars, just keeps getting redenomination and redenominated. The real wealth keeps getting drained off through this process.

[00:37:24.560] – Intermission

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube and follow us on Periscope, Twitter, and Instagram.

[00:38:13.610] – Grumbine

This brings me to one of the big ones, and that is you’ve got that article on your Center of the Universe website that talks about QE is a tax. And we frequently see these emergency measures that basically take the form of debt. And then the Fed writes it off its balance sheets or whatever it does on the back end, effectively creating a tax. This has been often seen as the great inflation creator.

[00:38:48.290] – Mosler

Say that again Steve. What did my article say?

[00:38:51.080] – Grumbine

Your article basically laid out that QE is a tax.

[00:38:56.860] – Mosler

Steve that was based at the time, the yield curve was steep. And so what I looked at was the Fed turning over $90 billion to the Treasury based on its QE profits. So that QE interest income would have otherwise gone to the private sector, but instead it went to the Fed because the Fed bought the bonds, which were paying three or four percent, and the Fed paid for it with reserves.

And the interest on reserves was a lot less, maybe one percent or half a percent at the time. So the Fed had a profit on its Treasury securities. It was earning three or four percent and it was only paying one percent short-term. That’s because at the time, short-term rates were half a percent. Long-term rates were three or four, based on markets anticipating higher rates from the Fed.

So those profits that $90 billion a year, this was back in 09, 2000, would have otherwise gone to the private sector. So what looked to be what was advertised as something that was helping the economy was actually hurting it by taking $90 billion of interest income and diverting it to the Fed.

[00:40:01.190] – Grumbine

So in light of the – I’m going to use the word backstopping, if that’s an incorrect term, I want you to correct me. But with the Fed backstopping the bad loans and the bad choices of Wall Street, does this not in some way.

[00:40:19.190] – Mosler

Let me give you a basic principle.

[00:40:20.660] – Grumbine

Sure.

[00:40:21.440] – Mosler

Fed profits are a tax, OK, because Fed profits come out of the economy. So any Fed profits function as a tax, and they’re unspent income. So just like any other corporate profits that are unspent income that reduces the [inaudible].

Number two, do you have any examples of the Fed buying loans that went bad? I don’t know of any. I think even the [inaudible 00:40:42] main aid package made them about a $10 or @20 billion profit, which is, again, a tax. So I don’t know of any real explicit overpayments that resulted in losses for the Fed. Do you know of any?

There might have been some. I think the auto bailout cost the Treasury a few hundred million dollars. And so that was a loss, that was deficit spending, but that was an isolated incident and that was not part of the Fed’s bond buying Treasury package, a congressional bailout.

[00:41:11.890] – Grumbine

Explain to me, well, me and the audience here, but me in particular, the role of the Fed in the 2008, 2009 crisis. As bad loans and the shorting of the mortgage industry, those mortgage-backed securities, etc., what was the Fed’s role there?

[00:41:34.080] – Mosler

Well, look the Fed, for the most part, 99% or whatever, bought Fannie Mae, Freddie Mac, government agency securities. So for practical purposes, they were money. Good. They were guaranteed by the federal agencies, so that’s not like bailing anybody out.

So the buying of the MBS mortgage-backed securities did something that you don’t read about much, and that is they took volatility out of the market because if you own a mortgage, let’s say you invest, you loan somebody money for a mortgage or the bank grants you a mortgage. And it’s holding your, at the time, I think there were six percent mortgages.

They have what is called negative convexity, which means if interest rates go higher, seven, eight, nine, the bank is stuck with that six percent forever because you’re never going to refinance. But if interest rates dropped to five, four, three, which is what happened to mortgage rates, they’re three now or something like that, you refinance.

And so the bank has at six percent taken away from it. So it doesn’t get the benefit if rates drop, but it gets all the bad effects if rates go up. That change due to changes in interest rates is called convexity. And when you’re sitting as a bank where changes up are bad and changes down are bad, that’s called negative convexity because you’re losing in either direction.

