It Could Happen Here - Everyone Else Admits We Were Right About Inflation

Episode Date: September 11, 2023

Mia once again talks with Steven Mann and John Michael Colón about the further expansion and spread of their inflation work and how mainstream economists steal from heterodox economistsSee omnystudio.com/listener for privacy information.

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Submit your podcast today at iHeart.com slash podcast awards. That's iHeart.com slash podcast awards. Podcast. It's a podcast that you're listening to. It's It Could Happen Here. It's the show where things fall apart and sometimes you put them back together again. And actually, okay. I really should have checked the calendar before I tried to do this introduction where I referenced the thing that I'm saying came out last week,

but might actually have come out like... No, no, no. Okay, okay. I got it right. I got it right. I should never have doubted myself. Last week, we did an episode about inflation. And we told maybe half that story. And the part of it that we didn't tell, we got through most of the part about what this sort of theory of inflation that the people at Strangement are developed. We got through what it was. What we didn't really talk about was what happened next, which is a very, very interesting set of sort of maneuvers

that happened where this theory started spreading through a bunch of very disparate academic circles and sort of like economic circles and different political circles that usually don't have anything to do with each other, but we're all, I don't know, taking things in very interesting directions and to talk about how this sort of supply chain theory of inflation spread through the world and all of this very, very interesting, somewhat bizarre stuff that happened next. We once again have Steve Mann and John Michael Colon, who are co-editors of Strange Matters.

Yeah. Steve, GMC, welcome back to the show. Thanks for having us. Hey. Yeah, glad we could have you two back and glad we get to talk about the really, really interesting, somewhat strange things that happened next, which was, yeah yeah a lot of people started picking up

your theories and starting to work with them yeah i was wondering if you could talk a bit about i guess like how that kind of first started and how people first started sort of coming to you for stuff yeah um like last year so last year um, the first of these pieces came out, Notes Toward a Theory of Inflation, we got like a really good response in general from it. And it was kind of provoking discussions between groups of, um, economists and like readers of econ stuff on Twitter and stuff like that, who otherwise wouldn't have really been talking to each other. But suddenly having a different theory of inflation, one that was a lot different than what the people who thought it would be super transitory or the people who thought it was purely a monetary phenomenon or something like that, having that option sparked good conversations.

And it eventually led to some writers approaching us who were sort of inspired by those conversations. And particularly, a few of them really wanted to follow up on specific key points from the paper or follow some of the implications as far as they think they could take them. One such paper... Oh, and by the way, just as a refresher, the original theory that is laid out in part one of this series that we're doing is essentially saying that inflation has a tendency to propagate along supply chains first and then through supply chain networks secondarily. And so it's saying it's essentially that that's how it propagates.

It starts in supply chains. and supply chains, things like bottlenecks along production processes, give the price setters, who are people at companies, socially acceptable reasons to eventually, if they need to, raise prices. But generally, pricing managers refrain from raising prices unless every other lever they've pulled essentially has not worked. So people took that theory and wanted to follow up on it. And so one author who did that was Alex Vecolo, who approached us, and he essentially wanted to do an updated version of the pricing manager survey that we found really helpful in writing those initial pieces.

we found really helpful in writing those initial pieces. So in my piece, No Sorter Theory of Inflation, I relied upon a wealth of pricing manager surveys where they asked these pricing managers, under what circumstances would you raise prices? And they sort of went through each scenario of that over the decades, starting in the 30s and going into the 90s and 2000s. In order to not have a replication crisis, we need more and more studies, right? That's a phenomenon across social sciences and elsewhere. So you want to have good replication studies. One way to do that is to have an updated pricing manager survey that talks to

like sort of modern corporations in the 2020s. So are they still concerned about some of the same things? Are they not? Are there innovations in pricing that we should know about? And so Alex Vekola, who's a financial journalist by trade, he went and interviewed some managers at Walmart and other big companies and some smaller ones and found that, broadly speaking,

a lot of the same issues are at play. So companies have cost plus market pricing as kind of their bedrock. And from there, they develop some innovations, such as so-called dynamic pricing, where they have the... Like, if you're a larger company who knows that they are viewed as a price leader, you have some leeway in responding to sales forecasts and changing your pricing like Walmart does, what they have like everyday low prices, that type of thing. And if you're a grocery store and one of your competitors is Walmart, sort of on the flip side, you might start developing indexes of prices set by Walmart or like of the other big behemoth chains,

knowing how important they are to the overall supply chain network. And knowing how important they are for the demand for groceries. If wherever Walmart goes, many people have no choice but to follow them in terms of their pricing schedules. And so that's another thing that is going on like people are developing just entire price indices of like walmart or costco or sam's club or who have you yeah and that was something that's i think interesting in terms of like the the difference between the way that like economists think about sort of price and the difference between and how it's actually getting set, which is like a lot of it. A lot of it very much seems to be like if you are if you are like the largest company in a market, like if you you have this ability to like like force people force your like downstream or like i guess upstream suppliers to like sell it to you at low at lower prices because you have this enormous sort of like no amount of buying power that like you know if

you're like if you're like a smaller thing you you don't necessarily like you know like like the same company will charge like another grocery store more for the same thing because Walmart has an ability to sell it at a lower price than – if I'm remembering this right, I'm getting strange looks. Yeah, well, it's important not to mix up two separate things. One is Walmart's relationship to its suppliers, and the other one is its relationship to its competitors, right? So the supplier bit, you were totally right on the right track. It's like, you know, like people who supply Walmart with, um, with products because Walmart is such a big customer. If you get the Walmart contract and you're a small producer or a medium size producer, like you're set, right. Because like, you know, then, then you can basically just

like, you know, they can even be your only customer in many cases. But that comes at a cost, which is that you sell at the price that Walmart dictates. Otherwise, they'll just tell you to to to fuck off, basically. And, you know, it's not only price, it's also the quality. You have to hit the standards. And oftentimes what these firms that are like the big, important firms, so-called nuclear firms in a supply chain do, is that they set those standards like very rigidly and you have to be certified with them. So McDonald's does this, for example, you know, like all those poultry farmers or whatever who supply the chickens for the chicken McNuggets, they have to go through this extremely rigid process in order to be able to qualify to

be a McDonald's certified supplier or whatever, because that's how they keep the product standardized, even though they're not in-house. And then the other thing that you were alluding to, which is Vokola's piece, is the relationship to competitors. So obviously Walmart's able to keep things cheap all the time and they're famous everyday low prices because basically they have economies of scale. There's this notion, I think common sense for a lot of people, especially those who don't have a lot of business experience, is that the more that you make of something, the more expensive it's going to be. But actually, it's almost the exact opposite. Any firm that has survived over a period of time being able to make more and more of something has generally found ways of making more and more of the same thing using fewer inputs and less labor.

