Unpacking Modern Monetary Theory w/ Warren Mosler

26:46I'm out here alone on this, okay? which I verified at the last talk I had in front of an international group. I said, does anybody else understand? You'll know. So, all right. But our debt to GDP ratio with COVID went up dramatically from like 50 or 60 % to 120. But what went up even faster is the debt held by the public, because a lot of that debt is social security and things like that, which doesn't make any difference, doesn't have any effect on the economy. But the debt held by the public went up three times from like 35 % to 105. Okay, so now I look operationally back to the core understandings of MMT.

27:26How do monetary operations work? What does the Fed actually do when they raise rates other than tell everybody? What things do they do? You know, do they just sit around and rates go up? What they do is they start paying more interest on the public debt that's outstanding. And a lot of that now is in the form of something like$6 trillion of the$25,$23 trillion held by the public is in the form of excess reserves of the Fed because they bought Treasury securities and what they call RRP, which is like just money people have at the Fed that earns interest. So they pay more interest on that pool of dollars.

28:05And the Treasury pays more immediately on their new Treasury bills. There's auctions every week. There's new securities that come out every week. sure that the only thing that changes from the government side of the ledger is deficit spending goes up to pay more interest on the 23 trillion of public debt held by the public. And the impact of that is three times what it was in the last cycle. It's always happened, but the public debt used to only be, you know, a third of what it is now. And so, yes, they paid this interest. And I used to say that had a big effect, and it did. But now the effect is three times.

28:43It's been magnified. And so now a year ago, I said, okay, with debt to GDP this high, we are just going on a wild spending spree of deficit spending every time the Fed raises rates. When the Fed raises rates, that's what they're doing. They're causing the public debt to go up. They're causing the deficit to go up. And right now the deficit spending is something like 7 % of GDP. That's a very high deficit. It had gotten up to 15 % for COVID, which was like World War II, was very high. But then it collapsed. As soon as people went back to work, they stopped collecting unemployment insurance. We had all these counter-cyclical reasons why it all came down.

29:22So it was one-time things that went away. And it had gotten down to 3 % or 4%. And the economy was collapsing. We had two negative quarters a year ago. and then the Fed started raising rates because of the inflation and the deficit started going back up. Right now, I think the interest expense is substantially higher than the military budget, which also went up, by the way, which is almost$900 billion. I think the annual rate of deficit spending on interest, when you include the amount the Fed's paying, is up to$1.2 trillion. Now, if we left rates at zero, it would have been on the way to zero.

29:57Instead, it's$1.2 trillion and climbing and it accounts for something like half of the deficit spending. And they're going to be raising rates again, and that's going to add to the deficit spending. And that adds to demand. It adds directly to people's income, to your savings, your financial assets, and supports the economy. Deficit spending always supports the economy. So they're raising rates. Yes. It's juicing the economy. Right. They're like drilling holes in the boat to let the water out. Something like that. I'm trying to come up with the right analogy. Yeah, the right analogy. Growing kerosene on the fire or something.

30:31Yeah, maybe that's it. So, but in every, do you think that they know this and they're just not saying it? Because the entire point of this is to be hitting the brakes on that. Right. They've got the brake and the gas mixed up. I don't think Chairman Powell either knows it or will consider it. Somebody asked him about the fiscal effect of deficits, which is what this is. Yeah. Fiscal impact. And he said, we don't look at that. That's up to Congress. We just look at the monetary side. Now, that's a little bit odd because they're the ones causing it directly. Now, so the Fed just, you know, at their meeting, they've unilaterally and mostly at the direction of the chairman.

31:13Increased deficit spending to something higher than the military budget. OK, without a vote of Congress or anything else. And it increases spending to fight inflation. right and and you know what's worse is you know i'm a progressive economist uh there this money interest goes only to people who already have money and in proportion to how much they already have so it's the most obscenely regressive form of juicing the economy you could possibly imagine so how so how so because they own like a liberal why is that because those people own treasury bonds because they are they have uh you know i wrote i wrote a book i caught i use the word innocent fraud that i got from john kenneth gulbright which was his previous from his previous book it's kind of like more damning to call them ignorant than to call them you know having done it by design and so i'm going to say they're doing it out of total ignorance if they want to argue with me and say no i'm not that stupid i knew i was doing this by design fine go to it.

