The Federal Reserve Balance Sheet
Mike Kendall is the author of the Man on The Margin blog and a prodigious writer on classical economics, gold price signals, gold standards, supply side theory, cryptocurrencies and so much more. Mike is a former military and commercial pilot and brings a wealth of life experience and deep research to the crucial topics of macro-finance and political economy that are shaping the 21st century.
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Jonathan Doyle Nathan Lewis
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[00:00:00]Hey everybody, Jonathan Doyle with you. Once again, welcome back to the supply side podcast. Great to have the pleasure of your company. Once again. Wow. What a moment of change we’re in around the world at the moment. Huh? That’s what the us Marines used to call a fluid situation of fluid situation. Always loved that.
[00:00:27] Metaphor the idea that sometimes things are unpredictable and in flux. And I think that’s very much what we’re seeing at the moment. We have new a new president. We have stimulus flying around the world left right. And center. Almost $20 trillion at last count since COVID kicked off. And there’s a lot to say.
[00:00:46] Every dollar finds a home. So we’re going to talk about some of that today with our special guest, Mr. Mike Kendall, joining us again from Texas. Mike step of insight, his knowledge, his experience. He’s real dedication. To predictive classical economics is such a blessing today. We’re going to be talking about more of the formative, the foundational pillar concepts.
[00:01:10] Of Jude Wanniski’s supply side model. We’re going to be talking about federal reserve balance sheets. So listen carefully mike just brings us such a depth of insight so there’s some real gold here alright let’s do this this is the supply side podcast and it’s time to welcome back our guest mr michael kendall
[00:01:30] Jonathan Doyle: [00:01:30] Mr. Michael Kendall all the way from a Texas in the United States of America. Welcome back to the supply side podcast. Thanks for joining us once again.
[00:01:39] Michael Kendall: [00:01:39] hello, Jonathan, it’s great to be back again. And I really enjoyed our first episode. It was a new event for me, but I’m happy without turned out and I’m still greatly pleased with everything you’re doing with this podcast.
[00:01:53]Jonathan Doyle: [00:01:53] Thank you. It’s a great journey. It’s I listened to our episode recently when I was cycling up in Queensland and I got so much out of it. And on the weekend we had a big family event here and one of my nephews was over. Who’s doing, I think he’s doing international finance. At the university here and he’s been listening to it.
[00:02:11] And he said to me, he goes, I had to keep pressing stop and going back and listening to, because he said there’s a lot of depth in it. And your episode so far has been the most successful. So if people haven’t heard that, make sure you go back and check out that original one. So without devoting too much time to it, we’re living in most interesting times.
[00:02:30] It’s a week since the inauguration of president Biden, a new stimulus package, all sorts of interesting things happening before we get into some of the supply side stuff. What’s what’s your general take? What’s your general feeling about political economy, both in the United States and globally at the moment.
[00:02:51] It’s an easy opening question.
[00:02:52]Michael Kendall: [00:02:52] Th I think anyone paying attention, there’s a big transitioning happen and it’s hard to see where it’s going, but I think when you look at it to most rational people, it doesn’t make sense. And I think people are trying to understand it. We talked about this and I email exchange just Tesla, how do you explain Tesla?
[00:03:14] I think most people rationally can explain it. But there has to be something behind it. And so there’s. All kinds of below the surface events, in my opinion occurring, that it is difficult to understand but if you understand the model that we’re talking about a supply side model, I think if you can explain that those events through the model and, that’s the purpose of this podcast is to try to Create a understanding of the model for people because it’s not taught anywhere.
[00:03:45] You have to self learn it. I self-learned it, you started self-learning it and contacted me. And I learned it from Jude and other people and you just have to pass it on.
[00:03:57] Jonathan Doyle: [00:03:57] let’s do that. So for new listeners, what we’re doing here is we’re exploring the supply side university work of Jude Wanniski. We’re going to put links obviously through to that, but what Mike and I are aiming to do here is to unpack some of the posts over time and allow the podcast to become a bit of a resource globally for people wondering.
[00:04:19] If it is in fact possible for central bankers to control the world, or there might other be other forces at play. So in this episode, we’re looking at the first three main posts in Jude’s work on supply side. And what I wanted to talk to you about is something that comes up in that first post you’ve mentioned it before, and it’s this concept of superior predictive power.
[00:04:42]What we are trying to discover in the supply side model is, does supply side offer superior predictive power to other models? And what Jude talks about in that first post is the difference between the Ptolemaic and the Copernican system. So if listeners aren’t familiar with that the Egyptian ruler Ptolemy developed a cosmology, developed a form of tracking the stars, which had.
[00:05:10] Some degree of predictive power, but eventually when Copernicus came along and completely created, brought about a phase transition in our understanding of the cosmos, the Copernican system had a superior vastly superior predictive power. So that’s the setup of my first question to you, Mike. Let’s talk about that.
[00:05:32] Let’s talk about. How do you make a case for the superior predictive power of a supply side focused approach to economics and to political economy?
[00:05:42]Michael Kendall: [00:05:42] Yeah, you use the best analogy. That analogy that Jude always used the Ptolemaic planetary system versus the Copernicus sun based model told them, Hey, was based on the earth centric. Copernicus was sunset drinks. It’s a foundational model. You have to get the foundation of the model, correct.
[00:06:00] To be predictive because the Ptolemaic system, it operated for over a thousand years, but it never quite got things. So that he had to come up with equines and ellipses to trick the system up. To make it work. Whereas when Copernicus came along with the sunset trick system, which of course explains our planetary system, you got it wrong in the beginning that he had circular orbits, but eventually other people came along and posited elliptical orbits, and it all fell into place and it worked so it’s predictive.
[00:06:31] If the foundational model works, what’s interesting is if you look at the band side and what we’re talking about is a production centric. Economic model the producer versus a consumer centric economic model, just like you had an earth centric, planetary model versus a sensitive, okay. It’s two separate models, which one’s right.
[00:06:53]I think it’s basically common sense that you have to produce before you can consume. All right. Without production, there is no consumption and we all have an unlimited propensity to consume. So we don’t need to be incentivized for people to want more or better or more things on the production side.