Like, you know, and that's something that happens through automation, but it's also something that happens through administrative innovation and through, and sometimes through less than nice things, right? Through, you know, Amazon warehouses where people aren't allowed to take bathroom breaks or through sort of like, you know, coercive measures that they can do because they've found a nice little spot in the economy that lots of people are depending on them and they can dictate terms. But whatever it is, you know, as firms get bigger, it actually gets cheaper to make more of their

kind of thing. So people in a bodega can't match Walmart's prices for everything from like hamburgers to detergent, right? Because for them, it's more expensive to produce or to acquire. So what they do instead, knowing this, and they're able to survive, is that they do Walmart's price, and then they do a markup over Walmart's price. So in the same way that by themselves, they would do a markup over their costs, Walmart's costs are lower, and they do a markup. So they do a percentage over Walmart's markup. And as long as it basically is something that's doable in terms of cost, they do that, which means that they're basically advertising themselves to customers as the slightly more expensive but more local, more reliable or easier to get to. You can just walk to the corner store or whatever conveniences they're kind of like justifying themselves with to the customer base. And in cities, this can be enough to keep small to medium sized sort of retailers in business. Although in the suburbs, the competition is basically just all other oligopolistic firms on Walmart scale, like Wegmans or in Florida, it'll be something like Publix, you know, and that kind of thing. So generally, what Vokola was discovering was, I want to just emphasize Steve's point about replication. Like, you know, if a lot of the supply chain theory depends upon a story about prices that most economists just don't believe in. Economists believe that supply and demand are automatically adjusting based on changing prices and that those adjustments determine in turn how we spend and how we produce.

You know, that's that's supposedly how everything works. They believe in this thing called the price mechanism. The supply chain theory depends upon a story where the vast majority of prices in the economy are a markup over costs or, you know, beyond, beyond that some kind of strategic decision being made in pursuit of a certain strategy. Um, but like, you know, if some studies had verified that, but then other studies refuted it, then you would have a situation like psychology where, you know, the psychologists are always saying all human beings really have a neck fetish, but then, you know, because some study of like some college students, you know, said this, and then six months later, it'll be like, actually, that

failed to replicate this, it turns out that human beings don't have a neck fetish, you know, and I'm being rude to psychology, but this is a real crisis that happened there called the replication crisis. Now, Fred Lee, the economist who kind of like started us along this track in his famous book, Post-Keynesian Price Theory, found 71 pricing studies and they form an appendix called Appendix B in his book, which ought to be legendary, but it's not because all this stuff is very obscure. different people with very different like political and economic commitments some of them are business school literature some of them are empirical studies commissioned by states or by corporations on how corporate management works some of them are by like marxist economists some of them are by neoclassical economists like and they all converge no matter what the biases of the people of the people involved upon this same kind of similar cost plus administered prices model um vocolo writing now in the present day,

not in the period that Lee was talking about, which is roughly from the 30s to roughly the 90s, like, you know, he's talking about the 2020s. He just went out and started talking to pricing managers and capitalists and all this other stuff. And lo and behold, he found the exact same thing. So the evidence base, the empirical evidence base for the underlying basis of the supply chain wrong because frankly, the weight of the evidence is so strong that they're the ones who have to prove their case, not the other way around. What's it called when you've got the – I think the presumption – The burden of proof. The burden of proof. Thank you. The burden of proof is on their side.

Yeah. And so something else i think is really interesting from that color color piece is that like you know there is a bit in there about firms that try to do this sort of like like in real time reacting to supply and demand stuff and it's like uber and if you look at uber it's like okay so uber has a couple things one they don't have like the thing that they're like they don't really have a supply chain really a b they don't make any money they never make money they will never make money and the third thing that's really interesting about it is that like that kind of pricing like you know if if you have some people who go in ideologically you're like we're gonna build an algorithm to like try to have pricing respond to demand or whatever it like it fucking sucks and everyone hates it because it means that like

you know suddenly like when you actually need a thing it's unbelievably expensive and it pisses people off like most most people who have to deal with actual like the normal things that a business do don't do and the only people who do it are like the insane tech people who are like in like i don't know i almost want to call it like intensely ideological and also assholes and also don't make any money which is just i don't know it's it's i think it's kind of a coincidence but it is just very funny to me that the people who actually try to use the neoclassical pricing theory, it sucks and everyone hates them. Yeah. pricing procedures that he witnessed into just say like on both,

on both determining your company's costs and determining what market markup you should have. So the cost plus markup, you need to, you need to figure out both of those pieces. It's anything but automatic. Yeah. It's a very manual process. And even I would, I would go so far as to say like like Walmart has teams of tech people, yes, but they're liaising heavily with the finance department and sales and marketing to determine what is an appropriate margin based on historical,

like in industry and sub-industry trends. And like, what is our historical cost structure for each product down to the product level? And they have so many different products that they might actually say, well, because we're selling everything to everyone, maybe some things can just be what are called lost leaders and have a negative margin

because they get people in the store and then those people are there and they see other things which have higher markups and then they buy those. And then overall, they've made more of a profit because they use some things that have negative margin on them. And it's a really complex process. And even if an algorithm is being developed by, say, Uber to dynamically price things up and down based upon events like a baseball game or something that are going on in the city so you can get more revenue. It was a group of people in a room in an extremely manual process.

Coding is extremely manual still. And liaising with sales, marketing, finance people all at once. Yeah. Oh, sorry. yeah yeah what you oh sorry and and the other thing is that it's like supply and demand is a phrase that gets thrown around anytime that there's any kind of interaction between like the amount of people who want something and the amount of people and the amount of stuff that there is, right? Which is a lot of different situations. But the specific supply and demand price theory

that's at the core of neoclassical economics is this price mechanism story whereby companies basically all make one thing. The price of that thing is not something that is really under their control. It automatically fluctuates based on demand, which I guess you can roughly measure as sales. And like the, uh, and in turn, like what the price of that thing is determines how much they produce and how much of it people buy because people's buying decisions are in some fixed functional way. And people's production decisions in some fixed functional way and people's production decisions in some fixed functional way are tied to that price. Like if you want to create an algorithm that includes as a consideration, doing a discount when you haven't yet sold all the seats in an airplane

in the hopes that you'll get some last minute sales, which by the way, statistically is shown to not actually help that much, those kinds of last minute sales and discounts by the way, statistically is shown to not actually help that much. Those kinds of last minute sales and discounts. I mean, I suppose in a flight where there's a time limited thing, it might work better, but for a typical product, it doesn't move the dial very much in terms of sales, which is why Walmart pursues an everyday low prices strategy. Just keeping prices down in general. So you don't do sales and discounts, which don't move the dial much, but like, you know, that's a strategic pricing decision that you've chosen to make because you think that it might move the dial in some way and you experimented with it and see if it works or whatever that's not the

automatic law-like functional relationship that is supposed to exist according to neoclassical theory between supply demand and prices people will say that the algorithm is about supply and demand, but that's not really how it works. It's not the same thing as the theory, right? It's just a pricing system that takes into account among many other variables, and usually not as the primary thing, whether or not, for example, there is available slack in what you're producing to be able to get some last minute sales if you do a discount or something like that. Or like Steve was saying, there's a game today, so you can do surge pricing because you know that a bunch of people are going to want to get in the game. So you're basically just price gouging based on this opportunistically, based on this event that's happening or whatever.