32:16But I think, but you're right. That's the question. I, from the people I've spoken to, which has included meetings at the fed, you know, not, not in the last few years, but before that, I think it's out of ignorance. I don't think it's out of design to do this. I don't, I don't, I've never had any sense of this conspiracy theory type of thing where they're trying to help their constituents. I've met with Chairman Bernanke. I I found him to be entirely like honest and transparent and, you know, trying to do the right thing. But of course, incapable because he didn't have the understanding of even how the Fed works.

32:54So I wouldn't call him competent in that source, but I would not call him, I'd call him like a good person. Maybe like a, you know, a B student who studied real hard and got A's and is trying to do the right thing, serving his country. and I wouldn't question his, I mean, his integrity and his, it seemed to be outstanding. And the same with Chairman Yellen when she was there. I've met with her and, you know, very high quality person. But in terms of monetary operations, I mean, you wouldn't hire any of them to make coffee in your office type of thing. You just don't know. It's not a world they've ever been associated with.

33:31Which is kind of shocking to even wrap your head around. I want to ask a question. We have a question related to this exact point. from Harry. You point out that each rate hike from the Fed will tend to increase the flow of funds from the government sector to the private sector, through what you just explained. So rate hikes might be net stimulative. The question is, is there a limit to this process? Okay. So I was in Argentina a year ago at the central bank. We were invited there. And I walk in, he says, you know, I've been following you for 10 years, so you don't have to introduce yourself. That was kind of nice.

34:03And I pointed this out in pesos rather than dollars, because their interest rates, they just raised them to 30%. And all these pesos they're paying, it was like 20 % of GDP. I said, they're going straight into the foreign exchange market and taking the currency down and causing your inflation, which causes you to pay more interest. So you're in the same kind of spiral I was just talking about. He said, well, yeah, I know. And his associate had some mainstream paper by Sergeant Wallace from the 80s. He said, this shows the same thing, that when debt to GDP gets too high, then you can't use it to fight inflation because the fiscal impact dominates.

34:42He said, but, you know, we're under the IMF umbrella. We just borrowed money. We've agreed to keep their interest rate higher than the inflation rate. So we have to keep doing this. I said, OK, I guess it's, you know, it's your country. And so after we left, the inflation rate went to 40. So interest rates went to, they raised rates to 45. and then inflation goes to 50 and they go to 55 and inflation they had gone to like 70 and they were at 75 and then i just saw inflation was at 100 and they just raised their rates again to 80 or 90 and you say like where does it end yeah well that's the question if you keep doing the same thing and it's not having an impact then and their their unemployment keeps going down so it doesn't cause a recession flooding the economy with money doesn't cause recession now there wasn't a single forecast a year ago that didn't say we'd be in recession today, right?

35:30And you had the leading indicators and the yield curve and the stock market peaks and all these things that tell you you're going to have a recession. These are all market forecasts. All those prices are in different levels of market participants who truly believe that the rate hikes will cause a recession. Otherwise, the prices wouldn't be there. When you see interest rates lower as you go forward, That's because these people buying and selling rates of money at that price. Both sides have this belief that these rates are going to cause recession. And if they don't, the Fed will keep raising it until they do cause recession.

36:07And it's going to be even worse. And that's the path we've been on for a year. And it just hasn't happened. It's happened the other way. And I think it's a huge case of confirmation bias. And they start looking at things along the way. the ISM for manufacturing dropped two-tenths or something. But then it goes back up. It's not Fed rate hikes that are causing the recession. What would cause the recession? Do you not see one happening? And if we do, what is the cause of it then? Well, I look at the last recession, 08, big one. COVID was different. Everybody just stayed home. But 08, the deficit had dropped by 2006 to 1 % of GDP, at which time I wrote, this deficit's too small to support the credit structure and I would expect GDP to start decelerating and that's when housing started decelerating and everything else.

