Deciphering Economic Growth: Interest Rates and Modern Monetary Theory with Warren Mosler

Uncover the surprising consequences of the Federal Reserve's interest rate decisions with Warren Mosler, a leading economist and the insightful voice behind Modern Monetary Theory. As we navigate the bewildering relationship between monetary policy and economic growth, Mosler debunks the expected slowdown narrative, revealing instead how higher interest rates and increased government spending have inadvertently bolstered the economy. This episode peels back the layers of fiscal strategy that have left experts scratching their heads, presenting a comprehensive analysis that's bound to challenge your understanding of the way our economy operates.

Venture beyond the headlines as we dissect the interplay of high interest rates across different sectors of society, scrutinizing the contentious debates surrounding government deficits and the true impact of social service funding cuts. The often-polarized discussion of Modern Monetary Theory versus traditional economic models takes center stage, offering fresh perspectives on the elusive natural interest rate. We probe deep into the heart of economic theories, questioning the status quo with Mosler's critical insights that chart a course through the complex maze of fiscal policy and its broad implications.

The conversation culminates in a forward-looking examination of the optimal taxation framework, the role of political strategies in shaping economic policy, and the pressing challenges looming over the US economic landscape. From federal property taxes to job guarantee debates, Mosler and I spar over the future of governance and the myths that have long clouded public discourse. With an eye on the US's economic trajectory, interest rates, and global influences, this episode is a treasure trove for anyone ready to confront the future of monetary policy with a critical and informed mindset.

Transcript

Speaker 1: 1:35

Hello and welcome to VARM blog, and today I'm here with entrepreneur, hedge fund manager, author and scholar Warren Mosler, co-founder of the Center for Full Employment and Price Ability and founder of the Mosler Automotive, uh, mozartomotive and um. We're here to talk today about modern monetary theory, particularly as reflected in the modern and the contemporary us economy and um. One thing I wanted to ask you is uh, the federal reserve has seemed a little bit hard to predict, even from the standards that I normally hold it to, which is not very high, and yet, despite seeming to want to cause an unemployment crisis, it seems to be unable to do so. What do you make of the federal service policy the last three years?

Speaker 2: 2:35

Yeah, let me just say I turned over my fund management to my partners back in 1998. So I haven't done that in 26 years now. In fact, I've been out of it a lot longer than I was in it. But yeah, so it was about.

Speaker 2: 2:52

It was 2022 early when the feds decided to start increasing interest rates, and it was at that time that I pointed out that this was going to have the opposite effect of what they intended. Instead of causing unemployment to go up, it would go down, and instead of a weak economy, it would be a strong economy and it would ultimately support higher levels of inflation. I like to call them the inflation indicators. They're not actual inflation, but what they use for inflation indicators, and it's pretty much what happened. What they overlooked is the debt to GDP ratio in the United States, and it just used debt held by the public. The things like social security holdings don't matter for the economy. So the relevant debt to GDP ratio went from 35% back before the OA crisis to around 100% currently, and that's not a bad thing. It doesn't mean the government's going to go broker and solve it or anything like that, but what it does mean is, when they raise rates, the government, as always, has to pay more interest on the public debt. And when the public debt's that much larger three times larger in relation to the economy, the effect of those rate hikes is three times larger, the fiscal effect of them. They increase government spending on interest three times as much as they used to increase government spending on interest. So with the zero rate policy, the government spending on interest eventually goes towards zero and we went up to a five and a half percent on what's now 34 trillion or so of total debt, not all held by the public but and so you get over time roughly a billion, a trillion and a half dollars of interest payments because of the higher rates. Now it doesn't go there right away. Some of the debt's short term that goes there pretty quickly. Part of it balances at the Fed, it goes there overnight, but some of it's longer term you have to wait for it to mature and then they pay more interest on the new debt that replaces it.

Speaker 2: 4:54

However, the important point is that deficit spending for interest payments just skyrocketed as the Fed raised rates, because the only thing that happens from the government's point of view when they raise rates, other than making an announcement, is they pay more interest on the public debt. Operationally, that's. The only change for government is they have $34 trillion in public debt. They have to pay more interest on it when they raise rates. And that interest there's no tax to pay for. That that's all new deficit spending, and so right now, the deficit's approaching $2 trillion this coming year, depending on what the economy does and more than half of that's going to be interest expense, and so the higher interest rates are contributing to the deficit spending, and that's what ultimately supports a modern economy. It's your deficit spending. It supports incomes, it supports sales, growth, employment. Everything in the economies are supported by the government spending, and not to say that it's good or bad, but that is a support for better or for worse and too much of it, you'll get inflation for sure, but it's still what's supporting the growth, and that's what we've seen in the last three years.

Speaker 2: 6:09

We've seen their forecasts go from recession to a worse recession, as the Fed kept raising rates, and I'm saying no, they've got it backwards. And you saw the real GDP numbers. Fed kept raising rates and I'm saying no, they've got it backwards. And you saw the real GDP numbers getting stronger and stronger and, instead of unemployment, going up to 4%, 4.5%, 5%, as they were forecasting way back. It's gone down to 50-year lows of 3.7% or at all-time lows in unemployment, because they're flooding the economy with money to pay the interest on the debt and there's just no way around that. You throw kerosene on the fire, the fire burns stronger, it doesn't go out.

Speaker 2: 6:47

Now I think what the Fed's got deep in their model somewhere is the idea that nobody ever spends interest income, or very little of it ever gets spent, and so, no matter how much interest income they pay, they don't count that. As you know, they don't see that as going to have an effect on the economy, and they could have been right. They could have raised rates and the economy could have gotten worse because nobody ever spent any of the interest income they earned. But if you assume a normal rate of spending, whatever that might be historically, just by going back and looking at the data you get what we've got, and so it should be no surprise to anybody correctly anticipating how much of the interest expense gets spent that the economy would be this strong.

Speaker 1: 7:34

This actually does kind of make sense, and it brings something that isn't often spoken about when we talk about government debt or interest rates, because everything's assumed as payments into banks, from the cost of the interest rate for the cost of debt, but no one's thinking about. Well, someone's making money off of that interest. Yet, you know, it does seem like a kind of regressive way to inject money into the economy.