Like, yeah, you can do that. And you can say that it's pricing that tries to take into account supply and demand, but it's not the supply demand price mechanism of neoclassical theory. And also as Mikhailov like, you know, finds out, theory. And also, as Vekolo finds out, attempts to do this are very, very mixed in their success at best. Basically, people who are trying to do it are like, yeah, maybe it could work. And then they try it, and nine times out of 10, it doesn't work very well. So they go back to some variation

on a cost plus model, or a price leadership a price leadership model or something like that. You know, the kinds of methods that Lee discusses. Yeah. I mean, the customer goodwill that you kind of put at risk with these more dynamic pricing models is like often a little too risky, like even for big companies like Uber, like there's been a backlash against uber for doing that absolutely the only reason they can maybe get away with it has been because uh they have access to infinite finance but yeah how long is that gonna last yeah like and that that's another thing that's interesting like you know this is this is to some extent like a different economic question but like you do at some point have to ask the question like to to what extent can you

learn things about the economy based on companies that don't have a revenue model or the revenue model is they will continue to be handed piles of money by like the same seven billionaires who they've conned and that's like a there's an interesting interplay of how dependent you are on actually making – like actually having revenue be the source of the continuing existence of your company and how ideological you can be about running the firm. Do you have a game plan? Yeah. Well, it's actually very funny that you say this because one of the people that Vokolo talks to is this guy Cohen. I can't find his first name right now, and I don't want to scroll up. But somebody whose last name is Cohen is, quote unquote, more skeptical of the dynamical pricing.

And he says, I think it's a sexy idea, and probably it has a lot of intellectually valuable pathways, except when it crashes into the sensibility of the customer, he said. Except when it crashes into the sensibility of the customer, he said. It could create a universe of very inconsistent prices across categories and time, which I don't think human beings are going to align to. These dynamic models need common sense judgment attached to them, which is not always necessarily available. Now, this is a very diplomatic statement by somebody who's formerly of Sears Canada. Now, I find this very funny because there's a kind of subtext here. Vokola doesn't get into it, but Sears Canada, obviously kind of related to Sears. In the 90s, Sears had a CEO who was like this ultra libertarian. He basically believed that the problem with the free market is that it's not free enough at the height of neoliberalism.

So he's really pissed off about the fact that inside the corporation, there's no free market. It's all a planned economy. Yeah. You know, which is true. There's no market exchanges in there. Like, it's all allocations. Like, okay, we have this goal, so we're going to allocate these workers to this place and blah, blah, blah, blah. You know, and, you know, anything that the company owns, they just use it to pursue

their goals. He wanted everything inside the company to have a price so that everything could just be bought. And this is this kind of mad scientist experiment done on this very old American corporation. But somehow, I guess it was the 90s, people were coked up on this kind of thing. They tried it and it was a catastrophic failure. It's actually generally seen as contributing to the end of Sears as a, as a major player in retail. And it's like, like, so it shows, so I think that the fact that this person very diplomatically from Sears is like, maybe this doesn't work, you know, I might be born of more experience than than than not you know yeah okay we have to go to an ad right before we do that i want to tell one more insane 90 like

people in the 90s really really had market brain in a way that's like difficult to understand now and you can even see this kind of through obama like they really have market brain and like i think the most market brain thing anyone ever did was the, the, the, I think it was the army joint chiefs of staff brought in like a group of economists who were, you know, like you were doing the whole, like, okay, we like, how, how can we make, how can we use the market to make the army run more efficient? table is we're going to have each depart each like uh like each like section like what's the type of time to clear we're gonna have each branch of the military bid for control of who of who gets control of nuclear weapons and there's a bunch of just like five-star generals sitting at this table going like what the fuck are you guys talking about and they just kicked them out and that that was the end of like but that was like like peak absolute peak 90s brain of like like these these people thought you

could solve terrorism by like having futures markets on like where when terrorist attacks would happen like i it was these people were wild none of this stuff worked um unlike the products and services that uh you're gonna you're gonna now hear ads for Welcome. I'm Danny Thrill. Won't you join me at the fire and dare enter Nocturnal Tales from the Shadows presented by iHeart and Sonora. An anthology of modern day horror stories inspired by the legends of Latin America.

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while commuting or running errands, for those who find themselves seeking solace, wisdom, and refuge between the chapters. From thought-provoking novels to powerful poetry, we'll explore the stories that shape our culture. Together, we'll dissect classics and contemporary works while uncovering the stories of the brilliant writers behind them. Blacklit is here to amplify the voices of Black writers and to bring their words to life. Listen to Blacklit on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. on the button we are about to message sophie about the fact that we have gold ads again like please don't like please leave sophie alone oh my god oh i think we've gotten we've gotten a little we've gotten sort of into the weeds of like it's like the kind of research stuff that's been produced but i wanted to move on i think to some of the some of the other like kinds of

like i don't know kinds of discourse and kinds of sort of work that's been produced out of this yeah so vocola's piece i think was uh was very very accomplished and it adds to this proud tradition of pricing surveys like we've been saying but the um the piece that i would say ended up having the biggest impact in the sense that it really kind of started getting followed up on by a lot of people and it caught a lot of attention was Tim Demetrius' piece. So a little about Tim. He's an economist based in Australia and I should remember the name of his university, but it was the University of something and it starts with W and it's a very long name.

Wollongong? There we go university yes um and um and he's a uh a political economist he does a lot of stuff uh pertaining to kind of like international relations type stuff but he also comes at economics from a particular perspective so we mentioned last time that there's these, the orthodoxy in economics is this one school called the Neoclassicals who believe in the supply and demand stuff and along with a whole bunch of other dogmas.

Then there's a bunch of dissident heterodox schools. And there's a whole bunch of these. And one of them is called the Capital as Power School, which is named after a book called Capital as Power by these two professors called Bickler and Knitson. And it has a lot of things to say about a lot of subjects. So Capitalist Power is a book that says a lot of things on a lot of different subjects. But at its core is the idea that what makes the capitalist system tick is the process of capitalization,

and that that process of capitalization is controlled by certain people, and their control over that process is the basis of the entire economic system. That's very heady stuff. It tends not to have to do with what we're going to be talking about, but it informs the perspective that Demutio comes from. Now, Demutio saw Steve's brilliant essay on the supply chain theory of inflation was very inspired by it because there are certain affinities between the framework that we're coming from, uh, in this kind of research and the, and the capital's power framework.

They don't agree a hundred percent on everything, but there's a lot of common ground there. So he basically hopped aboard to say, well, why don't we talk about interest rates? Because remember, the main upshot of Fred Lee's administered prices theory, and then by extension, Steve's theory about inflation is that inflation is not about money, it's about prices. And in order to understand inflation, you have to understand why people set the prices that they do and why prices across the economy will go up at any given moment, because it's people who set prices, not the market, not the money supply, and not any of these other sort of automatic general macroeconomic things. It's a microeconomic decision made by particular people

within particular institutions with the ability to pull the lever on particular prices, right? institutions with the ability to pull the lever on particular prices, right? So the interest rate is a price. It's a very important price too, because- Oh, we should back up for a second and explain when you say the interest rate, you should explain what that is, because I think it's an underexplained thing. That's totally exactly where I was going, because there's actually many interest rates out there in the economy. When we talk about the interest rate, what we tend to be talking about is the interest rate that is set at the central bank of the country that control – like of the currency under discussion, right? That is basically an interest rate that sets the price for credit, for loans in the rest of the economy. And it's basically – you can see it as a supply chain even though it's not a physical one. have to set a markup over that cost as the price for anyone who wants to borrow from them,

which includes other banks, but also includes end consumers and firms. So that's basically, I mean, I'm oversimplifying and probably has a more nuanced version of this, but that's the basics. Yeah. Banks, just like any company, need to determine both their cost structure to the extent that they are able to themselves and their markup. And the markup is they like banks have costs just like anyone. One of their principal costs is the rate of interest that they pay on deposits of their customers in order to get them to get new customers in. That's one of their main services that they provide is checking accounts and savings accounts. How much interest is a bank willing to set on its savings account is an important decision. That's part of its cost structure.

an important decision. That's part of its cost structure. But where people, if the Federal Reserve were to raise the federal funds rate, its principal policy rate up to what they have now, 5.5% or so, when it was less than 1% only a year ago, in order to compete with all of the other products, which are based upon this so-called risk-free rate of return that the central bank offers, that governments use to set the rate of things like treasury bills and stuff.

