Warren Mosler: Unraveling the Mysteries of Modern Monetary Theory

And all of a sudden it rallies like a hundred basis points. And it's like lower than it was before because of that bid for duration. So where is that coming from?

Now based in St. Croix in the U. S. Virgin Islands, he runs Valence Company Inc. and continues to shape economic policy debates. He's best known for Mosler's Law, which holds that no financial crisis is too deep for a sufficient fiscal response. His notable book, The Seven Deadly Innocent Frauds of Economic Policy, has it translated into multiple languages. And his contributions earned him an honorary doctorate from Franklin University, Switzerland, Warren.

Thank you so much for coming on the show.

So you know that if you take a currency, you like the Hong Kong dollar, which is fixed exchange fixed to the dollar, and you sell the forwards in size, the spot is fixed. Okay. As the forwards drop, that's the 90 day rate. It's the same thing. And you're actually driving up interest rates.

And that was the old trade when I first started up, a really equity hedge fund would get short stocks in the Hong Kong market and then sell forwards in the currency to drive up interest rates, which would spook the stock market, it would go down. They'd cover the short, make a little money and then hope that it was a bet covering their position in the Hong Kong dollar and it worked very successfully.

There was good leverage between those two in terms of the percentages, they have to move to make it work. Okay. Now if you try to do the same thing with the yen, which is free exchange rate versus a dollar, you sell forward, you can drive the currency down, but the rate is going to stay at zero. If that's where the Japanese is, you know, rate is fixed and the spot forward are going to stay the same. So there's something very different going on with those two currencies. And that's.

We've seen like fixed exchange rate currencies blow up all the time. I remember the Mexican peso in 1994, the ruble in 1998 and the ERM system that blew up with the pound, you know, so, but you'd never see that with floating exchange rates, so that there's something very different going on. You'll see the currencies go up and down. We saw the Euro depreciate 50 percent and nobody really noticed. We saw the Australian dollar depreciate 50%, nobody noticed.

And we've seen them go up the same amount, sort of make second page or third page news. So it's, it's very different. And so I think that distinction is something that modern monetary theory that I recognized back in the early 1990s, And before it was called Modern Monetary Theory and it later came to be called Modern Monetary Theory because most of today's currencies are now floating exchange rates.

The, uh, forwards are set by the market to reflect an interest rate, which is the indifference level between where somebody is willing to hold Hong Kong dollars versus cash them in and get U. S. dollars at the monetary authority. Right. And I don't, you know, a simple gold standard where you have convertible currency and the government wants to deficit spend, it's adding gold dollars. Right. it has to then borrow those, When it does that, You know, why is it doing that?

Okay. So what it doesn't want is people with the gold certificates to cash in the gold and deplete the gold reserves.

And there's an interest rate at which the, uh, investors in the, or, you know, whoever's holding the, uh, whether they're convertible reserve balances or actual convertible currency Is it different between holding that currency and cashing it in for gold and you get a positive yield curve because the longer the maturity you buy, the longer you have to wait before you can get your gold and the more odds are something's going to go wrong.

So, if you looked at the Russian ruble, I don't know if you were around for that crisis in 98, but, You know, Russia, it was convertible to dollars at 645 to one. And there was some concern as to whether if you had rubles, you could get dollars. It certainly, it was certainly overvalued in terms of any other reason you'd want to hold them other than eventually to convert them. And so, you, Okay. you saw that risk being expressed as interest rates went up.

The Russian government was selling G Ks to, ahh, keep people from cashing in their rubles for dollars, and you saw the rate go to 5%, 10%, 20%. 40%, and then they borrowed a few billion from the IMF. Okay. FIFA people felt that they had a little bit of a window and go down to 20%, and then when the IMF loans were exhausted and cut off, it's okay, now it goes up to 50%, a hundred percent.

And it was up to 200 percent and it was still wasn't enough for anybody to hold that thing rather than convert to dollars. And interestingly, the, uh, central bank, I think they didn't even turn the lights off. I think they just all got up and left, parked back to their desks for about three months. And so there

And their job is offsetting operating factors to make sure that, you know, when Treasury securities settle, There's a, and they see Fed funds going up, indicating the reserve balances are short. They come in and do repo, they add reserves. Now with QE, it's a big reserve add in advance, so they don't have to do it every time there's an auction. But even on fixed exchange rates, they're still spending first before they're collecting taxes.

So what they do is they buy the gold first, print, you might say, gold certificates or credit accounts that are convertible accounts at the central bank first, and then those dollars are there to pay taxes. So, it's, it's simple analogy. I mean, nobody thinks the football stadium has to collect the ticket first and then sell it. Everybody knows they sell the ticket first and then collect it because that's where it comes from, from the stadium.

