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Modern Monetary Theory With Nathan Lewis

Aug 18, 2021 | Podcast | 0 comments

nathan lewis magic formula

Modern Monetary Theory or MMT is the soup of the day in the global monetary shadow world. In this episode Nathan Lewis and I discuss The Deficit Myth by Stephanie Kelton, the current bible of the MMT and functional finance crowd. If you have interest in unicorns, mythical creatures and magical money printing machines that never cause inflation then this is the episode for you. We go deep into some of the core theories in MMT and hold them up against the cold, hard light of reality.

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Jonathan Doyle

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Modern Monetary Theory With Nathan Lewis 


[00:00:00] Jonathan Doyle: Hey everybody, Jonathan Doyle with you here. Thanks so much for taking a moment to check out the next wonderful interview with Mr. Nathan Lewis. We’ve had the pleasure of having him on the show several times here at the supply side podcast. And today’s episode is one of the absolute best. We are going deep into the deficit myth by Stephanie Kelton.

[00:00:21] One of the foremost proponents of MMT modern monetary theory. So we’re going to unpack some of the key themes in the early phases of the book. And as always, you’re going to hear Nathan’s wisdom, his insight. There’s so much here for everybody. If you’re seeing this on YouTube, please make sure you’ve subscribed, hit that notification icon.

mmt [00:00:40] It makes a big difference so we can let you know when next episodes coming out. We’ll be hearing this on the podcast version. Please make sure you’ve subscribed. And if you are not getting a regular updates, go right now to supply side podcast.com. I’ve got a great offer for you there.

[00:00:59] We can put your [00:01:00] details in and make sure we get you the latest updates as they happen. So let’s do this. We’re going to talk about modern monetary theory with Mr. Nathan Lewis. Mr. Nathan was welcome back once again to the supply side podcast. Always great to have you with us and today you and I are going to take the first step on a journey into the fictional realm of MMT modern monetary theory, or as Jim Rogers always calls it more money today.

[00:01:28] So we’re going to be talking about Stephanie Kelton’s. New book. And I think we’re going to do a real service here for people. The Google search trends on MMT are quite extraordinary. The amount of traffic of people still just typing in and T what is it? So I think there’s a, there’s obviously a genuine interest.

[00:01:46] There’s a whole bunch of stuff I want to unpack with you. We’re just going to talk about the intro and the first chapter give us your overview. We’ll, I’ve got a bunch of questions, but on your first reading your [00:02:00] experience with MMT so far proponents want to describe it as purely a descriptive mechanism?

[00:02:05] They’re saying all in, in T does is just describe what’s actually happening rather than some of the other models on your first reading, what did you take away? 

[00:02:15] Nathan Lewis: Yeah, so it was interesting cause I decided that we were actually going to read the book in and the Deficit Myth by Stephanie Kelton and.

[00:02:22] And try to engage in a one-sided debate, if you will give them their time on the podium and see what they had to say, so to speak. And I’ve also read soft currency economics by Warren Moseler, who she refers to the number of times. And I was kinda, I was ready for certain arguments because I was kinda thinking if I was going to write a book like this, and what would I say, I was ready for economic theory to be tortured and abused in certain predictable ways which it has been in the past. There was actually a book, [00:03:00] I don’t know the exact year, but I think it was around 1670 that took on some of the same topics. I actually read that book too.

[00:03:07] But so my impression of the deficit myth and empty as it’s described in there, and it is for a popular audience, so it doesn’t get into much detail, but it’s real and substantial. All the kind of arguments I was ready for, it didn’t really appear. It’s kinda just like wishful thinking.

[00:03:26] Which is interesting. What people I think can take away from this is that there’s really not a whole lot to it. It’s a big just poop ball. It seems to me. 

[00:03:39] Jonathan Doyle: So in a moment, I want to go to some of the absolute core principles to give people, because we’re going to have a range of listeners here.

[00:03:45] We’re going to have some sophisticated analysts and investors. We’re going to have some people who come across the content because they’ve just got a broad interest in understanding it. Is it’s current popularity? Can we argue that it’s current popularity, particularly with legislators, [00:04:00] is that because it’s sanctions aspects of profligate spending so that if you simply want to pork barrel or spend more or justify MMT gives you a kind of quasi academic license to do yeah. And it, it is toxic to our current political system because we have. This Congress and so forth which has been unable to restrain itself for 50 years. Really since since the Johnson administration handing out goodies in terms of welfare and social services of various sorts.

[00:04:42] Nathan Lewis: And before that spending a lot of money on the military so some kind of it’s like a new drug for people have been addicts for a long time. And one of the things that’s happened in the last few years and [00:05:00] they reach a certain level of restraint, right?

[00:05:01] Congress reached this point where for a long time, from 1970 to 2009, they had deficits, but they were three to 5% of GDP deficit. So the largest deficit. Since the war since world war II, since there was actually war time was about 5.4%, I think in 1983. And that’s because of the recession in 1980, very bad recession.

modern monetary theory[00:05:27] So it wasn’t just spending money. It was the fall off in revenue from the recession. So Congress at least managed to restrain itself to some degree. And now we’re through this MMT, very arguments. Now we’re running 15% of GDP devastates in peace time. Something happened to their brains and this book helped us, helps us to figure out what it is.

[00:05:53] I think. 

[00:05:53] Jonathan Doyle: So let’s pick up some of those opening trends. The first in the introduction Stephanie Kelton [00:06:00] I guess channels the Rahm Emanuel line of never letting a crisis go to waste. So it’s quite dramatic in its sense. And I, in my notes here, I said, there’s a sense in her writing that if it wasn’t for him, empty people would be dying in the streets.

[00:06:16] And there would be that it’s this sort of white Knight mentality that using MMT, the government can come to the rescue. And there’s a constant reference to this introductory phase where she’s talking about moving from a focus on balanced budgets. So she said, we really got to completely stop thinking about this idea of balanced budgets all together.