[00:07:16] There is a very. Incentivization requirement necessary because people are putting their time and energy and talent at work. Capital is required. It’s risk reward. You have to get all those incentivizations correct for that production to occur. And if they’re not correct, if they’re not incentivized, then the production doesn’t occur.
[00:07:39] And so when you. Look at, for example, a communist system versus our capitalist system. There’s no incentivization to do anything. If you don’t own the means of production, there’s no reward for your risk in a command and control system. So in a very essential way, it’s just basic common sense. I think.
[00:08:02] Jonathan Doyle: [00:08:02] so so many things that are common sense. We often say these days, they’re not so common. So help us understand is the fundamental flaw in the Keynesian system placing the concept of aggregate demand at the center of that economic cosmology. So is. Really what we’re living through at the moment is the outworking of hyper Keynesianism.
[00:08:26]So in T like government trying to stimulate and stimulate demand, is that the fundamental floor in the Keynesian model,
[00:08:34] Michael Kendall: [00:08:34] Yeah, the fundamental flaw is again that it tries to pause it, that every human is a. Equal hydrogen model that can be put into a mathematical equation and you can produce a desired outcome. Whereas when we look at the supply side of the production model, it’s behavioral, it’s not mathematical. We don’t do things because we’re all the same.
[00:08:58] We’re plugged into equation and we get an outcome. We do something because we’re all different. We all have our own individual ideas and responses to stimuli that are all around
[00:09:09] Jonathan Doyle: [00:09:09] it’s interesting. You say that because this morning I was going through Jim Rickards latest book and he makes the point, but the main floor in Milton Friedman’s monetarism is he assumed that. Velocity of money was constant. Now what Ricards was saying today was that the truth about humans and why I’m saying this is because when you were just saying.
[00:09:31] That these models assume it where molecules all acting the same way. What Ricards is saying is that the problem with monetarism is that we don’t all act the same way and velocity of money. Isn’t constant because it’s controlled by humans, perceptions of how they feel, the confidence they have. So is it true that the supply side model has a better grasp on how humans actually behave and live?
[00:09:57] Michael Kendall: [00:09:57] Again, when you go back to monetarism Milton Friedman’s monetarism, it was MV equal PT. It was a mathematical equation. And the velocity, like you said, was assumed to be constant because on a gold standard, it was constant. But as soon as they left the gold standard and it basically blew up the equation because people didn’t respond the way they were expected to with the cost and supply of money, which was actually credit and money.
[00:10:24] And it just didn’t work. It was a mathematical or equation that assumed positive certain constants. And people aren’t costed. So getting back to the basics of predictive supply side, it is behavioral and it allows for that behavior to be incorporated into the economic model. Because again, we’re back to your episode with Nathan Lewis on the magic formula.
[00:10:49] When you have stable money, when you have low taxes, you have all the incentives. For behavior for production and through all that comes growth and everything else beneficial to standards of living in human beings. But none of that can be formulated into a mathematical equation, but it’s the desire of economist of government to have a desired output that they can control.
[00:11:16] And it simply doesn’t work in the world. And that’s what we’re seeing everywhere around us right now. And economic forces that seem to just be blowing up because they’re no longer is stable money. The incentives are skewed because the fed is controlling the price of interest in which is the most essential pricing on to any market.
[00:11:36] And once that happens, you get the capital misallocation and economic distortions and it can’t hold. And that’s, I think the fear that you and I have discussed before is. And the previous podcast is when things can hold. How long can they go on for.
[00:11:51] Jonathan Doyle: [00:11:51] Yeah. And that’s the question, my brother who’s in his story and we were discussing this on the weekend and I made the point that Rome was sacked in four 76, but it took about another 400 years till it completely collapsed. So the question I’m interested in is whether, these things happen quickly or they’re going to drag on for a long time.
[00:12:11] I think Ricard’s position is that. We’re going to be in for a long journey of low growth. Even he thinks we’re in a depression. And the stuff that I’ve been looking at this week is of course the Dow took a think it was close to 25 years or longer to get back to its pre 1929 levels. After the, the great depression started.
[00:12:33] So the thesis is that. We may be in a depression. Now we could be looking at 20 to 30 years before we really get back to a. To where we were. But listening to you again, I thought about listening to Jeff Snyder this week on repo markets. He’s quite brilliant on. And I was, I had to listen to this several times to really get it.
[00:12:53] He talks a lot about shadow banking and a lot of what’s happening in the collateral side of the repo markets. And what struck me was he just said, the central banks don’t actually know what to do, or what’s actually going on half. It’s the time I say that because my illusion coming into all this was that we have this highly intelligent people making brilliant decisions as best they can as often as they can.
[00:13:16] But it seems that at this present moment, there’s aspects of our monetary system, where even the people controlling it don’t seem to know what’s going on. Do you think that’s
[00:13:27] Michael Kendall: [00:13:27] That’s an interesting discussion because that was a view I held for the longest time. And I’ve been coming around to a different view. And the reason is because of the COVID crisis. And because for me, the COVID crisis changed everything because. I didn’t see any spontaneous order to how people responded to COVID it, it seemed like it was top down controlled.
[00:13:53] Everybody will wear a mask. These were globally ticks. They were all over the world. The lockdowns occurred everywhere and it started making me think that maybe we’ve reached a point where there are. Central banks, the BIS the bank of international settlements in Geneva, the global central banks, the IMF, the world bank, the hu corporations, foundations, and of course media that seemed to all be in lockstep in the same direction.
[00:14:25] And if that’s true, It’s not something that anybody can prove. The whole I did for me beforehand was like what? There’s a group of small elite people that get together and decide what the world’s what’s going to happen. The world seems preposterous and most people can’t think that can happen.
[00:14:41] But when you look at COVID, there’s really no other way to explain these events. And they were actually predicted 10 years ago on a Rockefeller document. So the whole point on getting it. If events for a pandemic can be controlled on a global basis that possibly economic events could be under the same effect.
