Odd Lots - MMT's Godfather Says the US Government Is Spending Like a Drunken Sailor

Episode Date: July 8, 2024

Modern Monetary Theory has gained prominence over the last several years by offering an alternative view on the constraints to fiscal policy. The basic gist is that the size of the deficit is not per se problematic. What matters are real resource constraints, and that if government spending gets too high — or is spent in unproductive ways — then inflation can materialize as too much money collides with insufficient supply. Another argument that some MMT adherents make is that the conventional path to fighting inflation (higher interest rates by the Federal Reserve) can actually be inflationary, because the coupon payments made by the government to Treasury holders constitute a form of government spending or fiscal expansion. In this episode of the Odd Lots podcast, we speak with Warren Mosler, the intellectual godfather of MMT, to explain the mechanisms at play and assess the current macro environment. Perhaps surprisingly, Mosler is concerned with the combination of high government debt loads, high deficits (which he characterizes as spending like a drunken sailor), and the orthodox approach the Fed is taking to fighting inflation. With debt as high as it is, the annual interest payments due to these rate hikes has gone up significantly, creating a situation that mainstream economists might call Fiscal Dominance. He explains how this environment is a recipe for consistently higher and sustained inflation in the years ahead.See omnystudio.com/listener for privacy information.

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Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allo-Way. Tracy, you know there's that theory. People say it from time to time about, in different contexts, different schools of thought and kind of gets dismissed as crankishness sometime, that higher rates can be a contributor to inflation.

Yes, yes. And actually, I'm hearing, this more and more, interestingly enough. So you used to hear, you know, little rumblings of it every once in a while, but I swear in the past two or three months, a lot of people have been talking about this. And I guess the basic idea here is there's always been some question about the efficacy of interest rates in the current inflationary environment. So if you think back to the 2020 period, the idea that we had all these supply disruptions, lots of snarls in transportation and logistics, what are interest rate hikes really going to do in that context, right?

Yeah. And some people even argue that higher interest rates are detrimental for that kind of inflation because you make it harder for people to build out capacity. Yeah. But what's happening more recently, and I think you're hearing more talk of this, is the idea that higher interest rates in and of themselves can contribute to the inflationary impulse through the interest income channel. Yeah, absolutely. So right, there's a bunch of people that are on treasuries and then they get a payment, I guess, every month, and that is income into the economy and when you're fighting inflation. That's the more, I think that's one of the arguments for how higher rates can be inflationary. But then there is the sort of like, there is the more agreed upon view that you mentioned, which is that higher rates can constrain investment and contribute to less housing. And that has an inflationary impulse in a time of housing shortage.

that seems to be a little less controversial. The connection is clear. But I think regardless, like I think, okay, here we are in July 2024. Inflation has come down a lot. There's still many stories that could be told a lot about the last four years. And I don't think there are any really economists who have like nailed this cycle with some theory or whatever that it's like, yep, they explained how it's all going to work. There are many, this period, whatever we've experienced over the last four years will be debated and argued about and what role. did higher rates have in bringing down inflation or why do the, we'll be debated by economists for like a hundred years probably. I find this aspect of our life right now simultaneously exhilarating and

terrifying. So it's great that we're learning about how the world works. It's also terrifying that we still aren't entirely sure how interest rates work and what impact they actually have on the economy. But I am very, very interested in digging into more of this argument, the interest income channel here and the actual like push and pull of higher interest rates on inflation. I think we should talk more about it. Totally. Well, I'm really excited. We do indeed have the perfect guest.

Someone we've never had on the show before, but he's with someone who we get a lot of requests for on Twitter, on the outlaws discord, someone we probably should have had on long time ago. We are going to be speaking to a Warren Mosler. He's a, he's an economist, former investment manager. He drives fast race cars in the verge. Islands. Currently, he's on a bike trip in Croatia, a very cool life. He is also the originator of what has come to be known as modern monetary theories. So Warren, thank you so much for coming on odd lots. Good to be here and enjoyed listening to the introduction. How do we do? Okay. We're done here. Why do you give us your, yeah, thanks. That was great. What do you give us your

summary? So someone said people, okay, higher rates cause and inflation. I think there's even, you know, there's like a neophysherian school that I think the Turkish president subscribes to. How would you characterize what that means or what's going on? Well, I look at what is. I look at the numbers. I look at the data and I try and make sense of it just like everyone else. And my narrative has been different from everyone else, at least up until recently, from listening to you. And it's nothing more than that. Where to start? I wrote my first paper on this and I think 1997 called the natural rate of interest is zero. So it's not something new to me.

