Episode 140 – What If We Lose Faith in the Dollar? with John Harvey

Macro N Cheese – Episode 140
What If We Lose Faith in the Dollar? With John Harvey
October 2, 2021

 

[00:00:03.250] – John Harvey [intro/music]

If you want to go way down to the philosophical core of this argument that we’re gonna lose value in the dollar… Because this isn’t something that they’re “Oh my gosh. We might lose faith in the dollar!” They’re like, “Yeah, we’re going to lose faith in the dollar because the dollar is a government-created phenomenon and therefore it’s bad. So we’re actually celebrating the possible death of the dollar rather than it being a warning to people.”

[00:00:26.850] – John Harvey [intro/music]

The same way that if the government has a deficit, somebody must have a surplus. If I’m paying more, somebody must be getting more. So it’s impossible for inflation to be a net loss. Inflation is a redistribution of income. And as long as the forces are taking place, there’s going to be some upward pressure on prices.

[00:01:35.230] – Geoff Ginter [intro/music]

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

[00:01:42.700] – Steve Grumbine

Alright, this is Steve with Macro N Cheese. My guest today is none other than Professor John Harvey. We’ve had John on here many times and John is just a great all-around guy. The reason I have John on here is because we’re going to be talking about your favorite subject: What if we lose faith in the dollar, the value of the dollar? [laughter]

What if the dollar – what if we lose our faith in it? So let me introduce John properly. For those of you who have not heard John. John T. Harvey is a professor of economics at Texas Christian University in Fort Worth, where he has been on the faculty for over 30 years.

His main area of research interests are exchange rates and business cycles and his teaching responsibilities include intermediate macroeconomics, international monetary economics and contending perspectives in economics. He is published in over 40 referenced articles, two edited volumes and two books. John has a YouTube series called The Cowboy Economist and a blog at Forbes.com. So with all that, John, welcome, sir.

[00:02:56.040] – John Harvey

Thank you so much for having me again. I always look forward to it. And may I add that I just started a new book last week, a book on business cycles. So, in ten or 20 years that will be done. [laughter] Actually, I’m hoping shorter than that. We’ll have to see.

[00:03:14.020] – Grumbine

Alright, well, let’s get on to our favorite subject here. Between the bitcoiners out there and the libertarians of the monetarist variety and all the Praxiology BS, all of them are always waxing poetic about the death of the dollar. And what if we lose faith in it? And we’re debasing the currency. And all these other pipe dreams right out of Milton Friedman’s handbook. I’m curious, what is your take on their fatalistic view of the death of the dollar?

[00:03:45.230] – Harvey

I guess – and there’s so many things tied together in this as I’m sitting here trying to untangle it in my mind – I guess the bottom line is, “oh, no, it has to do with the government, so therefore it’s a bad thing. And hence that’s why Bitcoin is a good thing. That somehow the free market is more efficient.” And by the way, ask a neoclassical economists to define “efficient.”

They don’t really know what they’re talking about. Who decided to use the word efficient years ago? I have no idea, because there’s a very clear connotation that efficient is good. And the example I always use with people is, “Okay, let’s say this is 1940s U. S. American South. And efficiency in a market really means the speed and accuracy with which it translates our preferences into prices that reflect those preferences.

We’re all a bunch of racists, in the American South. So if black people are poorer than white people, then ‘Yay efficient market.'” So that’s all it means. That’s all it means because the market is simply one of the many ways that our values are translated into the allocation of resources. So don’t use the word efficient. Anyway, we’re too late. But they push that, right?

In the sort of Milton Friedman libertarian view that it’s more efficient, efficient, efficient. What do you mean by that? You don’t like black people in the south? And I tell you, the neoclassicals I’ve raised this with have been like, “Uhhh,” because they just never thought about it.

And the other thing is there’s some sort of sense of morality that is coming from them, that it is morally superior for the individual – and I guess it stretches back to political individualism of the 18th century and Adam Smith and so forth that we’re making our choices now and not someone making them for us. Or, as the Austrians would say, the government doesn’t know what we prefer.

So the government can’t possibly be superior to us in making choices. If you want to go way down to the philosophical core of this argument that we’re going to lose value in the dollar because this isn’t something that they’re “Oh, my gosh, we might lose faith in the dollar!” They’re like, “Yeah, we’re gonna lose faith in the dollar because the dollar is a government-created phenomenon and therefore it’s bad.

So we’re actually celebrating the possible death of the dollar rather than it being a warning to people.” So as I said, there’s so many different strands of this and so many things that are wrong with the basic economics that I’m not quite sure where to start.

[00:06:12.120] – Grumbine

And I tell you what, just that alone is great because I used to be a libertarian. It was very childish behavior for a guy in his 30s. It was definitely a place that seemed edgy. It checked a couple boxes: antiwar, check. Anti-drug-war, check. Audit the Fed, check. All these little things. But when you put it all together, you end up with this very stupid-minded thing. I mean, it’s got a couple things, like when a broke clock is right twice a day or something.

[00:06:43.280] – Harvey

Twice a day. Yeah, yeah.

[00:06:44.440] – Grumbine

You know, it’s a couple of things.

[00:06:46.210] – Harvey

Unless, of course, the clock is still running. It’s just set wrong. Because I’ve always thought about that. It was like, you know, well, if it’s still running, but it’s set wrong, it’s wrong constantly.

[00:06:54.480] – Grumbine

That’s right.

[00:06:55.360] – Harvey

Yeah.

[00:06:56.310] – Grumbine

Alright. So we’re on the same page here.

[00:06:58.620] – Harvey

Yeah.

[00:06:59.110] – Grumbine

So really, at the end of the day, I think what we’re talking about really does come down to a lot of folks, going back to the beginning of the Federal Reserve, have this very conspiratorial view of the US dollar in general. And so there’s an incredible amount of stories and myths from the table cloth, the myths from the fire pit, the bar stool, they get told and retold.

And by the time it’s all said and done, we got lizard people controlling the Fed. [laughter] It’s just absurd. But it does create this effect that many of the people that are not listening to MMT economists, or PK economists, or Macro N Cheese – who are not really paying attention to the activism – they get swept away with these stories.

So ultimately, when you hear people talking about investing in Bitcoin schemes, or you hear them talking about losing faith in the dollar, what they really seem to be talking about is “they’re printing money, they’re debasing the currency.” They’re behaving as if we’re all in a fixed exchange regime.

And I think that there’s a lot of suppositions there. They don’t really take the time to check their suppositions. They drop into mythology before they take one second to consider all the implications. So that’s why I’ve got you here.

[00:08:18.410] – Harvey

Yeah. And I would argue it’s even worse than not checking, because what you’re talking about right now is the layperson who’s heard a little bit and jeez, that sounds attractive to me. But even the professional economists, you go back to Milton Friedman’s philosophy of positivism. And this is how you do economic research. And the idea was that it doesn’t matter how unrealistic the assumptions of a model are, as long as they predict well.

“Indeed,” Friedman goes on to say, “often the most significant models are those with the most unrealistic assumptions.” Okay. I want you to walk into a physics lab and say that. That the most significant theories we put forward in physics have the most unrealistic assumptions. I think they kind of go in the opposite direction.

And what this has generated – not just in Friedman’s branch of economics, it’s spread elsewhere – is it doesn’t matter what you say. If we’re going to say that when the money supply goes up, inflation accelerates, then really the path that brought us there in our model is irrelevant. And so when you get into an argument with a monetarist, you can say, “well, but the Fed doesn’t operate that way.”

“So?” “Well, but that’s not the way the banking system operates.” “Yes. And?” To them, that’s not an argument. What they actually respect as evidence is not the same as what we respect as evidence. And that creates kind of a big problem in that, even when you’re talking to the professionals – I don’t know if you have time for this or not –

[00:09:49.620] – Grumbine

Oh, I do.

[00:09:51.020] – Harvey

I got into a very polite argument on my Forbes blog, probably a decade ago, in my piece on “Money Growth Does Not Cause Inflation.” And it went through and explained how Milton… Well, it implied. I don’t think I talked about Friedman particularly, I can’t remember anymore. But there’s a famous article from Friedman – and of course, it’s the basic argument that the increase in money supply causes inflation.