[00:15:05] It’s just a, an idea I’ve started looking at. And I probably the last six months, because really gotten deep into just seeing everything that’s happening with COVID and none of it making sense, and none of it adding up with the science and wondering how it’s happening and how it’s occurring and how it might.
[00:15:22] Be occurring in other realms like economics.
[00:15:26] Jonathan Doyle: [00:15:26] so that level of organization would have to be extraordinary, right? It’s, it seems unlikely that there is some highly coordinated global pact. To drive a lot of these outcomes, but because it seems that the more people involved in something like that sooner or later, something’s going to get out.
[00:15:47] Is it more a case of just, I guess the socio-cultural intellectual, trade winds of the West over the last a hundred years of. Broad about the kinds of systems of control and consumption that allow this to happen. I know that sounds a bit convoluted, but what I’m getting at is in one model is a.
[00:16:09] A room full of 10 or 15 global elite pulling the strings on the whole thing, which seems difficult in some ways to believe because coordinating vast numbers of governments and media organizations would seem to be difficult. Or is it a case of just as a society, we’ve got to a place where we’re highly accept, accepting of control, where people are.
[00:16:33] So I guess, shaped by consumption and self-interest that they’ll do exactly what they’re told or that means they’re going to be relatively left alone. Any thoughts on all that?
[00:16:43] Michael Kendall: [00:16:43] Yeah where it becomes really alarming is when you think about all the things I just mentioned, but then you look at the world economic forum. Run by a guy in a guy named Claus Schwab. Who’s a very strange person, almost like a bond villain. Exactly like a bond villain, but they’re promoting all these ideas openly and their name for all of this is the great reset.
[00:17:08] And as we speak, they’re in Davos right now with their 20, 21 great reset conference. And so it’ll be interesting to see what. Comes out of all of that, but it’s openly being promoted. And when you look behind it, they use these buzz words like resiliency and inclusiveness and communitarianism and sustainable development.
[00:17:29] But behind all those us words, you’re actually talking about a model that’s moving towards. The Chinese social credit score, totalitarian control. And it’s all being bedded by advances in AI, artificial intelligence, which provides the surveillance and the means to create this control. And the other things coming out is that you’ll hear discussed about are smart cities.
[00:17:54] The new ESG investing that’s environmental probably got environmental sustainability and governance, I think, which is basically. Investing based on wokeness, as a way to explain it. So all these things are happening. They’re pretty much in the opening. And when you start looking into them, they’re very alarming and it leads me to believe that we.
[00:18:17] We might be on path that we’ve never seen before. And I think it’s something that people need to be become aware of and start looking more into it. And there’s plenty of people that are aware of it. There’s all kinds of alarms being put out against the great reset in the world, economics, all these there’s like a spider web connection between all these corporations foundations.
[00:18:40] Places like the IMF, they’re all interconnected. These trilateral commissions, Bilderberg, it’s all just interrelated and connected. And there’s now a common message emanating from all of this down to your corporate structure. In my corporation, you have these sensitivity training things you have to go to.
[00:19:00] And it seems to just all flow downhill from sort of a. Central control that. Of course nobody can describe or explain exactly what it is.
[00:19:09] Jonathan Doyle: [00:19:09] It’s like the great joke. What’s a, give any centrist that the answer to every problem is more centralism, listening to you, I’m thinking the problem for these interconnected organizations, what they really want to deal with is individual freedom and free enterprise. In the sense that I was reading the other day, we’ve added here in Australia, 60,000.
[00:19:29] New public sector jobs. Now those numbers aren’t big compared to, say the U S economy. At a time when. Huge numbers of small businesses, medium enterprises have been fundamentally wiped out. We found a way to add 60,000 new public sector jobs in, in government and admin. So do you feel this is part of this, the kind of suppression of the private sector, but it’s not that simple, is it because.
[00:19:56] Because some big corporations really flourishing, but I guess they’re not employing as many people as they want smarter. And they’re not tending to reinvest capital back into the economy. So they’re getting rich, but that money isn’t stimulating the wider economy, the wider population, it’s affecting a nation’s political economy in a different way.
[00:20:16]Michael Kendall: [00:20:16] We’re seeing this another aspect of what I was talking about is the lockdowns that are essentially wiping out small business mom and pops entrepreneurs. And there’s no rational way to explain it. When you look at the science behind COVID, because there’s like a 99.6% survival rate for anybody under 70, and when you look into the immunological aspects of it and the herd mentality or herd immunity, you can’t explain.
[00:20:48] These lockdowns and the destructions is done to psychology and finances of individuals, except from a controlled aspect, because in a spontaneous order where people. Spontaneously responded to COVID however, locally or city-wide or state, or even nationally, however they wanted. I don’t think you wouldn’t have seen any of this.
[00:21:13] You wouldn’t have seen lockdowns. You wouldn’t see these rush vaccinations. You wouldn’t see all of these things that are happening. And in conjunction with that and in the U S right now, we’re seeing a real assault on freedom of speech through the big tech companies, which are siloed information control.
[00:21:32] That seemed to be very closely related with all these other things I’ve talked about. So for me it’s very alarming and it almost. Surpasses traditional economics, as we S as we’ve known it here in America, because it, one of my views of economics is there’s nothing new under the sun with economics.
[00:21:52] It just keeps cycling and repeating itself. We see that you go back in history, you have stable money, then you have devaluation. Then you have hyperinflation. Then you have Fiat money. And then it collapses and then you go back to its cycle back to stable money and that repeats over and over.
[00:22:08] And the same thing on the democracy and fiscal side is that you have monarchs, you have feudalism, you have socialism you have democracy, you have capitalism. And now we seem to be, cycling back towards totalitarian feudalism or. Socialism through communism, back to totalitarian feudalism.
[00:22:30] If this, all this stuff kept going in the direction that they’re talking about now, I don’t think anything of this, all this will happen. All I’m doing is laying out what I’m seeing occurring in front of my face, and how the global masses will respond to all that. Remains a big question because you’re seeing people all over the world.
[00:22:50] Now start to revolt against the lockdowns against the mask against their business. Shut down against the destruction against the psychological destruction.