Speaker 2: 8:02

Yeah, I call it obscenely regressive. It only goes to people who already have money in proportion to how much they have. So it's basic income payments, just like the stimulus checks, but only to people who already have money in proportion to how much they already have in order to fight inflation. I mean this is just madness. If the people looked at it for what it was and see the Fed as an agent of government, like the military or anybody else, can decide on its own to pay over a trillion dollars out of interest income only to people who already have money in proportion to how much they have and claim that they're doing this to fight inflation, I mean they get laughed out of the room. Right, but that's what's been going on and it's being supported by Democrats, Republicans, everyone.

Speaker 2: 8:48

It's like the Fed has to tighten up. Now, if you can explain to me how that's tightening up, fine, but it's not, and the numbers coming out show that it's not tightening up. It's drunken sale or levels of deficit spending where it's 7 percent of GDP. It's it's boom time. This is the strongest economy we've ever had outside of a war or, you know, immediately after a crash you get a little bit stronger, but in terms of a mid cycle or wait cycle recovery. This is as strong as we've ever had and they have no explanation for it except, oh, the consumer is resilient. Well, yeah, you're flooding them with money, it's going to be resilient.

Speaker 1: 9:25

Why do you think there's such a sense of economic malaise amongst certain, let's say, middle-class people right now? Because I agree, I look at the economic indicators, everything looks good. I, I mean you're looking at like gdp growth. We, we don't. We haven't seen this consistently in a in a long time. And yet I also agree that it does feel like, um, things are are rougher than those numbers should indicate. And you know my, my working theory is what you're saying is because this stimulus is aggressive. But what other reasons might there be?

Speaker 2: 10:05

Well, there's a couple of reasons, you know. One is I've been looking at some of the surveys lately, like consumer confidence, and now they're starting to break them up between Democrat and Republican. And the Democrats say the economy's, you know, good, and the Republicans say it's terrible. And when they divide it among different income groups and everything else, they don't find that divergence only when they do it politically. So it's a little bit, it's just tribal, you know.

Speaker 2: 10:28

One team wants the economy to be good, to help them in the election of the Federal Reserve, believes that things are going to get worse. If you look at their forecast, they've got unemployment up to 4.1% or 4.2% by the end of the year in a deteriorating economy, and it's broadcast all over the news and so it causes people to believe it. So you get surveys where people's current conditions are good, but they believe the future is going to be bleak. And it's because of all this talk and all the professional economists for the businesses the large businesses, small businesses they're all forecasting weakness because of the high interest rates. Look, everybody's got it backwards. So they all see this meteor about to crash into the earth and it's all doom and gloom. The sky is not falling. There is no meteor, it's the opposite. So what you're seeing is an economy that's doing well in spite of extreme negative sentiment, which means, if the sentiment just goes to normal, the expansion is going to be that much stronger, much stronger. The expansion is going to be that much stronger, a lot stronger.

Speaker 1: 11:41

This leads me to a kind of let me add one more thing to that.

Speaker 2: 11:46

You have people who are very upset that the price of orange juice went up or something like that, and it has selective. Prices have gone up and they blame if they're on the other team that you know. If they're on the Republican team, they blame the Democrats, they're on the Democrat team, they blame Republicans and it says, yeah, I'm making more money, yeah, I'm doing well, I just bought a second car and but you know, the price of orange juices up. This is really bad. So they focus on these headline price increases and it's just human nature to do that, and there have been a lot of them that are pretty ugly, you know that affect their, that they see when they go shopping, and it scares people because when you see prices going up, you're worried about whether that's going to continue and if it does, you're not going to be able to afford to eat, and so it's a very worrisome thing to see these prices going up, even though right now you're okay All government employees just got a 5.2% raise, they've got enough money to cover it all but it's still an anxiety that builds up inside of you when you see prices going up all the time and it makes you feel like you're on the edge of extinction, if you ever fell behind.

Speaker 2: 12:55

One false move. Prices go up and you can't afford anything. So it's a very anxious time for people and it's very uneven. Of course, you've got a lot of people. Even though, overall, the economy is helped by the high interest rates, a lot of individuals are not and even if it's only 4% or 5%, you're talking about millions and millions of people who are hurt. So there's a lot of winners and losers. It's a very disruptive economy. When they raise rates like that, the overall economy has done better. It's highly regressive and there are a lot of winners and losers out there.

Speaker 1: 13:29

Well, one thing that you bring up that I find interesting to talk about is that many people who support the raise in interest rates even from a kind of standard neoclassical theory of economics, which you and I both think is wrong.

Speaker 2: 13:46

But even when that's. Inapplicable not wrong, yeah, okay, inapplicable, inapplicable.

Speaker 1: 13:53

Okay, interesting, but what I would? What I find interesting about that is, for all the current political cycle, deficit hawkness which we always see, and we see debt rate that the government has to pay more for that it's just not ever factored in at all.

Speaker 2: 14:26

Yeah, the only way it's factored in is they say it's unsustainable and it means we're going to have to cut Social Security to pay for it or something they don't look at it as new money hitting the economy and supporting it. They come up with some nonsense that doesn't apply. That's inapplicable, like cutting Social Security, and that's the direction the conversation goes.

Speaker 1: 14:45

It's very misleading social services cuts you know actually do happen. How do you see that skewing the, the, the economic trajectory, considering that I don't see interest rates going down anytime, real soon?

Speaker 2: 15:11

So the main thing is this the size of the public deficit of the annual spending minus the inflation rate. Okay. So, with the CPI growth down to maybe 3% and deficit spending at 7%, we've got what they call real deficit spending adjusted for inflation growing at 4%, which is very, very strong and that's very supportive. If they cut that by reducing social programs, then that support for the economy starts going away. The economy becomes vulnerable. That's kind of think of that as the equity supporting the credit structure. Think of your income that supports your ability to make all your payments, your house payments, your car payments.

