From MMT Advocate To Outspoken Critic

of complicated. There's a lot to it, but I think the gist is that people get really excited about is sort of rethinking our approach to deficits. So I think the mainstream discourse government deficits are seen as bad or maybe sometimes a necessary evil is something to be avoided. And there's a lot more to it, but I think it hard it's this view like no deficits and government debt isn't the same as regular debt. We don't have to be afraid of it. Yeah, and MMT by complete coincidence.

I'm sure it could also be interpreted as many macro economists talking, which is what it has effectively become. Right, Like, there is so much discourse about this particular topic, and it's kind of weird to observe because you think, oh, it's a relatively obscure economic theory. But I think what gets people really excited about it is that it's in an economic theory that essentially comes with a sort of view of what the world is or how the world

should be, and also policy implications. So people get really really riled up about this particular topic. I had never heard that acronym any macro economists talking. I had heard a magical money tree? Is it another? Uh, another pejorative acronym for it? But I think you're right, and you know,

it's interesting. There are multiple parallels I think to bitcoin actually in the sense like seventeen, all these sort of old like, sort of mainstream people in banking and finance were asked to comment about bitcoin, even though it never got I never got any impression that they had even understood what it is, and they all thought it was awful. And now this year we're seeing the same with MMT in the sense that a lot of people are criticizing in saying, oh, if we adopt this we're gonna end

up like Zimbabwe or Venezuela. But it's not really clear that they've actually put in any effort into learning about

what it is. And the other thing, I think that parallel and you think about like why now both bitcoin and MMT sort of post crisis rethinking of like what money is And a lot of people are frustrated with the economy, inequality, bankers, austerity, and so I think that the frust straation with the post crisis period has sort of opened the door for new ideas to take root and gather steam and force the old guard to defend the existing system in a way they're not used to.

Totally agree, and Bitcoin and m m T are sort of two sides of a similar coin. I would say Bitcoin is a question about whether or not a government should have monopoly over money, and mm T is sort of the implications of what happens when a government does have monopoly over the money system. So I'm excited to talk about this one. We will add to the MMT

many macro economists talking move in this particular episode. Yes, and I mentioned that with both of the topics, I felt like there was this phenomenon where everyone grabbed someone on the stage and they said, what's your opinion on this? And even if it's not clear that the person did any idea what they're talking about, for some reason, they

will listened to. So today we're actually going to talk to someone who has been a critic of MMT, but unlike most critics, uh, he actually understands it well and at one point he was more of an endherent of it. And I first discovered MMT back and I think two thousand nine by reading his blog. So yeah, very way early adopters. So I am excited that on this week's episode we have Cullen Roach. He is the founder of Orkham Financial. A lot of people know him as the

author of the very popular finance blog Pragmatic Capitalist. Like I said, I first discovered m MT through him in two thousand nine. Now he's a bit of a critic, but he understands it very well. Uh, Colin, thank you very much for joining us. Hey, guys, thanks for having me. So it's pretty extraordinary how much talk MMT is getting these days, given that it was just you know, you were just one of hardly anyone A handful of people

writing about it about ten years ago. Uh, why don't you start off by saying, sort of in your view, what attracted you to this framework of thinking about the

economy way back then? Yeah? So you know, gosh, coming out of the financial crisis, I think what a lot of people were looking for was answers about how things worked because the world seemed so dysfunctional back then that I think, especially a lot of us in the UH in finance and economics, we were sort of rethinking the way that we had been trained about a lot of things and better trying to develop a model for for

better understanding the world basically. And the thing about MMT is that it has a very precise descriptive aspect to it, and they do in general a much better job of describing how the financial system actually works. So the big thing for me was in particular it was banking. They understand banking extremely well, so all the post Kaynesians do.