[00:23:01] Jonathan Doyle: [00:23:01] He alarmed. Yeah. Look, I’ve found since I’ve got into this work more and more, I keep joking with Karen, my wife, that I’ve, I keep saying to women when we’re out, I haven’t done it with people. I’m like, yeah, give me the look. If I start to go down the rabbit hole, give me the look, because I think what I’ve noticed is that as I have since I started at Oxford, my eyes have been opened to, the global monetary system as it is.
[00:23:25] And. And you start talking to people about this. And my experience has been 99.5. Or more percent of people have absolutely no idea how the global monetary system works and the implications for their individual lives. So many times the last few weeks, I’ve just seen people get this glazed. Look, when you start to explain.
[00:23:48]Monetarism and inflation and deflation and how they should be hedging. People are just, I guess I say that because as these great seismic forces are moving through this moment of history, most people seem quite unaware of the shape and the size of it and the implications for them, which I guess is how you would want people to behave.
[00:24:12] If you were running things right.
[00:24:14]Michael Kendall: [00:24:14] You can almost see it evolving because what do you do? You destroyed the small business and middle-class people lose their jobs. And then what’s the next thing we’ll we’re going to give you a $600, 1400 and $2,000 check. And then what comes after that? When you start looking into this and they’re talking about it is a UBI universal basic income, and then if you expand that out further to the other things I’ve talked about under tech technocratic control that’s the whole basis of the system is that.
[00:24:45]There will be a leak controlled and the rest of us will be on UBI. Under AI control and there’s, you go into the, a world economic forum and they talk about trans humanize humanism the melding of man and a machine fourth industrial revolution, all this stuff that I’m alluding to is published out there in books, on the WEF website and you can read it and you can see it and you can.
[00:25:10] See what they’re talking about. And when I, maybe when I talk about it sounds outlandish or ridiculous, but all I’m doing is just telling you what they’re actually publishing and interpreting what it means
[00:25:23] Jonathan Doyle: [00:25:23] was it class Schwab who said, in 50 years you’ll own nothing and you’ll be happy.
[00:25:28]Michael Kendall: [00:25:28] That was you can, there’s a video of them that they created and it says in 2030,
[00:25:33] Jonathan Doyle: [00:25:33] That’s right.
[00:25:34] Michael Kendall: [00:25:34] You will own nothing and you’ll be happy. You’ll rent everything. Drones will deliver what you need to your front door. Won’t own anything. This is what they’re putting out on their websites. And they’re conditioning people in this direction through, I think it all started with the coven and the district economic destruction and in the wake of COVID.
[00:25:55] And then it’s gonna move us into this path that they’re talking about.
[00:25:59] Jonathan Doyle: [00:25:59] So let’s join a couple of there were three sort of questions I wanted to work through with you on a supply side here. And we’ve talked a little bit about this concept of the supply side model with the producer at the center or at the center of the economic cosmology should provide us with superior predictive power.
[00:26:17] The second thing we’ve talked a little bit about is this idea that Jude has. Of economic eras and systems and monetarism, and now MMT being the, what he would say, what he wrote as the dying gasp of kinds aneurysm. What I want to talk to you about is the most basic question we can’t keep. Printing currency.
[00:26:39] And of course, people know we don’t actually print it. We just type it into a computer screen. Lynn olden said the other day, 19 trillion of global stimulus has coming to the global monetary system since COVID my favorite mantra. Every dollar must find a home. What I’m asking you is let’s talk about the superior predictive power of suppliers side.
[00:27:00] Let’s talk about where MMT is going, listening to Ricard’s this morning. The magic number seems to be once a country hits 90% debt to GDP, then they get what he calls a phase transition. 90% debt to GDP is the moment at which government creation of a dollar goes negative. So it actually doesn’t create an equal dollar of value in the economy.
[00:27:28] It actually begins to retard the economy. So if that’s true at 90% us debt to GDP as of today is 130%. Can you give us your superior predictive supply side insights into where you think monetarism. Is going to go and what would be necessary for the house of cards to collapse?
[00:27:50] Michael Kendall: [00:27:50] talked about this before in our previous podcast. There’s the gold signal and gold is like the purest economic forum because nobody can manipulate it or control it. It’s value. They can’t manipulate it. It’s the value of all the gold ever produced versus. The gold that is produced annually. In other words, Gold’s value is stable.
[00:28:15] So it’s foundation for looking at anything economic, but to understand gold is the inverse of the value of the dollar. I think most people understand that because is the dollar loses value gold gains in price. So it’s dollar becomes less worthless. Gold becomes more valuable now, actually the Gold’s value doesn’t change.
[00:28:37] It just changes in relation to a Fiat dollar, which has no defined reference other than gold. So what I’m getting at. It’s what you to understand gold. You have to look at the fed balance sheet and a lot of people have been very alarmed by the Fed’s balance sheet. And I started working on a post today for my website, man, on the margin.com, where I’m I went through the feds latest balance sheet and looked at it to try to understand what’s happening.
[00:29:04] And when you understand how the fed works, how base money. What base money is what it means, what the fed controls. And you look at the Fed’s balance sheet. It’s not as alarming as it appears. Now, if you go back to the beginning of 2020, the Fed’s balance sheet was like 4.1 trillion. That’s the total assets that the fed has today.
[00:29:30] And the latest from last Thursday, it’s 7.3 trips. Okay. That’s a huge increase in one year. And the Fed’s balance sheet. When you start looking into the Intuit more closely, and you understand how the fed works, it’s not so alarming because. When the fed creates money, it buys bonds. Okay. Here’s the thing about M and T.
[00:29:53] We can’t have MMT as long as the fed, there’s a firewall between the fed and the treasury and the federal reserve act created that firewall, meaning that the fed can’t directly buy a treasury debt. Okay.
[00:30:08] Jonathan Doyle: [00:30:08] open market operations,
[00:30:09]Michael Kendall: [00:30:09] When the treasury issues debt it’s purchased on the open market and on the secondary market, the fed buys it from a primary dealers.