Speaker 2: 15:54

You start cutting into the person's income Now. His payments are at risk, his credit is at risk, and so for the economy as a whole, we've got, I don't know, 40, 50, 60 trillion of debt and 30 trillion of equity, which is the public debt. That's our net financial assets that support everything. That's our net wealth for the economy. If you start cutting into that, it starts cutting into our ability to support the rest of the credit structure and things can grind to a halt and go backwards, and that's exactly what happened at the end of 2000. And that's what happened in 2008. All the crashes we've had were preceded by the public debt, the deficit getting too small, not growing enough to support the credit structure, which then ultimately collapsed. And you go back 200 years in.

Speaker 1: 16:52

American history and it just happens every time. So this gives me to a kind of theoretical construct of modern monetary theory that you've been kind of influential in writing about. I think the first paper I saw by you on this topic was probably around 2005, 2006, somewhere in there, and that is the argument that the natural rate of interest is probably zero. What do you mean by a natural rate of interest and why would that be the case?

Speaker 2: 17:27

Well, there's, in the sense that if there is no government interference in the financial markets, then the rate of interest is zero. A positive rate of interest requires government interference. They have to pay more interest on the public debt, Otherwise the rate doesn't go up. This is the risk-free rate we're talking about now, the Fed funds rate, and there's different ways for them to pay it. They can pay interest on excess reserve balances at the Fed or they can sell treasury securities, that type of thing. If you've thought enough about it, those are two ways they support the interest rate. But those are forms of government interference is to pay interest on reserves and they have what's called an RRP account, which is another way of paying interest on reserves, and they pay interest on the public debt. They offer treasury securities and those two things work. Those two pieces of government interference, that's, the act of government policy to pay interest into sub-securities, is what supports the rate today, the overnight rate at 5.5%, what supports the 10-year treasury rate at 4.3%, et cetera. So without government interference, the overnight rate would go to zero and these other rates would gravitate down to zero over time. And that's exactly how they operate. When we did have a zero rate policy when the rate was zero. The government was paying zero on excess reserves. They weren't paying anything, so they were not interfering and the rate went to zero. Japan's had a zero rate policy for 30 years by not interfering in the marketplace. So the natural rate in the sense that where interest rates go if the government doesn't interfere, is zero and all the money and banking textbooks understand that they show the Fed's job is to offset operating factors, which is to take an active part to support the target rate set by policy.

Speaker 2: 19:21

And when you hear the term financial repression they're saying that's assuming there's some kind of natural rate like five, the government's taking action to push it down to zero or to push it lower than that. They call that financial repression. It's completely inapplicable to today's floating exchange rate system. That would be true under a gold standard where there's a limited supply of gold. People compete for it and bid for it and bid to borrow the gold and their desire might drive the rate to borrow gold up to 5%. And if the government wanted it lower it would have to come in and suppress that rate by taking action. You know, but that's been gone since 1934.

Speaker 2: 20:02

And you'll still see the media talking about financial repression, keeping rates below some kind of natural rate, which is a fixed exchange rate phenomenon. It's got nothing to do with today's floating exchange rate policies of almost every country in the world. The only place that would be true would be like Hong Kong and Bulgaria maybe, or something like that, Some very small places that have fixed exchange rates, or dollarized maybe Panama's dollarized, I think. So it might be applicable there, but the rest of the world is entirely inapplicable and it's a disgrace that these economists would even say that. I mean, how can they not know that? It's basic economics 101 stuff? It's pretty bad that that stuff is in the mainstream narrative stuff is in the mainstream narrative.

Speaker 1: 20:59

This does lead me to some larger questions about the global economy. There's been a lot of talk, both on the mid to far left and on the far right, although for different reasons, about de-dollarization. Uh, on the far right and you see this in a weird plank I saw on the whole project uh 2025 that the heritage foundation was putting together for the trust administration, where they are, um, trying to pick back up something I thought that even the weird grifting libertarians give up on, which is, uh, because of de-dollarization, wanting the united states. That's their justification. I don't. It just seems to be this weird pet theory they have that we should go back to a gold standard. I'm not sure if they're talking about the pseudo gold standard of bretton woods are an actual gold standard of, you know, before 1934, but nonetheless that seems to be back on their political horizon.

Speaker 2: 21:55

Let's just say that's out of ignorance of monetary operations. Okay, People come up with these things. I had a car company and I used to have people come in once a month with some kind of perpetual motion machine. It just doesn't work that way.

Speaker 1: 22:13

And on the mid to far left there's been a lot of predictions of US dollar collapse because it not being as much of a forex currency which, a the latter has been kind of greatly overstated. How the replacement of the of the of the US dollar is a foreign exchange currency. How the replacement of the US dollar is a foreign exchange currency, but B you seem to think that's not as important as they do. Yeah, I mean.

Speaker 2: 22:36

I've been hearing it for 50 years, you know, along with Reagan saying if the deficit ever gets to $90 billion, we're all doomed. You know stuff's been going on for a long time. That's part of the fear-mongering over nothing that just gets dusted off and rev, revved up and revised, you know, every three or four years it seems.

Speaker 1: 22:57

Why do you think that it's both a left and a right wing phenomenon right now?

Speaker 2: 23:03

That's a good question. Yeah, you have to blame mainstream economics for not teaching this stuff properly in school and you know, just having just a pathetic level of economics education. So I have to give you a quick anecdote. I went to the University of Connecticut. I got a call years later from the donor department whatever. That is the guys looking for money to support this school. And I said well, you know they're teaching money and banking wrong and you know, if they agree to teach it correctly, I'd be happy to make a donation.

Speaker 2: 23:38

He goes really no, he was just a, he wasn't an academic. So he sets me up with the head of the economics department and the three of us sit down and I say you know, you're teaching that banks take in deposits so they have the money to make loans and in fact loans create deposits and then the banks have to take in money to replace those deposits if they leave. But the money comes from any bank purchase creates a deposit, the bank credits the account. And the guy says it was a woman actually, but whatever says you know, yes, you're absolutely right, that's how it is, that's how it does work and yes, we are teaching it wrong. And so the guy who's looking for my donation says, well, would you be willing to change it and teach it the correct way? And he says no, we're not going to do that.