And myself and my partner Cliff Feiner back in the 1980s, we always used to muse about how the best indicator of what M2 growth would be is LIBOR because the interest rate itself determines the money supply growth as it was measured back then. You know, there's been there have been institutional changes since then, but this was back the 80s. And so the idea that, you know, the interest rate itself was instrumental in how the price level moves over time. Now notice, I'm going to avoid using the word inflation rate. Okay. I may say inflation indicators from time to time. But that is the whole word and term has gotten so confused by the way it's been used. You know, if tomatoes go up, that's tomato inflation or

something, right? Instead of just the price of tomatoes going up. That I, I, it's not informative the way I like it to be. So, excuse me for not using that word maybe as much as you all do. Yeah. So the interest rate itself has had this effect on the price level, you know, for a long time that I've observed. Okay, it's 1980. That's 45 years, right? Something interesting happened to this cycle compared to prior cycles. Now, in prior cycles, like in 2008, I was saying back then that the rate cuts, the Bernanke rate cuts, were probably not going to do much for the economy, if anything, because cutting the rates from five and a half to zero or whatever it was time removed something like $400 billion a year of interest income from the economy, it lowered the deficit by $400 billion from what it otherwise

would have been, and all that income and those net financial assets were no longer being added. And so I was looking at a very sluggish recovery. I didn't see the stimulus packages being large enough to cause a particular boom. It was plenty large enough for, you know, decent growth, but not any kind of a runaway inflationary boom or anything like that. And I can recall being at the Fed at a meeting, private meeting with a guy named Dave Wilcox, who was talking about quantitative easing and how he didn't think would be inflationary. And I said, yeah, I'm not so much worried about not being inflationary. with the Fed buying all these securities, okay, they were buying securities that had higher yields,

and they were paying for them with reserves, adding reserves, which is fine. It was changing the duration of the government holdings. But it went from, you know, the Fed was now earning the high interest rates, and the market was earning the 0% or whatever they were paying on reserves at the time. It was very low. And I said, you know, they're effectively taking $90 billion a year of interest income out of the economy. That might have been half a percent, one percent of GDP at the time. I thought for that reason, quantitative easing would probably slow down the economy at that point time. Oh, that's interesting. You know, that's kind of what happened. So initially, you can't prove it. You kind of looked at it from the opposite side of where we are today. So the idea that QE was

sucking out income rather than higher interest rates adding to it. And that was based on the yield curve at the time and duration of government debt, you know, everything at the time. It was a, and a data seemed to play that. No, I don't know if it's just confirmation bias on my part, but it looked to me like that's what happened. And we did have this sluggish economy, and that was partially the reason that the deficit wasn't large enough partially because the interest. Now, I'm categorically against using a positive interest rate policy to increase deficit spending to support an economy because it's so obscenely regressive. When they raise rates, you know, the only thing they do is pay interest to people who already have money in proportion to almost they already have.

okay, and you increase deficit spending that way. Just to be clear, you may say that lower rates or Q or whatever, that they're not particularly stimulative, but that's very different than saying, oh, that a good form of stimulus would be higher rates. Yeah, I'd rather have low rates and a tax cut. Yeah. You know, then high rates and a tax increase, right? Sure.

So let's bring it to now. But back then, here's the point. Back then, the debt to GDP held by the public was something like 30 or 35%. So a 1% rate hike, or in those cases, rate cut, but a 1% change in rates, a rate hike would have added maybe 35 basis points of income to the, you know, a percent of GDP to the economy because the debt to GDP was like 30 or 35%. This time around, it's 100% roughly, you know, debt to GDP held by the public. Yeah.

So a 1% increase in rates, two and a half years ago, ultimately increased interest. payments by a full 1% of GDP, three times the impact of the prior cycle. So here I am saying, look, if I thought this had an impact before, now it really has an impact. Okay, now it's three times larger than before. This is going to be far different than anybody can imagine. And raising rates this time around is going to have a strong supporting effect on aggregate demand, you know, keeping unemployment down, you know, total employment growing, that type of thing. And at the time they increase the rates, the Fed was ranged with criticism for engaging in policy that was going to cause unemployment to go up to fight inflation. Remember that? Yeah, of course. Well, and I'm going,

no, they've got it backwards. This is going to bring unemployment down. This is going to bring total employment up. This is going to cause strong positive GDP growth, not a recession. Every forecast was for recession for what years, right? They were just ignoring this fiscal impact of this increase in deficit spending. Now, the only thing I could rationalize, why, where they get? And where they're getting this from is that they must have had in their, deep in their model somewhere, a zero propensity to spend interest income, right? No matter how high you raise, raise, no matter how much interest you pay there, nobody's going to spend a dime of it.