[00:30:18] Every time the fed buys a bond, it from its magic checkbook it substitutes in cash and reserves for that bond. And the fed controls those cash and reserves down to the penny. Now. Currency cash has currency in circulation. That’s on demand. Anybody can go to the bank and ask for cash and, globally, there’s some, I’ve read that 80% of a hundred dollar bills are held outside of the United States, but it doesn’t matter because the fed controls that those cash and and it controls reserves.
[00:30:51] Now, what you have to understand about reserves is that there are excess reserves that. That occurred in 2008 and only existed nominally because excess reserves were always a cost of banks to maintain. But after 2008 that changed the, an act that allowed the fed to pay interest on reserves. So we started a depository institution, started holding excess reserves and getting a return on them.
[00:31:15] So when you look at the, for example, the fed $7.3 trillion balance sheet, 3.2 trillion of that is excess reserves. Meaning that’s basically reserves that are locked out of the economy. Now they can enter the economy, but they’re basically held by banks and for various reasons, but for whatever reason, these excess reserves are held by these banks.
[00:31:42] Right now they’re drawing basically zero interest on them. So they’re holding these excess reserves and getting basically zero return on them, but they’re still holding up the other issue too. Fed’s balance sheet and this gets technical, but the treasury has a general account that it’s held at the federal reserve in every dollar in that treasury general account that’s held at the fed is a one for one removal of reserves from the system.
[00:32:08] And right now, and this is what has really exploded in the last year. The Fez general account has gone from 380 billion to 1.6 trillion in the last year. So if you take the excess reserves, that treasury is general account, that’s 4.8 trillion. And you subtract that from the Fed’s balance sheet of 7.3 trillion.
[00:32:30] That’s that’s 2.5 trillion. So you could say in effect that the fed has a 2.5 trillion balance sheet right now, because 4.8 trillion. Or reserves that are held out of the system. But here’s the interesting thing. If you go back to 2020, January of 2020, a year ago, and you did the same calculations, I just talked about, you would get a $2.1 trillion fed balance sheet.
[00:32:57] Okay. So that’s like a 25% increase last year in the actual. Realistic balance sheet of the federal reserve. What is gold done in the last year? It’s gone up almost about 22%. So gold has basically signal what the actual, what is it curve with the actual balance sheet of the fed, using these calculations?
[00:33:23] I just talked about the Fed’s balance sheet has gone up 25%. Gold has signaled that increase. It’s gone up. Almost the same around 22%. Now you could get more deep into the fed balance sheet and work out some more stuff, but I’m just giving you the most basic stuff of it. So the goal, when people look at the 7.3 trillion, they think gold should be to.
[00:33:46] 2020 500 should be going towards hyperinflation. But when you understand how the fed actually operates, and you look at its balance sheet and you view it properly, and then you look at gold, you’re seeing that this signal is telling you pretty much exactly what’s happening. So when you say, okay, Mike, what’s your predicted for the future?
[00:34:06]I always understanding all this. These things I talked about, I always, rely on the gold signal. I’m looking for gold to tell me what’s happening. And there’s one more component to gold that that you can’t analyze and that’s demand dollar demand the supply. We can look at the Fed’s balance sheet.
[00:34:24] We can determine supply down to the penny because it’s all right there on the balance sheet, but global demand for the dollar is. You can’t determine that because nobody knows why somebody wants dollars or not. And that’s, that’s based on trust the that people have trust in the dollar really the way I see it.
[00:34:42] There’s no other alternative. W if you don’t want the dollar, where else do you go in the world? You got the Euro, you got the Yuan, you got the yen. They’re all in the same boat, so when you look at the Fed’s balance sheet and it’s. And it’s not as crazy as it seems at first glance.
[00:34:59] And you look at all the other currencies in the world and you understand what gold is telling you. Then on the surface, things are not out as. As out of whack is it appears to us just looking at things from, the crazy perspective of everything that the fed and in fiscal policy that’s occurring.
[00:35:25] Now, all this could change tomorrow. If something happened that people lost trust in the dollar and the demand decreased and the fed didn’t. Reduce that supply then you, but gold would signal that again. So when you talk about prediction, predictive economics and understanding the world, my, my foundational belief is understanding the goals signal.
[00:35:49] Okay. Understanding gold understanding what determines its price and how that interacts with the federal reserve fiscal policy and geo politics and
[00:36:01]Jonathan Doyle: [00:36:01] How did you build that knowledge? Because your knowledge on the gold signals extraordinary. So what are some of the key resources? What did you read for people listening? How did you do
[00:36:15] Michael Kendall: [00:36:15] yeah.
[00:36:15] Jonathan Doyle: [00:36:15] this knowledge?
[00:36:16]Michael Kendall: [00:36:16] From June, this was, this is Jude’s model. This is what, how Jude was a editor of the wall street journal in 78. He just quit. His job, started a consulting firm from scratch and built it into a very formative Consulting institution over the years. And the reason he did is because he got things, and I mentioned this before in our previous podcast that the whole time I was with you for 13 years, I tried to find errors and I never could. And so I, I learned this model from writing, from reading his supply side university, and I. It’s very involved learning how the fed works.
[00:36:54] Very few people understand how the fed works. It’s a big mystery to them and that’s the way the fed Watson, that’s what was Alan Greenspan famous for? He’s famous for just gibberish, he’d get in front of senators and just say a bunch of gibberish and nobody would have any clue what he was talking about.
[00:37:11] Jonathan Doyle: [00:37:11] can’t remember if I say this to you or to one of the other. Recent interviews. But I was reading the, that the fed has over 1500 economics PhDs on staff. So the U S federal reserve system has the greatest concentration of economics PhDs on the planet.
[00:37:29] Michael Kendall: [00:37:29] Yeah. And have you ever looked at one of their papers? I, I’ve actually you read these papers and there’ll be a mathematical equation. That’s a half a page long, and that’s the econometric model. That, again, going back to the, that was supposed to plug us into it, they’re supposed to get the desired outcome.
[00:37:44] And the fed has always got their dot plots and theirs are stars and all this nonsense that they come up with and they’re always completely wrong, but it doesn’t matter because. Nobody understands it. And it’s basically the only game in town and they get away with this stuff, but you know what I hope your podcast and what I’m trying to explain now is there, there is a actual explanation beyond all this nonsense.