Now, President Obama made a statement once that, you know, that the money comes from the government. He got shouted down. He said, no, real wealth comes from the private sector. So what they did was they confuse or conflate or something real wealth with, The money, the dollars to pay taxes, right? And he agreed that real wealth came from the private sector. The government takes some of it. And so he backed off on his statement, but he was correct.

The dollars to pay taxes, the nominal, the tax credits needed to comply with tax liabilities come from the private sector, and that's what Stephanie's talking about with the sequence. And every Congressman has that sequence backwards, at least I think everyone does. They all think they have to get dollars by taxing what they don't get by taxing. If they want to spend more than that, they have to borrow it.

They're borrowing it from China and, worried about, the grant leaving the debt to the grandchildren and all that kind of thing. And you saw the Obama administration and they wanted to do that stimulus number one. They did half of what they thought they needed 'cause they were afraid of borrowing $2 trillion instead of 1 trillion.

Secretary Clinton flew with Obama, I believe, to China to talk to our bankers to make sure they would buy our bonds so that we could make sure our healthcare system wouldn't fail or whatever it was. And Paul Ryan was there saying, we're going to be the next Greece. He was a head of the Republican Party, you know, Speaker of the House. if we'd be on our knees at the IMF, you know, if we ever put, tried to borrow this much money.

And, I think Paul Krugman had a big document in front of the president about how interest rates would go up. If it wasn't Paul, it was somebody else like that, another New Keynesian. And now we look eight years later and, we have a COVID. Maybe total deficit spending, maybe 5 trillion. I don't know. Not a word of Greece. Nobody was worried about China. Nobody worried about rates. All they worried about was whether it or not it would cause inflation. Now, where did that come from?

What changed in those eight years? And I think that was, you know, the poster child was Stephanie Kelton when she got the job at the Senate Budget Committee. People started looking into it. She started talking about it. They started reading on it. Suddenly the, that suddenly, but over those eight years, it became understood that government checks weren't going to bounce. They might not have exactly understood the whole thing, but they knew the checks wouldn't bounce.

Rates wouldn't spike unless the Federal Reserve voted higher rates and that, the issue would be inflation, whether they were spending too much and driving up prices. And they're still arguing about whether they spent too much and drove up prices or not. They're not, nobody's arguing about whether or not the check was going to bounce. So I'd say MMT changed that.

dialogue for the better, because the argument is whether, what are the ramifications of the spending, not are the checks going to bounce. The government spends first and then securities are sold. They don't have to worry about whether or not the securities will be sold. And, uh,

But he wouldn't go there. And then later I met with him once after he got in and said, well, is there anybody else in Congress who understands this? I said, no, he says, well, if there is, let me know. And then, you know, I'll start talking about it too. So I know him. He personally just didn't want to take the first step. I can't say too much about the others, because I don't have the personal contact. There's Van Hollings, is that his name, in Virginia? Congressman.

He understood that I was up there with a friend of mine and had my book, he'd read it, went through it, and same thing. He was waiting for somebody else. So, I guess at that, I guess it's a level of intellectual dishonesty at that point, but at the same time, it's a lack of political will to go there and path of least resistance is to get reelected, to get funded, is to keep saying what they're saying. so it's just tough for me to give you a definitive answer for that question.

And I think there's a tendency to people to like having elevated rates of unemployment. Five, six, 7%. 93% who are employed can hire a plumber who come running out to do things because it's tough out there. You know, they can get someone to mow the lawn. They can, oh yeah, I got here and I got my lawn mow for $20. Oh really? I paid 30. Who'd you get it from you? So I think that, and there's a lot of people who are very secure in their incomes and, and in their.

And they don't like to see inflation and they do like to see people coming to them for money, puts them in a position of power and it's, you know, it's 5 percent inflation. That's, I mean, unemployment, that's 95 percent of the people are on the other side of that trade and that's human nature for them to like. So you look at now where, you know, the President gets, presidency gets turned over and over 3 percent inflation. Where did that come from?

It had nothing to do with people not wanting stuff for free or whatever, not wanting more government spending or services. They'd rather have, you know, the inflation is what turned it over. Even with a strong economy and low, record low unemployment, we saw a turnover in administration. So I think that tells us something. Now, it might not always be that way, but it sure is there right now.

fiscal spending would, would spend into the economy versus financial money, which is the money that quantitative easing, spent, quote unquote into the system to, to salvage the, uh, the health of the bank. So, how does MMT account between the two and, and do you see the high powered money, the, the, the more fiscal, aspects of, of, of money being the, the drivers of inflation versus, monetary policy operations like quantitative easing,

So. So, in that light, if we look at quantitative easing, it's the government's buying government securities. And government securities are just dollars in savings, but are functionally savings accounts of the Federal Reserve Bank. So, that's like if Bank of America or JP Morgan went to all their savings depositors and said, Look, we'd rather have you in checking accounts than savings accounts.