And in the article, he sets out this island and a helicopter flies over and drops money on it. That’s the Federal Reserve. The helicopter just engaged in fiscal policy, not in monetary policy. Monetary policy can’t increase your wealth. It can only change the form of your wealth. I’m going to buy treasury bills from you or sell treasury bills to you, whatever.

You’re not any richer than you were before. You might become richer because of the change in the value of the assets later. But you are not any richer. That’s fiscal policy. You know, again, what I was saying earlier about I pointed this out to a couple of neoclassical economists. “Oh, yeah.” I mean, here’s something I had to read in grad school, the core article.

So anyway, that takes me a little bit away from what I was going to say… Well no, it doesn’t actually. It works quite well. So I had this Forbes thing on “money growth doesn’t cause inflation,” and a very nice man who got his PhD at University of Chicago took exception. I was saying that it is impossible to have an excess supply of money via monetary policy, because a core idea in monetarism is that when that helicopter drops the money out – which they are viewing as monetary policy – this gave people more cash than they wanted, which they rushed out and spent.

So here’s a core part of this whole “we’re printing money, causing inflation” thing is something that can’t happen in the real world. The Fed can’t force you to take more cash than you want. You must voluntarily sell that treasury bill to the Fed; they can’t trick you into it. Or you can borrow money from the Fed, but again, you have to be willing to do that.

You can’t force money on people – and I want to return to something on that in just a second – but anyway, so this guy says, “well, of course you can. It must be possible to have an excess supply of money, or we would never have inflation.” And I collected all these comments in a document so I could remember years later because I knew I wouldn’t believe that this happened. I said, “Well, okay. What is the mechanism that the Federal Reserve has that allows them to force me to take more cash than I want?”

[00:12:20.800] – Grumbine

Right.

[00:12:21.420] – Harvey

“Well, it is like putting logs in a fireplace.” I kid you not. That was the answer. [laughter] And then I said, okay, I love analogies. I use them all the time in class. But at the end of the day, what is the mechanism the Fed has? “Well, it is like planting apple trees in an orchard. [laughter] Let’s see, then he went to a hot potato, the helicopter, and so on.

But this points out so beautifully and so horrifically that what we each respected as evidence was not the same thing. And so it’s like having a fundamentalist Christian and an atheist having an argument over a Bible passage. What we are going to respect as “ah that proved your point” is so different.

[00:13:03.420] – Grumbine

Oh yes.

[00:13:04.000] – Harvey

Anyway, to me, that’s a big part of the problem here is that the whole idea that we need to back up our argument by appealing to real world institutions and processes is not there in that whole “money growth causes inflation” argument. Now, again, your average layperson probably doesn’t even know that. And what does this open up then?

If it’s no longer necessary for me to justify my model assumptions based on real world phenomena, then what is this really allowing me to do? Well, it’s allowing me to preconceive my conclusion. I hate the government. So I’ve got my conclusion already and now I make up premises that will allow me to get there. And now when I spread these ideas to other people, who’s going to be attracted to my ideas?

Well, people that agree with the conclusion and that have no problem with the fact that the premises – and this goes right to what you were saying earlier, that they aren’t stopping to think about, “how does this happen in the real world?” They’re not questioning the premises. And of course, your average layperson can’t. They’re not really in a position to do that, unfortunately.

[00:14:07.580] – Grumbine

Yes.

[00:14:08.060] – Harvey

And so, you know, you’ve got somebody with a PhD from University of Chicago, well, surely they know what they’re talking about. I guess what I’m trying to establish here is that even the intellectual academic foundation of this argument is, in my mind, very questionable. There was a piece by a recent Nobel laureate, Paul Romer.

[00:14:28.070] – Grumbine

Right.

[00:14:28.700] – Harvey

He’s very famous. Now he wrote that piece on modern macroeconomics has ceased to be scientific research. And I think it did even earlier than he thought so, and I think for different reasons, but absolutely right. That was a long way of saying you’re right. They haven’t really thought about “does this make sense beyond the fact that it feels good to me, therefore, I like this conclusion, I like this argument, and I’m not going to challenge it and go in and think about how it might be wrong.”

[00:14:57.860] – Grumbine

It’s interesting, because when I first started learning about the Federal Reserve and how it operates, Rohan Grey gave an excellent history of the Fed. I mean, super super detailed history of the back and forth between those who wanted control to stay independent and those who wanted to have more oversight and the various recorded meetings throughout time.

It was just one of those real eye openers where you realize that you could have dialectical perspective on this, where you see it from different angles. You can see the truth from vantage point A, another truth from vantage point B. But in the end, ultimately, the real power lies within Congress, because Congress alone is the one that has the authority to regulate all these different aspects.

They write new laws and they can make new rules. What jumped out at me with this whole discussion we’re about to have really comes back to the person that breaks out the price of bread in 1913. [laughter] They come back to you here and they say “the dollar has lost 200% of its value since the Fed came into being!”

[00:16:08.420] – Harvey

Right.

[00:16:08.420] – Grumbine

And these are the tropes that they play into this discussion we’re going to have today. We have been a net importing nation for a very long time. I think it’s about 500 billion a year that we’ve been…

[00:16:22.530] – Harvey

That’s almost exactly right. In the new book I’m writing I just happen to be bringing that up.

[00:16:27.410] – Grumbine

Well, I’m on the right track here. Every time I hear about it, I remember when my parents bought their house. They bought it for, like, 25 grand and it had two acres and they’re going to sell the thing for half a million. And so does that mean the dollar lost its value? Or does it mean the property self-appreciated in value? What does it actually mean when they say the dollar lost its value because we’re not on a fixed exchange? Obviously there’s something there. But what exactly is it that they’re saying?

[00:16:59.720] – Harvey

I understand why people go to that. And I think you implied that as well in your set up to this. I understand why people go there. But really, the question is, what can the average worker afford to buy? Because clearly, that’s a huge difference between the price of a house in 1970 versus today. Okay, but what’s the average income?

And that, too, by the way, that’s far more concerning. That an average wage doesn’t buy what it used to. But the dollar, the value of the currency, as long as we’re going to be – and I guess we’ll get into this later – if we’re gonna be pushing the boundaries of full employment, there’s going to be some inflation. And that’s okay, alright? There are things are going to happen.

But right after World War Two, I think inflation the next year was like 16% because it was all this pent-up demand from the war. But people have to remember that inflation is not a net cost. It cannot possibly be. The same way that if the government has a deficit, somebody must have a surplus: if I’m paying more, somebody must be getting more.

So it’s impossible for inflation to be a net loss. Inflation is a redistribution of income, and as long as the forces are taking place, there’s gonna be some upward pressure on prices. And Pavlina Tcherneva has a piece where she argues that the heavy government involvement in the economy since World War Two has been part of an inflationary bias. But who cares? Because inflation isn’t a net cost.

Inflation isn’t a net cost. It is a redistribution. If I’m paying more, someone’s getting more now, I might be perfectly fine with who’s getting more. Right now, I would be perfectly fine with paying more for meals at restaurants that I don’t go to anymore, because Texans are idiots and COVID’s worse here than anywhere. Because laborers are in short supply.

Because laborers are saying I’m not going in there and doing that. So okay, you got to pay them more. And you know what? That’s inflationary. But notice here that it’s not a net cost to everyone. The workers at the restaurant are getting paid better. Now, do they also have to pay the higher prices? Yes, but the way the math works, their raises are going to be bigger.

Well, let’s go back to the big case of inflation since World War Two, and that was in the 1970s and 80s. And that’s OPEC. So we have the ’73 Arab-Israeli War, and then the OPEC countries get together and say, “Screw you, West, we’re going to restrict supply, drive up prices.” And this causes terrible inflation throughout the rest of the world. And so everyone on the planet is worse off.

No, of course not. If I’m the one selling the oil, I’m really, really, really well off. If I’m an Exxon executive, I’m really well off. See, I graduated College in 83. Everyone was majoring in geology because this was the industry with the big money because it was the oil industry. So inflation is a redistribution. Inflation in and of itself is not “oh, my God, isn’t this terrible?” We must always stop and ask ourselves, “yeah, but who’s getting richer?”