[00:38:13] That’s foundational. That explains things that if you learn it and understand it, then you’re not lost in this miasma of economic nonsense. That’s, just spread like a virus or a mist over everywhere.
[00:38:27] Jonathan Doyle: [00:38:27] Let me ask you both. I want to go into our last question in a second about taxation, but can you talk to us a little bit about gold price suppression? I came across, I’m just trying to pull it up here. I came across some of this recently. What was I reading? I was going to pull up my library. I was looking at the money bubble was by James Turk and John Rubino.
[00:38:48] They had a pretty extensive section on. Gold price suppression at the hands of central banks and several large commercial banks. Have you got any, anything for us on gold price suppression?
[00:39:02] Michael Kendall: [00:39:02] Yeah, I think, I have a big disagreement with the gold analyst over suppression of gold, because for me, it’s like the Keynesian economist when their predictive model doesn’t work. What do they do? They create, if they predict something doesn’t work, they create a new term to explain it, and that’s where you come up with liquidity trap and a pent up demand and circular stagnation and try lemmas and push pull, so basically they predict something. It doesn’t happen. So then they create an economic turn to exp explain why it didn’t happen. I see the same thing on the gold analyst side.
[00:39:36] When they don’t understand, all the things I talked about before don’t fit into their model because they don’t have the same foundational model to the extent I do that I learned from Jude Wanniski. And so when they can’t explain something in the price of gold, then they resort to.
[00:39:55] Manipulation, so for example, in 2008, goal was a thousand dollars. It fell to 700, they started QE, expansion of the monetary base gold ran up to $1,900 in 2011, and then it fell and crashed to $1,100 by 2015. How did the gold analyst People explained it. They explained it by manipulation.
[00:40:21]That the federal reserve was manipulating the price of gold, but they can’t explain to you. Why did they only manipulate it down to 1100, then 1100? Why is it now a client back? Why are they not manipulating it anymore and allowed to climb up to, again, back up to $1,900? If you go on my website and look at my golden analysis, I explained exactly what happened.
[00:40:43] And it has to do with what we talked about before with these excess reserves that, that had never happened before it was new and people didn’t understand them. And eventually the market found out that when gold hit $1,900, there were like 2.7 trillion excess reserves. So all this gold price. Prediction based on expanded, expanding, fed balance sheet.
[00:41:10]Eventually people came to under, or the market came to understand that these excess reserves are going to be withheld from the system. And so it had to rebalance down to a fed balance sheet minus these excess reserves, which ended up at about $1,100. And and currently this, when you look at it from this perspective, with the, within the last year, with the huge increase in the fed balance sheet, people like the ones you were reading and talking about exp expected another explosion in the price of gold, and it doesn’t happen.
[00:41:47] So then they resort back to manipulation. Now on the futures market, short term. Yeah. You can manipulate the price of gold. Somebody can buy yourself a bunch of future contracts and for a day or two, drive the price down and get a bunch of people to sell, drive the price down further. But long-term the price of gold cannot be manipulated because.
[00:42:13] It’s it, the price of gold is determined by a ratio of two ratios in the U S for the U S dollar price of gold. That’s the supplier base money over the demand for base money. And that’s the top ratio and the bottom ratio is a supply of gold of man of gold. But the bottom ratio is in general terms is basically constant because the price of gold is constant.
[00:42:36]So what that leads you to conclude is that the price of gold is determined by how the fed. Create space, money and the demand for it. And like I mentioned before, the supply is known, but the man is unknown. So that’s where as a, someone interpreting the gold signal, you have to be able to interpret that the bank component, because, that’s just something you learn with years of.
[00:43:00] Study. And it’s something, if you go back and read Jude’s archives, he’s constantly interpreting what the dollar demand is and what the gold is telling you.
[00:43:12]Jonathan Doyle: [00:43:12] Coming back to Jude now the final question for this episode comes from the third post in his supply side university. So we’re gonna talk a little bit about taxation. And the notes that I took, I said, Jude argues, there is no ideal taxation, right? To per se, to question of political economy, what kind of society do we want to live in?
[00:43:35] And the question that I wrote here was I’m curious how MMT explains the need for taxation at all. If we can just create currency, then my tax people. Why tax people when we are heading for more universal, basic income, why bother giving citizens free cash, if you plan to tax it. So can you give us your broad theories on Jude’s take on taxation and why is taxation still a question in a pure MMT universe?
[00:44:09] If you can just print currency endlessly.
[00:44:11]Michael Kendall: [00:44:11] As I mentioned before, we haven’t gotten to the MMT, we’re, if you ever see that firewall between the fed and the treasury, the federal reserve act changed. Then MMT will be coming in and all this that you’re talking about comes into effect the idea that you could fund everything taxes don’t matter.
[00:44:29]You’ll also probably see the price of gold explode upwards in that case. But what was the okay. We were talking about MMT. So what people. What people see is they see this massive increase in the balance sheet, these outlays that are occurring, the debt that says creasing, the budget deficits.
[00:44:57] And they th you know and I think you’re correctly thinking that this is heading us towards MMT, but really, when you think about it under the system, we have. All these budget, outlays, all these fundings, all these payments to people. It’s no different than how our budget outlays work now for, funding are useless Wars or for funding, the great society, or for funding, any wasteful spending foreign foreign money that we send to all these countries.
[00:45:28]All this is just another component of the money. That we spend that we’ve always been spending now where it gets confusing is that this seems so outrageous because of the increases in the amount of the Fed’s balance sheet. But like I talked about before, those are elusive or.
[00:45:50] Or not as they appear when you look into it more deeply and understand how the fed works. So the point, I guess the point I’m trying to get around to is nothing has really changed right now, taxes haven’t now they may change soon. Biden seems to be, I’ve heard some really bad things fiscal proposals on taxes that.
[00:46:11] It been promoted by whoever’s running Biden’s administration. So it could it could get, we could get a very worse as we go along but at the moment we’re really just A continuation of everything that’s happened before. And while it seems extreme underneath the surface at the granular aspects it’s not extreme yet.