Speaker 2: 24:26

And he was just looked aghast at this person Like what. I don't think he believed me when I told him that that was the reason I didn't want to donate. He's just like. He was just bewildered. You know we left the meetings. He goes like sorry to bring you in here. He didn't know what he got himself into and I think that's indicative of what's going on everywhere. From what I've seen, I haven't seen a single mainstream academic, and probably very few of the post-Keynesians, who get any of this stuff right, and occasionally some of them get bits and pieces correct. But the basic level of education is just incorrect. Now, when I go into the Fed and talk to their operations people, monetary affairs they know all this cold. It's what they do every day. They know what accounts get debited and credited, because that's what they do. They know how to offset operating factors and do all the other things it takes to sustain a monetary system.

Speaker 1: 25:37

But you go to the academics, they're just, it's just abject ignorance of what's going on. Yeah, that leads me to a couple of things that have kind of bothered me of the post-Keynesians including ones that I was always a little suspect of but I thought were closer to right, such as Paul Krugman really regressing he's a new Keynesian, by the way. Yeah, new Keynesian. Yes, he's a New Keynesian, by the way. Yeah, new Keynesian. Yes, but New Keynesian.

Speaker 2: 26:18

to explain what we mean by that is they took out the stuff about taxation and replaced it with monetarism, more or less.

Speaker 1: 26:23

You're being kind, so that's okay, but I've also noticed like let me think of an actual post-Keynesian like Steve Keen and whatnot, also being not as up on this as I would expect them to be from what they said I don't know, 10 years ago. So what, what do you think about the state of quote heterodox economics right now? And then it's like more mainstream. I'm putting all those in quotes Sisters in like new Keynesianism and more academically respectable post-Keynesianism. Why does it also seem to not be as much of a help as maybe it was a decade ago?

Speaker 2: 27:08

So at the highest levels, you're in New Keynes, and that's what the Federal Reserve is. It's been modified a little bit, but that's where it all started, and the idea was that the reason we don't have markets, don't find equilibrium, is because of sticky prices, which is absolutely not what Keynes said. Keynes pointed to a lack of effect. To me it had nothing to do with sticky prices, but anyway, that was their thing, and they have all their mathematical models surrounding it, none of which have money in them. And the core problem is it's going to get a little bit technical. They don't have any understanding of the source of the price level. They started with this thing called the fiscal theory of the price level, but they couldn't get the math to work on it, so they kind of abandoned it. These are top guys, you know, very astute academics like Michael Woodford and their whole group, and they just couldn't get it to work and so they've kind of abandoned it and sometimes they fall back on it. They were getting pretty close.

Speaker 2: 28:07

So what they've left out and what Keynes also left out, and Marx and the rest of them is the understanding that the currency itself is a case of a monopoly. The government's a single supplier of that which it demands to pay taxes, for payment of taxes and to buy its bonds. Ok, you can't go out and print your own money to buy to pay taxes. That's called counterfeiting, Okay, so all the dollars to pay taxes come from the government through its agents. And then people start arguing with me Like I won't mention names, there's too many of them. No, that's not true. It all comes from the banks. It's like the banks are agents of the government and they're registered. They're licensed, they have accounts at the Fed that are used to pay taxes. You can't use their regular accounts on their banks. They regulate their. It's called CAMELS, c-a-m-e-l-s. You know the capital, their assets. There's a big thick book on loans they're allowed to make and not allowed to make, and they get regulated and supervised to make sure they're only lending money. You know that they're in compliance with all the federal rules, which are changing all the time, with every crisis telling the banks what to do. They can change bank management anytime they want. If they don't like the bank's earnings, they can shut them down. If they don't like their liquidity, they can shut them down. If they think they're taking interest rate risk, the regulators could shut them down.

Speaker 2: 29:39

I was an owner of a bank small bank, very small bank for about 20 years and I knew I was an agent of government, that those guys were on us all the time watching everything we're doing, classifying loans, which means if they didn't like something you did, it didn't count. They counted as if you'd lost all the money for regulatory purposes and were always on the verge of trying to put you out of business. So you had to. You know. If they said jump, you know you said how high. If they said jump, you know you said how high. And so the banks for me, from my working knowledge, is that they are agents of the government. The same way, the military is an agent of the government. Yes, if you're a platoon leader, you have discretion on where you can march or where you can point your guns or how many shots you can take, but you're not independent of the military. You are an agent of the military. You're an agent of the government, and so all the dollars that can be used to pay taxes come from the government through its agents. Congressmen, don't spend directly. They have agents out there like the Fed and the Treasury and Post Office, whatever.

Speaker 2: 30:46

So it's a case of monopoly, there's a single supplier and everyone knows from Micro 101 that single suppliers are price setters. You set the price. If you've got the electricity monopoly in the city, you set the price 15 cents a kilowatt. Now it may have terrible consequences, but that price will stay there until your committee gets together and changes it. It doesn't come from the market bidding for electricity or anything. They've tried to implement things like that and they've had. I won't comment on the results. Some of it are absolutely horrendous. They don't deep down. They're better off just setting the price. But anyway, they're trying to break up the monopolies and make them competitive. But when you have a monopoly, you've got a single supplier, you've got a price setter. To not have a price setter, you've got to bring in competition and everything else. Well, the government is the single supplier of the funds to pay taxes. There's no competition there and that is the source of the price level.

Speaker 2: 31:46

Now markets can sort out what's called relative value. How many ounces of gold does it? How many ounces of silver does it exchanges for one ounce of gold? Or how many gallons of gasoline exchanges for a bushel of corn? That's what our markets do all day long. They show you relative value. You know the peaches die, so the price of peaches goes up, which means you know that's the markets allocating by price, you know determining that the relative value of peaches has increased because peaches died, or something like that.

Speaker 2: 32:18

But to put a price tag on those things, you know, if there was, if I came up with a new currency in a new country and we'd say, okay, how many peaches, what's the price of peaches? What's the price of labor, what's the price like? There's no way to determine that. You've got kids in Turkey, you go to buy a rug and they'll tell you in every currency in the world how much it costs. But if you've got a new currency that they don't know about, they don't have any way to figure this out. There has to be some information in those markets about that currency so they can get started. They have to have some price to get started with and that's called the source of the price level, it's called absolute value and so, um, that comes only from the monopolist. He has to tell you so.