[00:06:39] And we need to talk about using this idea of functional finance to create a more human society and exactly what a more human society is never quite defined. W and we’ll get into that in later chapters, but let’s talk first in this first chapter, [00:07:00] she’s talking about this idea of, we must not think of federal finances, sovereign finances as remotely like a household budget.

[00:07:10] So she goes to great lengths with this, that most of us listening to this, if we were to produce a money printing machine in the basement, we would soon find ourselves insignificant problems. And we also, she says that we think of our own finances in terms of weekend, theoretically only spend what we have.

[00:07:30] So she wants to get us out of this mindset that the government is nothing like us. Take us through that. What’s your take on that paradigm? She’s basically saying that we need to disabuse ourselves of this idea that governments even remotely need to pursue balanced budgets. They can produce print as much as they want.

[00:07:51] The only issue is inflation. What’s your take on that core thesis? 

[00:07:55] Nathan Lewis: Yeah. Throughout, throughout the book there, there’s a number there’s a [00:08:00] number of assertions that are made which MGMT theorists in the past that they refer to the charter lists, which were these people from about 1900 suggested as suggestions or even today, the MMT people may offer as suggestions.

[00:08:19] But then she treats it as if things are already being done that yeah. For example, she says what the way things work is that Congress just decided to spend money and the fed just gives them the money and they spend it. So spending is actually financed by the federal reserve, not taxes and sale of bonds.

[00:08:45] That’s not it’s not really true. The treasury has an account at the federal reserve. Now, you, and you can say, oh, the federal reserve in the treasury are just essentially one entity. It’s just the government. And, but even if you look at it that way the treasury actually has an account [00:09:00] at the fed his checking account, and you can see where every dollar comes from that goes into that checking account.

[00:09:06] And every dollar that comes with that goes into that second account is from taxes and the sale of debt. The federal reserve is specifically banned. From just giving the government money. You can’t, the federal reserve can loan money to banks, but it can’t loan money to government. And the federal reserve can buy the corporate bonds of corporations, but it can’t buy bonds from the government directly because being essentially both sides of government, that would amount to just pretty much.

[00:09:30] Now theoretically, you could have a situation where the fed just prints the market. If Congress says let’s spend a trillion dollars on Medicaid, Medicare or and the prejudice prints the money. And then someone with a charter list would say a hundred years ago, is that they would, they had these thirds where they put the money out and then it would be sucked back by taxes.

[00:09:54] So it was first, the money goes out and then it comes back in taxes. [00:10:00] But the so that was a proposition, but that’s not how it works today. So there’s this funny it’s oh wait this wow, I had this amazing realization that things don’t really work the way they have people say they work.

[00:10:12] And pretty much things do work. The people white people say they work and she just made stuff up at a fair Let’s get into that because in the first chapter she references. So we’re going to talk a little bit about this idea of tabs and stabs, which is what you’re alluding to exactly.

[00:10:28] Jonathan Doyle: She says that she references a speech by Margaret Thatcher in 1993, where Fetcher says the state has no source of money. Other than the money people earn themselves. If the state wishes to spend more, it can only do so by borrowing your savings or taxing more. Now, this is where the shift really begins.

[00:10:48] So before reading Kelton, she she would argue that people believe that. The government needs our taxes, right? So for the government, we the government has no [00:11:00] money apart from is that you would say the money that it gets from us. So attacks is first and it borrows. And then the final step is the government spends.

[00:11:08] So what MMT theorists, the postulating, what Kelton saying is that’s completely incorrect. I will give a credit and say that the vast majority of the population would assume that’s correct, that the government is sitting around desperate for revenue. And the only way I can get it is to tax and borrow before spending.

[00:11:28] So what they introduce here is this stabs methodology. The government spins currency into existence first. So the first step isn’t taxation, it’s actually spending first now Moseler and Kelton argue that’s the case because you couldn’t pay a tax if there wasn’t currency already in existence. So that currency first came from somewhere.

mmt[00:11:52] So the idea is so Mosela is this scene in the book where Kelton goes to visit Moseler? [00:12:00] It is know west Palm beach, palatial house, and Mosley basically she asked him, she says, why does the government need our taxes? And then this is there’s this idea, which I find quite chilling when I read it that the only reason the government wants a tax is to provision itself so that without people paying people, taxes, force people.

[00:12:26] To work, to become doctors, lawyers, judges, police, officers, so that they can pay the sovereign or the enter the government in its own currency. That kind of ticked triggered the Roth body and tripwire because it was like they’re arguing essentially that the governments are doing us a favor.

[00:12:46] They could send us all to gulags and make us work, but they’re so generous and kind to us that they allow us to work to get their currency, and then we can give it back to them in Texas. So can you give us your [00:13:00] take on that tabs versus stabs? Do we text first, does the government spend first and provision itself through texts?

[00:13:07] What do you make of all that? 

[00:13:08] Nathan Lewis: Good. Yeah. It’s interesting that it is communism with Soviet communism, but just like this little veil, because he uses the example of his children and being children. They are required to have chores. They have to do little things around the house and it’s really no different than Soviet communism, but it’s okay because it’s a family, of course, but they have to do it right.

[00:13:32] The kids have to mow the lawn or take out the trash or something like that. And he w he was able to apparently motivate them more by making it a little game. He would hand out a sort of household currency actually is his business cards, but it’s like a currency. He said you can earn my earn money by mowing the lawn.

[00:13:53] But then at the end of the day, you have to pay me $10 of this money. Or else, [00:14:00] presumably there’s some kind of punishment. You go to the little family. Ghoulag right. Yeah, it’s a funny story. And but it’s treated as if it was some kind of like amazing insight into the way things are actually done today.

[00:14:12] And there’s a there, like I said, there’s a history of this there’s these things that have been said along those lines in the past a hundred years or 200 years ago. And in the distant past before the modern venture, the income tax run 1800, a lot of taxes were like this you had, it was, the simplest would be a poll tax.