We're going to give you a premium of half a percent or something to, if you'll, you know, I want to go in and buy your savings account. Will you sell me your savings account and I'll credit your checking account with the money, we'll shift it from savings to checking. And you have a certain number of people with maybe a billion dollars who said, okay, yeah, I'll do that. And so they had savings checking accounts instead of savings accounts.

Would anybody have gone around saying, oh, that's inflationary? Okay. So, you know, the treasury 36 trillion in one amount to a savings accounts at the Federal Reserve Bank, it's a bank, just like any other bank, it's a ledger. When the government spends, they instruct their bank to credit the account of your bank, okay, at their bank. So the Federal Reserve credits J. P. Morgan's account at the Fed. It's called a reserve account. It's a Federal Reserve Bank. It's a checking account.

It's a transaction account. It's overnight. And those funds are there. And they can't go anywhere except to somebody else's reserve account. And when they sell treasury securities and you buy them, they shift those dollars from J. P. Morgan's reserve account to your securities account, which is another account at the Fed. And it's still, you still have the money. You had dollars in a J. P. Morgan account. You now have dollars in the savings account at the Fed. Your wealth hasn't changed.

Nothing's changed. Uh, you do it at market levels where you could do it anyway. You really don't care who is selling you those securities. You can buy securities anytime you want. But the price goes up a basis point, you know, the basis point, lowering yields, and suddenly people want to buy that thing. That's what the Fed does. It's an auction process. And so they've just changed the indifference levels of holding it.

And that's the difference between at the margin, the economy's desire to hold cash, you know, direct, to hold duration. they give you a basis point lower and you're less likely to hold duration at the macro level. And so people are holding reserves instead of securities accounts. It's not more than a basis point or two. It's not a whole lot at the margin. and so, um, why would that change anything?

So I had this conversation with a guy at the Bank of England, Andrew Crockett, I was over there, maybe 25 years ago, and we were there with someone from the Bank of Japan. They had just announced quantitative easing. We're having a friendly, just three of us chatting. I said to the officer of the bank in Japan, I said, like, why would you think it's going to matter if you go out and buy JGBs, you know, with your, you know, you buy them from the bank, you credit their reserve account.

So the bank has fewer JGBs and more reserve. So it's not like there's a line of credit worthy borrowers just waiting for you to have loans. The loans create deposits. It's got nothing to do with the lending side of the bank. Why, why would you expect this to do anything? And, Crockett looks at him and goes. Yeah. What do you say to that? So he knew it wasn't a surprise to him. And the guy says, well, you know, that's our policy. We'll just have to wait and see what happens.

Well, after 30 years of buying every JGB out there and shifting on maybe the entire duration of Japanese, what's called public debt to zero duration, it didn't make any difference, right? Like, why would it? The burden of proof to me is on somebody to explain. Why do you think it would do it? Not me to explain it, why it won't do anything

There were just four of us. And I wasn't here to talk about modern monetary theory because I wanted to get invited back, of course. But, he made this, I asked a question. He had just been talking about unconventional monetary policy. And he had written some with Vince Reinhardt, who was head of, monetary affairs for Greenspan and then Bernanke. Who helped me write some of my speeches, by the way, when you talk to these operations guys at the Fed, they know exactly what I'm saying.

That's their language. And you don't have to, you never discuss it. It's just, it's always the starting point. It's just assumed. but anyway, so, and I said to him, I said, uh, I guess he wasn't chairman. Yeah, he was chairman of the Council of Economic Advisors. I said, you know, you've been writing about unconventional monetary policy where the Fed might buy Treasury securities.

I said, since buying, the Treasury buying securities from the Fed is functionally the same for the private sector, it's the Treasury never issuing them to begin with. Okay. And so rather than issuing them and selling to the Fed, having the Fed credit the accounts, have you ever just thought about, you know, Coordinating between the Fed and the Treasury and just have the Treasury stop issuing those bonds. And he said, well, no, it is different.

When we buy from the Treasury, we add reserves to the system that has in effect. So it's like, okay, I didn't want to answer the question, but clearly he didn't understand reserve account because it was just a nonsensical answer.

And, and he had, he was a nice guy and smart guy, but, you know, he's like a B student who'd studied real hard and got an A's and he was a professor from, Princeton and his specialty was the gold standard to depression in 1930 and what caused it and everything he says is exactly right. And everything he did to my original point was, Echoing these gold standard things, like that was, that adds more convertible currency under gold standard.