Because I might be perfectly fine with who’s getting richer because then that’s causing them to produce more of the good or service that is in such high demand. For example, when COVID started, we had a shortage of medical alcohol and Scotch companies were switching over to making medical alcohol because the price has gone up so much.

Now, should the Fed have slammed on the brakes and stopped that inflation, or should they have allowed it to do what it was doing and that was attract more firms into the medical alcohol industry when medical alcohol was in short supply. And so if waitstaff are in short supply, then wonderful that we have to pay them more. Does that mean I got to pay more for my fajitas? It does.

But that’s one of the few times the market does something useful, which is so crazy about this whole worldview that the Fed wants to slam on the brakes when there’s inflation and the monitors want to slam on the brakes. Well, that’s one of the few times the market’s doing something useful. It’s changing consumption and production patterns. The time where it doesn’t do something useful – and that is with respect to full employment – they couldn’t care less.

[00:21:00.770] – Grumbine

That’s great. I do have one follow up to that. And then I want to jump into the “MMT as a currency killer” kind of approach here.

[00:21:08.700] – Harvey

Right.

[00:21:09.280] – Grumbine

I want to lay out the difference between a relative value story and a real honest to God inflation story because I see oil as ubiquitous as a commodity that is in everything, whether it be making plastics, cleaners, fuels , whatever. So it directly impacts the price of literally everything that we touch. That really could create – if my understanding of inflation is correct – that could create true inflation where the overall price level rises as opposed to a relative value story.

[00:21:44.660] – Harvey

But it’s still a redistribution, though.

[00:21:46.670] – Grumbine

Absolutely. No question about it. But what I mean is when I took a look at the waiter in the story that you just told about the restaurant and the fajitas. That’s a relative value story where we’ve got a very specific thing happening there. Where they don’t have enough waitstaff, so they have to pay more to get more waitstaff, which then in turn raises their prices just on that food right there.

And now the people that are waiting these tables make more money and you pay more for that. But that isn’t necessarily spiraling out. And that’s definitely not necessarily increasing the price of all things. Whereas something like petroleum product would be more of a true story of real inflation across the board. Is that fair, or am I missing something in that description?

[00:22:39.480] – Harvey

I don’t see them as different in terms of ultimately, the key issue is: who is getting richer and is that performing a useful economic function for the rest of us? After the OPEC oil embargo, who was getting richer was in our opinion… Well, okay.

Let’s take the opinion of someone in a developing economy. In the US, it was inconvenient, but it wasn’t the end of the world. But in a developing economy, it was the end of the world when these old prices went up. So they would very much believe to themselves this is not performing any useful function whatsoever.

This is not causing us to make more medical alcohol, where there’s a good thing happening here. It’s in short supply. It’s desperately needed. The price is going up, which is causing more people to make it. Now, by the way, I’m not implying that the government should never become involved and say, “hey, this is a really important good or service. It should be available at a lower price.”

[00:23:33.180] – Grumbine

Like rent control?

[00:23:34.820] – Harvey

Yeah, precisely. Rent, healthcare. That they should get involved, but just as a sort of starting point. So with oil, you’re quite right that it affects more things, but that doesn’t change the basic story that it is neither good nor bad a priori. Let’s say that there’s a shortage of oil and make something up here. And also oil was a bit of a bad example in the sense that we don’t want to be using oil because of climate change.

[00:24:01.490] – Grumbine

Right. We’ve got a very different thing there. Yes.

[00:24:03.850] – Harvey

Yeah. Well, let’s pretend climate change isn’t a thing for just a moment and have us not all be constantly depressed by this. Let’s say it’s not an issue. And the price of oil goes up because there was a massive refinery that caught on fire, you know, and all the oil burned up. But that’s okay that the price of oil is going to go up, because now it’s gonna make looking for more oil more feasible.

It’s gonna make shifting into substitutes more attractive. And that’s what we want. Right? So there are some things the market does, at least at first glance, “okay, well, that’s alright.” The tickets for the so-and-so concert are in short supply so the ticket prices are going up. Now we’ll find out who the real fans are. [laughter]

Again, back to the oil: when it is monopoly power that is driving up the price, then it is hard for us to see any good from that, because the redistribution has to do with power and not to do with the collective demands of people. And what if it turns out that, “good Lord, don’t say this out loud, but drinking oil cures cancer,” because I want to have a whole bunch of people doing it.

[00:25:13.770] – Grumbine

My God [laughs]

[00:25:16.450] – Harvey

Then certainly the price of oil would skyrocket. But that wouldn’t be a bad thing, because now what it would do is it would cause us to find more oil, maybe have cars be electric, so people could drink the oil to stop the cancer or whatever else. [laughter] So again, I think that yes, you’re right, it would spread into more areas, but the basic starting point… Here’s something else.

Not only are the libertarian monetarist types all about “Oh, we’re debasing the currency, printing too much money, and so forth.” There’s also a neoliberal hidden agenda in there. And that is that we’re against low unemployment because that will cause high inflation. So oh my gosh, the Fed needs to slam on the brakes. And we all buy into this view of inflation as a net bad, and that helps the government carry out policies that screw over the working person.

[00:26:09.740] – Grumbine

Sure.

[00:26:09.740] – Harvey

You know: ‘it’s bad, oh my gosh, yes, I know it’s going to be rough to throw the economy into recession, but I can see why it’s necessary because we don’t want all this inflation. So yeah, make some low end workers unemployed again, let’s keep this chronic unemployment going so that we don’t have this inflation.” And that trade off really isn’t there.

So I think there’s a reason for them to encourage this view that inflation is a net bad. And when those of us coming from the perspective we do, buy into that, then we’re buying into part of their secret agenda – I don’t think they’re smart enough to have secret agenda – but this hidden agenda that is aimed at pro-capital antiworker.

Let me say that again in a more succinct way: I believe that the “inflation is a net bad” plays into the pro-capital antiworker biases that our government policies have. So we need to stop, always stop people and say, “Wait a minute. Now, if you’re paying more, somebody’s getting more. Right? So the inflation can’t be a net negative.”

[00:27:17.280] – Grumbine

Right. And so that focuses on the “hey, I’m a net saver. And you’re hurting my savings.” Right?

[00:27:24.940] – Harvey

Yeah. Right.

[00:27:26.430] – Grumbine

Going back to ’46, getting in the time machine. So you had Ruml talking at the Fed. The speech about “taxes for revenue are obsolete,” and we’re no longer tied to the markets. He talked about we have freedom from markets and now that taxes for revenue are obsolete, etc.

[00:27:47.480] – Harvey

Yeah.

[00:27:48.650] – Grumbine

What he was really driving at there, I think for the monetarists and for those folks out there who believe in the market disciplining, it’s obvious that going back a long time before Milton Friedman even, we kind of knew some things that we’ve long forgotten. And it seems like the Milton Friedman school has really been able to capture the minds of more people. I don’t know how they’re so damn good at marketing.

[00:28:13.750] – Harvey

Oh, I can tell you.

[00:28:14.840] – Grumbine

Well, tell me, please, because it’s amazing to me how their perverse belief system is so ubiquitously accepted.

[00:28:23.120] – Harvey

There’s a wonderful fellow that I’ve been co-authoring work with, and he’s a communications professor. And as we’ve sent the paper back and forth, I’ve been like, oh, my God, I never thought of that. Because his area is rhetoric and how to make an argument acceptable and powerful. And Milton Friedman had this series on TV, “Free to Choose.”

And around the same time, Jamie Galbraith’s father, John Kenneth Galbraith, had a series “The Age of the Economist”? I can’t remember now [correction: The Age of Uncertainty].  I had to watch it in intro Econ class. And The Age of [Uncertainty] came off as “I’m really smart and I’m going to talk down to you to explain how these things work, and they’re really complicated.”

And of course, Galbraith is sitting there giving speeches in front of the Federal Reserve Building and in front of the Treasury Department. Friedman is standing on a street corner talking to people walking by, and he’s giving little small pieces of an argument: “inflation’s bad.” “Well, yeah, it must be.”

Because clearly on an individual level, you look at how much the prices are going up, not how much your wages are going up. And even if your wages go up by 10% and prices by five, you can still think to yourself, “Oh, my gosh. This would have been even better if the price hasn’t gone up by 5%.” Ignoring, of course, the fact that your wages going up by ten is what caused overall prices to go up by five.