Speaker 2: 33:06

So when the government's hiring soldiers at $50,000 a year, they're saying you have to work a year as a soldier to get $50,000 of our currency that you need to pay the tax. If you work as a Supreme Court judge, you get $200,000 a year. If you work in the post office, you get $40,000, whatever it is, the government has to let us know what we have to do to get their money. So we then have that information to know what everything else should cost. And the markets can't get that information from anywhere else except the government. If the government stops giving that information, the markets stop trading in that currency, which happens when a government fails or goes away or whatever. It just ceases to do it. And when you get a new government starting, you don't get it.

Speaker 2: 33:51

And nobody knew what a euro was going to be worth five years before there was a euro. So how did they know when the euro started how anything would be worth? Because they announced that they were going to buy the existing currencies at a fixed exchange rate. They announced the exchange rate so everybody knew, could put their finger on how many lira you needed to get a euro, how many marks you needed to get a euro, how many francs you needed to get a euro, and so that translated into all the other prices. The new government, the new central bank, the European Central Bank, bought the existing let's call it money supply had announced prices and that got price level started.

Speaker 2: 34:29

Well, the mainstream doesn't understand that. They don't know where the price level comes from. What they do is, when they assume a price level in their models, they just take yesterday's closing prices and then they can start to tell you how they think they're going to change. Oh there's, we're doing this and that we think those prices will go up or we think those prices will go sideways or go down. They don't know where they came from, except they were yesterday's prices. If you ask them, well, where did those come from? They say, well, from the day before. Where'd those come from the day before? It's an infinite regression, all the way back, and they'll tell you we don't have a source of the price level. The best we can do is use yesterday's close as a starting point and anytime you interview a mainstream economist, ask them about the source of the price level. They'll tell you that, okay, once you understand that it comes from the government, because they're the single supplier, then all this other stuff that they struggle with is easy and falls into place.

Speaker 2: 35:26

And so they have yet to model the currency, the dollar, as a a US government monopoly. The euro is a monopoly of the European Central Bank and the European Parliament. The yen is a monopoly of the Japanese government. They have yet to do that. Now, interestingly, keynes described the currency the way you would describe a monopoly, but he didn't call it that and I'll say he never realized that he was describing a monopoly. So he was right in his description. You know it doesn't grow on trees. You know he could have shortages because the government's not spending enough. He surrounded it and got all that stuff right, but he never called it a monopoly.

Speaker 2: 36:04

And when he was arguing with mainstream economists at the time, they called them neoclassicals. Now I don't know what they called them. Now they would tell Keynes no, in the absence of a monopoly, without a monopoly, you know, unless there's monopolies, you're not going to have unemployment. Unemployment is caused by a monopoly. Keynes would say no, you can have unemployment because of what's going on in the monetary system, and he was correct. But what was going on in the monetary system? And he was correct, but what was going on in the monetary system was a monopoly. Now, if he knew that's what it was specifically, he would have said to him he would have answered that way, but he didn't. And I don't want to get too far out in the weeds here with your questions, but once it's clear that currency is a monopoly, then you realize the source is a price level and then you realize that the sequence, which is the big contribution from M&T that the mainstream economists have, is backwards.

Speaker 2: 36:54

They all assume the government has to get money to be able to spend. The US government has to get dollars to be able to spend. It has to tax or borrow to be able to spend. That's not true at all. It's the economy has to get the government's money to be able to pay taxes and buy bonds. It's not the other way around. The dollars come from the government and when they believe the opposite, it leads to all this nonsense that's going on.

Speaker 2: 37:21

Jamie Dimon talking about how the public debt at $34 trillion is unsustainable just a matter of time. Jerome Powell, same thing. Moynihan, same thing. You know, st Amol. Just a matter of time, jerome Powell, same thing, moynihan, same thing. You know. Your top three bankers in the world really All have got this like pathetically wrong and they're public about it. And you know they're getting publicity about it and the people in Fed monetary operations know this is like. This is absurd. You know it's completely inapplicable to our system. It's like and they're watching these people do it and it's been going on. You know for my 50 years that I've been watching it.

Speaker 1: 37:59

Well, there's an interesting. You know, chartalism and neo-chartalism both have some interesting implications about tax policy, and I think you've kind of explored this in a different way than even some other modern monetary theorists Like. Your ideas on taxes seem to be a little bit different from like, say, Stephanie Kelton. I wanted to. I wasn't actually planning to bring this up, but I might as well. What would you think would be an optimal tax structure to anchor the currency in the United States that would not be like super regressive, and has your thought on this changed over the last 20 years?

Speaker 2: 38:34

You know it's right back in soft currency economics from 1993, three years before this was introduced to the academics and I think, just a property tax, real estate tax, like we have at the local level now. If that was a single federal tax it might be high, like 10 or something, and uh, combined with a job guarantee, so if you lose your job you can always get paid the job guarantee, so you're not going to get thrown out of your house, you know, out in the streets because you lose your job. And I understand that there are a lot of people who can't work, are disabled, and that all has to be taken care of, of course, the same way we do now. Then that would enhance the standard of living of the lowest income groups, let's say the 50%, the lower 50% of income groups, by probably a hundred percent. The real standard of living would go up by probably 100%, and without connecting all the dots in this, I can if you want, but it answers your question of why I'm behind it. And so to me the outcome is as progressive as you can imagine where the real wealth would go there and you wouldn't be taking anything away from the higher income groups, you'd just be enhancing the real GDP, which would go up by 25 or 30 percent, and most of that would, if it was in the correct public services, public education, public health, infrastructure would benefit disproportionately benefit the lowest or income groups, because the higher income groups have their own infrastructure. And so that's how I would do that, that's how my proposals all aim to do that, and at the same time, it gets rid of vast swaths of the financial sector.

Speaker 2: 40:31

And one of the channels that I really hadn't talked about, but I should, is that when you go to property tax, you eliminate income tax. You've eliminated tax, the massive incentives to save, to not spend your income, the incentive to put money in your 401k instead of to have it. To not do that and to not spend it is because it's pre-tax. Well, if that tax is gone and that incentive is gone, the incentive to put in a pension fund is there because it's all pre-tax. All the reserves that insurance companies and banks will pile up when they can is all because it's pre-tax. If you don't have those taxes, there's no incentive to do that, and so the pool of funds that would be managed out there, which is, I don't know, 40 or 50 trillion, would be way down, you know, maybe down 90%. So you're eliminating like 90% of the financial sector by doing this, which is a massive ancillary benefit.