[00:46:34] But all these things are, when you have a predictive model, you’re going to look at these. Taxation proposals. You’re going to look at the spending and then you gotta look at the price of gold and see what it’s telling you. And then you’re gonna look around the world and see what’s happening geopolitically, because all of those things affect demand for the dollar.
[00:46:54] Jonathan Doyle: [00:46:54] so in the supply side model, taxation. In general. So Nathan Lewis concludes his recent book. The magic formula arguing for kind of, he seems to, I think Nathan’s take is 10%. He likes value added Texas, but flat rate, Texas, right? Across across an economy. And in this post from Jude where we’re talking about this ideal rate of taxation John Tamny from real clear markets is coming on next week.
[00:47:26] I read his piece yesterday on Biden’s plan to raise corporate taxes and John’s take is the democratic argument seems to be, we’re going to take. Money from corporates. And we’re going to push that out as stimulus into the economy, but John’s take is you’re not creating anything there.
[00:47:46] You’re just taking money out of one set of pockets and sticking it in another set of pockets and no value is being created. What’s your take on taxation in general, in terms of political economy, what do you think are the limits of it? The state? What do you, what sorts of rates of taxation do you think are conducive to a successful supply side model?
[00:48:08]Michael Kendall: [00:48:08] The problem with taxes is that without stable money, everything is distorted. When you have stable money, then you can look at taxes and you have a foundation where you can see okay. This change in tax rates creates this amount of growth or destroys this amount of growth.
[00:48:24]So we have no stability. You have these two levers and they’re both unstable and, the fed driving the price of interest creates capital allocation or misallocation that maybe overrides taxation, change either a positive or negative change in taxation. So it’s really.
[00:48:44] It’s really hard to sort out what taxation is best without a stable money foundation to base it against. But right now, it’s even worse than that because, we’re seeing wide swaths of our nations being wiped out and New York city is a financial capitalist, practically a ghost town.
[00:49:06] So what effect does a taxation have when you’re, under the guise of this COVID business, you’re wiping out the entire economy is for me, it’s okay, let’s focus on this. Focus on what’s really happening in our world. There’s huge changes being brought about that subsumed the normal.
[00:49:31] Debates over taxation and money. And if you don’t get those into perspective and get some visual visual look into to these things that are happening, people aren’t aware of these things happening, it’s hard to have this discussion on taxes. It’s almost Talking about renovating your home when you’re in the middle of a war zone or something, it’s you got more something more important to think about, but in general I would agree with I differ on taxes because.
[00:50:00] Because, like I said before, until you get the money, I don’t see that you can have that debate on taxes. And it be that effective. But in general, yeah. Like you were talking about with Nathan, the people who do look into that stuff, I would default to their views on it.
[00:50:15] Jonathan Doyle: [00:50:15] It’s interesting hearing you talk about. The reality of how things really are at the moment. And again, listening to an interview with regards to Jim Ricards last week, he pushed back hard against this pent up demand arguments. So this idea of a V-shaped recovery, right? That there’ll be a vaccine, the economy will reopen and magical.
[00:50:35] Pixie dust will descend from the sky has, and everyone’s life will get back to normal, but he said something very interesting about pent up demand. For listeners not familiar with it, it’s this simple idea that during lockdowns everybody’s been sitting on this huge store of savings and they just desperate to run out to their nearest shopping mall and spend.
[00:50:56] And I wrote to I was in a. Online email conversation with a couple of funds managers in London, and they really pushing the pent up demand argument there that’s shaping their strategy. And I said two things, the first one is, I don’t think Amazon disappeared during lockdown, right? People were still spending and Ricard’s point was great.
[00:51:15] He said he and his wife go out for dinner once a week, pre COVID. They used to go out every Saturday night. And he said that he’s been in lockdown now for over 20 weeks. And he said, when they go back out to have dinner, he said, they’re not going to order 2020 meals. They’re not ordering the backlog of meals they missed.
[00:51:34] He said, they’re going to order one meal. So all of that lost capacity is lost. It’s genuinely not there. So I mentioned that in terms of, yeah, I just reading a fair bit of optimism that I. I don’t know whether I’m a natural pessimist, but do you see much? Cause for optimism
[00:51:54] Michael Kendall: [00:51:54] well, again, I alluded to pin up the man is one of these terms that they come up with to explain what they can’t predict or don’t understand. And whether there’s pent up demand, or there’s not, there’s a foundational system for growth. That’s based on stable money and low taxes and behavioral incentives.
[00:52:11] Everything we’ve talked about in this podcast. Okay. And so to the extent, on the one hand you say you have pent up demand, but on the other hand, we’ve wiped out wide swaths of the middle-class. Literally, and it’s really just getting started because they’ve had a people haven’t had to pay rent.
[00:52:29]They’ve been giving S a few basic income checks to people. But everything has been just like on hold. Th the reality hasn’t occurred yet. There’s that people are going to have to pay, whether they’re going to default on their homes or their lands or their businesses.
[00:52:47] That’s all in on hold right now. It’s hard to be optimistic when I see what’s coming, because they’re talking about health passes for travel. You’re not going to have a vibrant economy when half the population does it want to get a vaccine and refuses to travel because they can’t travel if they don’t have a health path.
[00:53:07]It seems like they’re promoting all these things and steps you get your vaccine, then the next thing that’s going to be a health pass. Then it’s going to be whether it’s going to be a mandatory vaccine from your company. All these things are occurring step to step. And there’s an, I can’t be optimistic about any of this stuff because it’s a step towards more totalitarian control, which is.
[00:53:30]The opposite of anything optimistic about a behavioral economic model foundation.
[00:53:39] Jonathan Doyle: [00:53:39] You’ll appreciate this. I read this somewhere in a book years ago that you don’t want an optimistic airline pilot that you don’t want an airline pilot. It’s just yeah, it’ll be fine. We’ll just throw, we’ll just land it in the cloud bank. It’ll be okay. Hey, you want to, you want an airline pilot?