Okay. But it doesn't do that under floating exchange rates. You know, reserves, the holder of reserves has one option or two options. Do nothing, hold reserves. I guess he could spend them. Somebody else holds the reserves, or he can buy treasury security and shift to a different account at the Fed. On the gold standard, he has another option. He can take gold. That option's gone. And when you're not competing with that option, the entire dynamics of the monetary system is different.

It's like you're watching a different channel on the television set. One program doesn't relate to the other. You can carry the language over, but it's a different program. They're different people doing different things.

I happen to have, you know, uh, let's say, let's say I am JP Morgan. I have a securities, I own treasury securities. They don't own a lot of them, but they own a few. And I sell it to the Fed. And so I had dollars in my securities account. The Fed pays me by crediting my reserve account and the Fed debits my securities account. So they debit the securities account, credit the reserve account. That's it. Debit 10 billion, credit 10 billion.

If rates go up, go down, you want to make sure your capital, for all practical purposes, does change. And if it does, you're supposed to make adjustments. So you're, you're duration neutral, you know, is it basically supposed to be zero duration. So if you have long securities and you go to short securities, you've changed your duration. And that may throw off your balance. you know, and if that's the case, you have to make that adjustment. So. But otherwise the securities are zero risk weight.

So it all depends on that. You also have like leverage ratios and it might affect your leverage ratios. And that's your total assets versus your capital. But that doesn't change your total assets. So I would say that particular thing only changes your interest rate sensitivity, your duration of your bank. For an individual, it doesn't change,

Half a percent of it is, but if you're in the middle of training, it's a big deal. So I'm not, you know, it depends on who you're looking at, but that's, that's I think when they started issuing 20 years, which were a lot at the time, they put a dent in the yield curve of maybe 15 basis points initially before it's sorted out. Now that falls under what?

Under fixed exchange rates, they used to call liquidity preference, which says there's always enough money to buy the log in it, but there aren't necessarily enough people who want to pay that duration. So the question is, what's the bid for duration of it? And the biggest surprise, one of my biggest surprises that I look at, cause I never know how large the duration bid is, is how large that bid is. Over the years, I've seen all these panic situations.

The Fed's going to do QT, sell long bonds, this is going to happen now. The long bond sells off and then it's like, this is, you know, going to get up to 10%. They're not going to be able to sell them. They're going to have failed auctions. And all of a sudden it rallies like a hundred basis points. And it's like lower than it was before because of that bid for duration. So where is that coming from?

Well, I can only look at the data and guess, but you've got pension funds who buy long bonds because it's Tuesday, right? They look at the balances and on Tuesday, whenever it came in, they buy it because they've got a 60, 40 mix or some nonsense. And you know, that money just comes flooding in because every teacher puts 40 a week into her pension fund and the teacher's retirement fund buys long bonds.

You know, and so, uh, and somebody needs duration out there and I can't tell you where it all is. But the bid is, how does the long get negative? How long have we seen this long the curve? Now, how does that happen without a huge bid for duration? Right? So there's, there's a massive bid for duration out there and it's part of the institutional structure. Somebody's buying it. Insurance companies have to buy it to match something. Somebody's buying it to match long term liabilities.

There's a lot more long term liability out there than we, than we estimate and that I estimate. It always like, wow, where? Well, I could rally it a hundred faces for you. Nobody

How bad can it be if it's 10 years flat, it's like, it's not like it's even positive. Okay, it's positive

And you'd have these wonderful opportunities to buy things against the long end, have huge, positively convex portfolios and make a lot of relative value, you know, out of alpha over time. And so that's another place where the bidder duration comes in because of all the positive convexity at the login. That is not something the average person who reads the Wall Street Journal or the watches the news thinks about, or even the average

They've got what you, they set the price and they tell you what it's worth. So, so the limit is what the tax liability, the need to create, that's the nominal limit created by the tax liability. if you just give people money, like social security, and now they become agents of the government, and so the limit to what they can buy, you have to consider not just the government, but plus it's agents who are getting money. Money. They're not selling anything to the government.

You're just getting dollars. you know, if you exceed what is available for them to buy and they start paying higher prices. They are redefining the currency downward by paying those higher prices. And we call that inflation. I call it one time adjustments in the price level. You get a, it's always a series of one time adjustments. It's like, quantum. It's not, time doesn't move smoothly. It moves in quantum measure. So Yeah so it's the same thing here. It's, it's one purchase at a time.

It's moving, it's redefining the currency. Now there's a lot of it, so it looks continuous, but it's not. That's, you know, what inflation would be and properly academically defined, if the definition were followed according to how it's academically defined, would be something else and it wouldn't be that. Now, what we call inflation, you know, fine, but that's a different matter. so not to get off the point, so the limits are a couple of things. What's for sale, right?