But Friedman can make these really simple arguments that appeal to the average person that you don’t need to stop and build a model or anything. So this coauthor of mine just did this wonderful job of explaining how the rhetoric of how the Milton Friedman types aimed their arguments, I don’t know, intentionally or not, in ways that somebody sitting there in the bar can follow pretty quickly.

Now, unfortunately, you get away from the bar and go to the library, and it gets a little bit more complicated. But sitting around the bar, that sounds pretty reasonable to me. Hell, yeah, I’m getting screwed. [laughter] Anyway, I don’t know if that explains all of why it’s been more attractive, but it’s certainly part of it.

Because as we all well know, using the household as the analogy for the government budget, well, gosh, it seems reasonable, doesn’t it? Until someone tells you otherwise. And when every frigging economist is saying it and everybody in government is saying it, then that’s obvious. It’s wrong, but it seems so clearly logical. So, yeah, their arguments are much simpler and easier to follow.

[00:30:43.670] – Grumbine

Right. That sadly makes sense. I wish it didn’t, but it does. So you wrote a chapter in a book, by Randy Wray, and Yeva [Nersisyan]. I’m curious. I believe the chapter is called Modern Monetary Theory and Exchange Rates, and I think that it’s worth jumping in here at this point because we’ve kind of touched on the monetarist view and why it’s been successful and kind of how these various false equivalences have been trotted forth and have become part of the fabric of society.

Talk to me about what this paper is, what this chapter is about and help me see the obvious. It seems that you really level a great strike or a blow against the idea that MMT is somehow or another going to destroy the currency and just drop the bottom out of the domestic value of currency. Lay out what this paper is about. Help us better understand the subject.

[00:31:43.770] – Harvey

Sadly, you have read it more recently than I have. [laughter] So I pulled it up here so I could look at it. Although embarrassingly, I thought, gosh, I must have finished this a year ago. I looked at the file and it’s like, oh yeah, July 2021. So I only finished a couple of months ago. Or at least the last revision thereof is when Randy sent it back with some comments and so forth.

So they asked me to write something on modern money theory and exchange rates, in particular, as you say, the idea that well, “all well and good that the government isn’t budget constrained, but all they’re going to do is cause the dollar to collapse.” And so the direction I went in was: okay, first of all, what mechanism are they envisioning? Is it magic? No.

They have a line of causation. Oh, and by the way, Milton’s helicopter example, it’s not monetary policy, but it is fiscal. And so it does actually fit MMT in the sense that okay, this is fiscal policy. Now, the rest of the argument is not going to work. But the point being that leveling the criticism that Friedman’s not even doing monetary policy like he says he is, isn’t that powerful when we’re talking about the issue we’re talking about right now.

Because, like, okay. But what you’re talking about with MMT is fiscal policy. As a matter of fact, I can’t remember if I took it out or not. I initially had a footnote saying, “by the way,” saying what I just said. So let’s go back to Friedman, and we’ve got the helicopter flying over dropping money out as MMT, right? That this is the job guarantee.

I guess they’re being very selective in where the helicopter flies and dropping it to people who are doing things for climate change and so forth on behalf of the government. And now, however, this is going to cause inflation and inflation is going to cause everyone to not want to buy the dollar. Right?

So that’s the basic simple argument that they’re coming from. And I think it’s important to mention the middle part, the inflation, because that’s where one of the two critical problems lies – is on the inflation part.

[00:33:44.120] – Grumbine

Right.

[00:33:44.480] – Harvey

So let’s back up here then. So I guess the paper starts off with – as I’m looking at it right here – a quick explanation of that whole Friedman helicopter thing. And let me quote John Harvey real quick. [laughter] “This matter in which this version of the equation of exchange is employed is the first half of the MMT-as-currency-killer argument.

First, as the government deficit spends, it does so by creating brand new money, which in turn increases incomes. As people try to buy more with their increased incomes, the fact that there isn’t any more means they simply cause inflation. And it is by this process, they argue, that MMT-inspired policies will cause another Zimbabwe or Weimar Germany.”

And it’s important to remember the underlying premises that we’ve made here. First of all, that there are no more goods and services than there were before. Friedman in the paper where he writes about this, say, let’s assume we’re already at full employment of all resources. Okay. Good lord. Let’s assume that we’re the world’s biggest problem. Right?

So we’ll assume away the problem of full employment. We’ve already got it. We’re already there. So we’re doing a job program now. So he has assumed away the need for the job program in step one, right? There is no reason for MMT to pursue a job program if we’re already at full employment. So that’s your first problem. Why would they be doing this?

You’re right. I mean, it would be World War Two, where 1.9% unemployment, and we’re still pushing on the productive capacity of the US, and more than that, pulling things out of consumer goods and putting them into war goods. And that’s why inflation jumped in ’46. So I mean, the only reason to have this government deficit spending, government stimulus when we’re already at full employment would be because they were at war. Right?

But otherwise, their argument that MMT would cause inflation if we were already at full employment and then tried to stimulate the economy… Well, that’s not what they do. It’s like putting air in your tire at the gas station. Have you ever yelled out to somebody “hey, buddy, be careful. If you keep doing that, your tire will explode?”

No, because you see, nobody’s so stupid to continue putting the air in. “Well, but I’ve paid a quarter, so I still got five minutes worth of air left. And so I’m going to put it all in the tire.” You have a goal. And that was the inside of your car driver side door that told you 35 lbs per square inch. And when you hit that, you stopped, even though you still had money left.

Hell, some places you can get free air. Right? So why… It would be like the monetarists are saying, “oh, my God, no one should put air in their tires, because if you continue doing that, then your tire will explode,” which is absolutely positively true.

[00:36:29.580] – Grumbine

But no one will be dumb enough to do it.

[00:36:31.800] – Harvey

No one’s going to do that. That’s right. So they’re ignoring the whole MMT idea of we don’t need to further stimulate the macro economy if we’re at full employment. Right. So that’s kind of the first part. There’s a little bit more to it than that. But I think that’s a really good place to go with that because it is very, very clear, at least as far as that aspect goes, what a job program is about.

If there are people who can’t find a job somewhere else, then we employ them. And if we are already at full employment, then we don’t need the job program. Or the job program has done what it needs to do. Could that create some upper pressure on prices?

And I don’t know, I think this is a place where I don’t necessarily agree with everyone because I know a lot of people say, “Well, no, then they’ll just do so and so and stop any inflation.” They might, they might. But I also don’t care. I don’t care about the kind of inflation that a job program would create because we’re finally going to have the right kind of inflation where those workers who have been getting screwed over, who were the chronically unemployed…

If I can work at McDonald’s for $7 an hour, or work for the government at $15, I know what I’m doing. [laughter] So you know what McDonald’s gonna have to do? McDonald’s gonna have to raise prices. They’re gonna have to raise wages and raise prices and that’s going to cause the prices to go up in that sector. Okay.

I mean, if that’s what it takes to be just, to be fair to people. And I don’t know if this is a politically incorrect thing to say, to me it’s very powerful. After the Emancipation Proclamation, I’ll bet the price of cotton went up, but that wasn’t the frigging point, right? So what?

Now, I will also say that this might be a sort of once-and-for-all rise in prices of Big Macs, or whatever, once the job program comes in and this is creating direct competition for those jobs that really, really suck in the private sector. But in general, I don’t think it would be ridiculous to imagine that when we’re running at full employment all the time, there’s the potential for certain sectors to run into bottlenecks.

And so prices go, Okay, if there’s a bottleneck in the timber industry, then the prices should go up and it should make people use something other than timber. It should make us perhaps substitute away from that or whatever. I’m not terribly worried. Now I totally understand why us MMTers don’t say that out loud – as I just did – because we’re fighting against this popular perception of inflation as a net negative.

So we have to calm people’s fears about inflation. Oh my God, this is going to be awful. And we’re saying, well, actually, no, because when we hit full employment we’ll stop and we can raise taxes to drain demand back out and so forth, which is all perfectly true. I just can’t imagine we would be able to fine tune it exactly. And if we’re going to err on one side or the other, I’d rather err on the side of some inflation.