And so you don't have to worry about it. And that's why they look at the primary deficit when they talk about emerging markets. They don't even count the interest income expense, right? That's all I could come up with as to why they would ignore that channel. Can we talk a little bit more about, I guess, the, the consumption avenue of the interest income channel, because I will fully admit that it was very nice in circa 2020 to finally earn positive interest on my bank account. I'm an elder millennial, so that had basically never happened to me before. However, I wouldn't necessarily say that because

I was earning, you know, two to five percent on my savings, that I went out and bought a bunch of additional things. And of course, a lot of that was offset by the increased cost of living, increased price level if we're not using the term inflation. So how do you see that aspect of it playing out? People are earning more income, but does that actually translate into more demand? Yeah, and that's a good question. And that's a micro question. You know, what you look at all the individuals who are getting it do, pension funds, get treasury, secure, you know, interest. How does that translate into aggregate demand. Foreigners get a lot of interest. You know, and I hear all this, that look, none of this interest is going to get spent. And so it doesn't matter. You're wrong.

We're going into recession. The interest rate affects on, you know, borrowers is going to dominate and that's going to take down the economy. And the answer is you can only look at the data and see what happens. We can both come up with a narrative of what we think the propensities to consume out of interest income. But we're not going to know until after it happens. And I looked at in prior cycles, the data was telling me that it's not zero, that there's a substantial amount that directly or indirectly does get spent. But that's all it is. It's a view looking at the macro data, looking at what GDP did versus what it was expected to do, looking at how the rate cuts helped the economy or didn't help the economy, you know, based on what their models expected, right? And the same way those rate cuts didn't help the economy as expected back in 2009-ish is telling me it was that $400 billion a year of income that was cut out was having a dampening effect on spending.

It goes back to under Bush in 2001, when we hit that recession, they dropped interest rates to 1%. And nothing happened. It didn't help. and I was actually in a meeting with Andy Card, Andrew Card, who was chief of staff at the White House in 2002, February, March. And I'd gotten that meeting because in my car company, two of the people on the board of directors were ex-engineers, one General Motors, one Ford. They knew Carr personally.

He was an engineer at GM. And when I talked to him about the interest in company, the same way I'm talking about it to you, they said, you've got to talk to Andy and set up this meeting. You know, I went to the White House. The meeting was in the West Wing. The first thing I did was just what I said to you and what it, look, in the economy itself, when they lowered interest rates, okay, it helped borrowers, but it hurt savers, you know,

into the penny. For every dollar saved, there's a dollar borrowed in the economy. Banks have loans and deposits, and they're equal or somebody made an arithmetic mistake, you know, assets and liabilities. And so, you know, when you lower rates, you're just shifting income from one entity to another. And the only way that can have an effect is if there are differences in the propensities to spend interest income of those two. But at the macro level, because of the public debt, when you lower rates, you're cutting the size of the deficit, you're cutting total interest income in the economy. I said, I think that effect dominates.

And looking at what happened in the last year in 2002, I wouldn't expect rates to do anything. The card looks at it and he goes, he says, yeah, why would anybody think that's going to work? And he says, and he goes, oh, like, what does work? it. Then I explained the fiscal side, where when you spend more than the tax, that is a direct add of income and net financial assets. And when you increase deficit spending proactively, any economist who pays to be right is going to revise his forecast upward for the economy. And he says, well, how much do we need? I said, well, I think it's probably 700 billion annually back then, which was maybe about 5% of GDP. He says, well, we don't have much time, do we? I said, no, I

He said, well, you better get started. It was a nice note back from. It was very nice. A week later, the president was asked about the deficit. And he said, look, I don't look at numbers on a piece of paper. I look at jobs, which came right out of our meeting. And after that, I don't know if you remember those days, but they passed every tax cut you could imagine, including retroactive tax cuts, something we never had before.

People were getting tax refunds from taxes from previous years. And they passed every spending bill that could get through Congress, trying to to get this deficit off to save the economy. And that included prescription drugs for Medicare. So I'll take personal responsibility, even though that wasn't discussed in a meeting, for the government spending all that money on prescription drugs. The deficit got up to $200 billion by the third quarter, which was about my rate target number, you know, $700 billion for the year. The economy turned around and it didn't cost him the election. So, you know, I've been on this for a while. And it's all been from a narrative and then watching the data.

So true, mainstream macroeconomists have this concept that they call fiscal dominance. And that sounds like what you're describing. A little bit, yeah, yeah. So basically. Yeah, so close enough. So I actually like maybe I'll try to get you in trouble with some of your MMT friends here. But it sounds to me that from a. policy like look if if if if debt to GDP were currently at 10% right now very very very low and you raise

rates that you have some constraining effect on borrowers and yes you do have this interest increase in the interest income channel but it's not that big of a deal because there just aren't many coupon payments at all that are going out that's right that's exactly right but where we are right now is it safe to say that the size of the debt is a problem that we are fiscal dominance and that the size of the debt constrains the ability of monetary policy to be a balancing force in a time of inflation. More than that, I've made it backwards. It takes it away. Now, I had had a discussion with Paul Krugman a few years ago, and that's when he and Stephanie Kelton were going at it with back and, you know, dueling editorial. Remember that?