And that's evidenced by prices. What's, we can look around and see what's for sale. And if those prices are going up, it means government and its agents are paying more than what's offered for sale at term prices and so prices are going up. And a lot of that depends on institutional structure, sort of builds a lot of the stuffing and some of it's based on you can casually call excess demand.

But if you spend on a price rule, if I say, I'm going to go down the street, and I tell you to buy every house on that street, but don't pay more than 500, 000 dollars. And they're all for sale at about between 4 50 and 5 50, you're going to buy some of them, but you're not going to drive up prices. If I tell you buy them all and I don't really care what it costs, then you're going to drive prices. So if you're spending on a quantity rule instead of a price rule, you get very different outcomes.

So the government spending policy is critical in determining the outcomes. It's not easy to follow, but if you don't understand it, you're never going to get it right, okay? If you do understand it, you at least understand the problem, and you can qualify your answer based on your understanding, which they can't even do.

And they can, they will also drive prices up for buying oil from Saudi Arabia at the margin, we have to pay the price or turn the lights off. So don't forget at the start of this whole thing, Ukraine thing broke out. Saudis raised their prices up to like 120 before it turned around and came down, and that is highly influential in what we call the inflation indicators, which is CPI, which is not, it's our politically determined inflation indicator.

And I'm not arguing whether it's good or bad, right or wrong, but it's not the price level. Okay. And so that. Oil is a big factor in that. Most things, prices are derived from that and, uh, right down to your food supply and everything else. And we had all those, supply constraints at the same time.

And we saw the same pattern of prices rising into the peak of oil and then oil coming down after president Biden cut that deal with Saudi Arabia, not to prosecute the journalists, they killed Khashoggi and to, make them a deal to get us weapons and get them back from Russia, they Left us to go to Russia for weaponry and things like that. After President Trump had threatened them with those kinds of sanctions.

If they didn't raise the price of oil during COVID because cut production by 2 million barrels a day, which they eventually did with Russia. They got Russia to participate and they raised the price. But he was the one who insisted, you know, when the price was negative on the foreign trade. But I think the physical price was about 30 or 40. That needed to be higher because it was ruining our oil industry.

So this whole thing about how to get more US oil output is simplistically based on higher prices, you know, we're going to get higher. That's their method of more production is to get prices up. So now there's an incentive to produce this capitalism. So I would, I interpret the idea that we want more drilling to mean we want higher prices, so more drilling makes sense. I don't know any other way they have in mind of getting more production.

Maybe they've got something I don't know about, but some subsidy or something, but I think it meets higher pressures because that's what they did last time around. Yeah.

Cause you know, the economy can get money doing that easier than making cars and buses and fertilizer or whatever, you know, so they will outbid everybody for what they want and it becomes, it is a command economy. The rest of it's a market economy.

You know, do they, is that what's behind them? So I guess there's an outside chance, but just from the people I've met, I think we'd be giving them too much credit to keep the secret like that and have a hidden agenda. The ones I've known, it hasn't been a lot of them. I'm not saying I'm insider like that. It's just, I don't think so. I mean, for me, the level of confidence I've run into at the highest levels of everything has always been severely disappointing.

And have you seen the Jared Bernstein from finding the money that clip where they ask him why the government's printing money and borrowing? And he just funnels terribly for a minute and a half, and then they go to something else. Have you seen that?

And they've read my book and they, yeah, I don't know. I don't know.

And I am trying, I am trying to keep an open mind, but that is definitely something that doesn't, doesn't really square for me.

I had a conversation with Paul Krugman six, eight years, seven years ago, but he was, he and Stephanie Kelton were on Bloomberg going back and forth. with written articles about the MMT and the job guarantee. And I said to him, like, what's your problem with the job guarantee, you know, with the deficit and job guarantees as well. If deficit spending gets high enough for the job guarantee, then the Fed can't raise rates to fight inflation.

Because when you raise rates, the extra income interest, the treasury is going to have to pay, we'll add to deficit spending and that'll cause inflation. And so the Fed loses that tool. And I said, well, you know what? I agree with you, Paul, but I think we're already there. Now our debt to GP was only 35 percent held by public, but I'd already started saying that since the early 80s when I first got into this stuff saying that it's already happened.

Okay, and I said and so I, I agree with you, but I think we are there. And so I don't think he says, well, I don't think so. I think we raised race, we still have that tool to fight inflation. And we kind of ended the, we just agreed on that and it wasn't even agreed. We both agreed that that's in the new Keynesian model. And the question was whether or not we thought that debt to GDP was high enough.

