Stephanie Kelton On MMT and the Inflation We're Seeing Today

I saw Ken Griffin of Citadel he was talking about he was actually kind of optimistic about it, though, like he wasn't at work. He had a lot of criticisms about this administration and policy and all that. But of all the things, I was actually a little bit surprised, like he didn't seem that concerned about inflation or as much as all the media is talking about it. He thinks it'll moderate towards the end of the year, or he thinks there's a chance anyway, give the had some flexibility,

so some interesting different views. Well, yeah, I mean, the thing that I've learned from the past year is that people feel very people have strong opinions about inflation, like it's a very emotional topic. Sure, and it's really striking that we've had this incredible labor market recovery, we have sub four unemployment, and yet it appears that because inflation is high, that explains why consumer sentiment is so bad,

although I think there's more to it than just inflation. Well, so this is the other thing that I think we've learned, which we've talked about before. But it feels like people care about more. People care about inflation than people care about the unemployment rate. That's what it feels like to me, because inflation affects everyone, whereas the unemployment rate is this

kind of abstract thing. You can go up to people and say, oh, unemployment is just four percent, and they'll be like, well, I've been employed for the past ten years and all I know is that the cost of living is going up. Yeah, exactly right. So even during period of high unemployment, most people hold on to their jobs over a given cycle, but everyone kind of feels rising prices and so there's sort of like this political asymmetry. And you think about the FED and it has to

balance the two. But this is the first time we really see like this, like it appears anyway that the high inflation is coming at a cost of consumer sentiment

and so forth. Yeah, I think that's right. And of course it's highly politicized, and people look at different policies, and in particularly they look at you know, the FED gets some of the blame and transitory shocks, but there's a lot of I guess ire, directed at the fiscal stimulus, and in particular that last round that Biden did um after he was elected, and a bunch of people say, oh, look it's proved it's too much. That was way over

there. There There was like there was one line and the other line was a little bit below and that was the outpost. Wait, but then there's they spent trillions and it's too much. When are you going to say modern monetary theory? Okay, so I was waiting. Okay, let's just jump right in. So one of the biggest advocates not of fiscal stimulus or spending per se, but in getting us to rethink what we can do with fiscal policy, of course, is Stephanie Kelton, who's known as one of

the foremost advocates of this way of thinking. Modern monetary theory and she's the author of the book The Deficit Myth. She's the co host of the Best Ideas Money podcast, and she's a professor at stony Brook, and she's here with us at Milkin. And so we're going to be talking about, Actually, you know what we're really gonna be talking about, is monetary modern monetary theory to blame for this high inflation? Are you to blame for this high inflation?

Step he jumped it into. I'm just gonna jump right in, are you to blame? I think so? Congratulations. No, look, I think that you YouTube probably more than anyone to have well no, no, no, I'm just gonna say, have done deeper dives into this question. Over the course of the last what eighty months, two years or whatever. You have been chasing this story in a more sophisticated and persistent way than I think anybody out there, and you've

I think, really forced the conversation to shift. I mean, maybe I've helped shift the conversation on some fronts, but on the inflation front, I really think you've helped to focus attention on issues of pandemic related supply chain and bottlenecks. Nobody has done more to change the conversation around those things. So thank you. This is going to be a double

edged sword for us. I think if people start, yeah, anyway, go ahead, Well look, I mean, so we we have that we we've been paying a lot of attention to the drivers of inflation and thinking about inflation in ways that we didn't before. And frankly, we haven't really had to think about inflation for so many decades. To the extent that we talked about inflation, it was how do

we get it up? I appreciate that, by the way, but to you know, the you know, the sort of it feels like there's sort of this revenge a little bit of the sort of the old school the New Kansian economists, and they're like, look, here's this line that's potential GDP. Here's this other line that's actual GDP. There is a gap between them. Biden spent too much money that was more than one line subtracted by the other line.

Our models work, it showed inflation. So what is that a vindication of that style of thinking, like this sort of like vulgar output gap thinking. No, of course not, I mean, you know, being potentially getting the inflation stuff right. But for the wrong reasons. It's not vindication. Okay, So I again we go back to what is a more sophisticated way to think about why we ended up with the high inflation we ended up with, And of course it's not just here in the US, but it's around

the world. You look at Europe and they're just right on our heels at seven and a half percent or so. So we know that that countries like China, countries like the UK also are at forty year highs when it comes to inflation. So it's it's a bit simplistic and I think wrong, frankly, to to look at things like the output gap and say this is all down to pouring too much fire on an economy that didn't need

that much fiscal support. Can you break it down for us a little bit more, how much of the current inflation or price increases do you think are due to demand versus supply issues and energy prices and things like that. Super hard, super hard to know the answer to that, Tracy. We were talking about that this morning on a panel that I was on with current CBO director, former CEBIO director and Jason Furman. We had exactly these kinds of conversations.