And so volatility is bad. You were what you call short volatility, if rates go up, you lose. If rates go down, you lose. So you want things to say exactly unchanged. So when you buy a mortgage, you might be earning a couple of percent more than if you buy a treasury. But you’re short volatility in that rates go up, you lose. If rates go down, you lose.

Where if you buy a treasury security or a corporate bond, if rates go up, you’ll lose. But if they go down, you win. So at least it’s fair. But with mortgages it’s not. So you get extra interest income to compensate for that. And so what you’re doing is you’re shorting volatility, getting paid a little extra income to take that risk. But when the Fed buys mortgages now, it has that convexity risk.

If people refinance, it’s not earning the high rate anymore. If rates go higher, it’s stuck with the mortgage. But it doesn’t care, it doesn’t act accordingly. It’s not trying to hedge that by buying and selling fixed-income security all the time, causing volatility, which is what a bank with a mortgage does. So, the Fed is taking volatility out of the market when it buys all these and you would expect volatility to drop.

In other words, things would be more stable after that. And that happened. You look at the volatility of fixed income securities, they went from being highly unstable to a very, very stable after the Fed started buying. Now, they shifted to lower levels, but they didn’t wiggle around a lot.

And so the Fed added an enormous amount of stability to the fixed income markets to taking that volatility out of the market, which I think is a legitimate way to serve public purpose, because I don’t think the volatility is good for anybody in the real economy. You want things to be stable as possible without being artificial. And that does it.

And so I had recommended way back then that the Fed do the same thing and let the agencies just hold all the mortgages and not sell them in the market. So you wouldn’t have that volatility and then let the Fed just buy them all straight from the agencies. In other words, just fund the agencies directly and not have all this volatility transferred to the marketplace. So I don’t want to get over technical with you, but.

[00:44:53.480] – Grumbine

No, I appreciate it more than you know, because

[00:44:56.480] – Mosler

OK.

[00:44:56.480] – Grumbine

Homeowners lost everything. They weren’t backstopped. They didn’t have any bailouts. They were literally left without homes. And it was all based in fraud, similar to what you talked about with the guy in Miami.

[00:45:10.130] – Mosler

Okay, yep but look, to be fair on the issue, some homeowners who lost their jobs lost that. And that was where my payroll tax holiday came in, right in the middle of 08 that we do that, which would have added $625 a month in working families immediately. And then they would have been able to keep making their mortgage payments and then it wouldn’t have been a bank crisis.

The only reason you have a bank crisis was because people couldn’t make their payments as an economy and then there wouldn’t have been a bank bailout. There wouldn’t have been an auto company bailout because people could have made their payments. And just by having a full payroll tax holiday, there’s no moral hazard.

These are the people who are actually working and producing all the goods and services we consume, like all of them. And so I was proposing that we stop taking $625 out of their paycheck because they need the income right now because of what happened in the credit – credit again being procyclical. We had a credit collapse. They couldn’t borrow any more.

So they can’t borrow on credit cards and whatnot. By not taking the money out of their income they could spend out of income instead of spending out of debt. What’s wrong with that? But anyway, we didn’t do that, so the whole thing collapsed. So I see the cause of the crisis was the failure of the government to stop taking all this money away from people working for a living when there’s a credit collapse.

When banks won’t lend, fine. Let them spend out of income, stop taking the money away from them. And then there wouldn’t have been a crisis and we wouldn’t be talking about it. I see the crisis as a total failure of public policy to act counter cyclically when the credit cycle is procyclical and going down. And in this last crisis, that’s exactly what we did.

Private credit was collapsing. People were not borrowing to spend using credit cards. The government stepped in, offsetting this procyclical private sector credit with countercyclical public spending. OK, but of course, we don’t give private sector any role at all, right.

[00:47:06.850] – Grumbine

Well, in the case of the housing market, right?

[00:47:10.340] – Mosler

Oh, yeah. So let me add to that.

[00:47:11.810] – Grumbine

Yes.