Eventually, if you're a bank, you have to start charging higher and higher interest rates. Sorry, you have to start offering higher and higher interest rates on your savings accounts. And likewise, you need to start charging higher interest rates on the products that are your actual moneymakers, like mortgages and home equity lines of credit and that sort of thing. And so the cost structure of a bank will shift as the Federal Reserve is changing its policy rate. And so too will its margin over time as it competes with other banks for like a narrowing pool of qualified mortgage applicants.

And also for people who are willing to shop around for where to keep their deposits in a way that they previously they weren't because there was no sort of differential in interest rates at all. It was just being held steady. Yeah, absolutely. So the key thing to understand, and by the way, up to now, Steve and I have been describing what we regard as the real world. Everything that we've just described, we can see it in action in the world. If the Fed raises its interest rate, effectively what that means is that this whole supply chain of people lending to other people who lend to other people who lend to other people, the cost of lending has essentially increased, which will eventually lead to a rise in the cost of lending

to people downstream until for end consumers, which is basically like firms and households trying to get a loan from the bank, those loans are going to be more expensive. And conversely, if the Fed's interest rate goes down, those prices will tend to go down as well. Crucially, none of it is just automatic. That's absolutely true. Just because it's a bank doesn't mean it's any different than the story that Vekola was laying out for retailers.

That's exactly right. The Fed's rate is a very important rate because it's basically the first one in this chain, and it's a cost for pretty much everybody who's doing business in dollars. But that doesn't mean that in some simple way, it just controls everything else. You can hope that it controls if you're the central banker. But of course, all these firms are making their own decisions based on their own reasons. So they can make all sorts of decisions based on their priorities and based on all sorts of things. Now, by the way, if you want the more detailed version of this story that actually talks about the different agents at each step of this process in much more detail, you should check out Perry Merling's work on this. And there's even online lectures that kind of get into the nitty gritty, which I have absorbed and then since completely forgotten the details of.

So I would need to watch them again to actually be able to name the names. But the point is that so far, so real, right? Now, here's where things get a little BS. Remember that the mainstream theories of inflation are all basically descended in their DNA, even though they've been moving further and further away from it from the old school quantity theory of money, the idea that the amount of money in the economy basically determines the price level. The more money that there is circulating, the less that money is worth because there's too much of it. So the price of it goes down and the price of money basically determines like how much your money is able to buy. Now, people have been moving away from that

towards theories that get more realistic, but still retain the basic structure where the money supply is the main thing that matters. And they'll say, for example, that it's the amount of money circulating in people's pockets relative to the amount of goods being produced, such that if too much money is chasing too few goods, like there isn't enough supply to meet the demand, and that causes something, although people disagree on what, that causes prices to be bid upwards. And that's called the demand-pull theory. It's the dominant theory that most economists, classical mainstream economists that you talk to today, will peddle to you.

The ones who are not orthodox monetarists, they still believe in this, which means that they still think that you have to, when there's an inflationary event, you have to attack the money supply. Now, from their point of view, it doesn't have to do with the absolute amount of money circulating. It has to do with the amount of money in people's pockets relative to the amount of stuff that can be bought. So if there's too much money in people's pockets, how do people use their money? They spend it on goods and services that are produced by firms. So if you reduce that amount of money, that basically the only way that you can do it is by putting people out of work, right? people out of work, right? You know, you buy, because then they don't get the wages, which they would have spent on stuff that, you know, the factories and Walmart and everything else, the

agriculture and whatever, all the stuff that gets made, the goods and services. Now, they think that if you raise the interest rate, it makes the cost of finance more expensive. Some firms are depending on finance. So if that cost increases for them, they're going to go under. And when they go under, people get unemployed. When people get unemployed, they have less money in their pockets, which means that they're spending less, which means that some other firms go out of business and then those people go unemployed. Now, the full version of this is like the crash of 2008 or 1929, where suddenly a whole bunch of people are unemployed and a whole bunch of companies are empty. They don't want to go all the way with

that, but they want to kind of get part of the way to that. They want to put the squeeze on the economy and get some companies put out of business and some people unemployed on the dole so that people don't have money in their pockets, so that the supposed pressure of too many people spending money on goods that are not being produced enough to meet that demand, the demand pressure goes down. So therefore, it equilibrates and inflation prices, inflation ceases because prices go down too. Because the idea is that there's a law-like relationship

between demand and prices such that if demand goes down, the price will go down. The actual explanation for this will vary depending on the thing. They basically accept it as a religious orthodoxy and then different economists justify it in different ways. But that's why they're trying to raise interest rates so that basically people get thrown out of work, and that will cause prices magically to go down. Agriculture, the container shortage and the war in Ukraine causing increases in grain prices that have caused cost increases that firms tried to hold off price increases as long as they could, but then they couldn't. And then they traveled down the supply chain and a whole bunch of prices across the economy went up. So we know that because we have looked at the news stories that, you know, and talk to people at these different companies. And by we, I don't mean strange matters. I mean journalists or whatever. That's what they say.

And yet, nevertheless, they're trying to make the interest rates go up to throw people out of work and partially induce a recession in the hopes that that will drive prices down. They can't even get that right. That's right. They haven't actually been able to get unemployment. They haven't been able to get unemployment up either. So it's like it doesn't work in either direction. Exactly. Well, and what's really funny is that Demuncio basically says, okay, why do people believe

this? They believe it for a lot of reasons, but they think that it worked in the 70s. That's the myth, right? You ask Larry Summers, why do you think this shit will work? And Larry Summers will say, well, you might might not like it and i think he actually said things like this like a couple weeks ago you might not like it but this is how we got out of the crisis of the 70s if we hadn't done the volker shock which is basically the same thing they raised interest rates through the up the yazoo um you know like like we and hadn't induced that

unemployment or whatever prices would never have come down. But you see, DiMunzio did something that you're not supposed to do, which is that he actually checked up on the relationship between interest rates and prices. And what he found was that basically there's either – the way that I explain his essay is that there's a strong version of his argument and there's a weak version. The weak version is definitely true. The strong version is speculative. So he charted it and he found that there is absolutely no inverse relationship between interest rates and prices. They raise interest rates. They raise interest rates.