36:58They just let the deficit get smaller and smaller because when you're in a growth phase, revenues go up because people's income goes up and they pay more taxes and transfer payments go down. And so and at the same time, the Saudis decided to raise oil prices. They set their OSPs higher and it spreads again benchmarks higher and oil prices started going up. And finally, when oil got to 155 and the deficit was down, now when oil goes up that high, it had gone up from, I don't know, 40 or 50. It's like a big tax on a consumer that gets sent overseas and it doesn't get spent. It's a big chunk of unspent income.

37:37So it's like the government, it's like a tax on a consumer and everything collapsed. And then the weakest links are Lehman and Bear Stearns and leverage real estate, it all fell apart. And it didn't turn around again until March of 2009, when finally there was enough of a stimulus package. So the deficit got up to 9 % of GDP, which was enormous. And at that point I said, okay, just go buy stocks and play golf. Because with a 9 % deficit, that's a huge tailwind, fiscal tailwind, you know, and it doesn't matter what they do, it's going to get better. And then we had other things, you know, a few years later changed, modified things a long way.

38:15But so it's been the fiscal cycle. So under Volcker in 79, same thing happened. He starts raising rates.

38:26And what I'm saying is the rates exacerbated the inflation. They caused prices to go up more, partially for what I told you, but also they raised costs of doing business, which you're doing today. So they, it adds to inflation in two ways, one, the cost of doing business and the other way through just direct spending. And so in the cost of doing business is what you call forward prices, like on the commodity, when they raise rates, the forward prices of all the commodities go up. It's a direct price increase. In fact, they go up continuously at the rate, at the policy rate, which is the academic definition of inflation, continuous increase in prices.

39:01That's what happens in the forward markets immediately with rate hikes. It's like that is inflation under the old academic - But he gets credit for killing inflation. So what happened? So the inflation was running like 12 or 14 percent and the government budget deficit was only running at six or seven percent. Today's level. That meant the real value of our savings, our financial assets, the money supply, if you want to call it the core net money supply, was contracting at six percent. It was like running a six percent surplus. The real value of the public debt was dropping. that's a huge fiscal tailwind contraction and the whole thing collapsed like we've never seen before because that was like a budget surplus like you know larger than the ones we had at the end of 2000 at the end of 1999-2000 which caused a major collapse okay that wasn't even the larger one and uh and so if you want to say the rates caused the recession you'd have to say the rates caused the inflation, which took away the real public debt and caused the crash.

40:04Now, let me give an example for people listening about what I mean by the real money supply. So how inflation causes a money shortage, right? If you can go shopping with$200 in your pocket at today's price is fine, but then if prices double, you have to go shopping with$400 in your pocket. You have a money shortage. If Apple computer has$200 billion in cash that they think they need for their operations and prices double, they need$400 billion in cash. The money supply core needs of the economy, which isn't a technical term, but go up in proportion to inflation. So it creates a shortage of transactions, money of net financial assets.

40:44If you've got so much in your savings saved up for retirement and prices double, now you need that much again. Now you're short money, you have to go out and work to earn it or do something. But your money has been taken away from you. And you've had people say, inflation is a tax that takes money away, which it does. It disappears. The value disappears. And people work because they need to accumulate the value behind that money. And so that inflation in the 70s created a collapse in the real public debt, public debt adjusted for inflation, and just took apart the economy. So it seems like you're saying that the business cycle, if you want to understand the business cycle, we have to pay attention to the fiscal side, not the monetary side.

41:26the fiscal side, and what our deficit is or surplus is drives what happens in the economy, not monetary policy. Well, they both do a little bit. I mean, to some degree, and it depends on what they are, but when you get a budget deficit this high, it's going to dominate any differences in propensity to consume between borrowers and savers that might give the monetary policy some effect. If the budget deficit was now one or two percent, I'd say, we're in trouble. It's not going to cut it. You have to look at it in the context of everything else that's going on. If we were in a good economy and suddenly oil prices double, consumers getting crunched, I'd say good chance we're going to go into a recession from this.