I don't think anybody on the panel feels really comfortable dissecting at that at that level, you know, half a third whatever, um. But we do know, and we have differences of opinion to be sure. Right, Jason thinks that more of the inflation is a result of the excessive fiscal support, and I think I put myself on the other side, which is that most of what we're still dealing with is you know, pandemic related and energy and so I think that's you know, because actually where to

put the numbers, I don't know. But when it comes to, you know, where to lay the bulk of the blame, I still come down on the side of you know, pandemic and energy and now food Ukraine. Right, you know it feels to me and again I were you're the expert here, but you know, it's hard to to me. It's hard to tell a story that, say, oil prices, which we know are a huge driver of all in inflation,

headline inflation, have something to do with spending. Yeah, right, I mean you could in reverse though, right when the pandemic first hit and largely things were shut down, oil prices did come significantly down, So there was some kind of a relationship between what was happening in the economy and that sort of thing. But yeah, you're you're right with respect to stimulus and the fiscal support. Yes we got a faster recovery. Thank god, we got vaccines faster

than a lot of people ever imagined. I remember when early on we were hearing, you know, Dr Fauci's saying maybe four maybe five years. I mean, thank goodness, that happened much more quickly. And so the bounce back happens sooner in the strength of demands. So some of that

is at play as well. So one of the things that we talked about a lot on this podcast is under investment in energy production and infrastructure, and this is something that the Biden administration has been very vocal about as well, and in fact, Biden has suggested a number of times that the solution to high prices is more spending, more investment to solve some of these bottleneck issues. And I wonder how that fits into m m T in the sense that my understanding is an MMT the constraint

on spending is inflation. And now we have CPI at eight point five per cent, and we have people who are also saying, well, the solution to the inflation is more spending. How do you reconcile those two things. Well, yeah, it's a good question. So if you think about it the way I think the President Biden does, which is, we need more capacity with respect to the labor force. We need to bring more, especially women back into the

labor force. And so he will in a sense justify investments in universal pre k and childcare and the sort of thing so that you can get especially women to return to the labor force to maybe ease some of the um difficulties that employers have been having hiring workers with uh computer chips. You know, he's talking about the importance of restoring some capacity with semiconductor manufacturing and building

resiliency and all of that stuff. Now you're rightly raising this question about how do you do that in a supply constrained environment. You know, if they want to do all of this infrastructure and we've heard talk about you know, climate and the rest of it. You want electric school buses, you want to electrify the grid, you want solar panels, and he be charging stations all over the country. Well, the question is, you know who's going to put those up.

Who's going to manufacture? Do you have firms that can meet those orders in a timely manner? Do you have the supply capacity? And to the extent that you don't, you're gonna have back logs, You're gonna have to wait to roll that out. So it isn't going to relieve a lot of inflationary pressure in the short term. And I think he keeps reminding us that these are sort of mostly medium and longer term investments, but maybe child

care helps a bit. So this is sort of the the emphasis on the real resource constraint within MMT, which I will, you know, credit to m m T. I think that real resource focus has been borne out by the past couple of years. But I guess my question is, does MMT have a solution to that? Like, what is

the policy recommendation in this kind of situation? Well, it depends what you want to accomplish, right If you if you're thinking about the kinds of things that worry me the most in some respects, which is the climate crisis that we're facing, then I think what you need to do is sit down and draft a program. And it's going to be a long term program. It's going to be a ten year or a fifteen year or whatever. Program.

But you've got to start thinking about how you're and resource the kinds of investments that are needed to reduce c O two emissions over a longer period of time. And that means investments in energy and investments in housing and transportation and agriculture. It's a big program. And so when you say, you know, how does mm T think about the capacity constraints, In part, it's addressing a housing shortage.

It's addressing got to build more housing. To deal with a housing shortage, you have to deal with the grid. If you're going to electrify, you've got to make those investments. And you know you're not going to get it all perfect. You're going to try to map this out and do it in a way that takes advantage of capacity where it exists. That build capacity, build capacity where it doesn't. That frees up capacity in the economy for other uses.