The prices keep going up. They're not coming down, right? keep going up they're not coming down right and the prices don't start to go down until oil because remember the oil shock caused by the uh the war in the middle east between um israel and um well and uh and egypt and a whole bunch of other places caused opec to raise their prices in order yeah i'm gonna i'm gonna i'm gonna point in a thing which is that it the actual story behind that is slightly more complicated which is that like okay so to to be completely 100% accurate about this opic had a meeting where they decided to raise prices and then the war started and then like like two weeks afterwards and then they kind of tacked their explanation on to the back of the price increase they'd already decided on

oh okay which is yeah so this this this is the thing that like i don't know there there was a there was an oil historian who went back and like spent a bunch of time looking through the records of opec and shit and try to figure out what the actual sequence of events was but it it is true that like one of the things behind keeping opec together so that it could increase the price of oil was like the like what was their sort of solidarity in the face of the opposition to the war but also it's slightly more complicated than that and i want to i want to i want to put that on the record just because uh the oil knowers will get mad at us if we yeah yeah also that that that's the version of it that like

like 99 of accounts will give you it's just slightly not quite exactly what was happening yeah i gotta read that book yeah i think it was god i'm trying to remember what book i i i i think it was in i think it was in carbon democracy% sure. Sorry, I read like four books about oil and coal in like incredibly rapid succession like several years ago. And sometimes I have trouble remembering exactly which one, which thing is from. But yeah. Although I want to say, sorry, I guess I want to say one other kind of interesting thing about that makes specifically trying to use the interest rates arguments about like – I think it is pretty clear that raising the interest rates directly would like did not immediately – wasn't the thing that brought down prices. I think there's like an interesting – there's like a weird thing going on there too because the – like almost – like when economists tend to look at this what they tend to look at what the interest rate rises was what was happening in the u.s economy and

the other the other thing that the volkschalk did was it raised the interest rates on it raised it raised the interest rates on all of these adjustable rate loans that like all of these countries like all over the world had and those economies got fucking obliterated and that actually i think i think actually that there is an argument that like my argument would be i think it kind of probably prevented prices maybe from going up more but it did that because it prevented any more opex from forming and just like absolutely annihilated any kind of political movement to like have pricing be set by like raw material producers rather than by like countries that do production and this is the kind of like separate thing but like this is i i think i i think the moral of my story with this before we get back

to sort of like the i don't know the the the other arguments about this is that like that moment was such a fucking shit show there were so many things going on it's so complicated it is absolutely nuts to try to base literally your entire theory about how you stop inflation by raising interest rates on one event in like probably the most complicated economic crisis like we've ever had and yeah and because like it it it did like the volker shock did a lot of things that weren't what volker or not not necessarily what not what volker was trying to do but it did a lot of things that aren't what economists talk about when they talk about what the volker shock did like it had all these incredibly like powerful political ramifications that they just don't put in the equations because it doesn't feel like how,

how, how do you mathematically model like the collapse of the, like, like the collapse of the non-aligned movement and like third world movement, like you, you can't. Right. And so they just sort of like wave their hands and pretend that it was just

like directly a cause and it caused more unemployment the unemployment brought the inflation rate down yeah it's interesting to think of the global effects of the volcker shock is like you have uh um countries who are dependent upon usd finance uh suddenly are facing a much stronger dollar so if they didn't already have dollars that's a huge problem yeah and again yeah and again also just like like just literally the interest rates on their loans like increased by like 20 and that's like you know like you're it doesn't really matter what your economy is you can't i don't know it's it's unbelievably difficult to survive something

like that yeah on on the forex dimension and just on regular lending terms, in dollar lending anyway, it's going to get way tougher. Even domestically, Demetrio superimposes the oil price onto the inflation. And the inflationary crises of the 70s and early 80s, it was a double dip, if you remember. And so the first time the Fed chairman who preceded Paul Volcker was blamed for not raising interest rates during an inflationary crisis because the emerging theory said that maybe that would be a good idea. Petraeus had their one moment after that to say where they became more than simply an academic movement and became briefly hegemonic with the Volcker interest rate rise. was about $15 per barrel. That's when inflation and the oil price start to move closely in conjunction with each other going into 1980, which is also when the interest rates are being raised more like, give or take, 9 to 18 months or so.

And the economic historians, the neoclassical economic historians will forget about the supply chain pressures, like the oil price, which has nothing to do with the fed. And like that happened in this inflationary, when oil prices were up to like one 10 during our current inflationary crisis,

this exact debate was taking place again. Yeah. There's like all the prices that the Fed has no control over. It's like, well, if you ignore those ones, then actually our theory is like kind of getting close to being right. And the worst part, the worst part is that the interest rate correlates positively with prices this is so like so like so like so like the interest rate when it's high theory expects that prices will be low but actually and and and like even if you adjust for like a delay where maybe like the prices get low afterwards, like, no,

that's not what happens. It's like the interest rate goes up and prices go up to prices go down and the interest rate goes down, you know, like, like, like it's like, yeah.

And like, and Demutio is like, um, it hurt when he, eventually he superimposes oil price, fed funds, federal funds rate and inflation all in one chart. It's just like this epic wave of all three going up at once. Yeah.

Like almost in lockstep. And then oil goes back down. And then interest rates go back down. And then prices go back down. Yeah, I think prices first before interest rates. Let me see. I can't remember. Oh, yeah, yeah.

Like inflation crests like yeah somewhat concurrently with the federal funds and then um the uh oil price eventually falls like like shortly thereafter yeah and this this gives you a disaster right because you like okay so the the you you will get neoclassical economists who are like oh my, my God, oh, no. All these idiots are saying that increasing the increasing the interest rate actually increases prices. It's not what happening. It's like you get into this mess. You have to figure out the neoclassical explanation. Right.

Is that like, OK, well, the reason it looks like the fund rate increasing increases prices is because you do that in response to the inflation happening. Right. But like you can also just very easily look at this as like a panic index basically like yeah where you know it's like okay well prices go up and then the fed panics and so they they raise their rate it doesn't and you know it like it's it's this is one of those things where like the neoclassical economists have invented a mechanism that like allows them to explain their own actions in a way that's plausible enough that

they can call anyone that they've gotten a hedge money they can say anyone who says they're wrong is just like nuts but they're not right and also it's it's entirely possible that not only are they not right they're literally perfectly exactly wrong.

Yeah. And that, yeah. They trot out the econometric jargon, long and variable lags, when people say, when are interest rates going to cause unemployment to rise? When are interest rates going to cut down on inflation by themselves and not some other supply chain phenomenon? are interest rates going to cut down on inflation by themselves and not some other supply chain phenomenon and they say like well the monetary transmission mechanism has long and variable lags which means that like 9 to 18 months from now it will settle down and then we'll know it's from interest rates trust us right and the thing is that like even their purported explanations are demonstrably false so theoretically the mechanism by which this happens is that the

monetary the the money supply will go down well, M2 is our best estimate for the money supply, and it's not even a perfect one. Interest rates go up, interest rates go down, M2 keeps going up. And this is over the course of from the 70s to the 90s. Like I'm going to get another graph of Demetrios. That's another important point that like the money the money it doesn't even get the money supply down yeah so like it's quite questionable whether this interest rate adjustment thing even works at all on its own terms because

all the evidence says that there's at least and this is what i mean by the weak version of argument that all the evidence shows that there's at least – and this is what I mean by the weak version of Dementia's argument. All the evidence shows that there's at least no relationship between interest rates and the price level, that there is like no relationship whatsoever. It basically just is useless for controlling prices one way or the other. Now, the strong version of Dementia's argument is he takes the fact that interest rates track prices very seriously. And he's like, well, what if making finance more expensive actually raises business costs and businesses choose to respond to it by raising their prices? You know, what if you actually, by raising the interest rate, are contributing to inflation? Now, this is kind

of how we framed the whole article in our title editors make titles not not um not not writers do interest rate hikes worsen inflation and i remember showing this to some of my friends who were finance bros and they were like what what are you talking about this is a crazy idea um but like it makes a lot of sense because if you look at things as a supply chain, at the very least, rising cost of loans would be a higher cost for at least some businesses. Theoretically, they could respond to that by raising their prices. Now, in actual fact, it probably, at least my solo opinion is this is a small effect if it exists at all.