[00:47:12.650] – Mosler

Part of the housing market. Look, if you had somebody borrow $300.000 to buy a house, which was a lot of money back then, who had $30,000 of income, but the bank sent them to an accountant who gave them a phony income statement that said they were making $75,000 and sent them to a phony appraiser who said a $200,000 house is worth $300,000 so that the mortgage banker could make his commission.

The appraiser who would be the most aggressive got all the business right. So we had a race to the bottom that the government wasn’t policing, which is their job to police races to the bottom of activities of their own agents, which were the commercial banks and the mortgage bankers who were part of the system.

So anyway, this person buys a house with no money down and moves into it, lives in that house for a year without making a payment and then gets thrown out of that house. OK, who’s the victim? OK, don’t answer that, but let’s say it’s an open question who the victim is. OK, because they were all perpetuating a fraud against the banking system, which first comes out as shareholder money.

And the shareholders did lose all their money for improper supervision. So the shareholders were the victim of the fraud for sure because they lost all their money. And you had all these banks, they were bailed out, but the shareholders lost their money. And they’re the owners. They weren’t bailed out. The assets were transferred over to new shareholders who had to buy in.

And the government took losses because they had insured deposits. But the largest losers in real terms were the bank shareholders who all lost their money. Now, if you have a grocery store that hits a soft spot, it doesn’t sell a lot of groceries and they go out of business. And the owners go bankrupt and lose. Does that mean you have to bulldoze the grocery store? No.

The bankruptcy court takes the assets and sells them to a new owner who can open up the grocery store and continue it without the debt. All the debt for the prior grocery store is wiped out. So do you say the bankruptcy court bailed out the grocery store? No. OK. Were the old owners bailed out? No, they lost everything. Lenders lost out because they made a bad loan.

But the new equity holders came in and you say, “Oh, well, the grocery store is still there with the same name on it, ABC Grocery. But they got bailed out by the government and the bankruptcy court, and they’re still there. It’s like, no. So the banks were still there. They still had the same name, Citibank, Bank of America. Some of the banks have been merged and were gone, but they had new shareholders.

The old shareholders lost all their equity or 98% percent in the case of Citibank. And the new owners came in. We didn’t bulldoze Citibank because they lost all their shareholders’ equity. We got new shareholders and they moved on. That’s what failure is in a capitalist economy. The penalty for failure isn’t that the assets get bulldozed is that they get sold off to a new owner. That’s all a misnomer about what happened back then.

[00:50:01.540] – Grumbine

Well, let me bring this back just momentarily to housing prices. So the housing prices are often pointed to in terms of inflation, look at the cost of housing. Then after the credit collapse, prices on houses plummeted.

[00:50:16.330] – Mosler

Steve, let’s call that the inventory liquidation phase.

[00:50:19.180] – Grumbine

OK, all right. The inventory liquidation phase. So with that in mind, as prices plummeted and homeowners lost their equity.

[00:50:28.900] – Mosler

Yeah.

[00:50:28.900] – Grumbine

Most wealth in America, I would say around the world, but particularly in America, is typically in your home. And now here we are in our current environment with house prices soaring through the roof again,

[00:50:43.240] – Mosler

Yeah

[00:50:43.240] – Grumbine

With the government being the price setter

[00:50:45.370] – Mosler

Yeah

[00:50:46.360] – Grumbine

I’m going to call this a relative value story again.

[00:50:49.430] – Mosler

Yeah, but it’s an inventory liquidation cycle. So at the time what I proposed and Jamie Galbraith presented it in Congress for the housing crisis and they didn’t do it, but the proposal was that the government would buy these homes at the lower going market price, at auction or whatever, and then rent them to the owner at going rental rates, which were lower also, and give that homeowner an option to buy it back two or three-year option to buy the house back over time.

So once the economy recovered, once he got his job back, once he was working, he’d been renting, he could then buy the house back from the government at the price the government bought it, because the government’s not in this to make a profit but as a piece of public infrastructure. Well then the only losers would have been the mortgage holder who had a $300,000 mortgage and sold out at $200,000, but they did that anyway.