If something is deemed a priority and you don't have the capacity to make the investments you want to make, you may well have to elbow out some of the private sector's current use of resources to freedom up for something that's deemed a higher priority like climate. So the way we're actually in this country attempting to deal with inflation is through rate hikes and the federal Reserve. And there's all you know, people like, well, what is the

federal reserve? How is that supposed to fix supply chain bottlenecks? And everyone knows it can't and etcetera. And most people seem to also have this view. It's like even the advocates of monetary tightening. It's a blunt tool. It's not the most amazing thing, but Okay, that's what we're going to do. But at least it is countercyclical. When you look at politicians, they're proposing things like gas rebates or cutting the gas tax, which is a kind of arguably

putting more, trying to douce demand even further. It's not I don't find like that very encouraging. And so like one of the good things I think about the MT view of thinking is I consider it to be democratic and outsource not outsource demand management to the to the FED.

But on the other hand, I look at what politicians their response, and I don't exactly feel encouraged by how they're thinking about dealing with a period of high inflation, and so should they give people pause about the MMT political economy such that when we hit high inflation, in many cases, the first instinct of politicians is to even do spending or two spend more or well, okay, so you you raise this um the gas tax, and that's a pretty modest I mean, we're talking about a few pennies. Really,

it's like tens. You know, I don't think this is gonna lead to a big burst of inflationary pressure. And of course alongside that, what at least Democrats are also talking about, are you know, trying to move another package through where President Biden is explicitly um referring to this as a package that would be deficit reducing and therefore

helping to bring down inflation. So you are actually hearing no, now I may not agree with that, okay, but you are hearing politicians say we ought to pass this legislation because it will actually help us to deal with inflation. So you know, you can say I don't trust them to do it, but the truth is they are actually trying to do exactly that, but just to broaden it

out a bit. This has been one of the classic critiques of M. M. T, which is that, Okay, you can you can change the narrative and make it so that people don't think that, you know, the budget in and of itself is the constraint on fiscal spending. But then you still have the problem of politicians having to agree on whatever the policy is that that we're going to enact. And to be honest that you know, recent history in Washington has not been conducive to consensus. You

still have to build that consensus. Even if you say, well, the budget is not unlimited, but bigger than maybe we think. And so I don't know, if anything, it feels like that issue is still lingering, consensus is lacking in DC. To sum it up, sure it is, but I don't I don't know that this is a in recent years kind of a thing. I mean, this is this is the name of the game. You know, if the votes are there, the legislation passes, and if the votes aren't there,

the legislation doesn't pass. And so MMT doesn't solve the political gridlock and that sort of a thing. What it does do, though, Tracy, I think is it really, as you said, it recenters the debate. So instead of you know, approaching something and saying, all right, we want to do a trillion dollars of infrastructure investment, and we know we have to pay for it. We're in the old framework, right, we know we have to pay for it. So we're going to couple the proposed spending with a whole slew

of tax increases to generate revenues. So we can go to the Congressional Budget Office and say, look at our legislation, give it a score. Tell us if we did a good job keeping it all deficit neutral. And it turns out and we've seen this with Build Back Better, right, it's really hard to get the votes. You have to convince your colleagues in the House and the Senate not just to vote for your spending priorities, but also to vote for the increase in taxes that you think are

necessary to keep it all deficit neutral. And what MMT does is say, you know, sometimes you don't have to offset the spending, maybe off set half of it, maybe you don't need offset any of it, you know, and so you can then maybe have an easier time gathering the votes to make investments because you only have to win one fight instead of win that other fight as well.

I'm a little bit confused still about the role of taxes in UH inflation management because I one thing that you hear is like, well, this would be a really good time to raise taxes on the rich. That's a politically popular thing. Maybe it UH marginally diminishes their spending power that create eases some strains on the economy. Maybe not just the rich, maybe the upper middle class as well. What is is there a role for a taxation in inflation management? And how do you think of it? Because

I feel like a little bit confused on this topic. Okay, Well, taxes function to remove purchasing power from somebody's hands. Right, every dollar that's taxed away from you as a dollar you don't have and excuse me, can't turn around and chase after some good or service in the economy. So taxes function to diminish one's purchasing power. Um. But there are other ways to do that as well. So the

role of taxes in MMT. First, there's an origin story, right, there's an If you wanted to start up a currency from scratch, taxes play an important role, and we saw that with the Euro. The euro is a currency that didn't exist prior to January of and then because the government said, Okay, after this day, we're going to start spending only in this currency, and we're going to require taxes be paid in this currency. Will low and behold, you switch over the monetary system and now you have

the Euro. So, you know, creating a demand for a currency is one role of taxes. Another role is, you know, inflation. If you simply spent the currency and never taxed any of it back again, then you would, you know, put too much purchasing power into people's hands, and the result would inevitably be inflation. So one thing that taxes do is allow the government to both spend its currency into the economy but also recover a portion of it as they tax some of it back. But can text policy