42:12So you have to look at the magnitudes. Right now, the magnitude of deficit spending for a non-war scenario is unprecedented. Non-cyclical recovery. We're not recovering now from with unemployment at seven or eight percent where we need to run a seven or eight percent deficit. Unemployment's gone to a 50 year low after a year after they forecast a recession. How does their narrative explain that? Yeah. My narrative explains it precisely. Powell is asking, MMT theory says that in case of inflation excess, money supply can be removed from the economy by raising taxes. This doesn't seem to be politically feasible.

42:53Doesn't it invalidate the whole MMT approach? Well, MMT is not an approach. It's an understanding. And what it does is that's a derivation of the understanding that if you think the problem is spending is too high, you can slow down spending by raising taxes. That's one way to slow down spending. So I don't think anybody today thinks the problem is spending is too high. They think prices are going up, which they call inflation, which they then subliminally say that's because spending is too high. If we had less spending, we wouldn't have this inflation, this thing we call inflation. Fine. If you want to reduce spending, raise taxes.

43:34But it's hard to say that excess spending was causing this, particularly with the supply shocks, with the oil price increases, with, you know, what's going on in housing. You have President Trump deciding that Canada is a bad country and they need to be punished because they're not charging us enough for lumber. It's like, okay, I'm not going to send you shopping for me anywhere. And so he puts a 17 % tariff on lumber and lumber prices go up. And so housing prices go up because that's the cost of building a house. So then President Biden comes along and says, you know what? They're still charging us too much.

44:12I don't like it either. puts another 17%. So now we have 34 % tariff on imported lumber. And so lumber's up at whatever it is. And they say, okay, we have inflation now and we need to like take money away from people to get the price of lumber down. It's like, what are you trying to do here? So if everyone is spending to drop off, then under the way you see it, we'd still have all of this inflation for other policy reasons. If we're going to raise prices through tariffs, which we did across the board. You know, I forgot to mention that before. Part of the inflation is from these tariffs. And they're both parties have just been behind this silly thing.

44:51Moving manufacturing back, that all drives the prices a lot, right? If we're going to respond to that by taking people's money away so they can't buy these things that we produce domestically to crunch our domestic prices, which is what we were doing with the tariffs to support domestic prices, now we want to bring them down by taking away people's money. we have an incoherent policy here we have a total contradicted policy and you might be getting at the heart of one of the questions that comes up all the time is if this isn't an experiment or an approach and it just is the way it is yes why do so many people fight back about it and feel so charged up about the issue if this is just the way it is and why are we always taught that it's different because they don't want to give me the satisfaction of being right aside from that they're waiting for me to die i'm 74 hopefully a couple more years and then they'll then they'll be okay with but aside from that why do you think there's there is no i don't know it's been a mystery it really is and uh it's it's i've i've done a lot of things and when i was a fund manager from 1982 to 1997 for 15 years.

46:06I'm not promoting my fund or anything. I don't run it. I've been out of it longer than I've been in it. But we had the highest risk-adjusted returns of anybody. I didn't have a losing trade for 15 years. And the point of saying this is after 14 years, I'd come up with an idea, and nobody liked it. Nobody liked any of the trades I had for the first 14. And even after 14 years of winning trades, I still didn't. No, that's not going to work. I'm not going to do that. so it i'm kind of used to the idea that when i point out something obvious it just gets denied and i just see that is it who benefits who benefits by the current system so if the system is different than everyone thinks it is and you talked before about the implications and viable options that are not pursued if you don't acknowledge this yeah so talk to me about that so who benefits from the system now and how would it look different under so if if it was acknowledged and understood and people took a clean sheet of paper approach to policy i think the real wealth of the nation within a couple of three or four years would double now there'd be a fight for who gets that you know if it's public transportation oh well that's going to go to lower incomes it's going to be more super yachts you know there'd be maybe some struggle but on that you know this rising tide lifts all boats it's just maybe some would get lifted more than others And so people would be unhappy with that.

47:26But everybody gains that I know. Maybe bankruptcy attorneys lose. I don't know. But it's nobody that you would consider part of this current debate that's keeping it from happening. So the pie gets bigger. Yeah, yeah, yeah. And do you think there's an assumption that, a political assumption that it would redistribute wealth? Is that what the fear is? it might be but that can only come from not understanding that it's it's growing the pie and not redistribute not cutting what they're doing is cutting it and redistributing doing both i'm just growing it and they don't do it i mean there's some concern that uh the earth can't handle it on a resource basis but it can all be non um uh you know disruptive type of growth in terms you know it doesn't none of it has to be disruptive to the environment or the air quality or the temperature or anything.