But again, I also understand why people don’t want to say that out loud because it terrifies people. Because they’re thinking of the 1970s and ’80s, and they’ve also been fed the neoliberal line that inflation is horrible, so it’s better to have some unemployment than to have some inflation. Pavlina goes on about that in a number of papers – that we’ve basically set up a system where there’s an acceptable level of unemployment and there shouldn’t be.

[00:39:45.600] – Grumbine

Right.

[00:39:46.020] – Harvey

And where does that come from? It comes from this whole inflation fear. So anyway, that’s kind of the first part of the chapter is where it’s saying, well, look, yeah, I guess it’s possible. But first of all, you wouldn’t be continually stimulating the macro economy if you’re at full employment anyway.

Let’s say there is some inflation. Let’s go there, alright? Now the second part of the argument comes in where that’s going to cause the currency price to collapse. Alright, this is based loosely on purchasing power parity.

I was just saying this to myself the other day. That’s probably a central concept in any class on exchange rates. Purchasing power parity. And the idea is, that currency prices come to rest at a level that make average prices of goods and services in each country the same. So that if a shirt in England is £10 and that same shirt in the US is $20, then the exchange rate must be $2 for £1, assuming away transportation costs and things like this.

If it weren’t $2 for £1, then there would be an arbitrage opportunity if somebody could buy up the shirts in one place and sell them in the other for immediate profit and that would drive the exchange rate to the level that makes all of the prices of goods and services equal in the two countries. Obviously not each and every good and service.

But the average price. Now, doesn’t that sound good? Oh, yeah. That makes so much sense. I can picture that. It’s also totally wrong, right. And so I’ll bet I’m the only one in the country – maybe two or three others – teaching a class on exchange rates where I’m never even going to bring that up. I’ve got plenty of other things I have to talk about because currency prices are not driven by the prices of goods and services.

International trade is about 10% of the currency market. The other 90% is the financial market. People are buying and selling financial assets in other countries. That’s what’s driving the exchange rate. So, you don’t see these massive fluctuations in currency prices because the prices of shirts in England are volatile. They’re not. The prices of most commodities are not that volatile whereas the prices of financial assets, we all know, very much are.

Well, guess what. The currency prices are simply a reflection of that volatility of the demand for American financial assets versus British versus German versus whatever. So what we’re saying then, is that if the MMT is a currency killer view is true. And again, I’m saying, okay, let’s say there’s some inflation. Obviously, there’s not going to be that much because again, we’re not going to fill the air in the tire until the tire explodes anyway.

But just for sake of argument, let’s say there’s some inflation. Which country do you want to invest in, in their financial market? The one that has little inflation and full employment or the one that has no inflation and 20% unemployment? I kind of know where I want to invest. There is no reason to believe that a country that is running at full employment is somehow not an attractive site for financial investment.

Now, not that that should be a goal. Not that we should hope that MMT would raise the value of the dollar, because then that makes it harder to export. But the real point is that there is no link, no realistic link. There has been study after study after study of this. There is next to no link between inflation and currency prices.

Purchasing power parity, the theory I just mentioned, the neoclassicals have tested it over and over and over, and they can get it to work in some unique situations. But in general, it works about as well as currency dealers say it works. There was a really nice article years ago by a neoclassical, and they asked these currency dealers, what do you use as your guide to the values of currencies?

And they mentioned purchasing power parity, and what currency dealers selected was overwhelmingly merely academic jargon. I’m quoting here from the original paper. The purchasing power parity has no relevance to their job. And if we’re going to be hardcore libertarians right now, let’s say that, hey, if your job depends on it – and they probably know what the hell they’re talking about.

If profit depends on being able to anticipate changes in currency prices, and they’re saying purchasing power parity is useless. And, on top of that, new classical economics can only get it to work if one of the countries we’re testing has terrible inflation. Well, you know what? That probably also was a real clear sign to those who want to invest in that financial market to not do so.

So the argument that currency prices are really driven by the financial market actually gives us a better explanation of even the times when purchasing power parity appears to exist. So, to back up and sort of summarize on that. The idea is that if MMT is printing new money, that causes inflation, but you have to bear in mind, they’re assuming that we’re already at full employment, in which case, MMT would not be increasing the job program because there’s nobody else to hire. Right.

So the first problem is that they’re assuming that MMT continues past the £35 per square inch on the tire. And then what if you over inflated a bit? Well, now the currency is going to collapse. No, it’s not because currencies are driven by financial capital flows, and I want to invest in the country that has 1% unemployment. That’s where I want to invest.

Obviously, there can be exceptions here, but there is no, absolutely no clear link. They find to think of it this way. Well, you know what, though, if we had an economy with full employment, the currency would collapse. Okay, I hope your Bitcoin isn’t going too poorly right now. Anyway, I’ll stop there. But that’s kind of the basic argument here. If I may show off just slightly, Randy said, oh, that’s a really good way to make that argument.

[00:45:44.800] – 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.

[00:46:33.900] – Grumbine

Okay, well, there you go. That’s a slam dunk from the master OG Randy Wray. So within that mind, one of the things that I’m trying to see – the parallel circles next to each other. We’ve got the finance over here betting with their casino fashion on the Forex and all the other bets on the exchange rates of these various currencies.

And on the other side, we have the actual functioning economy where people go and buy things. In my mind, what I say to myself is people – and when I say people I’m talking about watching professionals on TV that are economists. People look and say “he’s got the answers.” But when I look at this, they’re basically telling me that if people lose faith in the dollar, then all of a sudden the world is going to collapse. And I’m asking myself, where does that even come from?

Because the idea of faith in the dollar is a finance thing. Yeah, we’re talking about an investment type thing. Whereas when you go get your paycheck, if you’re paid in the dollar, I would hope you wouldn’t lose faith in it. [laughter]

Not to mention, how are you going to pay taxes? Because you can’t pay taxes without that. So to me, they seem disconnected. It’s almost impossible for me to grok that concept at all. I can’t even see the tie-ins. You know what I’m saying? It seems so far-fetched.

[00:48:06.880] – Harvey

And you mentioned it, it all boils down to there not being a clear understanding. Okay, what creates the ultimate value for the dollar? The fact that on April 15, that’s the only thing the US  government accepts. And faith is irrelevant in that case, unless your faith is, oh, my gosh, what if the IRS or the Treasury stops accepting dollars?

But that then begs so many other questions. It’s ridiculous that faith only is necessary when into baseball cards. And in that case, you’re right. Oh, my gosh. I have several rookie Eric Davis cards that I bought years ago. And then Eric Davis went and got injured and vastly shortened his career. So I don’t want to say people lost faith in Eric Davis, but certainly the Eric Davis card was much less valuable.

And what if you have some horrible scandal with some baseball player? Nobody wants to have anything to do with the card anymore. Well, now it’s useless. You’re right. Everyone lost faith in him. Or somebody on TV says people have been buying baseball cards, but honestly, that’s a ridiculous investment. And that can cause faith to collapse – one of these pundits on TV.

If somebody on TV says, I’m telling you, by the end of the year, the dollar’s going to collapse, I’m still going to hold on to some dollars because as you said, I’m paid in it. It’s what they’re taking at the store. When did they stop taking it to the store? Why would they do that when they have to pay their taxes in dollars? The taxes are the whole thing and we were talking about this a couple of days ago, you and I were, about somebody from Reuters – can’t remember now  – contacted me and wanted to interview me on something.

And she was one of their experts on cybercurrencies or whatever. And I mentioned in passing I wouldn’t put a nickel in that. And when we got done with what we were going to talk about, she asked, “Why did you say that?” And I said, Well, there’s absolutely nothing anchoring the value of Bitcoin. Nothing. It is entirely within the realm of possibilities they becomes useless.

It is entirely within the realm of possibilities they become worth a billion dollars of Bitcoin or whatever. But the dollar takes its value from the fact that the US government is the only thing it accepts in exchange for tax payments. Now, there’s also more than that. We also have much more than that going for us than just that.

But at the end of the day, if you’re tracing back as you so well said, faith is irrelevant when there’s an ultimate use for it. It’s like saying, Well, what if people lose faith in corn? As long as we’re going to eat corn, there’s an ultimate price to it. Or water? Why do people lose faith in water? Oh, Jeez, we have to have water to live. No one ever brings that up. Lose faith in gold sure, lose faith in water. We need that to live.