Yeah, yeah, of course. And I said to him, I said, what's, you know, what's wrong with the job guarantee, you know. And he says, well, if you deficit spend for the job guarantee, the deficit could get so large that if the Fed tried to raise, you know, if we get inflation, the Fed won't be able to use interest rates as a tool because the interest in, you know, expense will be so high that that itself would cause inflation. Now, he was using that as an argument against the job guarantee. And he made my argument. And I said to him, yeah, I agree with you. I said, but I think we're already there for all practical purposes. And the debt. GDP was lower than, but, you know, it was at least neutral that interest rates were a tool. And he disagreed with me, and that's fine. And I said, and in any case, you know, I support, as you know, a permanent zero rate, in which case, it's moot. You know, you could defest spend for job guarantee without worrying about whether raising rates is going to do anything or not because you're not going to do it. You're going to just leave them at zero. But the point was he, that was his new Keynesian, the position out of the New Canesian model. And it was a standard New Canesian position years, you know, not that long ago. You

remember them all talking about anti-deficit talk and how the interest payments are, you know, are unsustainable and all this stuff. By unsustainable, they always mean inflationary, right? You know, say it in their first phrase, but that's if you, if you drill down on them, that's what they get to. But in the last couple of years, when I asked them again two years ago, it's like, no, I don't think we're at that level. I still think the Fed can raise rates to fight inflation. I said, okay, you know, we'll see. So this is in the New Keynesian model. It's just arithmetic that at some point the deficit gets high enough, the public debt gets high enough so that when you raise rates and pay more interest, you do cause the interest itself causes inflation. Now let's look at how high the deficit spending is.

CBO's latest number shows 7% of GDP, right? Yeah. And I think that's just Treasury. I don't think that includes Fed remitts. So maybe it's seven and a half or something. Okay. Now, have we ever had anything anywhere near a 7% budget deficit during an expansion with unemployment? It's like 4% kind of record low levels?

No. The only time we've gotten anywhere near this high is countercyclically. When you have a collapse and then tax revenues fall off and transfer payments kick in because unemployment's high. Then we got to 8 or 9% in 2009 and we got to, I don't know what the number was, COVID, maybe 50%. 15%. But normally, if you look at 08, the budget deficit was down to something like 1% of GDP, and that was low enough to allow the high price of oil and the other catalyst to trigger a major collapse in the financial sector. Not a 7% deficit. 7% is like drunken sale or a level of government spending. And out of that, 4% is the interest expense. It's over 1.2 trillion, I think, annually. We just passed 100 billion for the month. Wait. So, yeah, go ahead.

Oh, no, sorry, go on. Yeah, so look, right now the deficit's 7% in GDP, 4% of which is interest expense. So without the interest expense, if they left rates at zero, it would have been trending towards zero and the deficit would have been down to, you know, two, three, four percent, something still high, but not like it is now. And that, to me, it's like, it's unthinkable that that's not going to support a strong economy. Now, what's interesting is in the last month, it's been a little bit of a bump in the numbers, right? The Fed Atlanta's down to 1.7% GDP growth.

Still not a recession or anything. And everybody's now looking for this collapse and Fed rate cuts and everything else. And I'm sitting here going, how can this be with a 7% pro-cyclical budget deficit? It doesn't, it seems like an absurd assumption that we could have any kind of substantial weakness. or really any kind of a sustained weakness in the price level. But for the last few weeks, maybe a month, a couple of months, it's certainly been plenty of indicators around the edges that things are weakening. And it may turn out, you know, I'm completely wrong.

We have a total economic collapse with a 7% deficit. I'm 75 this year. You'll never hear from me again, right? We'll see what happens. That's a good edge. age hedge. In the long run, we're all done. In the short run, I'll be dead before I have to answer for anything I say. Wait, wait, wait, wait. I don't know what's going to happen, but I'll be the first one to tell you that I've just totally caught out by a recession with a 7% deficit,

you know, unless we get a $150 oil or something. But absent some other shock, you know, I don't see how that much can be spent without GDP being strongly positive, of unemployment being very low and price pressures. Now, the other interesting thing is this $100 billion a month only translates into about a three and a half percent of the Treasury debt as interest payment, whereas Fed funds rates, five and a half, five and three A's, which means, and T bills are somewhere around there, five and a quarter, five and three A's, which means that as rollovers continue, as time goes by, the deficit expands, that number is going up.