[00:14:34] Just everybody has to pay $5,000 a year now, or else you go to jail. I also there’s some go to the Gulag year, some kind of horrible punishment. And so obviously people had to work to get their 5,000 bucks or in those days it was announced a or something like that, or else they would be shipped off to the concentration camp, literally prison And it turned out to be a really disastrous tax system because [00:15:00] inevitably there was people who couldn’t make the payment, something happened and they couldn’t make the pay, even if it was very small, right. Even today, if you went out down the street and you said American fan families pay up a thousand dollars cash and you can’t use credit cards, you can’t borrow the money. You just gotta pay up.

[00:15:17] The millions of people would go off to jail. And that’s why we don’t do that way anymore. Every tax we have the day is based on a transaction where the money exists to pay it. You don’t have to pay an income tax unless you have income. Which means you have money to pay the tax because you get paid, but you don’t have a sales tax unless you have a sale, which means you had the money to buy the goods.

[00:15:39] So actually in every way it’s set up there. And if you want to avoid all taxes, what do you do? You don’t work. The reason we have a reason people work is not, it’s not to give the government money it’s to get money from themselves, so they can go to the grocery store, pay the rent and the government that [00:16:00] makes this difficult by taking some of it away and income taxes.

[00:16:03] There’s actually. So there’s actually like a funny long history of taxation in the world where we figured out how to do that. So we didn’t have to put so many people in jail just for the crime of being, not being able to make the payment. Margaret Thatcher actually experimented with bringing back a poll tax and the lady.

[00:16:21] And I don’t know how much it was. It was pretty much over a thousand dollars a year or something equivalent. And it was total disaster there. Riots and Thatcher ended up being kicked out. She lost her post his prime minister, largely as a result because people see you were hot stuff 10 years ago, but now you’re doing, this is really stupid, there’s no reason to do it. So anyway, it’s just funny that there is this long history of taxes like that and how the Western world learned not to do that. And then it pops up Stephanie killers. Oh, this is what we do. 

[00:16:55] Jonathan Doyle: Just on that. I want to, just, as you’re talking, I just want to say to people I’ve [00:17:00] been reading Dominic Frisbees.

[00:17:02] Daylight robbery. And I recommend this book. He’s a great writer and a very interesting human, but it’s called daylight robbery because you were talking about poll taxes going back centuries, they were trying to figure out they used to have a half tax. They used to go, we’re going to text you based on the number of fireplaces in your house in, in the United Kingdom.

[00:17:22] So then people would start blocking up their chimneys and getting us fixated and getting all sorts of, and people that it was well, then it was, we’re gonna, if we can’t tax them on their hearts or their hurts, we’re going to text them on their windows. So this is where the daylight robbery idea came from.

[00:17:39] People started boarding up their windows. To stop being taxed by the number of windows. And they reckon this led to all sorts of emphysema and other problems in London because people weren’t getting fresh air. So let’s not pretend the government over the centuries has covered itself in glory when it comes to this sort of stuff.

[00:17:56] So 

[00:17:57] Nathan Lewis: there’s a really interesting discussion, which which [00:18:00] I’ve only, I only the last two years or so I’ve more fully appreciated. The incredible, amazing invention of modern taxes, 20th century taxes, like the retail sales tax Britain had to do this crazy stuff like charging people.

[00:18:13] Aren’t a windows because they didn’t have a modern retail sales tax. So that a real interesting discussion there. 

[00:18:20] Jonathan Doyle: And we’ve talked about this before, so I referenced people back. I think the first discussion you and I did, where you give us some great stuff on flat taxes In summary. 

[00:18:31] Nathan Lewis: So I do want to bring up, there was two parts of the question I was getting ready for the second part.

[00:18:37] And that is the only that argument before he could pay the taxes, the government must have created the money. You could pay the taxes with. Okay. But then again, it’s that’s it it’s just like a creative kid in the back of the class or something. They don’t, there was no discussion of what actually happens, which is the us government was out of the money creation business until the introduction of the federal reserve in 1913.

[00:18:58] So what were they doing before [00:19:00] 1913? Yeah. That’s a great question. In those days, money consisted of gold and silver coins and there was a U S mint, but it wasn’t paper money. It was, you had to get the silver out of the ground and all they did is it wasn’t. The, it was full weight coins.

[00:19:15] The market value of the coinage was the same as the golden silver container, just like a program. So how would the money come from those days? It came from a gold mine. I was working from and also there were private banks and thousands of private banks like stable currencies, stable coin cryptocurrencies today issued their own paper money.

[00:19:35] And to some degree, this could be used cause relatively reliable government tax office would say I know those guys off I’ll take their bank debts. So there is actually a history about this and we know what it is. And just characteristic of his book in general is that they just have this sort of wiseacre back of the classroom question and don’t even bother with the history of what it actually that’s all right.[00:20:00] 

[00:20:00] Jonathan Doyle: Cause it wasn’t that period from about 1860 through til the start of the federal reserves, I could be wrong on this, but in terms of real incomes and prosperity, it was a pretty good time in American history. Wasn’t it? 

[00:20:12] Nathan Lewis: It was civil work on a stock and the chaos through the reconstruction period that came up.

[00:20:18] But when they, when, yeah, when they, especially soon after the civil war, things really took off, that was when United States went from its sort of westward expansion, which is really a gray area. And there’s really subsistence farming to the incredible industrial expansion we had in the second half of the 19th century where you Britain had been the great industrial leader until then.

[00:20:43] And the United States was just his, a little house in the Prairie is gone to the west with the covered wagon while British were building railroads and steam ships. And that second half of the 19th century, the United States really took the lead because United States had the most dynamic economy.

[00:20:56] You had the lowest taxes. I had the most reliable currency [00:21:00] and amazing things were done in the 1880s. They were building 7,000 miles of railroad a year with hand tools. There’s no electricity hand tools, right? Pick axes and stuff. So laying down 7,000 miles of railroad a year. And know how many miles of railroad did we lay down in the last year?

[00:21:19] 300 meters. 