be used countercyclically? And is there a role for It's like, hey, inflation is hid. Now is a good time to raise taxes? Well, the Democrats are trying to do that now, actually, But tax taxes are already countercyclical, right. Tax revenues increase automatically as the economy grows, and they drop off in a recovery, and I'm sorry, in a recession. And so I guess you're asking about discretionary right, the discretionary use in order to battle inflation. It's been proposed in the past. You know,

the Federal Reserve building is named after Mariner echoes. And if you go back and you listen to the kinds of things Equals was saying when talking about how to bring down inflation now after the war or during and after the war, Equals was saying, we should use taxes to do this. So it's not a new idea, it's not an m m T proposal per se. Um, Could it work? Could it function to reduce inflationary pressures? Yes?

Is it practical to adjust taxes in real time to try to battle x post inflation like after it happens? And the answer is probably no. Um, maybe you can get the votes to raise taxes when inflation is high, and it may help to reduce inflationary pressures, but it's certainly not the frontline policy prescription for reducing inflation. And m m T basic question here, what is the right way or the ideal way to reduce ex post inflation? All right, So this is the way I always have

tried to say this. There is in my mind anyway no one size fits all policy response. To inflation, you have to look under the hood. If I were to walk down into my baseman and find it flooded with water, I know I have a problem on my hands, but I don't know why. I don't know if a kid left to sink, running of a toilet overflowed, if the dishwashers leaking of a pipe burst. Before I know what to do, I have to figure out where the source of the water is coming from, what's causing the problem.

And that's how I think about inflation. If it's end. We were talking earlier about energy. Right, is higher or higher interest rates the right response, the right policy response to an inflation that's being driven largely by oil prices? And I think the answer is no. So I really think where we're ultimately headed. I think, I guess I hope is to a more granular, tailored policy response, more sophisticated response to the way that we approach, you know,

combatting inflation. This is where we need. My idea of a FED that sets the speed limit of cars and in these days, lower the speed limit rather than raising interest rates, lower the speed limit to get better. Guess you know, the economists at the Center for Economic and Policy researches came out with a kind of six things you could do to reduce inflationary pressures today. That's one

of the six ideas they put forward. A shorter work week, right, Um, work shorter work week sounds fine, Yeah, work from sounds good. Every Tracy's ears always perk up work. If MMT says everyone should work from home, that we've got you, that's

okay with me. Um. But actually, actually on that point, can we talk about the job guarantee portion of MMT because I mentioned this in the intro, But it feels to me that given everything we've experienced now, that inflation seems to be a more salient issue for people than unemployment. And you know, maybe if unemployment was a ten percent or God forbid or something crazy like that, more people more people would obviously care, but a greater proportion of

those not directly affected would care. But it feels like everyone has a stake in inflation. Everyone is impacted by the cost of living. So how does MMT overcome that discrepancy? How do you get people to care about the job guarantee portion of the theory? Well, I guess you know.

One way to think about it is what if we had a federal job guarantee in place before the pandemic broke and instead of you know, twenty two million people lost their jobs in the first two months of the pandemic or whatever, and Congress sort of panicked because we didn't have kind of institutions in place to absorb and deal in a more focused way with the you know,

the unemployment and the you know, economic fallout. So suppose we had a federal job guarantee in place, then there would have been you know, less I think panic and pulling out the bazooka, the money bazuka and just spraying it across the economy and saying, we got to blow a bunch of money into people's hands because we don't

know what else to do. You could have employed people directly, and it would have been targeted as opposed to this much more you know, untargeted, would have had the infrastructure already in place, had it in place, and the money would have gone right to where it was needed. You wouldn't necessarily had to send large checks to almost everybody. Uh. And maybe to the extent that doing those kinds of things helped to fuel some of the inflationary pressures that

we're dealing with today. People could be persuaded by saying, look, we don't want to end up there again. I like the Bazooka. I thought it was great. It just sprayed all that money around, and we went from what was going to be one of the worst downturns ever to the fastest recovery in history. Yeah. Actually, I mean there's no question, right, it is true, right that we did have the fastest economic recovery in recorded history. So you've got to give some credit to the policy response this time,

especially as compared to two thousand, eight thousand nine. I've seen uh, Stephen Manuchin around the conference for AD and I keep trying to I haven't gotten close enough to invite him on odd lots. And we can talk about

how great that was. But in all but in all seriousness, you know, looking back, sitting aside the idea of like it would have been nice if there was infrastructure in place, looking back at the various rounds, and there was like the Cares Act, right, and the America and then Biden's airp right, Well, there was the Cares Act in March, and there was the nine billion um Consolidated Spending Bill in December, and then one point nine trillion in March,

five trillion in twelve months. So looking back at those three big bills, just from what we know now and where we are, in your view, are there lessons to be learned about how they might have been structured differently. So in a in a perfect world, right, you would run legislation through a sort of rigorous scoring process, if

you want to call it a scoring process. Instead of asking CBO tell us the budgetary impacts of what we're about to do, you want to have somebody on the outlook for inflation risk, and you want to have somebody taken a look at what it is you're proposing to spend and looking to mitigate inflation risk ahead of time.