48:21It can all be directed to promote that. Look at what happened with COVID within two weeks. You could see China from space for the first time. Yeah. Right? Emissions dropped. Extraordinary. Yeah, 50%. All right? So like we won the war against global warming. You know, none of these temperatures were reversing. And it was all done by, what do they call it? Non-essentials. We gave up non-essentials. There was enough food. Everybody had a place to live. It wasn't like there were any kind of privation of any particular kind to note of. And so what did we try to do afterward? Did anybody say, okay, look, let's bring the economy back.

49:03Except that we were bored, but otherwise, and people, there was a horrible health tragedy. Was there any discussion about, look, we've won the war against climate change and everything else, so let's bring this back in a way that doesn't get us back to where we were. No. Instead, we just went full speed ahead to get us back to where we were. Missions are now worse than they were before. And now we're talking about how much it's going to cost us to get them down to stop growing and then maybe go down 5 % over the next 30 years. We were already there. So, like, how much political will is there actually to do this stuff?

49:35I don't know. But if you give me the political will and tell me what it is, I can tell you how to get there. Are there conditions? So could every country do this? Are there conditions necessary for MMT to work? work well MMT isn't something that works okay all right sorry so are there any constraints yeah so look any country can sustain full employment if it wants to any country there's no reason you can't do that you know employment is a cost not a benefit you gotta go to work and do stuff you know it's like I remember when when Greece uh problem first hit the the European Germans or say we're saying things like well you know the greeks are lazy they don't want to work so what's your solution oh well we're going to put them all out of work it's like okay like what are you doing you know there's no like coherent discussions about these things there's no logically consistent discussions so um do you have to do you have control over your current i mean do you have to have some sort of you know are there currency issues are there you know if your funding isn't in your currency are there any let me give you a mainstream fundamental.

50:40The real wealth, what is it? It's everything you can produce domestically that it adds to your pile of stuff, goods and services, right? Everything you can import adds to your pile. It makes it larger. Everything you export makes it smaller. That's your real wealth. All right. Your currency is a numeraire, so you can value it and assess it. It affects the distribution of who gets that real wealth. You know, I used to say in Australia that there were boats out in the harbor. Nicole would leave. And it was a new university of Newcastle, Bill Mitchell. The coal gets loaded onto the ships and it goes to Hong Kong and they empty it.

51:21It comes back full of television sets. And, you know, Australia's real wealth is everything it can produce domestically minus it loses the coal and then it gains the television sets. and it doesn't really matter what level your Australian dollar is, what your deficit is or anything else. Your real wealth is going to be whatever you can produce plus what you import minus what you export. And I said, but what all these numbers do is they're used to determine who has to dig the coal and who gets to watch the television sets. Okay, who in South Africa has to mine the gold and who gets the men's suits that come back from London.

51:59Okay, so these are all these distributional issues and they are determined by public policy continuously, then they can be adjusted. But if you stick with your fundamentals, which is how do you get your domestic output as high as possible? Well, you want to have everybody working. So anybody who's not working, you're losing that real wealth. Okay? Real terms of trade, you want to be able to, the reason to export is to import. Because when you export, you're sending things away. When you import, you're getting things in. You want to maximize your real wealth. You want to get the most in terms of imports for your exports.

52:33These are just fundamentals. They're the oldest economics textbooks, and they're universal. And you can call it MMT, but it's no reason to. It sounds like it's common sense. So when you look at the real world, any country can optimize its domestic production with domestic full employment, no matter what the IMF or anybody else tells them. They can then optimize their real terms of trade, exports, imports. They can do that. But they have to understand how the system works to be able to use it to their ends that they want to use it to. So Vince is asking, Warren, what should one's portfolio look like in an environment such as this, where the Fed keeps wrongly raising rates to fight inflation and the government keeps indexing higher?