[00:21:20] Jonathan Doyle: I think us infrastructure, I was reading I think actually it was in Kelton’s book. She said it’s right at a D plus or something at the moment. In terms of some of that infrastructure fatigue, but, so what gives you summary on this tabs and stabs thing? Is this a case of this MMT idea of a descriptive modality by which she’s just saying, look, we’re just describing what’s actually happening.

[00:21:45] Where the government is spending first, do you think that’s what’s happening at the moment? Is she correct on that that the spending happens first so that people have the currency to pay the tax. 

[00:21:58] Nathan Lewis: No [00:22:00] it pretty much. Now you remember that, although you could, you if you just consider the federal reserve to be part of the government and some of the internal accounting of the federal reserve to be like the social security trust fund, it’s an internal accounting firm.

[00:22:15] You can kind of torture things a little bit to make it look that way. But oddly enough, they don’t, that was one of the things I was getting ready for. Right know I think I know what they’re going to write about, but they didn’t, they don’t really go down that path. But if you just take it at face value, like I said, it’s every dollar that goes into the I don’t have to think of the history of the federal reserve, even during some pretty goofy periods during world war one and world war II and some other funny times I don’t think they ever just gave him the money. That’s the principle of central bank independence and another thing is federal reserve is.

[00:22:48] Was founded as a private institution. It was not part of the government. Some people think it did become part of the government in 2013, 2015, when for some reason federal [00:23:00] reserve.org, their official website became fed reserve.gov and the.org website disappeared forever. No, 

[00:23:07] Jonathan Doyle: because we don’t even know who the shareholders are.

[00:23:10] Like the actual list of shareholders of the U S fed is unknown. 

[00:23:16] Nathan Lewis: That’s an interesting question. I’m not sure it’s unknown. I think it’s a, I think it’s the big banks primary deal is, 

[00:23:22] Jonathan Doyle: but yeah, 

[00:23:23] Nathan Lewis: they’re very cool. I about it. I’m not sure it’s a complete mystery, but but often when you look into these things it’s not really what you think it is.

[00:23:30] For example, the bank of England was founded as a private institution, entirely private institution, no fictions about, oh, we’re part of the government. And then it got nationalized in 1940s, 1940. Anyway around the 1940. But if you actually look into it, the bank of England is owned by some like society of lawyers.

[00:23:53] And we, I think about it, I think it’s, I think it’s on the bank of England. It’s a known thing. It’s not my guessing it’s [00:24:00] but the actual shares are held by this like society of lawyer as well. Sounds very trustworthy government of Britain, is it? But it’s really nationalized. It’s just there’s steps in between oh, are there really 

[00:24:15] Jonathan Doyle: well, we can trust that.

[00:24:17] Nathan Lewis: Yeah. And to return to our point I know a fair amount about these things. I’ve written a number of books. Monetary economics and burgers are. And I don’t think there’s one example of the federal reserve, just giving the money to government. There are some examples where the federal or the government would have its regular bond auction to the primary dealer is Goldman Sachs and JP Morgan.

[00:24:40] And within a very short period of time, maybe minutes, the very same bonds, very same. Q-tips ended up on the federal reserve balance sheet. So you say that’s smells bad, but they kept up with appearances. 

[00:24:55] Jonathan Doyle: Just on that, I’m gonna see if I can find this quote that really jumped out at me yesterday was just [00:25:00] before I was finishing yesterday, she was describing this relationship between the primary dealer banks, the treasury, the fed, and she described it as a perfectly choreographed water ballet.

[00:25:13] I’m not sure Jeff Schneider would agree with that. W we don’t want to go down this rabbit hole particularly, but is it a perfectly choreographed water ballet at the moment in terms of reverse repos and the repo market in general and collateral? Is it let’s not go flying down that rabbit hole, but yeah.

[00:25:31] Does the term perfectly choreographed water, ballet resonate for you? It just looks like they’re making stuff up as they go along flying by the seat of their pants and they got a trillion dollars, a pretty big amount of money, million bucks in reverse repos, and nobody said that was going to happen and there’s no plan and there’s what the heck’s going on here.

[00:25:52] Nathan Lewis: And trust us we’re from the government. 

[00:25:55] Yeah. And a reverse repo is literally what it means is the fed [00:26:00] borrowing. Like when you make the money, why are you borrowing my phone? And the reason they do is it actually sucks money out of the economy, out of the system. Yeah. But it’s there a reason why reverse repos even didn’t really exist until a few years ago is because why did the fed reserve to borrow money?

[00:26:18] And so the whole thing is they got this whole making it up as you go along quality. But the kind of, I think we shouldn’t say something about the bigger picture and in which assault takes place. And that is obviously the federal reserve does create money. And if we just assume, forget about some of these subtleties, like who owns the fed reserve.

[00:26:38] And we just assume it, we’ll just call it part of the government for argument’s sake. They’ve been creating money for since 1913. So there’s some truth to that and this money creation because they buy government bonds, especially amounts to government paying its bills with bank notes, coming up spring [00:27:00] break, more or less.

[00:27:01] That’s what it amounts to with a few steps removed, which would be, which is worth talking about. It’s really happened in the last few years beginning in 2009 my, my interpretation and I think events have shown that my interpretation is pretty sound is a funny thing back in the old days before 1960 and for a century before 1960, it was normal banking practice for banks to have about 10% of their assets as cash.

[00:27:29] Literally bank notes, literally gold. Because if they had to make some payments someone said I want to withdraw some money from my account. They had to have something to give them, otherwise they had to have a shortage of the doors of the bank. And so the regular banking practice was to hold about 10% of their assets in cash.

[00:27:50] And then the federal reserve was created in 1913. And one of the functions of it is to settle in our bank payments and thus this cash [00:28:00] became bedrooms or deposits. And so the bank clearing houses, they literally deposited their gold coins, but so that cash was blood reserve deposits part of base money.

[00:28:14] And then what happened after they didn’t, we didn’t, we’re making money on this cash, right? Just like it was, is the exact equivalent of having a shoe box full of $20. For a private citizen and that they were making it 10% of the balance sheet let’s just say that’s a billion dollars.