That's the big advantage I think of MMT is that when it comes to inflation, the goal is to preempt it, not to chase it on the back end after you've caused the problem, but to avoid inflationary problems, partly through a job guarantee, but partly through changing the way that

you evaluate legislation prior to voting. Now, having said that, you know, I said, we're in a perfect world, and in a perfect world, you'd also have perfect information, so you would be able to see the delta variant coming, and you would be able to see the O macron

variant coming. So when I think about it, if you had been able to tell lawmakers, say, let's say you take Larry story to them and you say, the line goes here and the other line is here, and this is going to be too much, but also you should know a delta wave is coming and an omicron wave is coming, would lawmakers have wanted to air on the side? Member Everybody originally said it's better to do too much

than too little. So maybe if you had perfect information about what was coming, lawmakers might have still preferred to to take the risk of going too big. We just don't know, and this was also the criticism of two thousand and eight two thousand nine was that we didn't actually do enough. But so, one other thing that people are talking about quite a lot right now is the idea of the dollar and its place in the global

financial system and America's enjoyment of reserve currency status. And this has also been one of the sort of tangential criticisms of m m T, which is that it might only work for a country like the US that enjoys that reserve currency status, maybe it's not so well suited

to emerging markets. And I know you have strong opinions on this, but I'm just curious, how are you thinking about that aspect of it at the moment, And what's your response to people who say, well, inflation, the inflation that we're experiencing, and you know, it just proves that um, the dollar is on its way down or that America's reserve currency status is somehow endangered. Well, I mean, I don't know. I'm looking at the dollar versus the Euro

versus history. Hard to make that argument right now, but it's not I don't think Jacy, that I have strong opinions about e M. I think that for a lot of em countries they don't enjoy the kind of capacity, you know, to spend that a country like the US or Japan, or the UK or Australia, Canada doesn't. It of course not just the US, because you look at what even countries across Europe this time as compared to

last time. This time, European countries, even those that are on the euro enjoyed basically the full back stopping of the e c B. It was almost as if the e c B restored monetary sovereignty to all of these countries and just basically said, we have your back. We're not going to let yields blow out. Go and spend what you need to spend deal with the pandemic and the economic fallout. So it's not just the US that

can do these things. Every European country could basically spend whatever was necessary because they enjoyed the back stopping of the e c B. The UK did a lot of fiscal you know, Australia and and so um. But emerging markets are definitely different. You've got a lot of dollar denominated debt, You're dependent on energy and food and other critical items to import. You're not necessarily going to be able to get those things, and you're in a different spot. Right.

This was Fidel Kabob's argument when he came on here, which is that actually MMT when applied to emerging markets is about building up that independence, that fiscal indepacity. You know, I mean, you know, when I think about like the last ten years or two thousand nine, two twenty roughly, obviously incredible ascendant m m T is around for long before then, but the conditions were very right for that, for the message that we're underutilizing our fiscal capacity and

we had elevated employment, unelevated unemployment. We know expos factor that the unemployment rate could drop for far much further than economist thought, and it's like this is full employment. Then it just kept going lower. So like the conditions were very good in the post grade financial crisis for mm T to have like a big impact and for this mess age that we're under utilizing um these policy tools that we have available. I think like regardless of

why we have inflation or etcetera. It feels like now it's going to be like MMT on hard mode and it's gonna be uh, these questions about like how do you build port capacity, how do you build sustainable energy capacity, how do we build electrical grid capacity? These are like these are it feels like these are gonna be the really tough questions of the next decade. And I'm really curious, like, from your perspective, how are you aiming to have MMT

thinking inform these conversations. Well, at least that's the proper question.