53:20So look to the stock market in Argentina. sorry you know it goes it's sky high it's up 500 or more well it's in pesos right what are they worth i don't know maybe nothing but the number goes up so you can say that about the u.s stock market if they keep doing this they're adding earnings and income to everybody which includes corporate earnings and they're all forecasting lower corporate earnings i don't believe it now maybe s p 500 but if you look at the corporate earnings as a whole they're going to go sky high with all this deficit spending. And the numerical value of the stocks would go up.

53:57But is it going to buy more? Is it going to stay ahead of inflation? Because they're also creating inflation. Don't forget, like when you pay interest, it's kind of like a stock split or a stock dividend. You're just paying out more of the same thing and giving it to everybody. You're diluting it. You know, and the value goes down, I guess, unless you're Tesla or something. But for the most part, every other case I've seen, the value goes down when you pay a stock dividend or do a stock split, right? and i guess there's the last time they did so um uh so from a nominal point of view investment from a real point of view how do you ensure your return is going to keep up with your cost of living that's another issue entirely okay you could buy tips bonds and take a lower nominal return but be insured of a one percent return against cpi but now you're at risk of whatever that means going on.

54:48So, you know, ultimately we're at risk of the government, of our institutions, of our legal systems, of, you know, of our ability to have what you call, you know, property rights and things like that, you know, all of which can vanish and has vanished in many parts of the world, you know, in a blink. I think somebody who escaped Germany said the only real wealth is what's in your head and what you can put inside your toothpaste tube or something like that. Quite a dire mindset, but I mean. I don't know how far you want to go with that question. So Paul asking, long term, what's the solution to prevent U.S.

55:29citizens from needing$1 ,000 to buy a sack of groceries like what's happened in other countries? Well, I think it's just a matter of time because even a 2 % inflation will get to that point. And the question is whether incomes will keep up with it. what's our real standard of living what's the growth in the real gdp and what's how's that being distributed and is this real gdp what's the quality of it because if we pass laws against marijuana and then put people in jail and hire guards and build jails that's all gdp it's like okay you know so it doesn't to me that doesn't enhance anybody's standard of living so uh but if we can get real growth that really enhances our standard of living and isn't taking it away long term because it's degrading the environment, you know, you've got to throw all these measures in, then that, that's, to me, I look at that as our, you know, as a long term goal.

56:22But I'm not in office. You have to, we have to look at what the long term goals are of people in office. And usually it's, how do I get by the next election, which is two years, which comes to my campaign finance reform proposal. Yeah. Yeah, there's a short-termism both in markets and in politics. Yeah, yeah, yeah. And so you're asking me for a long term. It's like, why bother? Right, vote maybe. Someone asking about Triffin's dilemma. So the idea that deficits, if deficits continue, a steady stream of dollars, you get a glut of dollars. It erodes confidence in the value of the dollar. And maybe it no longer becomes the world's reserve currency.

57:06something that is that is that something that you think about worry about would be a it's kind of already been said because um when the government spends or gives people money that they spend you only buy something from a willing seller you don't stuff dollars into anybody trying to sell something if you sell your house for five hundred thousand dollars it's because you'd rather have the dollars in your house nobody's stuffing dollars into you you don't want So at the end of the day, because we have a market economy, all the dollars that get stuffed out there are dollars people want. And either just, you know, and including what savings.

57:44Some people decide not to spend their money at the end of the day. They'd rather have the money than the house they could buy because they want to. That's a decision. That's their savings desire. So in a market economy, you don't have savings gluts and things like that. That's not an applicable concept. maybe in a command economy or something, but not in what we have. In terms of reserve currency, again, what does that even mean? It used to be, you know, with gold, we had the most gold, and the U.S. went into World War II with more gold than anybody, but we had no guns or boats. Other countries had no gold and lots of guns or boats, and it took us four years to catch up, right?

58:21So what do you mean by a reserve currency? Why does it matter? All the arguments I've seen are just way off pace. they're i don't bother to read them because there are no consequences i really don't care about what they're saying i don't give it any weight one way or the other as being something important uh mostly the dollar is a numeraire for transactions it's not that's different from being a reserve currency and they worry about it whether oil is priced in dollars i mean i don't care if oil is priced in paperclips doesn't really matter whoever buying and selling is going to look at the exchange rates for what they really want and actually want, and they'll transact and add.