It's much more plausible that there is simply no relationship between interest rates and the general price level. And that like the fact that they're correlated is just a panic index on behalf of the Fed that they just get scared and do this thing and it has no effect but like you know

they've got to press the panic button. Yeah I think I'm for a variety of reasons I think I'm, for a variety of reasons, I think I'm a weak form Demutziast on this point. I think, especially these days, there's so many other, a relatively small percentage of commercial and business credit is variable rate

to begin with these days. More of it is fixed rate. And like, is fixed rate, certainly for mortgages. It's like 80% plus approaching, 85% even fixed rate, which will not be affected. And then businesses have so many other means of liquidity other than loans these days, many other means of liquidity other than loans these days, particularly the medium and large scale businesses. You can go to the capital markets, private equity or the stock market and get the funding you need in ways that don't depend upon what the

federal funds rate is doing or only weekly depend upon it. There's so many other liquidity sources, especially like in the last 30 years or so, like, well, since, since the Volcker shock, basically they've like all of these like private equity and other capital markets methods for liquidity have opened up and a good deal of the debt, a good deal more of the debt as a percentage of total debt is fixed rate. So like on that basis, I'm like,

maybe it doesn't increase prices, but at the very least, it's non-correlated. Welcome. I'm Danny Thrill. Won't you join me at the fire and dare enter Nocturnum, Tales from the Shadows, presented by iHeart and Sonora. An anthology of modern-day horror stories inspired by the legends of Latin America.

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Together, we'll dissect classics and contemporary works while uncovering the stories of the brilliant writers behind them. Black Lit is here to amplify the voices of Black writers and to bring their words to life. Listen to Black Lit on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. This caught a lot of people's attention. Like once D'Amencia put this paper out there, this is one of our most successful essays because it got picked up by a bunch of

folks. I mean, Investopedia cited it as a source, even though they called us a blog and not a magazine. It ended up being taken up by another capital as power influenced economist, Blair Fix, who found yet more empirical evidence that there is no relationship whatsoever between interest rates and, and like the general price level, you know, and to the extent that there is, it's only because you induce a recession, puts people out of work, in which case you've basically – in order to deal with a paper cut, you've cut off your hand, right? And even then, they can't reliably get unemployment up by raising rates. So what use is that even if you accept that mechanism. So they found more evidence and they got even more attention. Cory Doctorow, the science fiction writer and futurist and kind of left wing,

all around public intellectual, he found both Demetria's study and Blair Fix's study and was like really excited about it. And after that, it really took off. It started getting debated all over the place. There's a heterodox economics international organization called Rethink Economics, which basically, uh, sided with us in an essay called the Fed can't fine tune the economy. JW Mason's a very important, uh, heterodox economist, uh, who's often on the cutting edge of a lot of these kinds of theoretical developments. Interestingly, the, the, the first fellow though, uh, Matthew Harris, uh, at Rethink Economics, he actually found a study, which I was not aware of, which is why I love these – when we started all these conversations all over the place, people dug up stuff that we didn't even know about. There was a study done by the National Bureau of Economic Research by two professors from the University of Chicago. But notably, they were not University of Chicago economists. They were in the University of Chicago business school.

Chicago economists, they were in the university of Chicago business school. And as many people have pointed out, uh, you know, capitalists started business schools because economists are basically just propaganda, but like, you actually also need people who know how the world actually works in order to run your company. So that's why economics and business schools are two separate schools. Yeah. This is a real, this is like a real, like, I remember this on campus. This is like, this was a real thing where like, if you're, if so, the business school, if I'm remembering correctly, the business school is like, is most, I think it's, I think it might only be a grad school. Let me look this up.

Yeah. So that was my memory of it. Yeah. So, so this is a real thing because, because the university of Chicago doesn't have an undergrad business program. because the university of chicago doesn't have an undergrad business program you get people who want to do business who go into econ and the econ people fucking hate them because they see them as like like they they they they see them as sort of like like these like inferior like fly-by-night people who don't care about like the sort of deep like the deep math and like the deep sort of like

you know like intellectual like political pursuit of economics they just want to like go be a business person and this has really interesting effects because it means that like you know like the business school i guess it's not like the business school is like like a bastion of leftist or whatever but they don't agree on stuff a lot because they're like like the university of chicago economics program it it produces basically two things it produces like a bunch of people who go on to be investment bankers where you don't actually need to know how a firm works at all uh and then it goes on to produce a bunch of people who become economists and so like it's actual sort of ideological purpose is is is is specifically it's it's a school that trains other

economists right it's a school that teaches like the ruling class what to think whereas the business school is like the school that this is like this is a very very very explicit it's something that like when you're there you can like watch like in practice the fact that these aren't the same thing and the fact that like you know they're they're going to produce different conclusions because you know the like because like because their actual like purpose is different one is ideological The other one is like making money. Yes. And, and, and this is a great case study of it because these folks at the business school, um, their names are, uh, Neal's Neal's Gormson and Killian Huber. Uh, they actually went and asked companies what they do when credit gets more expensive. Now, according to the theory,

and this is the most sophisticated theory, the theory that people at the Fed will tell you, which is, you might need to put a few drinks into them first, but it's like we have to induce a partial recession in order to make it so that people have less spending money in their pockets and prices get bid down. Theoretically, the mechanism by which this works at the individual firm is that the firm sees that the cost of capital goes up and they invest less, you know, or just outright go out of business. Right. But in fact, future investment is only weekly correlated to the cost of capital because of the limited transition into discount rates.

You know, in other words, like basically there is no real effect. So yeah, go around and do business service... Sorry, go ahead. Companies they do a good amount if not perhaps most of their capital investment

from cash on hand before seeking out finance. Yeah that and that like and that means that it doesn't have an effect and then even if you need financing there are non-debt finance so there's like equity finance either private or public that you have as an option alongside the debt options exactly so we go from like a situation where we published this article in 2022, right? And it's got a title that for a mainstream economist, even a very sophisticated one, is unthinkable. Like, do interest rates, hikes, you know, cause inflation to get worse or even just don't matter for inflation? to get worse or even just don't matter for inflation. But then suddenly, like you have a bunch, once it gets taken up by a larger discussion,

you have a bunch of quite reputable people saying the exact same thing, citing us directly. And even in one case, six months after our article comes out, lo and behold, that a certain little-known economist writes in The Guardian, in fact, raising interest rates could do more harm than good by making it more expensive for firms to invest in solutions to the current supply constraints. The U.S. Federal Reserve's monetary tightening has already curtailed housing construction, even though more supply is precisely what is needed to bring down one of the biggest sources of inflation, housing costs. Moreover, many price-setters in the housing market may now pass the cost of doing business onto renters. You know, so in other words, like maybe higher interest rates can actually induce price increases as the higher interest rates induce businesses to write down the future value of lost customers

relative to the benefit of higher prices. To be sure, a deep recession, you know, parenthesis, like the kind of they're trying to induce, that's my parenthesis, back to the quote, a deep recession, you know, parenthesis like the kind of they're trying to induce. That's my parenthesis. Back to the quote. A deep recession would tame inflation. But why would we invite that? You know, Jerome Powell and his colleagues seem to relish cheering against the economy. Meanwhile, their friends in commercial banking are making out like bandits now that the Fed is paying 4.4 percent interest on more than $3 trillion of bank reserve balances, blah, blah, blah, blah.