Well, after COVID, the debt to GDP went from, held by the public, went from 35 to like 97 or so, maybe went to a hundred and I go, okay, well, this is like, I've seen it, the effect at 35. It's, you know, I'm pretty sure that it's three times the fiscal impact now than it was back then. And when the fed started raising rates, I was the first one out there saying this is going to backfire, it doesn't work that way, other forecasts of inflation, of, uh, going up. I said, it's wrong.

Unemployment is going to go down, not up, because their deficit spending is going to go up. And it went up to 5, 6%, of which 3 or 4 percent was interest rate. And that's what happened. Unemployment came down and didn't go up. It went up because we had big immigration. That number went up, but the jobs have always been there. And, uh, and it's still only 4. 2. And GDP, I said, it's going to be strong. It's been gag busters the whole time. Three ish percent.

Everybody was forecasting flat to negative. You look at the old Fed forecast, they're all forecasting a zero propensity to spend interest. That has to be in their model because it's the same new Keynesian model only with that, for that, You know, assumption, would they not be forecasting a strong economy? They had a normal type of pension spend interest income as they had for other kinds of spending, they would have shown runaway GDP and, and all that.

And inflation came down because oil came down or inflation indicators came down, oil came down. The supply shocks the way, but if you notice it's leveled off, core inflation has started going sideways, started creeping up, approaching the fed funds rate, which has come down. So the target's a little bit low instead of five and a quarter is four and a half or wherever it is. And if they bring it down, then it'll level off there, you know, I think, but, and that's not day to day.

That's, you know, year to year or whatever, that's, that's longer term. And there's a lot of, uh, yeah, go

And everything I see substantiates that. It all works through an institutional structure, which clouds it and everything, but it's still there. You can still see it happening and it's still a consistent explanation.

And as we see the price level changing, I see this as a series of one time changes and okay, they can call that inflation and I have to go use the words or else nobody's gonna know what I'm talking about, but, I can't every time I say, oh, well, the series of one time adjustments has now compounded to like equivalent of a 3. 5 percent annual rate or something. Yeah, I just say, okay, the inflation indicators are going up at three and a half to uh,

And if you double the gold reserves, like San Francisco gold strike, government monetizes it, buys the gold, spends it, prices, Go up, you have an inflation, you have the value of gold. The relative value of gold is fixed at 35, whatever it was back then. It's decreasing now to the value of everything else because of the new supply. Straight supply demand, quantity theory. It fits, there's nothing wrong with quantity theory on a gold standard. It actually fits very nicely.

The reason everybody's proves that it's wrong because we're on a floating exchange rate. Well, it's the wrong context. Of course it's wrong. It's got nothing that is not supposed to be right. But it is right with fixed exchange rates. So inflation would have been a continuous depreciation of currency, which would be continuous new gold. Supply coming online or a devaluation where you devalue gold continuously. So you get a change in relative value, either nominally or in real terms.

And that would have been inflation under the gold standard. So what is it under floating exchange rates? Well, you know, what we have in the gold standard. Is an interest rate set by market forces. And it's generally a positive curve because there's risk in holding gold. And, uh, the indifference levels of people holding paper versus gold, you know, they want to get an interest rate or they just as soon hold the gold. Cause that's a risk free asset. That's the top of the pyramid.

There's no pyramid for floating exchange rates, except government and other credit. But with gold, the pyramid is how far away are you from the gold? You got the gold in your pocket. You got the gold in a bank vault. You got the gold certificate from the government. You're getting further away. You hold a third of your bond. Now you're getting pretty far away from the gold, right?

And so you get this positive yield curve and that interest rate implies a continuous rate of change of the price level because it's the price of gold going up. You look at the forwards, they're going to be going higher, right? Or lower, right? Discount, you know, depending on what it is. Okay, so whatever gold is, that's the price level. So if you look at the forward prices, that's the price level. And so to translate the language to floating exchange rate, what is inflation?

It's a continuous change in the price level. So when I look at the price level with floating exchange rate, it's different from the gold standard. So for example, when we had that gold strike, we fix the price of gold at three, $5, all the prices go up. That's inflation. Today. If we have gold strike and the price of gold goes down. That's deflation because we're not fixing it. So the exact same event, exact same shift in relative values, one's inflation, one's deflation.

So the different contexts. So we've got to kind of, to be able to use the same words and have it mean something, we've got to turn it around. So inflation is a continuous change in price level. I see that as. Forward pricing.

So if you look at spot gold at, what is it, 2, 600, and forward gold, and you have a zero rate policy like Japan and Yen, forward gold would be 2, 600, translate to Yen, whatever that is, and the Yen, of course, forward would be different from the dollar, but that's, that's how it's equated. That's how those three points meet. But in the end gold prices are flat, whatever they are. I guess it's, it would be, uh, 26, 260, 000 or something times 100, 2. 6 million or something like that.