The The mm T people are a strand of the post Kaynesian school, and all of the post Keynesians have a very solid understanding of banking because they understand and dodges this money. Basically, the and dodged his money is the concept that essentially banks create money from thin air. They don't. They don't lend out their deposits, they don't lend out their reserves. The central bank doesn't control the

money supply. Really, the banking system itself is indodgingus. It literally can control the supply of money that is existent at any given time. And this was really crucial to understand coming out of the financial crisis, because at its heart, the financial crisis was a banking crisis. It was a crisis of too much credit, too much money being extended by banks too you know, finance homes that people couldn't afford, and when everything deflated, the central bank then responded with

all these big actions. And the interesting thing at that time was that a lot of mainstream macro models said that what the central bank was doing, through things like q E and whatnot, we're going to potentially cause hyper inflation. And understanding MMP and in Dodge's money was really important because if you understood that that's not how things actually work. You understood basically that if the central bank flooded the banking system with reserves, it wouldn't necessarily cause banks to

lend more. And in fact, if the lending system and the demand side of it was dysfunctional that banks wouldn't lend more and it actually wouldn't cause high inflation. And so from a market practitioner's perspective, that was a huge, huge advantage to have by understanding the impact on financial markets and bond markets in particular. And so that was really my general attraction was that the post Kanesian schools in general just have a better, a really more sensible

operational description of how things work. So Colin, I want to dig into this point because I think a lot of people won't remember that, you know, in the aftermath of the two financial crisis, just how revolutionary or different that idea was. When central banks around the world started doing quantitative easing. I mean, the sort of common take on that was that it was going to lead to

hyper inflation. And I will admit I remember writing up some analyst notes that said exactly that, what was it about practitioners of mm T, like, what did they see that other people didn't? Well, I think it's that they just had a They have a better understanding of how banks actually work. So banks don't take their reserves from

central banks and actually lend them out. In fact, they can't lend them out to non banks, and so people who understood that operational aspect knew that if you added a trillion dollars of reserves to the banking system, that wouldn't be multiplied into you know, ten trillion dollars of money, as the money multiply UH tells us. The money multiplier is basically a great, big myth, and the indogenous money people,

they all understood that. And so, you know, it's interesting for me because I I don't have a specifically a banking background, but I know enough people in banking and have worked with enough people in banking that and done enough work with bankers that I have a pretty solid

understanding of how banking actually works. And so what I was hearing from MMT and the post Kaynesians and the theoretical side of things was being exactly relayed to me when I was talking to people on the operational side of things, and in particular, I was talking to a lot of people in Japan market analysts who had been through the various iterations of KWI and the two thousands, and they laid out the accounting framework for me, and I was kind of relaying what I was reading in

the theoretical works from the post Kaynesians and the m MT people relaying it to these guys, and they were saying, yes, this is exactly how this works, and the outcome will be primarily the opposite of what a lot of people are saying. You know, all the analysts that I was talking to in Tokyo, they were saying, Cullen, this thing does this program quantitative easing, it does the exact opposite of what all of you Americans seem to think it does.

It is more likely to cause deflation, cause interest rates to stay low, rather than cause interest rates to rise and cause hyperinflation. And so the theoretical framework matched up exactly with the practitioners accounting and explanations of how these things actually work. And so that was around the time when I was becoming a very vocal proponent of you know, in retrospect, I wasn't, you know, to be fair to the m m T people, I wasn't exactly explaining their

theory correctly. I was explaining components of it correctly, mainly the endogenous money component and the the sovereign money component of it. To me, was also very attractive because the flip side of this is, well, okay, if the if the government might not cause inflation, couldn't it cause us to go bankrupt? And that also was something that to

me didn't make a lot of sense. And so the m m T people seem to have a better explanation of Hey, yeah, we can print our own money, but we also can't go bankrupt in a money that we can print. You explained this, So this is where I was gonna go. So in the intro I mentioned that I think most people when they think of MMT, either whether they really have no idea or some idea, they really think a lot about this idea of rethinking deficits