So they didn’t lose relative to where they would have been without the government interference and in fact, you could argue it might have been lower than $200,000 if the government had allowed this to go on longer. OK, so the government would come in and buy it. Nobody has an economic loss or is hurt. The mortgage holder doesn’t have to sell the house to the government.

They could keep it the bank that foreclosed or the pension fund that foreclosed, they could keep it, rent it to the owner also and then give him an option to buy it back. They could do the exact same thing. But it would be a government policy where the government would buy it. When you buy something like that, the mortgage holder and the owner can redeem it at any time under normal bankruptcy anyway, right?

So it’s just an extension of what’s already on the books. And then you wouldn’t of had the physical displacement of somebody being thrown out of their home. And the going rents at the time were low enough because those people moved and rented somewhere else and the rental market was depressed and the rent would be based on anyway, not higher than what the carrying costs would be for that house at $200,000 at the lower interest rates at the time because the Fed had already cut rates.

And I thought that was an equitable solution to minimize that kind of damage, but it never got done. So again, the fact that there was this severe collateral damage, unforgivable collateral damage, is a consequence of a total failure of public policy to do the right thing. And you talk about market failure.

Well, when you have a monopoly, currency is a public monopoly, you don’t have markets in the sense that they operate only within the institutional structure set up by government, which includes pricing, which includes all the mortgage rules and everything else. And markets just determine relative value within that structure set up by government.

And it’s like you’re driving the car down the road and the car is going straight, but you get a small bump in the road and now it’s heading left towards a guardrail and you’re sleeping and you crash into the guardrail. Who’s at fault for the crash? Is it because the road had a bump in it or because you fell asleep and didn’t steer your car in the middle of the road? I blame the driver.

Look, everybody else is doing is looking at the road and saying, you know, without that bump in the road, car wouldn’t have crashed. And I say, what about the driver? Well, we don’t need a driver if we get the road right. It’s like, what? OK. And so they’re working on fixing the road. So we need Glass-Steagall and we need rules for this. We need that.

We got to fix this road so there’s no instability and the car will never move because they got their head in the sand when it comes to the fact that there’s a driver who can easily keep this car on the road. So when I look at this crisis, I’m looking at the point of view from this driver who can easily keep the car on the road, which is the government.

So I look at everything you’ve talked about that’s happened during this time entirely as a failure of government with none of the participants in that sense directly responsible for the macro failure. Now I see them responsible for a lot of criminal activity, violating laws and whatnot, but not for the macro failure of unemployment, people getting thrown out of their homes.

And I would have put tens of thousands in jail for these conspiracies to defraud shareholders and defraud the government through falsifying appraisals and everything else. And not one has been prosecuted because we’re only as good as our regulation, which I talked about early on.

And if we can’t regulate properly, the solution’s easy enough. Just don’t have the banks. It’s not to have public banks instead because they need just as much regulation, if not more. Not that they’re not better in some aspects, but understand they need at least as much regulation, if not more.

[00:55:07.620] – Grumbine

Sure. Okay, so this brings me to a point that you just made me have a light bulb moment.

[00:55:13.920] – Mosler

Okay.

[00:55:14.260] – Grumbine

And that is there is a real demarcation, a real bifurcation, if you will, in the sense of what is criminal activity and what its impacts are in the micro sense in perhaps aggregated up to a macro. But, the other side of that is the side that we can never lose sight of as MMT’ers and hopefully the rest of the world just picks this up.

And that is the fact that any time government in particular in this case doesn’t step in and do its job, it’s an abdication of its duty. And the government could have made the impact to everyone, minimal or equitable or nil. And they chose to do nothing and they allowed it to go into the gutter.

And that doesn’t take away the fact that there was a lot of criminal activity, doesn’t take away that there were liar’s loans and a whole series of control fraud. It does however, on the other side say the government failed to protect the people in this process by not doing what it had within its power to do. There’s two sides of that ledger in this case.