Okay, even if they just leave rates alone, it will get. get to five and three a's, you know, asymptotically, but it'll get there. And so that we're getting more and more of this. And the CBO's deficit forecast are showing deficits higher than six percent out into the future. Like this is like going to be interesting. That to me is at least six, seven percent nominal growth. And if you think, you know, price level is going to be, I don't know what you want to use, PCE or something at two and a half. That's four and a half real, right? That's pretty strong number. More likely, you will get two to three real and the rest will be, you know, price level changes, which is one of the channels where the interest rate normally or over time,

I've just noticed over 50 years, the change in the price level, the rate of inflation gravitates towards the Fed's policy rate over time. They converge. And so with a five and a half percent rate, five and three rates rate, you'll see CPI gravitating towards that interest rate. you know, towards that number at five, five and a half. Not in day one, you can go months without it, but over a longer periods of time. And you can think of that something like a stock split, you know, or a stock dividend, where if you just pay out more shares,

you're getting, you know, all else equal the value of this, of an individual share goes down by that amount, right? So if you have a two-for-one stock split, the price of the stock falls in half. If you're paying out five and a half percent a year on, the public debt, which is the net financial assets in the economy called the net money supply in the economy, you're expanding it at 5.5% a year through payment of interest. There's nothing on the supply side. It's just a distribution. Then I've just observed that over time, the price level gravitates upward by about that amount.

And there's, you know, plus or minus. So those are my expectations going forward. And if you notice, CPI has leveled off at about three and a quarter percent or something. It went up with COVID. It came down and then sort of leveled off. It's been going sideways here. And that's about at the interest rate. You know, the effective rate on Treasuries last year was about three and a half, whatever it was. So to me, that's not a coincidence.

It's not a surprise. It doesn't have to happen. It could have been a different, you know, but it's kind of like the midpoint of my expectations as to what's going to happen with the price level. Now, PCE is a different thing, right? That includes substitution. If the price of steak goes up and so people eat chicken instead, but spend the same amount, you know, then there hasn't been any increase in the PCE. Just to be clear, we're recording this on a day that I've incurred something of a substantial head injury.

And I was in the emergency room until late at night. But did I just hear the godfather of MMT say that large definitely? can be a problem? Is that what you just said? I feel like I might be hallucinating that. Well, the deficit itself is just a accounting residual. But this, you know, the spending in any given year, any spending has consequences. You know, if they decided to spend trillion dollars to buy eggs, they're going to drive off the price of eggs, right? So if the government's spending on a, you know, our government spends on a quantity constrained basis, let's say, they decide what they want to buy and then pay whatever they have to to buy it. Yeah. That, that, that,

can drive up, it does drive up prices or down prices, you know, all the time. That's constantly changing relative value in the economy of all kinds of things. You know, there's no way about that. And we have coercive taxation, right? And the tax structure affects prices and affects things. So if we have right now major tax credits for solar, for example, I think I get a 40% tax credit for installing solar. So I'm putting solar panels in. In the USVI, the, the, uh, electricity is 45 cents a kilowatt, so it's a pretty easy calculation. You know, so that I wouldn't have put in without that tax incentive from the government. So I figure it's probably not just me.

So I talked to people at accounting firms, major accounting firms, are you seeing tax time of people doing this? And they go, oh, yeah, we've got our own partnerships and structures where you can put money in and participate in this solar tax credit. You know, so who knows how large is open-end tax credits getting and what it's affecting. So yes, government's space. But fiscal policy is entirely distribution between tax liabilities and spending. It's pushing and pulling everything, everywhere.

It's a major determinant. It's a large part of the command economy, and it's a command economy to the extent that it's there. If the government decides it wants jet planes, it's going to get jet planes. Right. Through the tax structure to the spending structure, the free market would not be producing jet planes without the government ordering. Right. It's that everything caters to these, you know, forces of government that are just

honest all the time. So it's not that I'm in favor of them, but I'm just recognizing them and what they do. It sounds like, so you did, you used the term drunk of a sailor, which thank you, because maybe that'll go at that headline of this episode. It sounds like the issue is, so A, a lot of spending, yes, that creates a lot of, the more spending, the more demand prices go up. And then it sounds like, if you spend at market prices. Yeah, if you spend based on a at a fixed price, if you say, look, I'm only going to spend

this much for labor. You can't drive prices. Right. You might not get any, but you're not going to drive prices up. Yeah. You might get a lot. But the government orders, the government orders tanks and jets. And it also guarantees Social Security recipients a certain, a certain fixed level of

inflation or price level adjusted consumption capacity. Yes, and then we become agents. We become agents, because I get social security, of the government. Right. You know, with no restrictions on what we do when we spend it. But it basically, yeah, but it basically sounds like it's that mix of sort of conventional macro thinking in which high rates is deflate, disinflationary, plus the high levels of government spending, that seems to be the cocktail for both higher upward pressure on the price level. And it sounds like over time, worsening higher price level because there's a compounding effect. Yeah, and that's the situation at the moment. It doesn't have to be that way.