59:01If the other person doesn't have it, they'll sell it in the FX market for what they want. So what matters is currencies people save in, accumulate in, and not what they use as a numerera for a price. It's just of no economic consequence. So I don't know if I got all parts of your question there. Yeah, I think it did. Nikhil is asking, by extension of your thinking, would you support UBI, universal basic income? Okay, so what we have now is a UBI of over a trillion dollars, almost trillion, 1.2 or three trillion dollars a year, but only for people who already have money in proportion to how much they have.

59:39So we had the Fed decided that there's going to be a UBI. It's going to be only for those people. And it's going to be 50 % larger than the military budget rather than zero. Okay, so I don't support that one. Yeah, the interest you're getting on all those treasury bonds. I think the rate should be zero permanently, always. In my base case for analysis, if you ask me to do a model, it'll have a zero rate policy in it. And then if you want to say, well, the burden of proof is on you to tell me why that should be 1 % or 10%, then we can walk through it. And I'm sure by the end of the walkthrough, you'll say, okay, maybe there's another reason, but you're right, it's better at zero.

1:00:17So I have not come up with any reason to divert from my base case, which is a permanent zero rate. I'm open for suggestions, but I haven't thought of them yet. Do you think, I mean, we just said make the feds ignorant. The other problem with UBI is if you look at the money story for an economy like the U.S. or anybody else, it's best thought of it this way. You have a government that wants to provision itself. It wants public health workers, educators, soldiers, jet planes. And so how does it get those people? So starting from nothing, what we do is we levy a tax, a tax liability. and I'll use a property tax so you can understand it.

1:00:55Put a tax on everybody's house. You can say income tax, but it's a transactions tax and people work, they don't work. So rather, it still works, but it's complicated. So for purposes of this discussion, we'll just say a real estate tax. So you put a tax on everybody's house. Now people need US dollars or they're going to lose their house. It's going to get sold in action and at auction if the tax doesn't get paid. And the only source of those dollars is the government. So it starts offering jobs for what it actually wants. We'll pay$50 ,000 for a soldier, $70 ,000 for a public health worker, or whatever.

1:01:28And so the tax created people who need to sell things to get the money to pay the tax. So the purpose of the tax is to create sellers. Why do we want sellers? So that the government can buy their stuff, their labor to provision the government. So now the government hires what it wants, buys food for the cafeteria, puts up army bases, pays the people, and then the tax gets paid. So that's the money story. Tax liability, unemployment, people looking for paid work, people looking to sell things. Government buys what it wants. That's the whole point of the exercise. Then the tax actually gets paid.

1:02:07If you went and said to these people, here's the tax liability, but we're going to have a UBI. I'm going to give you all the money to pay the tax. Then the government can't spend anything. It can't provision itself. It can't hire anybody. Why would they? They've been given the money to pay the tax. Now, that's a very cursory look at it. But it's an abstraction, but it makes the point. So if you give everybody enough UBI to cover the tax liability, the currency, it's hyperinflation. The currency doesn't buy anything. It's the same as if you didn't have the tax liability to begin with. Right. And so the money is the tax credit for the tax liability.

1:02:48Without a tax, tax credits aren't worth anything. If you just give everybody the tax credits to pay the tax, that's it. It's over. The government can't then spend more tax credits to buy anything because nobody needs them anymore. So UBI is very small amounts. Probably get away with it. But it carries the risk of interfering with the government provisioning itself, which is absolutely critical. Without that, everything goes away. We're back in the Stone Age. So, again, it's a live wire, kind of like the debt ceiling. And so if you look at what you're trying to accomplish with it, there are other ways to do it where you don't risk shutting down the whole system.