and rethinking fiscal sustainability. And of course, the other thing that happened post crisis is our deficits in the US and elsewhere exploded because tax revenues dropped. There was a physical stimulus, automatic stabilizers kicked in, and there was a lot of handwringing about the size of the deficit and can we afford stimulus, and some countries adopted austerity and we kind of did too after in But that's the

other component besides the banking system. A sort of explained to us that link between the endogenous money characterization of how the banking system works, and also the MMT view

on UH deficit or death sustainability. Well, there are almost two different components in m m T. They really are and mean the mm T people describe it as basically vertical and horizontal money, and so the there are really two different money systems in the in the MMT world, where the government issues what is essentially the real stuff, the stuff that you settle your taxes in basically reserves, currency, coin, um and even treasury bonds to some degree are I know,

the MMT people don't like to use the word money, but they they are essentially what what a mainstream economist would think of as money in the MMT world, and so you have kind of two different money systems where the banking system is basically using it's issuing an IOU for the real thing, and so households and basically the non government sector they can create money like instruments that are denominated and say dollars, but they're not the real thing.

They're not what you ultimately settle your your tax payments with, or or what you basically what you have to pay the government at the end of the day. With and so that is important because the government can't run out of the thing that it actually issues, so whereas the rest of us we can. You know, a household can run out of out of income, it can run out of money, it can run out of people who are

basically a willing counter party in the relationship. I mean, I can't always find a bank that I want to be my counterparty in a loan, whereas the government A and M M. T uses this the word sovereign and what I would say is a little bit of a slippery way, but in general it's a for a developed and diverse economy that doesn't borrow in a in a foreign currency, it's a generally accurate term to call it a sovereign currency, basically meaning that they can't run out

of the money that they alone can create. And so there I think Stephanie Kelton has said before that the government's deficit is essentially self financing, in the sense that the government doesn't need to find sources of financing to to basically issue new money. So um, this is probably

where the policy implications start to come in. But before we get to that, I want to ask a question that you often here or you know, make a point that a lot of people often bring up, and that's the idea that yes, okay, a governments are in some way self financing, and their deficits can sort of go as high as they want them to go, and the

only upper constraint on that is the inflation rate. But then a lot of people come in and ask, well, our governments that already have high deficits de facto mm T. So if you look at the US, I mean, I think the budget there is supposed to get to one trillion in the next year or two. Japan has been running sort of persistent budget deficits for a long time. Are those countries, those systems already m m T or is there something people mean about mm T as an

economic theory that is different to just a big deficit. Yeah, So I think that the the MMT specific theory of the world is very different than the the world that we see in most of these economies. So running a big deficit is I mean, to me, that's just sort of it. It's basically mainstream macro canesie and econ. I mean, most of what you see with the deficit is sort of an EBB and flow in a countercyclical way. So you know, we've all kind of become Canesians in the

sense that you always see countercyclical deficits. Nobody becomes an advocate of budget surpluses during periods like two thousand and eight. It just doesn't happen. In fact, we've set up our policies so that we basically automatically have larger deficits because of automatic stabilizers that are in effect automatic spending programs and automatic cuts and taxes that cause the deficit to expand when the economy contracts. But MMT is much more specific in that, and I think this is the thing.

The thing that I misunderstood about MT when I first came across it was this fact was that MMT is specifically different from mainstream macro in that it is a buffer stock of employment theory. And what that means is that basically, the way that mainstream macro use things, in the way that a capitalist economy essentially works, is that you have a buffer stock of unemployed people, and that in mainstream macro is the it's the buffer through which

you control inflation. Basically, the the number of unemployed people to some degree is the thing that keeps inflation low, so you always have a certain number of I mean, for instance, today people are saying we're at full employment, and the unemployment rate is you know what, By some measures, it's it's seven eight percent, by other measures it's you know, three to you know whatever, five, depending on which number prefer. So, but there are still a lot of unemployed people out

there by any measure. And you have mainstream macro economists who are saying that the economy is operating out or near full employment, which is a weird thing to think of because really what they're saying is that we're operating at a rate of employment where inflation is not high