So we're now we've shifted the debate onto this new terrain and you hear you know, Secretary Yelling going and giving speeches before the World Bank just recently and saying, you know what the administration's basic macro approach is modern supply side economics and and and the ship the shift that she's talking about there is exactly what you're talking about, building capacity and dealing with supply side right reassuring and building resilience and all that sort of stuff. Um. So

I think MMT can play a role in that. And um, you know, we're not quite there in the sense that for for Jannet Yellen and the way she's talking about it, you still have that adherence to the idea that everything needs to be deficit neutral and that keeping a deficit neutralist tantamount to keeping it inflation and neutral, which it is not. Um. But at least we're starting to focus on things like how do we make the investments in ports and childcare and all the rest of it, you know,

semiconductors and so forth. How do we get there? How do we get there? Well, we do it. You have to make You have to spend the money. There's no there's no like secret you know recipe here. You just simply have to spend the money. So how do you continue to make the kinds of investments that are necessary in an economy that is supply constraint? How long will we be supply constraint? You know, the word recession is

everywhere at this conference. Everyone is talking about whether the FED is going to successfully orchestrate a soft landing, and if they don't, hard landing means a deeper recession, which automatically means you're going to free up capacity. Right. So I'll just come back to climate because for me, that is the number one issue. It's not going anywhere, which means I don't think that MMT has lost its place

in the debate. I think that you know, the weather related tornadoes, hurricanes, fires, floods, all the rest of it, that stuff is only going to intensify in the years ahead, and we have to spend and we have to make the investments, and so MMT gives us, I think, the confidence to know that there is a path to get there.

One thing that just really strike me. I mean, obviously there are these sort of like big macro factors driving um the inflation we're saying, but we also have had a lot of drought, and I like in the US corn planting season right now is is moll and that's a problem. And there's you know, droughts in Brazil that have India and the heat, and so thinking about like the connection between climate and weather and the inflation and

food that we're thinking right now, it's pretty rid. So I mean, just on this note of of how MMT sort of recaptures the narrative again, one of the critiques has been that the theory itself is complex and people tend to kind of see what they want to see inside of it. What do you say in response to that to people who say that the theory is is too complicated and has a tendency to sort of like change goals and aims over time. I'm not sure i've

heard that critique as much. You know, I think you must have heard that m m T is complex, right, and hard to for a lot of people to grasp because like the goal post seems to change sometimes. Okay, well, I've heard people make accusations about goal postings over but I think I guess I'm used to hearing people say it's almost too obvious and too simple. I've heard that one too. Just to be clear, when it comes to the complexity with UM, can you just help me by

I guess it's the idea. So for instance, it takes like a real example from from recent history. So UH, the Sri Lankan Central Bank governor, I think he came out like one or two years ago, I can't remember exactly, went and said like, we're pursuing MMT, and he thinks

he's doing MMT because it's more physical spending. But then a lot of other people who are more closely aligned with MMT, who are more involved with it, will come out and say, no, no, no, this is an MMT because he's not building up physical capacity and independence, he's not focused on increasing productive capacity or whatever. That's what I mean. It seems open to interpretation. I got you.

So it's I agree with you. If your takeaway, if your if your thumbnail sketch of MMT is UM, don't borrow in a foreign currency and you can do whatever the hell you want, and then that's not gonna work. But you can see how that would be attractive to

some emerging market policy. And I think you know, I know only a little bit about the Sri Lankan UH comments and the justification the invocation of MMT there, and I think his his belief was as long as the proportion of domestic debt is higher than the proportion of external debt, then you're somehow okay, which makes no sense whatsoever. You still have a lot of external debt that has to be service and if you can't, you know, export and earn for an exchange to service debt, you're in

a world or hurt either way. So there's no way for MMT to rescue you there. But just to bring it back to the US, for instance, a lot of people will some people I should be careful. Some people will say that, well, we just experimented with MMT. We ramped up our fiscal spending at a time when we

really needed it. And some others will say, well, actually, you know, for instance, real MMT would have told you that we should have had the architecture in place before pandemic happened in order to provide that kind of support to people, or that you know, the policy should have been slightly different. That's what I mean about the complexity, And I think that's the aspect of it that might

be difficult for people to sort of grasp. Yeah, so I did a post um that was I think it was titled something like it's too late for an MMT informed approach to budgeting. And again it was the pandemic. It was the panic, you know, and when everybody's in panic mode, then it just became, like I said, the whipping out of that money bazooka and trying to do smatter, you know, the the economy with enough cash to support

income to pull us out of the pandemic and the recovery. Um. So, it is true though that if you're doing quote unquote doing policy, and you're doing it consistent with MMT principles, then you've transformed the federal budgeting process. You're evaluating legislation differently. We just didn't have time to do that. The FED raising interest rates seems to have some effect on the real on the economy, and I don't know like exactly what it is, but it seems to you know, it's