[00:50:48.640] – Grumbine

Okay, so what if China stops buying the US debt? And what if they stop accepting the dollar? What if some Silk Road only does this?

[00:50:58.460] – Harvey

Yeah, yeah

[00:50:59.860] – Grumbine

What if this group does that? And this group does that? And so on. It’s all the what-ifs. But the worst part of it, it’s easy to punch down at the armchair economist that are just regular Jane and Joe neckbeard and six-pack. But what gets really frustrating is when the people that have the P and the H and the D next to their name say these things.

And they do. They say them a lot. And so you watch these YouTube channels, the imminent collapse of the dollar, blah, blah, blah. And China is to not use the dollar anymore. Warren often says, it really doesn’t matter what currency that they’re using. It just matters what currency they want to save in.

[00:51:43.880] – Harvey

Yes, that’s it.

[00:51:46.880] – Grumbine

And so take us down that path.

[00:51:49.880] – Harvey

Okay. So, wow, many things going through my head right now. One of the talks I give – well, back in pre COVID days – was on the hyperinflation that occurred after the financial crisis. Remember that the hyperinflation that happened? Oh, it was awful. It’s a talk I do on what actually causes inflation. And I start off with several slides of somebody predicting hyperinflation in 2010. It didn’t happen.

But next year, surely, 2011 and mixed in amongst those are Alex Jones. First of all, who I had no idea who that was back when I put this together. But he’s one of the ones talking about how terrible it’s going to be. But also an economist, or two mixed in as well. Oh, God. Anyway, when I get done with that, then I show the local optimist club or whoever it is I’m talking to here were the actual inflation rates.

And they were the lowest decade of inflation since – maybe not since World War Two, but certainly since the 1970s. So anyway, there’s that you’re right. There’s all these predictions of the collapse. And then China buying our financial assets. I almost reached the television screen and strangled Hillary Clinton.

I think in the first Obama administration, she’s reporting from Beijing and thanking them for buying our treasury bills. I was like, oh, my God. If they don’t do that, then the value of their currency will tend to fall. They’ll have to intervene more. It is helping them, because when they buy a US financial asset, they have to buy a dollar. And when you buy a dollar, you drive the value of the dollar up.

And it makes Chinese stuff cheaper and American stuff more expensive. In fact, my lucky students were about to start this – probably this week, I guess. The big graph that shows you mathematically, it must be true. It’s the whole: if there’s a deficit on this side, there must be a surplus on that side. It’s the exact same concept.

It’s harder to explain with currencies, but it’s the exact same thing. If we have a trade deficit, we must have a capital account surplus. Otherwise we wouldn’t have a trade deficit. Well, as long as China wants to have a trade deficit, then they have to grant us a capital account surplus. Now, I’m not going to explain that because it’s going directions we don’t really need to go.

Alright, so. But you were suggesting: okay, if it’s not the dollar, then what, what other currency is it going to be? And it’s exactly what I’ve always said – I hadn’t ever heard Warren saying that – that, well, then what do you want to hold your savings in? So at the end of the day, you’re a flashy international financier. Let’s see.

I can hold the currency of a communist dictatorship. Yeah, I’m going to hold my savings in their currency. Or are you going to hold it as euros? Well, maybe a few years ago, but now all the cracks are very evident and it’s a bunch of different economies. It’s not one economy, so that makes it difficult as well. So you have to have a substitute for this.

There’s got to be somebody else. And what makes you the reserve currency is that you could be big because, like, you know, let’s say Belgium still had its own currency. I can’t imagine the circumstance under which everyone holds their savings in Belgian currency, which I guess was the franc.  I can’t even remember anymore.

You also need to have some stability and some trustworthiness, not necessarily with international policy, but certainly with economics. And you know, I guess that’s where China falls down. Certainly they’re very large. Now, I can’t imagine a scenario in which they insist that other countries use their currency to trade with them because it’s a power play, but it’s still not going to cause it anyway.

In order to come up with a scenario where there isn’t faith in the dollar, you can’t just say that. You must also tell me what currency is going to take its place. And obviously crazy things can happen, as we all well know over the last decade or so. And even then at the end of the day in the United States of America..

Now, certainly it affords us a wonderful ability to run trade deficits. When people accept little green pieces of paper or the electronic equivalent, thereof in exchange for cell phones. Yeah, that would become more difficult. But we’re awfully freaking lucky. As you mentioned, 500 billion dollar trade deficit. Our total GDP is like 21 trillion.

So we are not terribly trade dependent. Anyway, again, if you’re going to give me the scenario of the dollar collapsing, I need to hear the scenario of which one takes its place and how that actually happens and why people would trust that one. And I have a funny story talking about trust. And I told this, I think on the Australian MMT show.

But I was just telling my class last week I got this call several years ago. I went into my office in the little lights blinking and “Hi there. This here is Bob Johnson. I’ve done graduated from TCU back in 19 and 76. I got a question about international monetary economics.” I thought, well, this is an alum. And that is my area of expertise, so I guess the polite thing to do would be to call this person back.

So I called him back, Howdy. And they’re going on about Vietnamese currency, Vietnamese Dong, which has been the currency. Yeah, I don’t how that conversation went now? I don’t remember that in the Iraqi Dinar. Right. And we’re talking about investing in these things. I was like uh-huh, uh-huh, uh-huh.

And then he says, “after the world currency reset..” I said “the what? The world currency reset, what’s that?” “You’ve never heard of the world currency reset?” No. Well, that’s gonna be the day where apparently overnight they’re gonna, like, double or triple the value of the dong and of the dinar.

[00:57:20.700] – Grumbine

The Viagra of currency. [laughs]

[00:57:23.890] – Harvey

That’s right. [laughs]

[00:57:27.660] – Grumbine

World Viagra Day.

[00:57:27.660] – Harvey

[laughs] First of all, I said, why would they do that? They’d never be able to export anything. You’ve essentially doubled the price of every Vietnamese and Iraqi export. “Well, but anyway…” And then I said, you know, I assume you’re saying that so that way they can cancel out their debt. “That’s right.” So then hy doesn’t everybody do this every day?

“Well…” Anyway, what he was really asking was, how much should he be invested in these? Right? Because he’s got, like, a garage stacked high with these currencies. Stacked high with dongs, if you will. While I’m talking on the phone, I’m looking this up, and it’s the number two currency scam. Right? A, I want to get off the phone and B, I’m thinking, well, it’s my duty here.

He called me. He’s asking my opinion. I need to give my opinion. And so I said, well sir, I gotta tell you while we’ve been sitting here, I looked it up, and WallStreet.com says it’s the second biggest currency scam being run right now. “Well, the big boys don’t want you to know.”

[00:58:30.230] – Grumbine

He’s in the know, right? He’s calling you for your opinion, but he’s in the know.

[00:58:35.810] – Harvey

Right. Right. Well, his problem was he assumed I was in the know too. And I wasn’t. [laughter] He did try to call me back once. I just never answered and that was that. But, you know, how do you discuss anything with these people? And of course, it’s so much worse now with all the crap that’s going on.

But how do you discuss anything with these people? It’s horrifying. That’s why Melanie and I are retiring to Ireland because I’ve been told that everything’s within walking distance of a pub there.

[00:59:03.430] – Grumbine

Keep it simple, smiley.

[00:59:05.900] – Harvey

Right. Right. And Texas is just insane.

[00:59:10.100] – Grumbine

Anyway, I do have one more question for you. Kind of finish this out. You know, obviously there’s a lot of confusion about how money even gets into the economy. And I think this plays into this trope as well. The government doesn’t just print money and stacks on pallets and take some to the bank, and they just sit there waiting for us to peel them off.

The government literally writes a bill, send the instructions to the Fed, they keystroke deposits into the Treasury’s accounts, and then they’re spent into existence. Right? And it’s in that vein that they’re spending things on either production, real resources, commodities, war, whatever — anything but health care, right? But they spend this stuff into existence.

[01:00:01.730] – Harvey

Yeah. Yeah.