So, but it's flat all the way up. Okay. And in the U. S. gold prices are, because we have rates of four or five percent, they're going continuously higher forward at a four or five percent rate, something like that, roughly.

So, and what that rate is, is the price of what you would have to pay for gold right now, as an agent, you know, what today's agents have to pay to buy for forward delivery. So if you want to buy gold a year from now, you have to pay a 5%. And it's fair value because the seller of gold wants a 5 percent premium. Otherwise he can get the price today and put in the bank at 5%, right? So four and a half percent. So it's indifference levels are 5 percent higher.

So the, the term, I call that the term structure of prices. Okay. And the term structure of prices are the prices faced by today's agents. It was today's flat yield curve, 10 years at 460. You could say that the term structure of prices appreciates continuously compounded at 4.5 percent rate for 10 years. So I would say the rate of inflation over the next ten years, academically defined as the term structure prices as 4.5 percent.

Now whether that means anything or not, that doesn't mean the spot price of gold is going to go up continuously or the price of is going to go up continuously, but it also doesn't mean that it's not. So here's a question for you. Do the Forward prices that are much higher now, you know, what's 5 percent compounded continuously for 10 years, 70 percent higher or something, 80 percent higher. Does that influence where the price of spot price of gold is going to be 10 years from now?

I think it does. People decided to mine gold, know their costs. They know what they'll pay for people. They. Any kind of forward planning is done based on those rates. It probably does, but I don't have the hundreds of millions of dollars to hire PhDs like the Fed does to do that correlation, but you think it might be useful for them since every time they change the rate, they're changing the term structure of prices.

They are changing the academic definition of inflation, you know, directly one to one.

Every time there's a reset because of oil price shock or something, it starts doing it again. Every time there's a break, it starts doing it again. It makes me think, you know, there might be something there that I don't have the resources to, you to affirm or deny,

Or split, you know, a 5 percent stock split or something or stock dividend. What does that do to the value of the stock?

Nobody who heard it that way and recognized it could possibly vote on, I don't think, unless they somehow thought, I don't know, it just seems so far fetched that anyone who was properly presented with it would actually do it, but that's what they're doing. That's what they've been doing for a long time. So you asked me, are they aware that that's what they were doing? Doing this, it couldn't be more regressive plan.

I mean, if Elon Musk and Donald Trump have a plan to help the high end, why do they want to race?

You know, estimation certainly come up with a lot better ways to deploy 1. 2 trillion. It's not that you need that money. It's, you know, it's interesting when people talk about money moving and this money could do that, you know, all it is, is debits and credits. Right. So it's, and in this information age, it's just dots going on and off, you know, on some computer screen or on the, you know, pluses and zeros and ones on a computer until we get quantum, but it's still zeros and ones.

And. If anybody looks at their TV screen and they watch a football game, they see people moving across the screen, but there's nothing moving on that screen. You get very close. It's just dots going on and off. It's got the appearance of motion. Well, you know, dots don't move. It's just accounts going up and accounts going down. And then, you know, you don't need the energy from one dot to light up the next dot, or else the person can't move across the screen.

And so if you look at it, the government spends 7 trillion. What does it do? It credits reserve accounts of all the commercial banks, mostly on behalf of their clients. then debits those accounts for 5 trillion. Taxes get paid, mostly client accounts. The remaining 2 trillion, by and large, decide to shift those dollars, to, from reserve accounts to securities accounts. Okay. And so the 2 trillion winds up in treasury securities.

Now, formally, formally, formally, 36 trillion is either cash reserves or treasury securities. They're all Fed liabilities because the Fed controls the composition between those three places and they do it reactively generally to what the economy needs. That's what they call offsetting operating factors. So that, Their interest rate targets are met with a zero rate target. They just have to keep excess reserves and supply cash on demand. So simplest thing, you don't need interbank trading.

You don't need anything else. You don't need any treasury securities. All those people trading treasuries can go out and cure cancer, do something useful, right? And if you look at that real compliance costs for all these policies, how many people are doing things that are functionally digging a hole and filling it in for massive salaries too often, right? Uh, and well earned because it's a tough thing to do, but it doesn't need to happen.

I think we're losing 25 percent to 30 percent of GDP in real compliance costs. People's time that would be spent otherwise. And if you look at that time being spent on, I'll just say public education, public health and transportation. Public transportation, just for three things. that enhances the standard of living for the lowest income earners the most. People at the top already have those three things. They're not going to get enhanced.

And so what you've done is increased the real standard of living of that group, which might, whatever percent it is, by maybe 50%.

But I think it's less clear in other, in other dimensions. But why, why haven't we seen that? Did we see that in Japan? We haven't seen it here.