or or worrisome to a large degree. So there's a buffer stock of unemployed people in the way that mainstream macro works and m m T is very specific and that they prefer, and they explicitly say that you should use a buffer stock of employed basically to not only reach full employment, but to control inflation. So that's where the job guarantee that they advocate. It's not just a

theoretical aspect of their view. It is an essential descriptive component of how they view the world, because they basically say that the government is the cause of unemployment. Therefore, the government is the only entity that can solve unemployment, and they're they're the only ones that And I should be clear, when I say unemployment in the MMT world, they mean zero involuntary unemployment. So there's always some level of involuntary unemployment in mainstream macro basically. So MMT is

using a little bit of a different definition. And they're very specifically saying that they want to control the economy and prices and employment through maintaining a buffer stock of fully employed workers. Yeah, let's let's dive into this, because I think this is sort of the crux of our A lot of different disagreements come out, and it also gets to some of the difficulty that I think people have in defining m m T. Of course, critics of mm T will say, oh, they keep changing the goalpost.

But what we have, let's say, if we can break it down, So what we have is this sort of pure descriptive characterization of how money and banking works. But the financial system, the vertical uh, the horizontal money, the government uh self financing deficits. It doesn't sound like you have much of a disagreement with that. So that's the pure descriptive aspect of how mm T says the existing

economy works. It's not a policy prescription. Then they have these other aspects, and a lot of mm tears are associated with sort of fairly radical or aggressive economic proposals. Lately, we've seen a lot of mm tears advocate for the

Green New Deal. Um you mentioned the job guarantee, this idea that the government would guarantee full employment, and it sounds like to me that the crux of the issue, or one of the key questions, is is the job guarantee component, which some people would say sounds like, you know, big government socialism, is that part of the descriptive aspect of mm T or is that part of the prescriptive aspect of mm T. So I there seems to be some disagreement with within some of the m m T

people over this, but I think Bill Bill Mitchell is really the clearest on this, and the way that he describes it essentially is that the government is the in the theory eddical MMT world, the government causes unemployment. So when they start the money system, they basically they invoke rules and regulations and taxes that basically require people to obtain state money. So you have to obtain money to pay your taxes. And if you can't obtain money to pay your taxes, then you don't have a job and

you don't have an income. So and if there's involuntary unemployment, then the MMT people would say basically, well, the government caused this, so the government has to fix it. And so if you understand that descriptive component of the MMT world and their view, then your logical conclusion is the job guarantee. There is no alternative basically, um And I think I think they're on a little bit of slippery

ground there. I I do not necessarily think that you can say definitively that the government is the cause of

unemployment in the monetary system. So there there does seem to be at least some theory slipping into the description there and the and that leads to their big policy proposal, which you know, that's part of why although I I like a lot of what MMT says, I think they tend to get, they tend to overreach, and they tend to find themselves in in positions that are not empirically sound, that aren't really supported by a lot of evidence, and this is one of those positions um and it weirdly,

it goes against a lot of sort of basic Kansian principles, mainly the the idea that really unemployment is the result of a lack of investment and so you know government. They MT people would say that, well, yeah, that's just related to a lack of effective demand, which is the result of people, you know, needing an income and the only way they can get their income is from the government.

So you know, they're pretty the MT people are very very smart, and they're they've constructed a very sound and cohesive sounding theory that I think is especially intuitive to people who don't have a professional background, and actually is even more confusing for people who have a professional background, because they use a lot of these words in a sort of alternative way, words like unemployment and sovereignty in ways that they don't have a meaning to uh, you know,