[00:28:33] And if you’re, you could alone that out at 7% where you’re giving up $70 million, is that right? $70 million a year in interest income if you’re a ambitious young man manager at a bank, you might think of ways to get that seven $70 million or higher. So after 1960, the banks figured out many ways to run down their cash accounts.

[00:28:57] By having this, what they created the money market [00:29:00] didn’t really exist before the money market was banks have only have 1% of their balance sheet in cash. And if something came up, they could just borrow the money from the, from other banks that’s somebody’s market. And it’s just like having a credit card, we only have 40 bucks in bank notes in our world. And it’s okay, because something comes up, I could put it on a credit card and it’s basically the same idea until your credit card get canceled, which is what happened in 2008, banks all canceled each other credit cards and they had to do, they had to make, do with the cash in their till, which would, by that time was almost nothing.

[00:29:35] And that’s why the banking system almost melted down because nobody can make any payments. So bankers got together after 2009, they said, you know what? That was stupid. But the reason we got down that path is because we’re all trying to maximize the profits, right? Because if one manager is conservative and another manager says no, let’s lend out the money and make [00:30:00] $70 million.

[00:30:00] The guy who makes the 70 million bucks tends to win over time, as long as there’s no crisis. So they say, where are we going to have to, we can’t just say, it’s a nice idea. We’re going to have to make it a regulation. So that we all have to do it. And because it’s a level playing field, it’ll be okay.

[00:30:20] And this is basil three, which went into in November of 2010 and they phased that in. And while this was happening, that’s when the banks all had to get their cash levels back up. And that was QE and the first round discount landing in 2008, 2009, they used to, they weren’t well to borrow from each other.

[00:30:38] So they all had to go to the federal reserve and say, Hey, can you loan me some money? And the federal reserve loan with them about $2 trillion or whatever it was. And so in the C in, as this was all happening For the reserve, essentially first they had the discount lending and then they started to buy, they regularized it by buying bonds that was QE [00:31:00] MBS and government bonds.

[00:31:02] So the federal reserve started buying government bonds, a lot of them so that banks would have this cash. And so the the amount of funds that the reserve was buying went from a little bit for related to economic growth, to this big slug, because it had this new regulatory structure and this new, these new needs and the without a whole lot of discussion or theory, the political system picked up on it real quick.

[00:31:31] And at the same time, that’s when Congress Obama under Obama in the recession of 2009, 2010 spent 12% of GDP deficit. Yeah, until that moment, the biggest deficit since world war II was five point something percent. And they just went to 12 because the federal reserve was buying bonds of about the same size.

[00:31:56] And so [00:32:00] is that some somehow without even a lot of rational discussion, they just figured it out right. Somehow in the political system and somehow in Washington there. Cause I don’t think they really could explain it in the sensible way. We’re talking about it here and that is what has been going on until really the present.

[00:32:17] Even at the end of 2019, there was a major shortage of bank reserves. And so in the midst of COVID not only did or there various increases in demand for money but the fed had to pet to catch up. It had to fill that hole. They had to make up that deficit that they had at the end of 2019.

[00:32:40] So they, again, they had a huge slug of money that kind of came out of the fed. And now that’s all been topped up now, today, all these Bazell requirements, Bazell three that began in 2010 were phased into 2019, but even in 2019, they hadn’t fully caught up yet. And so only at the beginning of 2021, they finally got caught up.

[00:32:59] And [00:33:00] now we’re at the stage where we’re done, it was like this one-time adjustment to pre 1960 style bank management. And and yeah, Emma, MMT hat has arisen in that environment. There’s not a breath. There’s not a single sentence in the book about what I just said.

[00:33:19] It’s it’s like the politician is the Washington DC version and definitely Kelton was economist for the democratic party in DC during that time. It’s the DC version of I don’t know why, but we can just spend money like crazy. And the federal reserve buys a stuff and it seems like there’s no consequences it’s like a, it’s just like an amoeba going towards the sugar or something like that.

[00:33:51] There’s not, it doesn’t make a lot of sense. So 

[00:33:54] Jonathan Doyle: the, that was your encapsulation of the [00:34:00] 2008 crisis in about two sentences. One of the best I’ve ever heard it was when you said the bank started canceling each other’s credit cards. That was excellent. It was because often you’re trying to explain the mechanics of the GFC and people are like, but that was excellent.

[00:34:14] Now we should wrap up because I’m going to I’ve got a tribe of lockdown, homeschooling children, all about, all, about to hit zoom at the same time in a few minutes, but I’m going to ask you there’s just in this first chapter, we can talk a little bit about taxation, but she says that the only real issue with NMT isn’t deficits, she constantly says deficits are irrelevant.

[00:34:36] We’ve got to stop thinking about deficits completely. The government’s not like a household that can spend blah, blah, blah. She’s the only limit is she would say inflation, and then she says resource constraints, right? So the quote she uses is she says MMT is not about removing all limits. It’s not a free lunch.

[00:34:56] It’s about replacing our current approach. One obsessed with [00:35:00] budget outcomes, with one the prioritizes, wait. Human outcomes while at the same time, recognizing and respecting our economies, real resource constraints. Talk to us a little bit about MMT and inflation and the idea of what happens when MMT hits up against genuine resource constraints.

[00:35:24] By that it just seems, it seems that advanced economies are becoming less and less productive. So at what point does the expansion of the money supply, the inflationary implications hit up against the fact that there’s just less and less being produced. So over to you, inflation resource constraints, what are you thinking?

[00:35:48] Nathan Lewis: Yeah, that, that was real that, that gets into the second chapter, which it kind of elucidate, so ideas, a little more accurate and a little more detail. What the book really amounts to [00:36:00] is once you say, we can just print the money then, and she goes into this in very overtly, if you can spend the money, but you don’t have to go through all the unpleasantness of taxes and debt issuance, and paying off the debt and paying interest on the debt.