[01:00:01.730] – Grumbine

And this is such a key thing for me, because when you think about it, it’s like, well, shoot, if we just printed thousands and billions and trillions of dollars and shove them into everyone’s mailbox… That’s just not the way it’s done. It could be done, I guess, technically. Congress could write a bill that says, Please print trillions of dollars and simply put in everyone’s mailbox.

That’s not really how it works. And with that in mind, I think of it as a circuit. And I don’t know if this is going to fly perfectly, but that’s how I describe it. There’s a circuit and the money spent into existence and circles back around in the economy, and the money is going to be deleted when it’s been received as a tax.

[01:00:47.310] – Harvey

Right.

[01:00:47.880] – Grumbine

That’s your circuit completing it end to end. The birth of a dollar and the death of a dollar. So why they don’t realize when you talk about just printing money more money? Why do they not realize that every single day. Money is being shredded in the paper form, and it’s also being deleted in the digital form.

It’s like there’s no more common sense here. There’s no base understanding. The currency is not a permanent thing. It has a certain shelf life. It lives and then it dies. What do you say to that? Because it seems to me one of the paradigms that might help put the kibosh on some of this understanding is that flow.

[01:01:29.090] – Harvey

Yeah. The problem is that that’s not the simple story. That’s the complicated story. You’ve seen that cartoon where it has simple but wrong, complicated but right. And everyone’s taking the branch that says simple but wrong. And to make things worse… Okay, so here’s simple but wrong. If you burn yourself, put butter on it, right.

I remember one time with Melanie’s grandparents, I got burned on something and Melanie’s grandmother’s trying to talk me into putting butter on it. I was like, actually, that’s like a bad thing to do. And there was a clear battle of wills going on. I had to put my finger into the cold water. So what is fighting against the common sense?

Because the butter does feel good at first, but then, of course, it’s just making the burn worse. The medical industry – the medical industry! – is saying no, that’s wrong. Economics is not saying no, that’s wrong. Alright? To all the things you just said. They’re not saying, “eh, that’s not really the way it works though.” Alright, so we’re really screwed. It’s not what I learned.

I didn’t learn the right version. And did I teach the right version when I started teaching? No, I didn’t because I didn’t know any better. The problem was things bothered me and I’m hanging out with a very different group of people. The people that I hang out with are all post-Keynesian  institutionalists. And so remember the thing I said at the beginning of this about for the monetarists is what they respect as evidence is different than what we respect?

But the institutionalists and post-Keynesians, we respect the same thing as evidence. So I’d be reading stuff by them and questioning. But I taught the wrong stuff. And I have to say I see this on Facebook and I don’t know if it’s just people blowing off steam or whatever, but MMT folks posting things like, how can people be so stupid? They’re not stupid.

[01:03:08.460] – Grumbine

Yes, they’ve been taught wrong.

[01:03:11.030] – Harvey

Yeah, and it makes so much sense on a very basic level. Just like the butter on your burn. It seems to make sense. Butter is nice and smooth and it feels like it makes sense. And it’s being reinforced by people who are equally ignorant. I also don’t think it’s some big conspiracy. I think they are just plain freaking ignorant.

If you knew actual mainstream economists, it’s not that they’re out trying to come up with some conspiracy theory. It’s just that they’re ignorant. They’re really, really smart in very specific and frankly unimportant places. We had somebody come in and present a paper. He was competing for a job in our department about the effect of speed bumps in a neighborhood on housing prices.

And okay, but it’s not that important when we have unemployment like we do, chronic poverty. And this is what we’re doing research on. But to them those questions are answered already, or they just don’t want to ask them because they’re too complicated. So, and actually, I wanted to finish up what I was saying about people saying, “how can people be so stupid?” Don’t do that.

When you’re trying to spread the word, be a diplomat, not an assassin. These people have been taught wrong. And it’s funny to people on Facebook that I see calling other people stupid for not believing what they believe. You didn’t believe it either. Oh, is it Randy Wray posting this? Oh, no, that’s right. Because Randy doesn’t even have a Facebook page.

And I’m quite certain Randy was taught the wrong thing to start with, too. He just got lucky and had Hyman Minsky in his graduate program. So don’t act like you knew this all your life and put people down. Act like, well, actually, you know, if you think about it this way… And you also have to understand, and I guess I’ve shifted on to something else here, and that is spreading the word.

Well, it’s similar to what you were talking about, you also have to understand that it’s too much to accept at first. It’s way too much. You have to hope for a little bit of progress each time. Melanie, my wife, said she saw my talk on the debt and the deficit three times before she was like, “ahhh”… And she’s got to live with me, right? So she’s already heard all this stuff.

I’m really bad. I make her watch presentations I’m going to do and stuff like that. So, you know, she has to suffer through all that. It took her three times before she said, “oh, now I’m beginning to see it.” And now she’s pretty hardcore, very strong supporter of a job program and not a UBI. And so the problem is that not only does it feel like simple common sense, like putting butter on a burn, but also our medical industry is saying, oh, yeah, put the butter on there.

So where do you start to explain all this? I think the easiest place always is that if the government is running a deficit, then, hey, who’s running the surplus? But don’t push too much more than that. You can give more of the story. I don’t want to say that. You can give more of the story at that point, but don’t expect instant conversion because even John Harvey’s wife was like, “I don’t get it.”

And it was the third time the same talk before “ahhh.” I remember other MMT people have criticized one of the talks I do. Well, you’re only doing the government in the private sector. You’re not doing the foreign sector. I said that’s right, I’m not. I can add that in later. It’s too much for people to take. It’s easier to give a balance of two things, but a balance of three things is more complicated.

So let’s do the balance of two first, and then we’ll introduce that later. You’re right, it’s important to bring in there. And in fact, really important when we’re running a trade deficit, which means that the government must run a deficit bigger than the trade deficit for the private sector to net save. But not yet, because people can only learn so much at a time.

And it’s not their fault that they have been taught the wrong thing and the wrong thing that feels right because it is more consistent with their personal experiences. They do have a budget constraint. They do feel like when inflation goes up, it’s a net cost, right? And they do see money as something physical, even when it’s in their bank account, they still see it as physical.

So they can’t imagine the whole money being destroyed and money being created. So my answer is: little pieces at a time to convince people. We’re up against a lot but my gosh, the kind of progress that has been made in the last ten years. And, of course, Stephanie’s book last year, and the way it’s being passed around is well beyond the scope of anything that we even approached before that.

[01:07:24.870] – Grumbine

Absolutely. And I got to tell you, full disclosure. Anybody that’s listened to me in the past, I’ve got a lot of tape. I have been an economic hitman at times. I have been an assassin, as you said. And I’ve literally opened up the flame throwers. Now mind you, to be fair, I think on the other side of that equation, the sectoral balances, if you will, is the one where you’ve got the End the Fed-ers, and you’ve got the other libertarian trolls that come at you fast and hard.

[01:07:54.690] – Harvey

Oh, yeah, that’s not the same thing.

[01:07:56.880] – Grumbine

And they try to pull you down. And after a while, your patience finds a new level of “hell no.” And so you finally hit that tipping point. But I want to say you make a great point.

[01:08:08.790] – Harvey

May I interject, too, with experts – go ahead and attack experts. They should freaking know better anyway. No, but this is really important. I subscribe because the way I was brought into this was a little bit of hellfire, and it was hearing some of that that I had to have that – I don’t know whether you want to call it this cacophony or whatever…

[01:08:31.750] – Grumbine

Yeah right. An epiphany. But some people boom! Blew up and made me have to take notice. Right? Because this stuff, most people don’t want to talk about it, and they don’t even want to take five minutes to think about it. So somehow or another, it has to make sense to me. And I think what did it for me is that when I first started learning MMT I had literally two major things happening at once.

Number one, I had just finished two Masters degrees back to back, and I had been pumped full of neoclassical nonsense. Number two, I’m in my most libertarian state at this time, coming out of an MBA program, having learned it all completely wrong. And I’m feeling pretty damn smart, of course.

[01:09:18.000] – Harvey

Right.

[01:09:18.610] – Grumbine

Because after all, I am Steve Grumbine, MS MBA now, right? I started talking through this stuff. It was a little bit of a brutal push, but I remind you, we did not have all the tools and tricks today on the left to create your own stuff. There was nothing made, right? So that said we’re at a different place, and I do feel like there’s just enough of Stephanie’s new – the substack, it’s fantastic. The Lens, it’s called.