certainly mortgage rates have shot up. That's going to make borrowing or affording a house at current prices at least more difficult. It seems to already be uh slowing some things perhaps in the housing market. What is in your view, like just from your perspective, what do we you know, let's say we're getting the fetists seems to be set

on this like very aggressive series of hikes. Um, by the time this comes out, actually will have had the main decision, but you know, more hikes likely on the way. If we've given your assessment of the inflation that it's not necessarily about demand, then that it's global and that's about energy and food largely, which it's hard bit harder to tell the demand story. What are you think is going to come out of these hypes? What are they

going to do to this kind of economy? I guess it depends how big they are and how quickly they come. And uh, you know, I think that the likelihood of a soft landing, you know, I think I'm on the side of that's really difficult to pull off, and uh, you know, you can slow things down. Housing is of course the probably sector that is the most sensitive to

interest rates. And but you know, you've done shows and I've listened to them where you're you've talked about the housing market and you say, listen, you put a house on the market and all of a sudden you have forty bids and half of them are all cash, which makes you go, okay, so interest rates are rising, so maybe a few of the people who would have borrowed and bid on that home are out, but maybe you still have twenty all cash buyers in the mix because

they're not interest sensitive. So to the extent that you do see housing start to cool, then of course a fewer people buying homes and furnishing them. Maybe that takes some strain off of durable goods and that sort of stuff. So I don't discount that interest rates have a channel, you know, but it's just very difficult to figure out. In power will remind us long and variable legs. Right, So by the time inflation starts to come down, the

interest rate increases may not really have taken hold. And yet the fiscal tightening, which is already baked in, we have huge reduction in deficit right now. Um, that may do enough to help with the reduction in inflation. One of the reasons it seems that the Fed is uh, you know, uh inclined to do an aggressive series of rate hikes is this idea of like, well, yes, a lot of the inflation is still transitory factors. Maybe it's still related to the pandemic and now of course the

war or the new lockdowns in China. But it's too late, and we're worried about the inflation expectations Genie coming out of the bottle, and that if you just let inflation get too high for too long, regardless of the fact, regardless of why, our expectations become unanchored, and then we have a decade of high inflation just because expectations. And I'm curious, like, do you sign any significant force to this idea of like the expectations channel. I don't assign

a big force. I mean, I I won't say that I discounted entirely, but the idea that there is this dominant channel through which interest rates work, which is through inflation expectations. You know, I'll put myself on the side of Philip Rudd, who I think wrote that pay for They got a lot of attention. Again it was at the Richmond Fed. I think it was actually the FED. I think the Bed Fed. I think a lot of it is economists sort of hand waving because most of

the old theories seem to have stopped working. You know, most people don't put a lot of cred in the idea of a Nirou or maybe if Phillips curve sort of fell out of favor when the data stopped working, and so people just sort of turned to this other way to explain inflation and said, well, it's mostly expectations channel, this is what's the driver. So just on this, on this topic, there are some people who in early or

maybe mid I'm thinking specifically of Larry Summers. But you know, Larry Summers came out and said like, oh, this is way too much. We're gonna get massive inflation. And he's been doing victory laps um around that thesis. And you know, technically he didn't actually say we're going to have massive inflation. He said there's a one third chance of having lots of inflation. So certainly one of the louder absolutely, And so you know, people are giving him a lot of

credit for for seeing these price increases. What what did he get right in that scenario or what did he see that other people maybe didn't, Well, inflation went up, you know, I mean it can be a case of right for the right reasons versus right or maybe the wrong reasons. And I'm not sure that I heard Larry articulate back in you know, January of one or December, when the debate was really heating up over that's one

point nine trillion dollar COVID package. I'm not sure I heard him talk about, you know, housing and energy and food, and you know, it was this sort of line goes this way and the other line goes that way, and the gap is such that we're pouring too much in um, so, you know he I think that I had a piece out in April of one in the New York Times. It was a fairly long op ed and it was all about inflation, and so it wasn't as if inflation wasn't also on my radar and others. But I think

we were thinking about it in different ways. So maybe just to sum it all up, you know, if you had a wish list right now, what would be your biggest policy recommendation or what would you like to see the has happened right now, it has to be climate. I don't see a bigger threat challenge before us than climate change, and it's going to touch our lives in ways that you know are unimaginable still for many, but

I think the scientific community is telling us. In the latest Inner Governmental Panel on Climate change, report is pretty scary stuff, and um, I think we're gonna we're gonna have to deal so in a time in which we're already strained by high oil prices and high fossil fuel costs and also labor constrained to would appear and other constraints. What does climate, what is acting on climate look like from your perspective in a way that doesn't exacerbate inflation.