[00:36:16] If you could just spend the money, but not have to raise the money and she uses, it goes those exact words. There’s hardly any problem in the world that can’t be solved by spending money in the first instance, we can all be, we can all have a good job and a living wage and healthcare and schools that probably just as bad as today, but teachers get paid more money, all these things.

[00:36:38] So in a sense, a lot of them, the second half of the book is just a wishlist of things that want to spend money on. Yeah. So it’s the first two chapters that it get into The rationale for all this. And it’s funny because there’s this black and there’s this sort of like good cop, bad cop tone to the book oh, we have restraints, [00:37:00] but then a couple paragraphs later, she’s talking about this federal jobs program that’s going to give employ 12 million people or something like that.

[00:37:09] And she has numbers, her numbers, not mine and a green new deal and the list goes on and on, not right. But I was getting ready. I, these various arguments that have been around a lot, they’ve been around 200 years. People were talking about this in 1807 and I read those books or at least And I was getting ready for things that I thought were going to be in there.

[00:37:31] And the funny thing is, it’s just, it’s not even monetary at all. There’s a book about monetary economics without like hardly a paragraph about monetary economics. What it is Cajun economics or little or post-war Keynesian economics economics of the 1940s and 1950s, which was developed when there was a gold standard system.

[00:37:51] And so their hands were tied on monetary topics. And so it was, they all, they focused entirely on, on fiscal government spending. [00:38:00] And so the idea of resource constraints is that post-war canes in economics and she cites them direct influences. I don’t remember their names, but she talks about them.

[00:38:11] It was very strongly in the United States. It was very strongly affected by world war II and the gigantic amount of government spending. For world war II and the deficits we’re running it 25% of GDP and all the jobs that resulted and and the increase in business and how will these things, and some of the price increases that also resulted because people had a job and their wartime shortages and so forth.

[00:38:40] So basically she says that we can just print money, Willy nilly as long as there’s unemployment, that’s basically like the resource constraint, right? What

[00:38:50] You just go to any hyperinflation country unemployment rate in Venezuela is on a 50% or so. Doesn’t seem to have any they have hyperinflation. [00:39:00] So I guess that’s not really a constraint, is it? But we never hear it. We never hear a breath about any of the many examples in history.

[00:39:08] Very high. It doesn’t have to be hyper inflation, but very high inflation and unemployment at the same time, like the 1970s United States where all that Keynesian stuff blew up because they could no longer rely on a stable currency was not assumed anymore. So that’s it was, and what I think we can, we could talk about this in greater detail sometime in the future, but it was really interesting to see that it’s, the arguments were not monetary at all.

[00:39:35] They were just, it’s just wishful thinking. As long as there’s some unplanned out in her later on the book, she says we’re going to hire all the underemployed people and give them jobs. That’s better government. We’re going to hire 12 million people and that way, and we’re going to pay them $15 an hour and give them healthcare benefits and daycare and all this, all these nice goodies and essentially the private [00:40:00] market too.

[00:40:01] To get away that labor from the government is going to have to pay more than that. Yeah. That’s the idea that she presents later on. So basically her version of resource constraints is if there’s any people in this federal employment program, which she says will have tens of millions of people in it in the first instance then there’s pretty money Willy nilly, for example, for the federal unemployment program is not going to have any, it’s not going to have any consequences.

[00:40:29] And again, it’s just put out there just totally I was all surprised, right? I thought you would hear some interesting but wrong arguments, but it was just, it’s just like a it’s still a fantasy, but it has an interesting case. I dunno of the intellectual history of American.

[00:40:49] Arising out of world war II and as it existed in the 1950s, which he draws on a number of places throughout. Okay 

[00:40:54] Jonathan Doyle: Let me ask you, we gotta wrap up, but I’ve got to listen to questions that came in during the week that [00:41:00] people wanted to ask you some, ask you those in a sec, while I bring them up, what is your off the cuff analysis of where this is going to head?

[00:41:10] Let’s wait if we keep drinking this Kool-Aid with, where are we going? For me as a neophyte, how it doesn’t just distort markets drive inflation and it just, the can gets kicked down the road indefinitely to some kind of implosion. Tell me what I’m missing. Like where do you think this MMT thesis eventually goes?

[00:41:36] Nathan Lewis: That’s an interesting question. Cause it’s w we’re right there now. And like I said my interpretation, my, and I think this is being more broadly appreciated too is that we had this one-time adjustment to a new banking regulatory system where we said we made rules that said banks have to own a lot of cash and the cash didn’t exist before.

[00:41:59] So we had to make [00:42:00] it or else is it’s like musical chairs at banks. All of these break had required to sit in the chair, but it didn’t exist. So central banks had to create the money. And that’s basically what happened from 2009 to really just the beginning of this year 20, 21.

[00:42:16] And along the way, they bought a huge amount of government bonds and this indirectly did finance. Approximately $5 trillion of debt it’s pending by the United States government. Some of the things that are going on in Euro zone with like negative interest rates and some things are going on in Japan are doesn’t quite fit this model of banking regulation, but it fits pretty well, the United States.

[00:42:40] So now we, at that point where We we can’t just finance double digit deficits with money printing. At least not in the, at least on the prior model there, there [00:43:00] actually are some ways to get away with it. And and Japan is doing them. Basically just stuff you just stuff more on the banks over the, over their regulatory requirements.

[00:43:09] You just twist their arms to make them do it. There are things you can do but we’re now at the point where, and it’s actually potentially quite explosive because it’s what you find when you look what really happens in the real world. It’s not a thing like where if money creation goes up 10% and nominal GDP goes up 5%, then you get, there’s 5%, too much money and inflation goes up 5%.

[00:43:42] How the monitor’s payment, it doesn’t work like that. Or the value of the currency, the value of dollar stops 5%. If it, at some point, if people see where this is going, they’re going to say get me the heck out of here. And that is when you can see currencies drop in value a lot. [00:44:00] And that’s what happened in the early 1970s.