Speaker 2: 41:28

All those people are the brightest and best. They'd be out curing cancer, educating and doing research into who knows what and software and everything else and improving our lives. Instead of digging holes and filling them in, which is what the financial sector is, it's just largely predatory. That lives off the institutional structure set up by Congress, which includes all these savings designers. So I'm not blaming these people or demonizing them. It's not their fault. Congress has set up this structure that rewards them dramatically for compliance, for being part of it compliance you know for being part of it.

Speaker 1: 42:11

So just predicting a counter-argument that you normally get, would not that decrease investment in productive capital? Quote unquote. No, I don't know.

Speaker 2: 42:22

I don't know how you connect those two. And it's chapter six of my seven deadly innocent frauds, which is free online. Just click on it, mosleereconomicscom, or on my Twitter account at WB Mosler. But savings is the accounting record of investment.

Speaker 2: 42:39

It's not the stuff that gets invested. And all the old mainstream textbooks had that. And now it's become counterintuitive. And somehow all these congressmen are convinced that. And now it's become counterintuitive. And somehow all these congressmen are convinced that you need savings to have money for investment. And it's completely backwards and all that does is feed the financial sector. And so it's surprise, surprise, that's what they're pushing right and it's intuitive for people to understand. Oh, you need savings to have money for investment, so let's do this. We need this huge financial sector to have investments. It's completely not true. In fact, it's the reverse. The financial sector uses up real resources that would otherwise be contributing to real investment, and nothing. So that's where the financial side is actually interfering with the real economy.

Speaker 1: 43:29

I guess this is kind of harkening back to something we mentioned almost 20 minutes ago, but you were talking about the economies that do have actual monetary constraints because they're explicitly legally pegged to the dollar. Explicitly legally pegged to the dollar? Um, yeah, where this has seemed to be the most you know to put it, I mean just directly, the most unstable fiasco, uh, is argentina, and currently the right wing government seems to be big on another dollarization scam to cut down on their inflation, et cetera. What do you think is likely to happen?

Speaker 2: 44:12

I don't know. You know, when the guy with the chainsaw talks, you listen, right? He actually campaigned with the chain. That's how bad things got, you know? Or how unhappy people were, didn't it with the current system? And that's what happens Now.

Speaker 2: 44:28

The easiest way to understand that is let's say you were going to start a bus company and you were going to charge $2 for a ride and you were going to use bus tokens. So people could buy tokens and then use them to ride the bus. And so you had two choices you could either make up your own bus tokens, which might cost you a penny a piece, right, because they're cheap metal, whatever, and maybe it costs you a nickel or you can go to the bus company in Europe that already is operating and selling bus tokens for $2 and buy their tokens for $2 each to use at your bus company. Okay, so let's say I had two bus companies, one on the East Coast and one on the West Coast. No, I don't want to polarize myself that way. Two hypothetical bus companies, one in country A, one in country B, so I don't alienate anybody. One bus company buys their own tokens for $2 a piece from some other bus company in another country and the other one just makes their own. Which one's going to do better? Financially, it's a burden to have to take your profits and buy these tokens for $2, right, versus the other bus company that's just making them out of copper or something tin or zinc I don't know what's cheap nowadays lithium and using them as their bus tokens. You know, creating them for 5 cents each and using them as bus tokens.

Speaker 2: 45:59

Why would you let them buy bus tokens from somewhere else? Say, well, that way the bus token has intrinsic value and people you know will buy them. Don has intrinsic value and people will buy them. Don't have to worry if they buy them to ride the bus, because they could always sell them for them, use them in another country. I don't know. It's like a ridiculous argument. Nobody would ever do that.

Speaker 2: 46:20

Yet that's what Argentina is doing. They can create their own pesos or they can buy them from the US for a dollar apiece, and they have to use real exports to get those dollars. So they have to use their real output, their real labor, sweat off their back, to export to the US, to buy our dollars, to get our dollars, just to have their money supply, their money in pension funds their money in the banks, their net financial assets have to come from net exports. Why would you do that when you can? Their net financial assets have to come from net exports. Why would you do that when you can get your net financial assets for free? So, but that's what they're doing and every time anybody does it, their real wealth is being diminished by the cost of those net financial assets, whether they know it or not, and they never measure success by that.

Speaker 2: 47:05

And there's a guy named Steve Hanke, at Johns Hopkins I think, who's been advocating currency boards. I talked to him about 10 or 15 years ago about this, because he was advocating a currency board where they accumulate reserves. You know it's kind of like dollarization. I said, yeah, you get price stability but you lose. You know it's costing you like 5% of your real wealth every year to fund your net financial assets. He goes yeah, I know. He says, but I think it's worth it to have price stability. It's like, okay, you disagree with this, you just think it's a good tradeoff, but why would you trade off even 1%? It's like madness, I think, you know, and it caters to a misunderstanding or an illusion or something and nostalgia, I don't know it works politically, but it's. It's just a heavy cost on the economy. So it's not that it can't work, it's just that it's always a heavy cost on the real standard of living.

Speaker 1: 48:03

Which always makes it interesting to me when non-rich countries try it because, okay, let's say you know you're Hong Kong, or even the U? S would never do it, but let's say you're the U? S, we have the real wealth that we could. We could theoretically eat some of that for price stability, Right, but but Argentina doesn't. Why would?

Speaker 2: 48:27

anybody do that. It's not that once you understand how a non-convertible currency works, price stability is no more difficult. It's just as easy. Once you understand the source and the price level and the whole thing, you can sustain full employment. You can sustain. Look, your real wealth is your domestic output plus whatever you import, minus what you export, and most of it's domestic. So you can sustain full employment to maximize your domestic. You know real wealth and work your real terms of trade, so you maximize those. It's not hard to do once you understand what you're doing and what the target is. But they don't. They just don't do it. The countries that are the poor countries are the ones that don't have full employment. It's pretty hard to pick a country that's not a top-tier country that has high levels of employment. They don't. The reason they're emerging or developing or whatever polite name you want to give them, is because they've got staggering levels of unemployment for the most part.