But that's what I see happening right now. In that context, and you sort of touched on this before, but I would love to hear a sort of like play-by-play guide here. But what should the central bank be doing in the current environment where we do have high fiscal deficits that might end up, you know, constraining them? So if they cut rates to zero tomorrow, then the CBO would score it as like 20 trillion of reduced, you know, fiscal spending, budget cutting or whatever, over 20, over 10 years, probably. You know, like the largest spending cut in the history of America times 10 just by cutting rates to zero. All right. And that's got to have a, well, unless you assume none of that's going to get, nobody's going to change their spending because a $1.2 trillion of income has been taken away. But, you know, looking at the numbers I'm looking at, that's going to have a massive deflationary bias to it.

It's going to be taking away all that income and all those net financial assets from the economy. going to be a staggering, like, creation of fiscal space, let's say, I don't know how you want to put it, but just a major deflationary event. And it's not even under consideration. It would be considered a major inflationary event. Right. That's why I look at all the people that have looked at Japan with their zero rates and forecasts like hyperinflation. Or the yen went through 160.

Big deal, right? Their inflation rates lower than ours. It didn't go up and they kept zero rates the whole time. But they're still forecasting hyperinflation. So they've got this bias that the low rates are going to, a rate cut like that would be inflationary when it's the opposite. Well, actually, since you brought up Japan, you know, for all, you know, I started really paying attention to this stuff in the mid-2000s. Yeah. You know, I heard all the tales of the widow maker trade and everyone betting on that hyperinflation and how it never happens.

In recent years, Japan has seemed like the rest of the world, a substantial inflationary impulse, still low by international standards. but the stock of the national debt in Japan is very high, as we all know. And now they actually, for the first time and forever, have actually seen inflation. Again, not that high, but again, historically by Japanese standards. Is there a potent mix right now for Japan? Is there a risk that, I don't know about hyperinflation kind of seems unrealistic, that actually if they follow conventional macro thinking and could hold rates up or move rates up to fight this inflation that some of these disaster scenarios might actually emerge with the size of the

debt. Ironically, ironically, they entirely embrace conventional macro theory. And the reason they're keeping rates down is they're worried that they might not actually be out of deflation. And so they've got to keep rates down to ensure that the inflation stays, you know, somewhere towards two. They just had, you know, numbers from Tokyo or something that showed a lower rate and they're all panicking about a deflation. So, Yeah, they're there for the wrong reason, so to speak. But they're there. So we have the data. But yeah, okay.

Does that answer your question? But if they were to raise, if some point there's like, oh, no, the inflation is not, you know, if they were to raise, could that create some real unfortunate dynamic feedback loops given the stock of the Japanese debt? Yeah. Yeah. If they ever decided to raise rates to do something with their debt to GDP, you know, they'd be throwing gasoline on the fire the way we have except, you know, twice as much. Yeah. Wait, could we talk a little bit more? So we've obviously been focused on the interest income channel for good reason. But can we talk a little bit about the credit channel? Yeah, this is important. Yeah, and the impact of higher rates there because the standard economic theory is that rates go up and that makes the cost of credit. That increases the cost of credit for businesses. And so they cut back on their spending. And investment. And investment. How do you view that component of interest rate function? Well, their clients of the businesses are getting flooded with interest income, and buying their output at whatever price they need, which includes what you need for investment

to keep up your output, right, and to train your personnel and do whatever else you need. You know, their prices are at levels where they're sustainable, where they can pay interest expensive if they need to. And so we're seeing, you know, three, it's not this quarter, but we've seen, you know, three and four percent GDP numbers. First and second quarter seem to be a little bit weak. I don't know if there's something in the seasonals that aren't quite fully sorted out. But, and it might prove me wrong, but I think, you know, the first quarter was 1.4, right?

Due to inventory selling off inventories because they believe the economy wasn't going to be strong. So they didn't replace their inventories. Now they have to replace them. We'll see what happens in the second quarter. But anyway, so that's a narrative that you had. But the data hasn't. It hasn't played out because. the income of their clients has been high enough to buy their output at a price that they like,

you know, that they're comfortable with. They've had good pricing power and covers these added expenses from the interest expenses and interest related expenses that you were talking about. But like- So if you're spending enough, you're throwing enough gasoline on the fire, yeah, it's going to burn. But like, so just on the private sector side a little bit more. Like as you know, one of the key things, themes that you talk about is these are distributional questions or the effects of a lot of these policies are distributional. And you mentioned maybe economists think there's no propensity to consume interest income and maybe there's some good reasons for that because it's, you know, most,

the wealthy people own the treasuries and banks and stuff like that. But there's consumer credit. There's cars. We know that housing has slowed down. It does seem, housing has slowed down substantially. it does seem like there are many parts of the U.S. economy. Yes, yes. That have responded to these higher rates by diminishing their activity. Yes, there are winners and losers. If you just look at the losers, you could maybe conclude by projection or confirmation bias that the whole country's losing. But it's not.