Now, this little known economist writing for The Guardian is Joseph Stiglitz, who won the Nobel Prize in economics. Now, does he cite our article whose talking points he's basically going through point by point? No. Does he cite any of the better known places that cited us that are heterodox? No no he basically presents it as if it's his own idea now maybe he did have this idea six months after we started a conversation in like stinglets has not had a single idea in like 15 years like that man oh that that that man is a transpedic parent medium through which the stuff that he reads appears on a page i'm i'm to be mean. I'm sick of doing this bullshit.

And, you know, the worst part is, like, you know, this is something that happens a lot. There's an orthodoxy that says certain things that are nonsense. The heterodoxy goes through the hard work of, like, figuring out the reasons why it's not true and presenting an alternative model. It's denied at first but then increasingly it's just plagiarized you know perhaps accidentally probably not uh you know like like and then it's presented as if actually this is what the theory has always been all along you know and like how can anyone think differently and it's this it's this unfortunate thing because since the neoclassicals control the discipline, they control advancement through the ranks of the economists. So they're always wrong and never right, but

they're never punished for it. And they control all the levers of who gets to be an economist. So it's this sort of like continual, sad, unfortunate thing. But on the bright side, we were right we were right early a bunch of people picked it up and our talking points ended up making it to very very distant and well-regarded places to the point where now it's it's a viable alternative that exists out there in the world in terms of like you know why keep raising rates it's not doing any good it could even do bad and that's a talking point that I don't think would have existed if it hadn't been for Demozio's research, which depended entirely upon the supply chain theory of inflation framework that Steve

developed out of Fred Lee's work, which is basically a research program that now the magazine has put out there in the world and is continuing to build up on that actually makes it make more sense. Yeah. And I want to just sort of like take a second to highlight like how impressive it is that this happened. Because like, again, like a year and a half ago, even like, I don't know, even like a year ago, right? For the entire time I have been alive, if you tried to say that raising interest rates raises inflation, like people would have thrown bananas at you, like,

like volleys of tomatoes. Like you, they, they would have like, like you would have, you would have gotten 16 contracts to be a professional clown. Like this, this was the thing that like,

you could not, you couldn't even like suggest this. And you know, like within a pretty rapid span, suddenly like stinglets is being like huh i want this maybe this is a plausible thing it's like oh my like i don't know i i think it's i think it's it's really it's really impressive watching how fast i don't know like how fast the combinations of like reality and having an explanation of reality that actually like lines up with it has been able to change.

Like, as I'm able to actually just sort of like change what the discourse at like the highest levels of power and sort of like what, what has actually been happening in, in the economy, like has shifted. And that's wild. Like I would not have guessed that, that,

that was a thing that was even remotely possible and and yet we are now here yeah the the overton window has shifted so far that like the idea that interest rates just don't seem to have any discernible effect upon the price level is kind of like becoming the base case yeah yeah so like the entire yeah the entire spectrum has shifted to where it's like yeah it's very strong form demetrius and have like uh i'm starting to use that phrase now by the way and um okay people won't be throwing a ton of they'll still throw some things at you, but it's manageable now.

I mean, you can always point to that argument from authority, but Stiglitz says it might be so. And then Stiglitz, who could question Stiglitz? He won the Nobel Prize. Really? He won the Nobel Prize, too.

Can we say a bit about the Nobel Prize I've been containing myself but I really want to the so called Nobel Prize in economics is not actually the Nobel Prize in economics there's Nobel Prizes in science and in

literature and all this stuff that's administered by the Alfred Nobel Organization and the fund that he left and whatever. This started in the 60s, like I think some 70 years after the Nobel started or something like that. And it was started by the Swedish Central Bank to imitate the Nobel Prize. So technically, it's the Nobel Memorial Prize in economics, you see. And it's just, it's basically like peeling off the skin of the

face of the Nobel Prize and then wearing it, you know, and saying, we have a Nobel Prize too. And basically, it's not a Nobel. And, you know, it puts the lotion on its skin or else it gets the hose again. And they did this specifically there's a historian of um of economics uh oh my god what the hell is

his name um the uh it's it's the it's the more heat than light guy he's uh oh my goodness uh i cite him in the fred lee thing and i can't remember his name murawski that's the guy yeah okay so he actually like went and like studied the origins of it and it turns out that they specifically did it as a scheme to only give the nobel prize to people who are basically like neoclassical economists um and they mostly have so sometimes they've diverged but mostly they've done it to very reactionary economists in order to promote neoclassical economists. And they mostly have, so sometimes they've diverged, but mostly they've done it to very reactionary economists in order to promote neoclassical economists in Europe, because it was stronger in America than it was in Europe. And in order to promote the idea of central bank independence, which is a fancy term for, you know, a central bank should not need to operate under a political uh a democratically controlled you know legislature

that says actually we don't want more unemployment because that would be bad so don't do that like instead they should have independence the independence that allows them to technocratically decide that it's time for people to get out of work you know and and that kind of thing so um you know that's that's the story of the socal nobel prize it's really the fake nobles so i always call it the fake nobel yeah which is also really funny if you talk to other people like specifically one of the things that like happened to me when i was in university was like i knew a bunch of people who were like really really good at math like one of my friends was like like an actual genuine prodigy was doing

like like was doing like like graduate level like math in high school and if you talk to these people and you talk to like math professors about the nobel prizes they like they will like yell about it for like 20 minutes because the math is so bullshit it's like yeah this guy is like the like the math involved in these nobel prizes are like they figured out two plus two equals four and they gave them like this fucking fake nobo prize you look at like the fields medal and it's like i don't know like it's it's it's it's it's it's really nonsense all the math people are really mad about the fact that the econ people think that they know math because they don't and the consequence of this is you get these like you get people handing out nobel prizes for saying shit like the economy can't miss like the

market can't miss price like an act like assets that are like the price of houses and then the the entire housing market immediately implodes because it was all mispriced it's it's it's a disaster it has been i don't know we should everyone at all times should be doing anti-fake nobel price propaganda against the economics nobel price the economic Nobel Prize because it's fake and bad and we should all say it more. You know, there's, on the heterodox side of things, there's some really promising uses

of mathematical economics to create like input-output matrices. Yeah. And to model, like do an IO model of the economy that the math is very much subservient to empirical data that is coming in that trains the model and then like like so much of economics is well data fits data fits the model data fits the model like over and over again when it should be

the other way around yeah absolutely does the. Does the model fit the data? Because if it doesn't, then you've got to throw it out. This whole raising interest rates is going to control prices bullshit. When has that even happened? Because theoretically it happened in the 70s, but then you look at it and the data doesn't tell you that story. So, you know, do they throw it out? No. it out no um call like brief brief call back to um fredley's table uh table b was it oh yeah appendix b uh yeah is the blinder study in there i forget yes yes it is oh that's like an instance

that's an instance where alan blinders and neoclassical economist who, like, he messed up and did real science. Yeah. And what he found was the administered price theory. Yeah. He made the terrible mistake of thinking that his bullshit theory would be vindicated, and then it turns out that it was not. Yeah, there's just, like, the history of intellectual thought for economics is, like, replete with examples where they kind of like they screw up and they actually do real science for a change and like find things like cost plus markups happening. And he tries so hard to explain it away. You know, he's like, well, supply and demand exists.