Because Isabel sh novel the Deutsche Bank is talking about green inflation, I was going to ask if inflation is just, you know, what we have to accept and live with in exchange for healing the climate or fixing the climate change problem. I would certainly hope that if it came down to that and that was the trade off, that the answer would be unequivocally yes, that it is a small price to pay for the sake of the survival of humanity, that it seems like a worthwhile trade off.

But voters are voters, and we know there's people are really unhappy about the existing inflation. And if you want to keep a durable political coalition alive in Washington, you have to win elections every two years. And so how do you think about when you say, you want to see something done on climate at a time when people are really upset about gasoline prices. How do you think about making putting? Uh? You know, what's a policy framework? Uh?

Look like that? What's your energy bill gonna look like when we don't deal with climate change? What is it going to look like when your house is burned down? And what is it gonna look like? You know, I've ever seen people in an airport when their flights are canceled. Climate change is going to massively disrupt life. Uh in so many ways. Right. It is going to be an irritant,

It is going to be a hardship. People are going to be feeling pain in ways that haven't even imagined in their lives, in their pocketbooks as a result of climate So um again, I think you know, the kind of inflation we're dealing with now is mild in comparison to what lies ahead if we don't get our arms around this. Stephanie Kelton, thank you so much for coming back on upload. Thanks so much, Thanks Stephanie. That was

really fun. Yeah, obviously I really enjoyed that conversation. You know, something I was thinking about just in general with inflation. Um more broadly is things have really started to normalize in the United States from a pandemic perspective, there really are like very few restrictions on anything now. Of course there's still you know, the awful war that's happening in Ukraine, and there is the the ongoing lockdowns that are happening

in China. But to the extent that inflation is sort of pandemic related, I kind of think like, now is the period where we're and then we're going to find out like is it start to cool down as things normalize, whatever that means, or is there some other force that

continues to push it extremely high. I think where there's like a pretty pivotal juncture and the moment of truth kind of I think it is, well, the other thing, and we've spoken about this before, but in retrospect, maybe transitory wasn't the right word to use to describe what was actually pandemic related inflation or narrow inflation versus broad

based inflation something like that. And it does feel like by using that word, the Federal Reserve basically put an expectation in that this would be something that last three months by the end, right when actually, to your point, it's only recently that a lot of these pandemic related

restrictions are starting to go away. The other thing I would say, and this is sort of a big picture theoretical philosophical question, is I feel like a lot of this MMT debate boils down to relative versus absolute gains, and this kind of comes to the inflation point, right. It's easier to get riled up about cost of living than it is about employment. And on the other hand, a lot of it also comes down to short termism

versus long termism. A lot of these policy recommendations absolutely makes sense for big long term problems like climate change, but sometimes it's hard to get people to think beyond like what are my bills going to look like for the next month. Yeah, and I thought your question was, like, was it was really astute on that matter about this sort of like disparate impact of employment versus inflation and everyone experiencing inflation only some people at any given moment

experiencing unemployment. You know. The one other thing, and this is just my personal opinion, but you know, the one other thing is so much of the mm T message has been co opted and then claimed that this is always how we thought it's like, oh, we always knew that real resources or the constraint, we always you know, we always knew extra y. But I really feel like that's very relevant now. And Stephanie of course mentioned Jenny Ellen and the sort of new supply side economics, progressive

supply side economics. You have like liberal pundits like as our client talking about, um, you know, the new supply side. But this idea of well, if the constraint is on the supply side, then let's build out the supply side is like this a core like MMT idea. Then now a lot of people are talking about my most MMT leaning opinion or recognition this year is and we've said this, I think we've written this, but the idea that any problem that can be solved with money isn't actually a

big or real problem like that. It's a very MMT thing to say, but I think that's something that we've learned over the past couple of years. Yeah, if you can, if you can write a check to solve it, you're it's not not my most real MMT view. Actually I'm not gonna say, I'm gonna wait, it's too it's too hot for it's too hot for air, So I'll tell you after we hit record. Wait an MMT view that's too hot for air? Yeah, I can't say wow, Okay, all right, sorry all lots listeners? Um, should we leave

it there? Let's leave it there. This has been another episode of The Odd Lots Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisn't All. You can follow me on Twitter at the Stalwart, Follow our guest Stephanie Kelton at Stephanie Kelton, Follow our producer Carmen Rodriguez at Carmen Armon, Follow the Bloomberg head of podcast, Francesco leave me at Francisco Today, and check out all of our podcasts at Bloomberg under

the handle at podcast. Thanks for listening year to