It's just shifting to different areas. You know, Rolls-Royce has like, I don't know, two, three, four-year backlog of sales, right? And you would know. Yeah. I read it in a Wall Street Journal. I mean Bloomberg. I read it on Bloomberg. Thank you. What are you driving these days? What race car are you in driving these days? I've been driving a 2015 Nissan lead for electric car for a while.

Because on the island, you can't 35-mile-hour speed limit. But what do you drive on the track? I haven't been on the track since I turned since I turned 52 I think Oh okay So I you know I haven't I don't race on the track anymore Got it But I used to drive things that burned gasoline

I have my own cars you know I had the Mosler MT 900 which I would run on track days I never ran at real races I used professional drivers You know but In amateur racing I would drive it And I would drive our consulars I used to say these cars can

when races, even with me driving. We should, another episode, can we, would you ever come back to talk about when you had a race car, your, uh, your car company? Sure. Yeah, that'd be fun. That'd be really fun. Ooh, this looks like a sweet car, the Mosler M2.

This is a beautiful. How many of them were made? This is a beautiful car. There were 50 or 60. And, you know, I stopped making the MT-900s in, I don't know, 10, 15 years ago. But, um, so they're still racing. So like in the Spanish GT and the British GT,

they're still winning races. against the latest and greatest. And the car is 20 years old. So there's still a top performance car in the world where they let them run. So just going back to interest rates for a second. Suddenly that seems way more boring now than looking at race cars. I know.

I know. This question is inevitably going to fall flat. But it does feel like we're sort of talking about the economy is not a monolith. So you have these interest. rate sensitive portions of the economy like housing that that are affected by rate rises and then you have pockets that are more insensitive and maybe we don't have the balance of those two things exactly right or maybe traditional economics hasn't done a good job of taking like those individual portions of the economy and netting them out into a cohesive picture of the actual effect of

interest rates on them. How do you like, I guess this has always been sort of a criticism of MMT, but how do you take those disparate ideas and sort of make them into a useful theory of economics? Does that make sense? Yeah. Well, look, the whole composition of GDP changes all the time. And it's driven, as I touched on before, quite a bit by fiscal policy deciding what the government wants. So if the government wants more solar panels, it puts a big, tax credit, unlimited tax credit. We'll see how large that is when the smoke clears, but I think it's going to be a lot larger than anybody realized. If you notice government revenues have been flat in a booming economy, that's never happened. It's got to be tax credits of some sort, you know,

working out there. So the composition is going to follow the money. And if the money's going to those, you know, earning interest, then that's where the composition is going to go. And you'll see more high-end purchases, you'll see more things that sort that group of people, there'll be, you know, all kinds of investments in that direction. And that's what we're seeing. So again, it's about following the money and the government policy directs to a large extent where the money goes. And right now, we've got over a trillion dollars a year going to interest income, which is more than defense and more than Social Security and everything else, right? I just have one last question. And this is more in the category.

of Warren Mosler lore rather than it is in interest rates. But we're in the studio right now, and I looked up and I saw on Fox biz, which we have on TV, Art Laffer is on there. Isn't it true? You were like friends with him. Isn't there some story with you and Art where like you had some important insight that led you to MMT thinking from a chat with art? Well, I was looking for somebody to write up my what became soft currency economics.

The first thing I wrote. This was in 1993. and I went to my ex-boss, Ned Junata from William Blair, and he sent me over to Rummy. Don Rumsfeld was his 1954 Princeton, you know, roommate. They were on a football team or wrestling team or something together,

and they'd been good friends. So I had a meeting. I called his office, and he was real busy. The only time he had was an hour in the steam room at the racquet club in Chicago. So I went out and met him there. So we're sitting in our towels. in the steamroom going through soft cars, the economics.

And he then gave me a list of his economists that he thought would be good place for me to go. And Art Laffer was on that list. And his guys were like Paul McCracken and Samuelson. I mean, these were not anybody on my roll decks. And I contacted a few of them, and Laffer agreed to do it in exchange for $25,000 would help me write this thing. And he assigned Mark McNary. So I got to know Art a little bit because we talked quite a bit on these. things. And it turns out he's an ex-like university, a Chicago professor, and he knew all this

stuff. He knew learner and functional finance, and, you know, long before I met any of the academic community. And, you know, he agreed with it. He assigned Tom Nugent to cover me because he was always looking to do business. I went to a little conference where he was, and he got up to talk. And he said, I'm going to give the talk on money. And I'm going to tell the money story. He says, and Tom and Warren, and he points to us, disagree with it. He said, and they're right and I'm wrong, but this is the way I tell it. He went and told the story about how banks take in deposits and make loans, you know, completely backwards.