[00:53:54] It’s meticulous about it. Assuming that the worst can happen. And I think it is interesting times. It’s going to be interesting having John on next week because he’s he’s a real advocate of the entrepreneurial energy of the United States. But wonder if there’s really a significant transition in the national mood.
[00:54:12] It seems watching it here from Australia, I’m pontificating on it. But it seems that the kind of fundamental shared values around what constitutes. A good society are very much in flux, not just for the U S but for a lot of economy, a lot of countries in the world. All right, so let’s pick this up next week.
[00:54:33] I’m going to get through the next three posts in Jude wind skis, supply university. I’ll put links to that for everybody. I want to put some links to Mike’s gold Ray, his writing on gold. I’m going to go on the record here and think it’s about time for Mr. Michael Kendall to write a book on gold signals.
[00:54:51] I think it’s about time because I listened to you and I’m going, I just got to go deeper on this. We’ll get everybody across to check out the man on the margin.com and
[00:55:01]Michael Kendall: [00:55:01] Let me just say one thing, one more thing about optimism. All the things I talked about seeing fairly pessimistic, but. But when you look back in history thanks. Never go as planned. So they have all these plans that you can read about and see them happening.
[00:55:16]But things go awry. People step out from the shadows people wake up and that’s the history of the world. That there, there was advances or setbacks, but. But eventually, mankind moves forward. This is a sort of the last year has been a unique pessimistic period.
[00:55:34] In my viewpoint, I remain optimistic and spiritually and in my fellow man and and the way the world works, which is of course Jews book. Don’t want to take this away. People would take this away is a completely negative and pessimistic outlook on the world. I actually have the opposite view.
[00:55:52] I’m just not happy with what I’m seeing right now.
[00:55:55] Jonathan Doyle: [00:55:55] Yeah, that’s a good way to put it, familiar with three young kids. I yeah, I really do. Look, I look ahead and I think, okay, what do we need to do? What are we, what are the skill sets? What are the knowledge bases? What. Is, what do we need to do? I think Churchill famously said that the further you look into path into the past, the easier it is to predict the future.
[00:56:15] So I guess we look at some of these big transitions in human history and yeah, I guess there’s always people that navigate it well, and I guess it’s about being prepared and being vigilant about what’s happening and
[00:56:29] Michael Kendall: [00:56:29] Yeah, I think an odd thing is I think people are starting to evaluate what’s important and what’s not important because of everything that’s happening. And I know in my own life, I’ve changed quite a bit in the last year, things that I thought I needed to do and wanted to do.
[00:56:44] I now see that that stuff, there’s more important things and it’s not, this is like getting back to a more basics of life. And that, that way I see things as positive because when things are going good, you have a more, tend to awards, more materialistic sense. And this is.
[00:57:04] Sent me in a direction, more of a spirit, a spiritual sense. And that’s certainly a positive thing too. So that’s, I just want to put that out there because I think there are positive things that will happen in the long run. We might all be better off for this interlude.
[00:57:19] Jonathan Doyle: [00:57:19] I I, one of my other podcasts, I shared a quote yesterday, which I’ve got here. I’m reading a great book on on masculinity, by a guy called Morgan Snyder. And he said The quote is few things have more power to help us cultivate a life giving habit of soul. Then unhinging our emotional life from outcomes and renouncing the idolatry of success as a meaning as men and women.
[00:57:48] And I spoke about that. Cause it’s, I think for many of us in these. Difficult times it’s very easy to hook our emotional and psychological wellbeing to external forces. And I guess on one level, it’s obvious, if you’ve just lost your job, it’s not easy to go dancing in the streets, but I think you make a good point.
[00:58:06] I think and maybe this ties into Jews Jude’s view of the way the world really is. We’re as beings we’re geared for relationship, belonging, community connection. And political economy is important because it is not as easy to be happy if you’re in abject poverty. But I think he made a good point that there are, this is helping many of us rediscover what may be truly important in life.
[00:58:39] Michael Kendall: [00:58:39] I think so. Yeah.
[00:58:41] Jonathan Doyle: [00:58:41] And yeah. Yeah, it’s interesting. Cause my career I said to someone at dinner last night, I was due in Baltimore in April last year to speak, to do a keynote 10,000 people. And I was in the U S every few months on speaking tours and my life was remarkably different. And then And it all changed and my entire life has changed enormously in 12 months.
[00:59:02] And what do I have wished that at the time? No, but it wouldn’t have opened up this this new direction and the study and talking to people like you. So I guess there is some encouragement out there that when one set of doors in life shuts due to lock down or whatever else, then often it’s an invitation to some new adventures.
[00:59:21]That’s what I think about that. All right, Mr. Kendall, thank you for your time. And we’ll touch base again next week. I think we’ve got John Tamny coming on, but you and I will pick up the next load of supply side university musings on the next episode. Thanks again for your time.
[00:59:39] Michael Kendall: [00:59:39] yeah, you too. I hope I didn’t deviate too much from the w what you wanted to accomplish on this,
[00:59:45] Jonathan Doyle: [00:59:45] this podcast is like central banking. There are no rules.
[00:59:49] Michael Kendall: [00:59:49] yeah.
[00:59:50] Jonathan Doyle: [00:59:50] We just make them up as we go. Awesome. Thanks. Thanks. Hey, smug speak soon.
[00:59:55] Michael Kendall: [00:59:55] all right. See you, Jonathan. Bye.
[00:59:58]Hey guys, Jonathan, with you again, I really hoped you enjoyed that episode. So much to go through there. I find that often listened to these episodes two or three times when I’m out training and I get something new every time I relisten. So I hope you really got some value there. I think Mike’s depth of learning his commitment to understanding the real engine of what drives our macro economy is just so valuable to us.
[01:00:24] I hope you enjoyed the episode, please make sure you’ve subscribed to the podcast. If other people that have a fascination for some of these topics, then please make sure you’re sharing this on your social media feeds. Everything else you can find on the firstname.lastname@example.org. So that’s it from me, Jonathan Doyle, your host here at the supply side podcast. And we’re going to have another episode for you very soon
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