supply and demand exists it's just that these prices are sticky because the cost of changing the price on the menu is actually too expensive so they choose not to and that's why prices are they can't they can't change the stickers you know it's completely insane it's like the cost of admit there is a cost to administering prices themselves and that's why they don't change prices like the price mechanism for neoclassical economics would suggest and then he went to look for the stickers and he couldn't find it he couldn't find the cost so he's like well i guess it's not sticky because of menu costs it's like i wonder what it could be what a mystery okay so we we should we should start wrapping up because this has been this has been a very long episode already but i wanted to ask before we go uh what what what are you all doing next and what other incredibly funny

economics discourses can we expect to have giant like craters punched into in the next couple of years. So one thing we've started to work on, and we've discussed a little bit on this podcast, I believe, a while back, was the importance of forex for an exchange for all sorts of macroeconomic things, like inflation being one of them. If you're a small country that does not have hegemonic monetary authority like the US does to get people to use its currency and you have to go out and import things in some other currency, how does that affect your ability to socially provision yourself as a nation state and do development work. And we're developing a theory of forex, essentially, that is an extension of the chartlist framework that informs MMT, but with some important criticisms

about how the central MMT insight is you can create... If you're the sovereign issuer of your own fiat currency, you can always provision enough of it to... You can always spend as much of it into existence as you need to to do productive things. And yes, that's true.

You can create infinity of your own money, but your own, not other people's money. Yeah. So other currencies, like if you're like. Like Sri Lanka, for example, had this problem. Sri Lanka or Mexico or whoever, most of the world, basically, you need to maintain and augment your balance of the major trading currencies, US dollars, yen, the euro, to name three, and have balances of those, you need to maintain your balance of payments and your balances of specific currencies in order to meet the biophysical obligations

that whatever your development strategy necessitates. Because in most instances, not all, but most, you're going to need to, like, no one's going, if you're Sri Lanka, no one's going to want to to transact in your currency for major uh purchases of like staple goods you're going to need to use like dollars or euros or yen or or the yuan perhaps you know who knows exactly one of the

major trading currencies and this also raises the question of how a currency becomes a major trading currency. And that almost invariably takes you in two directions. One is which countries are powerful and able to industrialize and make capital goods that nobody else has that everybody wants a piece of. And two, which are the powerful imperialist great powers. And it turns out that those are the nexus that's created between imperialism, development, and the balance of payments, those three things can't even be discussed independently of each other. And the politics of what is going to be used as the – what Steve and I are tentatively calling the international means of payment. In other words, what you can use in international transactions across a whole region or across the entire planet, that is a hugely political question that all the major great powers in their inter-imperial conflict are constantly fighting over. So right now, it appears that China is attempting to make a bid for a global yuan. do it through the digital UN. Now they're seemingly trying to do it through BRICS by getting the other BRICS countries to agree to a kind of UN gold standard, mirroring the Bretton Woods agreement that was basically the dollar piggybacking off of gold to reach global preeminence.

Will it work? Will it not? Nobody really knows. It's a total mess. But in theory, that could be one way that you could suddenly have the UN, at least in a certain currency zone, be used as the main way of doing imports. And if the U.S. suddenly needs an import from that zone, which hypothetically, if it existed, right, they couldn't use dollars anymore. Or maybe dollars would be at a high disadvantage in the exchange rate between dollars and that currency at that point. Or maybe they would just be banned entirely from using dollars. They have to get it in that currency, which means that suddenly the US, which has basically been able to print Forex, to print the international means of payment for some 50 years now, would suddenly have to actually hold reserves of this thing. Now, if we have to hold reserves of it, that means that we have to sell something to the people who issue that currency. Now, if we have to hold reserves of it, that means that we have to sell something to the people who issue that currency. That means that we suddenly have to worry about which firms are the most profitable exporters. And I bet you anything that none of our listeners know what the most important company in America would become if that situation happened. Is it Uber? Is it Amazon? Is it all these like Fortune 500 companies and whatever?

No. I mean, it's one of the Fortune 500, but it's not like towards the top of that list. It's Boeing. Boeing is by far our single greatest exporter firm. It would be in a situation like this, the national champion, so to speak, to use language that's usually reserved for less developed countries than the US. And this is exactly the kind of thinking that is important because obviously the other thing that would happen if dollar hegemony ended is that it would be a huge economic crash in the US. Like suddenly the import, the cost of importing anything that were in that zone would skyrocket and it would mess up, you know, our balance of payments and it would cause inflation depending on how quickly it happens and how, how little, how much or how little time firms have to adjust their supply chains and stuff like that. So it's, this is exactly what you need in order to understand everything from the decline and fall of the Roman Empire to current geopolitics today. And I'm hoping that Steve and I, through developing the theory, will create a general framework that can be used to tie discussions that people usually have in purely political terms about inter-imperial conflict into economic questions so that there's no longer a kind of

division of labor between economics, which denies the existence of imperialism, and then the people who study imperialism as historians or political scientists or whatever. Stay tuned for more theories dropping at some point in the future. Oh, and we should do our marketing pitch. If you like the stuff that you hear, you should seriously consider checking out the magazine, which is at strangematters.coop. And also please consider if you have the ability to

subscribe or donate. Subscriptions start at $5 and it really helps because all the money that we get that doesn't just go to our capitalist overlords for basically like, you know, paying for the services that we use to keep the website going and the magazine going, all of it goes to our writers and we try to pay them above market rate for little magazines of our size. So if you want to see more of this stuff and more arts, philosophy, anthropology, history, all the other kinds of stuff, poetry that we publish, definitely please consider. Yeah. We'll, we'll, we'll put, we'll put a link to the magazine in the description

yeah Steve Jim see thank you so much for thank you so much for being on the show and for yelling at he got no more price with me it's been a pleasure it's been great man thank you yeah and you can find us at

it could happen here but that happened here pod on Twitter and Instagram It's been great, man. Thank you. Yeah, and you can find us at It Could Happen Here, but that Happen Here pod on Twitter and Instagram. Yeah, we have a website where we post our sources. It's coolzonemedia.com. There's other stuff there. You should go there. And yeah, go into the world and make life worse for mainstream economists. It Could Happen Here is a production of Cool Zone Media. For more podcasts from Cool Zone Media, visit our website, coolzonemedia.com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts.

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