[00:44:01] In the early 1970s, Nixon abandoned gold yesterday was the 50th anniversary, August 15th, 1971. And actually it actually, he had technically abandoned in 1968, the collapse of London gold pool, but he was just saying, all he did is he said on TV, we’re just not going to worry about that anymore. The dollar is linked to gold at $35 an ounce, the Bretton woods system, the gold standard. We’re just not going to worry about it temporary. 

[00:44:30] Jonathan Doyle: Yeah, but he promised us it would be temporary. 

[00:44:32] Nathan Lewis: And it actually was. That’s an interesting, there’s a lot, there’s an interesting discussion there, but we’ll have to skip that now.

[00:44:38] And that it it was the spectacle of the political systems saying we don’t care anymore. And the value of dollar went from $35 announced in 1970 and 1971, when he made that announcement as about $45 an ounce. And it went to about winning [00:45:00] 80 in 1974. So if you just do the math it took five times more dollars to buy an ounce of gold, which means pretty much the dollar fell about 80% of value.

[00:45:11] Five to one, a dollar was worth 20 cents, right? Mostly because of the implosion of conflict you call it’s called confidence. It’s much more raspy than that. They just see the currency being abandoned. The currency is going down and they say let’s, I’m out of here.

[00:45:29] And that obviously that, that dumping in the lifeboats causes the currency to decline more and so on and so forth. So just the just going it largely amounted to just Nixon. Good. Just going on TV and just saying that the federal reserve really wasn’t printing very much money in those days.

[00:45:50] It was a little bit, but not much a little aggressive, but not too much. And so I if we keep talking like this, there’s a [00:46:00] potential for that kind of event to happen. And then the next thing that happens is. The difference between them in 1970s. And today is 1970s. Debt to GDP was about 35%.

[00:46:12] Now we’re at 130 today. And and the deficit was maybe like 1% of GDP and we’re talking you it’s going to come down, but we’re talking about 5% plus there’s this huge spending package in us Congress, which could bump it up to six, seven, 8%. And what really kills currencies, the way governments get into hyperinflation is something like this happens, right?

[00:46:36] The currency falls out of bed and they’re no longer able to finance a deficit. No one’s going to buy their bonds, or at a price. Interest rate that’s unacceptable, deferring. It becomes very difficult. And then they step up and say, okay, we’re. Trillion dollar short or trillion dollar storage.

[00:46:57] We can’t sell the bonds. [00:47:00] We’ve got all the we gotta make payroll, you gotta pay the military, you got to send out social security checks. Where’s the money gonna come from. And they go to the central bank and they print the money. And it wasn’t really a plan. They one got it. There was no cabinet meetings.

[00:47:12] Oh, you know what, let’s have hyperinflation. They dealt with the difficulties of the day and then what happens next is everyone sees, not only did they have this earlier collapse, but now they’re printing the money to pay for the deficit. So then there’s an additional collapse. So that’s the kind of situation that.

[00:47:36] Whether it be United States or Britain or Europe or Japan, or we’re around it. Doesn’t have to it doesn’t have to happen this year, but th there’s a risk of that in the next, let’s say three years. 

[00:47:48] Jonathan Doyle: Yeah. That’s what I’ve been thinking. Let me ask you these two viewer questions.

[00:47:53] First one was you’ve been asked MNT implies that a central bank will [00:48:00] supply base money to meet the demand for it. Thus, conceptually implying that gold could remain stable if a perfect match, what do they get wrong with their insights? In a sense, yes. If because when the federal reserve buys bonds and expands the monetary base it does.

[00:48:23] Nathan Lewis: Indirectly finance the government they don’t handle shoe boxes a trash bag full of $20 bills to the government, but the government issues, the bonds, and it comes back into the government disappears from the publicly held debt by going on a third reserves bouncy.

[00:48:39] Yes if you call that monetization process, the money process MMT, which in a sense it sorta is then yeah, the federal Reserve’s job is to have just the right amount of MMT, to monetize just the right, the amount of debt in the past to maintain [00:49:00] a goal standard system, they did this under the gold standard system.

[00:49:02] The monetary based in the United States, before the fed, but between 1775. 1900 increased by over 160 times. So you can have that monetary expansion on a gold standard system or in, in the context of floating currencies that aren’t too shabby as we had for the last eight years. So yeah, that could work but the critical point and George Selgin and Cato Institute wrote a book about this is essentially central bank, independent central banks have had the independence to say, we want to create this much money and no more, because in our good judgment, that’s the right thing to do.

[00:49:40] And they don’t have very good judgment. But the point is there’s no direct connection between that process and the government financing process, right? No one in the government said we want to have pretty subsidized daycare and therefore we’re gonna twist your arm to create a hundred billion dollars to pay for it.

[00:49:58] It’s [00:50:00] when you ha when that starts to happen when central bank independence is lost, that’s when you can get into big trouble. And that’s essentially what the book’s all about. Isn’t it, right? 

[00:50:10] Jonathan Doyle: Yeah. Are we there would you say, do you still see JPL and friends as truly independent?

[00:50:17] Nathan Lewis: That is what this reverse repo thing is about. They were on the schedule to print that type of they were going to tape her later, but let’s just say for the, until the end of the year, there’s not allowed taper expectations before the end of the year. There was this treasury draw down treasury spending money had already had on the books and then the QA that was on the schedule and then which they have been doing.

[00:50:48] And it was it amounted to Two and a half million dollars during calendar 2021. And that was money that was essentially created [00:51:00] out of nothing. And like I said, it’s like an amoeba going towards the sugar, right? In the environment where the fed reserve itself on pretty much like the official agenda, this regular schedule said, we’re going to create two and a half trillion dollars out of thin air.

[00:51:16] And the government would benefit from this indirectly. Congress just happens to be running all these crazy spending programs this year. And what has happened with the reverse repo is. They managed to cancel that out. So th they actually did create the money under the official agenda.

[00:51:33] And then they took it back out with the reverse repos, which is like this little trick behind the scenes. And and now they’re talking about tapering and all this stuff more aggressively because they realize that they’re in trouble. And so we’re right at that moment, right?