[00:56:17.010] – Mosler

Yes, don’t hold me to every comma, ya know, in the last word that you said but, overall yes, that’s correct.

[00:56:24.660] – Grumbine

Fair enough. I’m going to call that a win. I’m pocketing it.

[00:56:28.230] – Mosler

Yeah.

[00:56:29.010] – Grumbine

But the big thing for me, though, is I know that we have three points that I want to make before we close out, and that means there’s going to be a little longer than normal. But I think it’s worth it. Number one is there are certain materials out there that are laced throughout the entirety of every product we buy and sell, things like petroleum products, they create plastics, they create fuel they serve as lubricants.

They do a host of things from transporting goods and services in terms of the cost of the supply chain to keeping us from freezing to death. If we have a shortage in something like this, what are some of the key natural resources or real resources that could bring about a spiraling inflation in a relative price scenario, turning into a spiraling inflation story?

[00:57:20.790] – Mosler

Well, let’s keep it in very simplistic terms.

[00:57:23.100] – Grumbine

Sure.

[00:57:24.300] – Mosler

If prices go up, that’s not inflation, because the market will just allocate by price. You’ll just be able to buy less, but if the government then gives everybody a raise so that they can pay the higher prices when the stuff doesn’t exist, then it goes up some more. So you can only buy what’s there.

And if the government gives everybody another raise to pay the even higher prices, then prices go up some more. And that’s an inflationary spiral simply defined by giving everybody the money to pay for it, that includes the government paying higher prices itself for all this stuff. So that is the source of the inflation.

[00:57:59.770] – Grumbine

Now, you know, our friends out there that you have spent years swatting them with as few words as possible. And I’m going to force you to use these words again,

[00:58:09.880] – Mosler

OK.

[00:58:10.330] – Grumbine

When it comes to the petrodollar, you’ve eloquently stated it’s a numeraire and it really matters on what people want to save in.

[00:58:18.970] – Mosler

Well, the definition of a petrodollars, is a dollar you earn from selling petro.

[00:58:23.880] – Grumbine

And if you are selling grass, it would be the grass dollar.

[00:58:28.500] – Mosler

Right yeah, It’s the same dollar, yeah.

[00:58:29.760] – Grumbine

Exactly.

[00:58:30.600] – Mosler

You get a tax credit for selling petroleum to the U.S. You get a tax credit for selling bananas to the US.

[00:58:37.000] – Grumbine

So why do you suppose, especially in libertarian circles, this particular thing is brought up? Why do you suppose this just keeps coming back?

[00:58:47.430] – Mosler

Well, there were policies that evolved around the misunderstanding, just like President Obama went to China with Hillary Clinton and somebody else to make sure that they would fund the health care plan for us because you see them on video saying we’re out of money and we have to borrow from China, right?

[00:59:03.750] – Grumbine

Yes.

[00:59:04.450] – Mosler

OK, so that brings about people saying, OK, the US has to borrow from China. And what do you mean? President just said so. So there were people at the time who thought that somehow the petroleum exporters, particularly the Saudis, them having this dollar is going to be some kind of problem that could be solved by ensuring that they sold their oil in dollars.

And if they decided they wanted pesos instead of dollars, then we would have had a problem because we would have had to sell dollars. Anyway, they thought this whole thing was a problem because they didn’t understand monetary operations and they clearly didn’t understand monetary operations.

And I would say, from what I’ve read, none of the economists surrounding them, whether they were Keynesians or monetarists, understood monetary operations either. And so you’ve got all these YouTube videos of these people and you have policies that came out with regard to what they called petrodollars as if they were different from banana dollars.

And it was a big political crisis and a lot of policies came out around it and a lot of data was collected to show that there were so many billions of dollars they earn if they didn’t recycle them back into US Treasuries and the US would run out of money or something. I don’t know. They had all this mythology around it that’s still there. The best I can tell.