Speaker 1: 49:35

So it seems like what you're arguing is also the refrain that I might see to this argument is well, argentinians have to buy things outside of Argentina. You're arguing yeah, you realize that, but you need to get your domestic economy up to top production first, and then you'll actually.

Speaker 2: 49:58

You say can't buy things outside of Argentina.

Speaker 1: 50:00

They need to. They need to buy things outside of Argentina.

Speaker 2: 50:02

If you look at every one of these countries and you look at what problems have been identified by the IMF or anybody else, oh, they're importing too much, so they're importing too much. And then you say, well, what's the problem with this? Well, we won't be able to import. Well, you don't have that problem. You're telling me, your problems are importing too much and you want to do this. Because what are you talking about? Any country running a trade, they're all running trade deficits, right, you know so. And they're all trying to get to balance trade, which is to import less. And and it's not that I'm saying they should do that, of course, but they're all. They're just talking out of both sides of their mouths when they, even when they ask these questions, they don't realize what they're saying. It's just self-contradictory.

Speaker 1: 50:49

Well, it has to be fundamentally wrong right yeah, well, I mean, it is interesting to me when, when you're talking about a country pegging its, its uh money, its money to the dollar, which would only make sense if you need to buy things from the united states to also decrease your trade deficit.

Speaker 2: 51:07

But they're already doing that, even with 200% inflation. Right, they're already importing all they wanted from anywhere and they were trying to reduce it as a policy because the United States and everybody else wanted to sell and was selling them more than the government wanted people to buy. So they're working to reduce that as a policy. And then you're saying well, the problem here is you would do this only if you want to buy from the US. You see how they're like talking out of both sides of their mouths. Yeah totally.

Speaker 2: 51:37

Yeah, they're just empty headline rhetoric, and that's what rules the day and gets you elected, I guess.

Speaker 1: 51:42

Because it makes sense that in any economy, even in a highly globalized one, still the majority of financial transactions within the country are within the country.

Speaker 2: 51:54

Even if they're not, you can go to the poorest country in Africa and buy gas for your car and you pay for it in local currency. That's true. How does that happen? Because the markets figure that out. Okay, you don't need the government for that. Okay, there's an exchange rate and it figures it out. Maybe the price is more than most people can afford, but whatever, it's not that you can't use your currency to buy imports. Every import in the world is available for sale in every country, you know, at a price, and maybe the price goes up in local currency every day, like Argentina was, but it's there and somebody's buying them in very large quantities. You've got huge boats bringing them in every day and the government's trying to reduce it, not increase it. It's not like we haven't been able to import because of the inflation. Let's dollarize so we can import more. That's not what they're thinking.

Speaker 1: 52:51

This does lead me to a different but related problem, another country that seems to be dead set on destroying its internal domestic economy. I might get to a third one, but here I'm talking about Britain, which I might get to a third one, but here I'm talking about Britain, which has seen dramatic economic declines recently. In fact, I make a bitter joke that it really wants to be Argentina, but it is not dollarizing. So what's?

Speaker 2: 53:28

going on there from your perspective. Well, the budget deficit is too small, right? So the real deficit after inflation is pretty close to zero. Last I checked, I looked at it recently I don't follow them on a day-to-day basis or anything and that's pretty much it.

Speaker 2: 53:48

They've got this idea that um I guess going back to Thatcher is who popularized it, at least in the started before that about um, uh, you know, you eventually run out of other people's money and you have to. They don't understand. They've got the sequence backwards and there's no telling them about it. And until they understand that right way around and until they understand the source of the price level and so they can make decisions on the price level, on inflation, you know, based on what actually causes it to go up and down, you know after which they might decide they want a 5% inflation rate, but at least they'll know what it is and won't be afraid of it and won't be fighting it with austerity. Until they gain that understanding, they're just going to wallow in the mud over there. I think I don't see much of a way out if they're going to keep themselves in a fiscal straitjacket see much of a way out if they're going to keep themselves in a fiscal straitjacket.

Speaker 1: 54:52

I guess this also leads me to the last question, which is I actually am having trouble understanding exactly what kind of financial shenanigans are going on in Turkey. So what do you think is happening there?

Speaker 2: 55:03

So it depends on let me take a view that somebody might consider cynical or practical or something when you have high rates of inflation and you've got high levels of output and relatively low levels of unemployment, so who gets the real wealth? Now, in the US, we're paying interest, so it's going to the higher income earners, right? So in Turkey what they do is they have their wages of the lowest income earners are indexed. Government sets the minimum wage that affects most you know like 50% of the workers or something workforce, and they continually increase that to make sure that 50% of the workforce is doing reasonably well, no matter what the value of the currency is. They just give them more of it and if that causes more inflation, they'll give them more of it. All right, and that keeps 50% of the people relatively pleased with what's going on, relatively secure. The other 50% have to scramble to stay where they are, but they're doing better anyway and those 50% support the leadership who is taking care of them. So that's a constituency that supports the leadership.

Speaker 2: 56:20

Now, I haven't taken any surveys or looked to it, I'm just reading the headlines. I don't follow Turkey at all, but I'm just tossing headlines. I don't follow Turkey at all, but I'm just tossing that out as something to look for. You've got lots of state-owned enterprises. You've got lots of foreign companies that are exporters, right, and the inflation is not getting in the way of any of that.

Speaker 2: 56:46

It's making it easier for them to do that. It's making it easier to have real wages, not run away, so that the foreign exporters can do well with their exports. It keeps their costs down. At the same time, the wages are high enough for that group of people working there to keep them happy and to keep them ahead of the curve in terms of the inflation. That's going on and it seems to be working and it's kept the leadership in power for quite a while and it's kept them reasonably popular, in spite of everything else that you see, all the headline things that people talk about that you would think would make them unpopular, things that people talk about that you would think would make them unpopular. But keeping that 50% whole is like wielding political power and it's supporting, you know, their longevity in office Now in Argentina it obviously ran out and they got, you know, turned over.