[00:51:49] Over the next 12 months, maybe where Congress thinks that everything good and the fed saying we changed our mind and they’re [00:52:00] acting on it. But even

[00:52:04] they’re doing now they’re gonna, they’re going to try to re they’re moving toward wriggling out of this QE commitment tapering, it’s kinda like this long drawn out process, even with the tape they’re planning to create trillions and trillions of dollars more money. Let’s say at least.

[00:52:18] And so it’ll be interesting. And they’re gonna, they’re gonna, they’re gonna come under, they’re gonna come under pressure from Congress. All all the discussions that happen in DC. Cause all of DC is just a bunch of people talking to each other in January 

[00:52:33] Jonathan Doyle: to watch like that’s the primary way.

[00:52:35] This with no political partisanship president Biden seems to be in quite extraordinary cognitive decline. So it’s almost as if these confluence of forces, it’s almost that perfect storm where there’s, it’s quite a seismic moment I think. And you’re right over sometime in this next three years, the number of times people ask, I guess people like you and me, [00:53:00] when do you think it’s going to happen?

[00:53:01] Oh, next Tuesday at 4 36, the markets will collapse now. So let me ask you this final question. From one of the listeners said money is not well. Why do M T adherence not understand this? I’m wondering if the main currency is not wealth, but the question is phrased as money is not wealth. Why do MMT adherence not understand this?

[00:53:24] Nathan Lewis: Actually MMT as presented by Kelton goes along those lines. It’s it’s a confused argument, but she makes a similar sort of arguments like it’s just it’s paper. It’s just computer entries. What really counts is people showing up for work and making goods and services, and we have all these unemployed people.

[00:53:46] So why don’t we just, why don’t we just fill in the numbers and print the money? It’s all this imaginary data so that we can put these people to work. That’s like a whole book right there.[00:54:00] 

[00:54:04] Jonathan Doyle: Version one. 

[00:54:07] Nathan Lewis: Yeah, it has. No, the problem is that money in the way it works? It’s a real thing in the real world. You know what? Just get the backup stuff out of thin air, like writing a comic book or something. Yes. I’ve writing science fiction. People get ready to get into trouble when they do this.

[00:54:25] Jonathan Doyle: Yeah, it takes it. It takes me back to the reason I got into this when I was running those marathons a year or two ago, listening to George Gilda’s book. I think it was life after Google maybe. Or there was a great 

[00:54:38] Nathan Lewis: runner by the way. 

[00:54:39] Jonathan Doyle: Yeah. He’s still just out there. He’s I saw a video of him speaking last week and his thesis around the relationship between that money is and its relationship with time in terms of.

[00:54:52] The thesis that regardless of CapEx, stoled extraction costs remain relatively stable. And [00:55:00] the idea that real wealth real money has a relationship with the time involved in its creation, where a couple of key strokes on Liberty avenue can create a trillion dollars in a fraction of a second.

[00:55:14] It’s interesting. Just how divorced from the classical understanding of wealth and money we’ve come. 

[00:55:23] Nathan Lewis: Yeah. It’s interesting. I think the fed re people, the fed reserve actually read my stuff because. With this reverse repo thing and some other events that have happened over the years.

[00:55:37] I just wrote about that. It’s really interesting that they’re taking this, they’re taking this action as if I was in a meeting in Washington, DC, and we talked about it, which never happened but they’re just reacting as if we did. Because I was saying that’s these guys are in trouble.

[00:55:51] If they don’t cut the stagnant stuff out in a Jiffy there might be problems in poof [00:56:00] for bursary pose appear. But 

[00:56:05] Jonathan Doyle: I love listening to you and Jeff Schneider, I listened to, I don’t know if you’ve heard Jeff’s podcast with a meal Kalinowski is just brilliant. And I listen to you. Sometimes I listen to Jeff and the dark arts of the repo market is just a it’s the ne the nether worlds of shadow finance.

[00:56:21] It’s fascinating stuff like really is. I would, I will not pretend to say I understand it’s a, it’s many permutations, but it’s a crucial topic. All right. So that’ll get us through this week, as we’ve opened up the Pandora’s box of the deficit myth. We’re going to have Carol on Carol Sokolowski on Friday night and you, and I might do another episode next week.

[00:56:42] And just, I was going to say we do a chapter a week and I’m not being facetious, but we can probably knock the rest of it over in an episode. I think I think 

[00:56:51] Nathan Lewis: when, once you get past the second chapter, which goes into the rationale is like why we can print money Willy nilly once you accept that, [00:57:00] Then, of course, you’re going to have government spending program for every possible thing under the stars.

[00:57:04] Yeah. 

[00:57:07] Jonathan Doyle: Apply the ten-year-old thesis. One of my daughters is 10 and I’m like, if I explain them in T to her when she says that doesn’t make sense, I know probably I’m probably under something. So Nathan has always thank you so much for your time. You just bring such a great breadth of knowledge.

[00:57:25] And I know that there’s such depth in what we’ve discussed today and what you’ve brought. So thank you again, and we’ll look forward to having you back on next week. 

[00:57:33] Nathan Lewis: Thank you. 

[00:57:36] Jonathan Doyle: Why everybody, Jonathan, with you again, listen, I really hoped you enjoyed that. There’s so much depth and so much quality. Every time we get Nathan on the show.

[00:57:43] So I really hope you enjoyed it. Please make sure you’ve subscribed wherever you’re seeing this or hearing this. It’d be great to keep sending you these really important discussions in interviews. If you want to get on our regular list, just go to supply side podcast.com and you can pop [00:58:00] your details in there.

[00:58:01] At the time I’ve just recorded this in a few days. We’ve got Mr. Kiril Sokoloff coming on the show Friday night, one of the most respected and well-known macro investors of the last decades. So excited to have him on the show. So please make sure you’ve subscribed so we can get that episode to you.

[00:58:18] That’s it for me, we’ll see for the next episode.

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