And then he finishes the talk and look at him like, what was that? He says, well, you know, I told everybody you were right and I was wrong. He said, like, what do you want? It's like, okay. So I don't know what's going on with our laffer. But he did say, the problem

with the Laffer curve was it only worked at the very extremes. He was very, like, you know, reasonable about everything. You know, he's a very, you know, easy guy to talk to and, you know, self-deprecating in many ways. And, you know, he worked out well. Mark was very good. And we wrote and I edited.

He wrote and I edited and did it. We came up with the soft currency economics thing. And it didn't help. I thought having Lafers name on and whatnot might give it more attention, more media attention. But I don't think it made any difference. But, you know, as I say, you have to kiss a lot of frogs. And that was just one of those times.

Lauren Mosler So great to have you on I swear we will I would honestly love to do an episode Just about Mosler Automotive And just talking about the business I just want to hear a day in the life Of Warren Mosler as well

Okay so Joe Let me get in my fog We met at a dinner UMKC maybe or something Yeah I was I was at UMKC Okay I think it was 2015 No it couldn't have been 2015

2012 or 2013 That sounds right Yeah it's long ago I don't remember what it was. Those were fun days. But so great to finally have you on the podcast and enjoy wherever you're going to be vacationing next. Okay. Thanks.

Take care. Tracy, the godfather of MMT says the government is spending like drunken sailors and that it's contributing to inflation. I'm still not entirely convinced that this isn't like a hallucinary output. Oh, yeah. From your forehead. from my head injury. But wow. Okay. I mean, I do think it is not hard for me to envision a world in which companies pass on higher interest rate costs to consumers. We've talked on the show about companies passing on higher input costs and things like that. So that part of it, I can believe. And the

other part that does seem intuitive to me right now is this idea of a tiered economy where people who do have a lot of financial assets and are earning a lot of income on those financial assets do spend on certain things like, as Warren mentioned, luxury items. Like a lot of that makes intuitive sense. So definitely. And look, here's where like I think I would need more exploration. So there are aspects of it like clearly interest income is a real thing. More deficit spending, which more interest income entails is on the net going to be stimulative at the margin. But rich people or people with financial assets also just care about the price of their financial assets.

Oh, yeah. And so when we did see, you know, they really jacked up rates aggressively in 2022 and stocks did decline. And I think stock prices probably influence real estate prices. They've certainly, you know, we haven't had a housing crash. but real estate in many realms has been stagnant or if you're in multifamily or commercial real estate, then you probably have seen some price declines. And so I do think that like that is an offsetting factor.

And then I also think that while it's certainly true probably that the propensity to spend interest income is not zero, it is probably somewhat low given that we're talking about people who already have a lot of money and income, whereas the propensity to spend among people who are paying high interest rates, either through car payments or credit card payments, etc., is probably much higher and therefore impaired by higher rates. So while I certainly get the theory, and I think there's probably something to it, I still would need a little more convincing that the distributional effect of this change in spending is on net inflationary.

But it's interesting ideas. Absolutely. I think that's a really fair assessment. And I think like the composition of wealth matters. So you can say that there are all these treasuries in the world. I can't remember the exact number, but like what $30 trillion or something like that? And people earn income on those treasuries. But each individual person is probably not holding a pure treasury portfolio.

As you say, like personal wealth will be comprised of real estate, which is effective. by higher interest rates, stocks, which also go up and down depending on interest rates. And so, yeah, it seems like there's a sort of like net, or sorry, there's a compositional complexity there that we still need to work out. And speaking of financial assets that go down, the treasuries themselves. Oh, yeah, of course. And as you learn the first day you joined Bloomberg, when rates go up, price goes down. That's right. We should start adding that into all of our new stories again. like we used to, just to hammer the point home. When price yields up, price it down.

I also just really like, I do want to do an episode on Warren Mosler lore because he kind of seems like a really cool guy who has a fun life. We should go to the island and hang out with him. Go to the island. The Mosler M.T-900 looks absolutely sick. Wait, I got to look at that up. I mean, I'm not a car guy, but that's a sick looking car that he built. Isn't it?

Yeah, that's no joke. Like, that is a sick-looking car. The one on Wikipedia is a very bright green. It's beautiful. Okay. Shall we leave it there? Should we stop admiring race cars and leave it there? Let's leave it there.

All right. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway. And I'm Jill Wisenthall. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin. Dashel Bennett at Dashbot and Kel Brooks at Kel Brooks.

Thank you to our producer, Moses. On them. For more OddLod's content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter, and you can chat about all of these topics 24-7 in our Discord. A lot of MM2 fans in there. So it'll be interesting to see how they react. Go to discord.g.g. slash oddlots. And if you enjoy Oddlots, if you like it when we talk heterodox economics, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes. absolutely ad-free. All you need to do is connect your Bloomberg account with Apple Podcasts. In order to do that, just find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.