One of the guys who’s talking about it sent me videos I’d never seen about our policy leaders talking about these petrodollars and it is just the spinning of mythology. And so he’s right in the sense that it was driving policy and none of them quite got the idea that it was all about foreign exchange reserves. And so we agreed that if they priced oil in dollars, we would defend them.

We would use military to defend them, not realizing that once they had the foreign exchange reserves, if they diversified into pesos or whatever was around at the time, pounds or euros, francs, then that would be negative for the value of the dollar. And that was foreign exchange reserve composition that mattered and not pricing. But these guys didn’t know that.

So we had arrangements based on pricing. Then people say, oh, if they ever stop doing this, then we’re going to have a problem. No, we wouldn’t of had a problem then and we won’t have a problem now. But you do have a problem is with foreign exchange reserves, composition changes, and it’s not a problem you can’t deal with, but it’s a problem.

So in China diversified out of euro and massively because Draghi threatened to do QE in negative rates and they thought that was hyperinflationary. So they were afraid of the euro. They sold euro and bought dollars and the euro went down from 140, 150, eventually down to close to 100 before it came back to where it is now, which is somewhere in the middle.

And it’s not a major move, but it started off with China diversifying out of euro. And that’s what happens when you do that. Now, this was Draghi saying that maybe, probably, he’s a pretty smart guy, as a way to get China to do that because he wants a lower euro to help their exports. And so he managed to trick China into selling their euro all the way down to help their trade position when he knew that wasn’t going to be any inflation or any currency degradation or anything else, you know, depreciation or inflation, he knew that wasn’t going to happen.

And China says if you do this, cut rates to zero and do all this QE, we’re going to sell our euros. And he goes, OK, go ahead. So they did. So he did. Now, what’s happened is since then, the euro has been relatively strong because negative rates are tax, which is the last thing we have to talk about before we leave, if that’s OK.

[01:02:37.740] – Grumbine

Yeah, let’s do it.

[01:02:39.060] – Mosler

So it looks like with John Yarmuth, they’ve got fiscal policy right. So that battle’s been won. And if he knows that, everybody’s got to know because there’s a herd mentality over there that I’ve seen in action many, many, many times. And it’s the path of least resistance right now for them for all kinds of reasons. And so that’s why they’re on it. It’s pro-agenda, it’s everything else.

They’re going to be on it. What they’ve still got backwards is the interest rate thing. And so right now, the idea is if we do get inflation, Powell is going to raise rates. The Fed’s just talked about backing off on accommodation and leaving rates low but quantitative tightening I guess they call it. They’re still looking at that.

If and when they understand that raising rates is going to add to inflation, that they’re already as deflationary as it goes, except for negative rates, you won’t hear that talk anymore. Then they’ll be saying, look, if there’s inflation, you guys are going to have to make a fiscal adjustment because we’re doing all we can here with zero rates.

We have a deflationary policy right now. Zero rates are a magnet pulling down on prices. And as long as you guys don’t let it get out of hand with your deficit spending, inflation’s going to be OK. The prices you’re paying, as long as you don’t get out of hand with that, with your indexation, as long as you don’t cause inflation, we’re going to be OK. There’s nothing more the Fed can do. And that’s[inaudible 01:04:00]  that already deflation.

If we raise rates, it’s only going to make it worse. We’re not going to do that. That makes no sense. It’s just basic income for people who already have money. Why would we do that? So once that understanding is understood, then that gets taken out of the equation. It’s out of the debate. It’s out of the discussion. And then our work is done on that side. And I look forward to that day sooner rather than later.

[01:04:24.630] – Grumbine

Understood. All right, well, listen, Warren, thank you so much for your time. I really appreciate it.

[01:04:31.120] – Mosler

Yeah.

[01:04:31.890] – Grumbine

This subject, there’s a lot more to talk about, I’m sure, and we’ll do it again in the future. I really appreciate your time. And folks, thank you so much for joining us today. Got Warren Mosler. Steve Grumbine Macro N Cheese. Have a great day, everybody. We’re out.

[01:04:52.290] – Ending Credits

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