[01:09:47.180] – Harvey

I haven’t seen It.

[01:09:48.090] – Grumbine

And it’s a fantastic blog. I strongly recommend reading. Yeah, I think it’s like $70 for the year and worth every penny of it. Obviously her book..

[01:09:56.180] – Harvey

I’ll charge it to the Department.

[01:09:58.810] – Grumbine

There you go. That’s great to use also. It’s all in the research. But you even go back to Mosler Seven Deadly Innocent Frauds. That’s great.

[01:10:08.240] – Harvey

Right.

[01:10:09.100] – Grumbine

So is Randy Wray’s Modern Money Theory book and the primer that’s freely available both on New Economic Perspectives, and we’re bringing it over to RP. Courtesy of Bill Black. Thank you, sir. But we’ve done a whole lot of stuff over the last decade. And ever since Bernie Sanders came out with Stephanie in his back pocket…

[01:10:30.840] – Harvey

Right.

[01:10:31.440] – Grumbine

We’ve had access to the highest level. The things are changing in a way that many of us who are out there slugging it out before there were the tools and tips and great books and videos, and memes, podcasts… didn’t even really largely exist at the time. And if they did, they were grainy and poorly produced.

So you really had to want to learn. It was tough. Are you really seriously watching the silly video of these three people sitting in a classroom with echoing in the classroom? It’s terrible sound production, right? No, I’m watching it because for some reason, it grabbed me. And what grabbed me was somebody punched me hard in the mouth, and I felt like I had to defend myself like what Stephanie did when she went out to disprove Warren Mosler.

Come to find out I tried to disprove this man, and he was right. [laughter] So I had my own moments. But I went through there, and I took the techniques, what was done to me, which was just a throat punch, and I used that at various times. Various people require that kind of wake up. It sticks, but it turns others off. No question.

[01:11:41.500] – Harvey

Yeah.

[01:11:42.060] – Grumbine

So we’re at a really different place today where I think that everybody can literally provide really good resources. Quick, short videos, great podcasts. Podcast like the ones that you’ve done, the Cowboy Economist. There’s so many great tools, I’m jealous of newcomers. I’m jealous of what they get to experience as their coming out party because it wasn’t that way back then, right?

You had to really want it. Right now, it’s accessible, accessible to all and people, I think forget how hard it was for us folks that were out there slugging it out before anybody even knew what MMT stood for. But the fact is, it was tough sledding.

[01:12:22.860] – Harvey

You know, it’d be worse if you were now ending your career of doing all this, and now it starts coming on. I think of my poor professors who gave me all this background stuff. And I think I mentioned this in my review of Stephanie Kelton’s book at the Journal of Economic Issues. I went to this lunch when I was in grad school with Paul Davidson and Alfred Eichner and Terry Neil, all these really, really famous institutional post-Keynesians.

And Chris Brown, another grad student, and I were in awe. We hardly said two words, and all they talked about was how “remember when we thought we could change the world and we didn’t” and I thought, well, great. This is what I’m going into, because I thought I was going to change the world too. Well, now we are changing the world and they’re all retired or passed away now and they missed all that.

They laid the foundation, though, which is what I was saying at the book review. I said they felt bad, but they shouldn’t because they were the ones educating the Randy Wrays and the Stephanie Keltons and so forth. But, yeah, wouldn’t it be awful to be at that stage of your career and things start to open up? And I know I just turned 60, so I’ve got at least a couple more years in me before I retire to Ireland.

But it’s a great time to be doing this. And you make a point when you say about different things convert different kinds of people. And now there are so many different things out there. And it must be a multi-pronged attack on the powers, just not on the poor sucker that doesn’t know what they’re talking about. That the ones I feel like they’re turned off by “Well, what about this? Haven’t you thought about this?”

There’s a better way to do this. I got to tell you, my little talks I do are almost always for certainly white and oftentimes male-dominated business audience. And I do my deficit thing like, oh, now have I converted everybody? No. It took me three tries with Melanie. I don’t attack them for not believing what I’m about to tell them in the first place because I didn’t believe it either.

[01:14:12.620] – Grumbine

Amen I’m with you. I mean, I feel guilty at times. I go back through… But also on the flip side, though, it’s kind of like a time and place thing, right?

[01:14:21.560] – Harvey

Yes.

[01:14:22.380] – Grumbine

If you took a snapshot of where we were in the continuum, things were very, very different. And I’m really excited to see guys like John Yarmuth come out there and boldly, unapologetically speaking MMT.

[01:14:37.490] – Harvey

Right.

[01:14:38.060] – Grumbine

John Yarmuth. He said, okay, I got this and ran straight to the end zone. If we can start building on some of that momentum… Though, mind you, there’s an awful lot not to like about the political parties. And I understand why people are skeptical. I really do.

But that said the only way to get a mass movement, the only way to get people to really rally around these core truths is, in fact, each one teach one, our motto, and to get each person to understand at least the most basic fundamentals. We’re not talking about becoming a PhD economist, right? We’re just asking you to believe that we have the fiscal space that we have the ability. We can dream. If we can resource it, we can afford it.

[01:15:20.660] – Harvey

Right.

[01:15:21.150] – Grumbine

And I think that’s the net of this whole thing, right? That’s my net anyway. Yeah.

[01:15:27.020] – Harvey

It’s a paradigm shift. That gets overused, but this truly is a paradigm shift.

[01:15:31.180] – Grumbine

It is. I agree.

[01:15:31.940] – Harvey

It’s not about the market, it’s not about money, it’s about resources.

[01:15:35.060] – Grumbine

Absolutely. Well, John, look, this was a fantastic discussion. This podcast, in particular has been a labor of love, and it’s really taught me how to frame things differently. This particular medium allows me to settle into my chair, have that conversation and really explore some of my own misconceptions.

[01:15:54.010] – Harvey

Right. Right.

[01:15:54.980] – Grumbine

So these are really fantastic. It’s self improvement. And I hope others find the journey equally beneficial.

[01:16:00.460] – Harvey

And thank you for inviting me. There are invitations I get where I think, “Oh, crap. I guess I’ll do that.” This is not one. I’m happy to do it. You and Christian Reilly and Patricia [Pino], this is fun. I enjoy this.

[01:16:13.700] – Grumbine

You’re an amazing guy. I really love you. And you’ve been my go to guy. And the article you quoted about balanced budgets and money growth doesn’t cause inflation.

[01:16:23.220] – Harvey

Right.

[01:16:23.790] – Grumbine

These are my go to resources. I literally have them bookmarked ready to go in a moment’s notice. And just really a special guy. So I really appreciate it.

[01:16:33.580] – Harvey

Well, I appreciate that. It keeps me off the streets.

[01:16:36.840] – Grumbine

There you go. Well, tell us what’s coming up, John, and where we can find more of your work.

[01:16:43.180] – Harvey

Honestly, I need to get back into the Cowboy Economist stuff. When my daughter Alex comes home for the summer – she’s just about to finish law school, she’s in her third year now – but she ends up occupying the bedroom that’s between me and where the Cowboy Economist videos would be done.

Plus, she’s always doing a law school internship. I haven’t done any. So right now, honestly, unless you look for my old stuff, then there’s not a lot of new stuff out there. I don’t know about everybody else but Covid has beaten so much energy out of me. And in particular, the reaction of Americans to this whole tragedy.

And, oh, we all come together. No, we don’t. We rip each other apart. And it’s been exhausting. I haven’t have the energy to even do my Forbes thing in a while, so. But I find myself becoming more excited right now since I got started on that new book.

So maybe some Cowboy Economist, if you want to be horribly bored, feel free to email me at jharvey@tcu.edu and I’ll show you where the playlists are for my International Monetary Economics class because I videoed them all during Covid so that if something happened to me, my classes will have something containing Perspectives in Economics and Intermediate Macro – all three of those classes. All the lectures are up on YouTube.

[01:17:56.210] – Grumbine

Very good. With that, folks, thank you so much for joining us today. John, thank you as always, for joining us. I’m Steve Grumbine. This is John Harvey with Macro N Cheese. We’re out of here.

[01:18:15.390] – Ending Credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/RealProgressives.