1:03:27You don't want to have these nuclear landmines out there. Yeah. Like liquidity crisis. It's another nuclear landmine. It doesn't need to be there. It's arbitrary. It's thrown in by bad regulation. One last question. one last question i want to squeeze in because we are we are out of time and i know we could talk about this and i'm sure we're going to have to do a follow-up because we're probably going to get so many questions from people who couldn't watch live and are going to are going to watch it later if you're if if we're talking about the fed rate hikes actually stimulating the economy yes is the reverse true then when they start to ease does that have a break effect and will that be problematic that's what i said in 09 i said they're gonna they started cutting rates rates rates went to zero and they cut rates 500 600 basis points and look they just they just stopped paying 400 billion dollars of income to the economy this is a depressing effect this will this is a fiscal drag the deficit's that much lower and it's not going to stimulate the economy or anything it's going to slow it down and if you look at zero rate policies around the world none of them are associated with credit expansions or growth or anything that's right yeah but you're always thinking it's the chicken and egg because you're thinking that they're zero because of the recession low growth and maybe they were but then you just get stuck in it and that happened in 2001 when um rates were cut by greenspan and the economy was dying and i was actually invited with my wife we went to andrew card who i knew through my car company invited me to he was white house chief of staff and to discuss this with him the first thing i discussed was interest rates just like I spoke with you about the rate cuts.

1:05:09He says, well, why would anybody expect this to help the economy? I said, it won't and it isn't. He said, well, we're in trouble, aren't we? I said, what do we do? I said, you're going to have to increase the deficit. Well, that's the interesting thing. So the fiscal spending could offset that, though. If it's a drop, you need fiscal. Card agreed. This was 2002, February, I think. And he said, how high is it going to have to get? I said, I think$700 billion at the time. And he said, we don't have much time, do we? I said, no he said thank you i got a nice note from him a week later president bush made the statement by the way i wasn't like a bush supporter or anything like that uh i don't want to get that part wrong but he made a statement saying they asked him about uh the deficit he said i don't look at numbers on a piece of paper i look at jobs and i don't know if you remember but that guy passed every tax cut he could imagine including retroactive tax cuts he got through every possible spending increase you can imagine okay including prescription drugs and it all came out of that meeting and by the fourth third quarter the deficit was up to 200 billion dollars the economy turned around and it didn't cost them the election and so if you're worried about why the government's spending all this money on prescription drugs it's like it's my fault personally and uh it came out of that meeting and it's still there nobody's dared to turn it around since but that's why they That's why they did it.

1:06:30Brave is the politician who wants to go near that. Right, right, right. Without opening a whole other can of worms, it just occurred to me when we're talking about spending. And how does Japan, what do you think of Japan? How does that fit into this conversation? Yeah. Because they have very low growth, don't they? They've kind of been stuck in this low growth. It hasn't been bad. You know, the real growth has been 1%, a little more. and they have an institutional structure that has very high built-in things to like not reasons not to spend income and it's a and it's an export-led society which you don't want to do because in an export-led society you keep wages down because exporters only care about their costs they're not selling anything domestically they're all selling overseas so they have no interest in the domestic economy.

1:07:23So whenever the exporters get in control, your wages tend to stay low and policies come in to support your exporters. And the whole low inflation thing is keeping down the cost of exporters. So they have different political agendas. And we almost went there. President Obama at one point said, we consume too much and we don't export enough. We have to export more and consume less and i'm going oh no and because this is your real standard of living your real terms of trade and then he has jeff immelt from general electric our biggest exporter you know his economic guru there and it's like i don't know unfortunately it didn't materialize that way but the u.s runs a massive trade deficit so it enhances our real standard of living our pile of stuff is that much bigger japan's is not another another concept that people always point to as a negative, but Warren, we are out of time.

1:08:19This has been an amazing conversation, so fascinating. I think it gave all of us, we could keep going, so I've just got to hook myself. Otherwise, I'm going to ask you another question. I didn't duck any of your hard questions. No, not at all. Thank you for that. They're not hard. They were very elementary, but I think we really need to understand this because it is so contrary to what so many of us have been told and are told. But an issue that keeps coming up, as I mentioned, so many of our viewers wanted to have a deep dive on it. So you gave us a great framework and background, and I hope you'll come back again so we can continue it.

1:08:55Thank you. Thank you so much. Thanks to all of you for watching. We'll be back with the daily briefings. Some of them may be happening. We'll be back at four. Thanks. Take care.

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