Speaker 2: 57:44

So they were not keeping that a constituency happy enough to keep them getting reelected.

Speaker 1: 57:53

Yeah, that makes sense. Well, we're coming into election year and this will be my final question, but I think we're going to see a lot of economic claim shenanigans. But I think we're going to see a lot of economic claim shenanigans and do we see a lot of fiscal changes from the government on the horizon? Are monetary changes? Are both Like? What do you think might happen? I know we talked about the project 2025 thing. I I tend to believe that, uh, when conservatives talk about the gold standard, they will quickly be corrected and not do anything about it, because that's always what's happened in the past. But, um, are there other possible big changes you see on the horizon? Um, I don't I don't see.

Speaker 2: 58:39

I see interest rates staying up and I see the deficit staying at what I call drunken sale or levels of spending to keep the economy going, and some effort to talk about lowering it, but nobody actually doing anything. And what's happened is, as the inflation indicators have come down from the COVID highs, post-covid highs, covid highs, post-covid highs the Fed has been concerned that that means their 5.5% Fed funds rate is it's a higher real, what they call real rate. It's above the inflation rate. So if it's, the inflation rate is three and they're at five and a half. They're two and a half over the inflation rate, which they think is highly restrictive. But what they haven't taken into account is that a 7% budget deficit is also much higher in real terms as the inflation indicators come down. So if it's at 3% and the deficit's at 7%, we have a 4% deficit after inflation, which is very high and it's record high for this point in the business cycle. Over our history as a nation, our strongest business cycle has never had this much fiscal support. So I think it keeps going. If anything, fed starts looking at raising rates like they have been now that this pause to see if inflation would come down, seems to be reversing. Now I could be wrong. If the price of oil suddenly drops and the CPI numbers come down, then the Fed might decide to lower rates or something. On the other hand, if it goes up, then they start shooting up and they could start to raise rates more quickly. More often than not, at this point in the cycle, it's things like that that cause the next move. And you can have somebody forecasting things based on all these models, but the models can't tell you whether oil is going to go to 200 or 20. That's the price setters and they're deciding what to do on that. It's just a couple of people. So you know all our forecasts are at risk of that. But things staying the way they are now I just see this economy getting stronger and stronger, unemployment staying at 3.7 or maybe even going down to 3.6, 3.5, 3.4.

Speaker 2: 1:00:52

And the Fed keep revising their forecast for the second half of this year ever higher, as they did in December. In March there's another meeting They'll revise them higher. The rate cuts were there as a consequence of the rest of the forecast. The rest of the Fed's forecast showed unemployment going to maybe 4.2%, growth going to 1% or less jobs, growth down to under 100,000. As those get revised up, like they did last time, now the unemployment number may be only 4.1.

Speaker 2: 1:01:29

And then, you see, their forecast for the interest rate are a little bit higher than they were before. So, with a very negative forecast, their forecast for the interest rate were maybe coming down to 3.5%. And now, with a stronger forecast, their forecast for the interest rate is maybe 4.5% and the market shows that as fewer cuts. The market had anticipated six cuts. Now it's anticipating maybe two or three cuts or something like that.

Speaker 2: 1:01:56

And so as the Fed's forecast gets revised higher, the interest rate forecast for that period of time will get revised higher, I believe, and then, once it's strong enough, then they'll be looking at whether or not rates need to go higher. Because that's all they know. They've got it backwards. They're not going to change that. I don't think. If they do, it would be wonderful if we suddenly had some kind of serendipity thing and all of a sudden Chairman Powell says we've realized we've been backwards on interest rates this whole time. Raising rates has been inflationary because we're pumping in all this deficit spending. It's obscenely regressive. We're immediately reversing policy, going to a 0% rate, like Japan, and we expect inflation to come down.

Speaker 1: 1:02:37

Wonderful, I stand up and cheer, but I don't expect that. I'm guessing you're also not seeing any other progressive economic policies coming out of Congress either.

Speaker 2: 1:02:48

So I don't think they can get any policy out. They can't even get a border policy the Republican border policy passed that the Democrats agree on because of the divisiveness over the election. It's just pure tribalism. And there are people vote for their, want their team to win and the means justify the ends and it's just a race to the bottom, to how low they will go to get there.

Speaker 1: 1:03:14

For me, this has been an irony for a while, that people talk about American decline and I'm like, well, in one sense, I think that's almost there's a lot of things declining because we don't invest in infrastructure, like that's all very real, um, but it's not because we don't even. We don't have the material wealth to do so. I'm not even talking about paper wealth, I'm just talking about, like, we have land, we have materials, we have farmland, etc. Um, we're in a remarkably good geographic area with with good trade partners to the north and to the South of us.

Speaker 1: 1:03:48

We should not be having the problems that we do. And if we have problems in the United States, it's because our political system has just cracked, for whatever reason. I have my my theories, but it does seem like our real crisis is not. Well, in some ways, all economic crises are political crisis, but in a very real sense, it seems that are even beyond what that would normally mean. Our crisis is a political crisis. We can't get pretty much anything through our own government, even even even when it's backed by the party and ostensibly in power, although there's not one right now.

Speaker 2: 1:04:30

And look, don't forget, things are heating up in real terms. You know the climate and forget about who caused it or why Nothing's going to be done about it except trying to deal with it. You know better air conditioning and walls around Miami or something you know, so you know it's going to be interesting to watch how we deal with all this change in the real world. Yeah it's Massive migrations, all that stuff. It's all going to happen. We're not going to do anything to prevent it, we're just going to have to deal with it.

Speaker 1: 1:05:02

Yeah, absolutely, yeah, absolutely. Um, I've been thinking about, uh, you know the the weirdness of our border policy when also, we have a declining population right, and it seems to be like, uh, both sides have decided that we're not particularly open to immigration, and I, I get it, but I'm like you're about to be hit by a wall of, you know, people from this, from the equator, because, well, the crater getting real hot, um, uh, also just uh, interesting. I mean, yeah, we'll be, we'll be we'll be.

Speaker 2: 1:05:37

We'll be raiding, raiding, we'll have military raids on mexico to bring back workers and it's just, uh, just around.