Paul Krugman or Larry Summers, they read those words and they have a very specific meaning in mind when they think of those things, and but they're they're speaking right past each other when they're talking to each other. So I see a lot of these articles and I'm like, oh, well, I understand what Paul is saying, but I also understand

what Warre Mosler is saying. And they're saying the things that in their own world there are right, but they're talking right past each other because they're speaking a different language. So you know, if you if you set aside that empirical criticism that maybe unemployment isn't caused by the government,

maybe it is caused by that lack of investment. Even setting that aside, if you believe in empty and you believe that the government should be fulfilling this sort of full employment mandate, I can imagine that that on its own has certain political connotations. Um certainly in America, right, Like, a lot of people will hear that and think that

is a very slippery slope on the way to socialism. Yeah, well, gosh, I mean, you could argue in a sense that it isn't even consistent with the way that a capitalist economy actually functions. I mean, America is very specifically a capitalistic type of economy. And this is consistent more so with the mainstream view that basically the way capitalists manage their own risks is through managing the unemployed. They don't hire everybody because they want to retain some profits, they don't

want to pay out all of their profits. And so capitalists, to a large degree, they manage and try to optimize the economy by managing that buffer stock of of unemployed

people in essence. And so I think you could argue to some degree that that is sort of the natural case of capitalism, that capitalism results in some degree of unemployment because capitalists, you know, going back to Kines, capitalists never invest enough um, and so you need some other entity that is going to come in if you're gonna mop up all of that the rest of that involuntary unemployment.

And I think you could make an argument that you're kind of you're kind of veering off of the base case of capitalism into something you know, I don't want to call m m T socialist, but um, it is more along those lines than it is arguably along the

natural base case of what a capitalist economy produces. And I think that's the thing that kind of gets a lot of people riled up about this is, you know, the government is so involved in the economy to some degree in the MMT world that I think people view that as a slippery slope, and you know, honestly, I don't know how justified that is. The thing to about m MT I think that maybe worries me more than anything else is that it really hasn't been tried anywhere.

You haven't really seen a true MMT regime anywhere with a full job guarantee, persistent deficits. Some of them advocate a zero interest rate policy in uh perpect perpetuity. So it's, you know, that's never been tried, and so I think the uncertainty of it to me is something that because there's no real empirical evidence supporting whether or not all of this works, to me is uh something that I think is worthy of of criticism to some degree. But again,

I don't know. There's also a part of me that looks at a world with a job guarantee in certain countries where I mean, for instance, if the United States started a job guarantee, do I think that the U. S economy would suddenly go to hell in a handbasket? No. In fact, I kind of wonder if it actually wouldn't be a lot better in a country like the United States.

But you kind of get back into the question of Soba and te there where the United States is so sovereign, our economy is so big, so diverse, and so productive that we can afford to do things like that in my view, which makes MMT kind of interesting in specific cases like the United States, whereas in you know, a place like Brazil, you know, they probably have no business adopting something like an mm T mentality because they quite literally can't afford to do it because there it would

probably result in runaway inflation or at least the risk of it, or so so big picture and we've got to wrap it up soon is that it sounds like listening to you and reading you over the years that at least on the pure descriptive side, MMT gets us a lot closer to understanding how the world actually works than almost all of these sort of mainstream economics or economism is James Quack uh the professor uses the term to sort of describe economic economic sounding things that aren't

really rude with anything. MMT gets us closer than a lot of other framework to do, but that there are certain prescriptions that they offer that in your view, just aren't nearly as solid and as sort of grounded and empirics Uh as the advocates would claim yeah, I mean, I think they take certain liberties with explaining some things

that are in my opinion, kind of sloppy. For instance, they tend to consolidate the central bank with the treasury, and they argue that the the government is uh, it doesn't need funding because it it can't basically accept its own liabilities, which is what happens when the government pays taxes.

But the that to me is sort of an arcane discussion because it gets into really specific reserve accounting in the way that you know, the debate over why the reserve system even exists and things like that, which is I think, you know, for someone like me who's kind of a nerd about all of this, I get kind

of nitpicky about stuff like that. But in general, yeah, I would say that the the MMT description compared to the way that the mainstream models of all this stuff works, I mean, especially on the you know, the central banks and banks are such an essential component of the economy that if you can't describe how those things work, then you really are going to have a hard time describing how the system works. And m MT does a really

nice job of describing those things. So you know, well, I disagree with some of the maybe specifics and whether or not the government is the cause of unemployment and descriptive aspects like that. I would say on the whole, they definitely do a much better job of getting us closer to reality than a lot of mainstream schools do. Well.

I think this was a I'm sure the We're gonna get a lot of hate from the MMT crowd on Twitter for having you on, because I know you fight with a lot of them, but you're very polite, you're talking person. I like them a lot more than I think they think, and I think I sometimes come across is more critical than I really am. So I hope

I provided somewhat of a balanced of you here. Yeah. Well, I was gonna say, you know, Tracy mentioned in the intro we hadn't really done an MMT episode yet, but I think this was a good balanced introduction for our listeners. So Colin, roach really appreciate you coming up. Thanks for having me. I'm actually really happy Tracy that we started.

We had our first MMT episode with Colin. Like I said, I'm sure some people are going to get really angry or say he mischaracterized something, because that's always how things are on the Internet. But I thought that was a good balanced take. What's that quote from a street car named desire. I feel like you know, we we've had this date from the beginning or whatever, Like you knew the MMT episode was coming, it was only a matter

of time. We'll definitely have to do more because we can get some of the more hardcore m M tears who could come on and disagree with him. But I think that this sort of the spectrum of what mm T means is sort of the source of a lot of the fighting and confusion because it does have this very descriptive aspect that's like, this is how it works. And then they're also these follow on prescriptions of like, Okay, we know how the world works, so this is what

we should do. And the question is always how much does the latter necessarily spring forth from the former and how much does the description of the world lead you to automatic policy conclusions or is there sort of a range of options we then have. And it feels like that's where a lot of the uh, the fighting and

disputes really happens. Yeah, I would agree with that, but I would also question the usefulness of an economic theory that is, you know, apparently self evidently so unclear to so many people and seems to mean so many different things to different people. So MMT has done a fantastic job of capturing a lot of political interest and discourse and also a lot of economic interest, but it probably hasn't done as good a job in simply defining itself.

You know what's interesting, there hasn't been and I suspect it will change, but there hasn't been like the definitive mm T book yet. I mean, there have been written on it, but like the real mainstream one that everyone can read, Like, I feel like that's still coming Bloomberg. We actually ran a really good piece a couple of weeks ago that I think it is one of the

fairest descriptions yet. So I feel like the mm tears do recognize this and say, like, Okay, there is a lot of confusion out there, and some people think that MMT just means print money forever. And so it will be interesting to see if the people have brought it this far, and you know, they've they really just sort of in the last ten years gone from commenting on blogs and some obscure academic x two entering the mainstream, whether they can actually start to help people understand what

it is they say it will be interesting to watch. Yeah, there's a book deal in there for someone somewhere. But the the other thing that really interests me about MMT and Cohen touched on this towards the latter end of the show, but how useful is it actually for a country that isn't the United States, or that doesn't have a global reserve currency or a currency that's somehow viewed

as a safe haven. And you know, he mentioned Brazil, And I really wonder the opportunities that MMT proponents are talking about full employment and you know, various other things. Could those ever apply to emerging market economies or developing market economies that do not have the luxury of printing money without inflation. Yeah, the M M tears would say that they do, and that there's nothing specific to the US.

But I do think it's an open question. Don't we have an episode coming up kind of about this question MMT in the context. Yes, we did get a suggestion from someone on Twitter, so we are going to talk about it. Uh So, Yes, plentymore MMT episodes to come, for sure. All right. Well, on that note, people can look forward to that this has been another episode of the Odd Lots Podcast. I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart and I'm Tracy Allaway.

You can follow me on Twitter at Tracy Alloway. And you should definitely follow our guest Colin Roach on Twitter. He fights with a lot of m M tears all day. His Twitter handle is at Colin Roach. And be sure to follow our producer Topur Foreheads. His Twitter handle is at foreheads T and follow the Bloomberg head of podcast, Francesca Levy at Francesca Today. Thanks for listening.