We're at three and a half percent. I think if we take it down three, it's going to get cold. You know, look, we had a stronger housing market in the late seventies with 15 percent mortgage rates than we've had here, even with three and a half. You know, if you look at it, particularly per capita, I started off in, 1973, I was at the Savings Act. We'd had 2. 6 million housing starts with 8 percent mortgage rates and only 200 million people.

Okay, so that's almost double the population today, 340, and 2 million is an unsustainable bubble with lower rates. You know, it's not, yes, the rates have some effect in the short term at the margin, but fundamentally, I don't think that's driving things. Yeah.

So if you look at the labor market, it's a disparity of power. People have to work to eat. Which they have to work or they're in trouble. Even if you're the last guy to be hired, the fact that everybody else has a job doesn't help you if you don't get one. So you're not in a better bargaining position because everybody else has a job as an individual, the micro level. Yeah. Business only hires if they feel like it that day, they decide to wait a week.

They wait, you know, nothing bad's going to happen. They have to like the return on equity. So, and I'm not saying they don't have times where they have to hire people, but overall, it's a massive disparity of power. So elementary game theory will tell you that real wages will stagnate at some kind of subsistence level, which, you know, vary from society and we have others.

Support unless there's some kind of support for labor and up until the early 80s, we had support through labor unions, which were, you know, pretty ugly way to do it. I think, I mean, you have to support it and a large group of people is better off, but it's very uneven. And for whatever reason, the corruption of labor unions is staggering. I don't know why that happens, but there's something else in this. It doesn't have to be that way, but it is.

And so I'm not against labor unions per se, but I'm certainly against what happened.

And the others would fall into line and just raise prices. That was the path of least resistance for business. And business always follows the path of least resistance. They want to make money. That's pretty clear. And that went away with foreign competition. So the only reason labor had power was because business had power. Without big, business doesn't have any pricing power. Labor doesn't have any power. They can just, they'll just shut the firms down.

There's nothing the firm can do about it and they lose their leverage. And that went away. And predictably, those lines diverge where the productivity line and earnings line diverge. Now, part of that is that line, I don't think includes benefits, or so you got to double check to make sure that benefits are in there.

But even with that, it is, if you look at the real standard of living, what's happened is, you know, one wage earner, the husband typically could earn enough at a medium factory job or at a, you know, Supermarket job to support the wife and have two cars and the television set and the kids went to school and they were dressed nice and had plenty to eat, went to college. And today, husband and wife working is struggling with that.

And, and, you know, at least on the surface is, you know, in some ways, worse off. And so you could call it a 50 percent decrease in the standard of living. Two people have to do the job instead of one. And the anxiety level now is much higher. And so our prescription drugs are a lot higher. And, you know, everything else that goes with that. And, if you look at all the miracles of the Internet. What it's doing and companies like Google and Facebook, they just replaced Madison Avenue.

It's all just the advertising agency thing. That's the real strength of that, which is, you know, what it is, what it is. We're spending enormous amounts of energy on advertising. If you look at how much it's all consuming and all the data centers and all the AI, what's it, what's it all for? Why are they doing this to sell advertising?

And so it doesn't happen. And labor gets crushed and our disparities of income go up. Minimum wage in Australia is, I don't know, 20 or 30 an hour. So other people do things about this that we don't.

If you don't suddenly have nobody in the job guarantee and you've got inflation going, okay, you failed. But if you keep fiscal policy tight enough, so they're one or 2 percent of the people in the job guarantee, it's turning over regularly and you're introducing other benefits. It comes with childcare, it comes with healthcare, it comes with whatever you want. Now, everybody else has to provide those to be competitive.

So you're using market forces to introduce benefits from the bottom up instead of the top down. And so if you want that as public policy, that's the way to do it. Now, a lot of people, like I started earlier, don't want to see that as public policy. They want to see somebody desperate so that they will come to cut their lawn for 20, you know, or beg for their money. They want to see that happen and they'll complain if it's not like that.

Oh, I remember when I could call up a repairman and he was there in an hour. Those were the good old days. Yeah. 15 percent unemployment turned into the oil crisis or something. You had people showing up really quickly. So it depends on how selfish the person passing judgment on the economy is.

Central government doesn't do it, so the states do it. Somewhere in the public sector, they have to do it. Or else, oh, this is what I missed back. You know, that's where the net financial assets come from, okay? The public debt, whether it's state level, guaranteed by the ECB, or at the federal level, here, is the equity behind the entire credit structure. That's the net financial assets of the economy that are there to support credit.

And when that, and it's, it's in real terms, you need so much of that in real terms to support, you know, an equity, just like Apple needs so many dollars in real terms to have a cushion. and if you don't sustain that, then everything collapses. So in 1979, where the inflation rate was higher than the rate of deficit spending, you had like 12 percent inflation and 6 percent deficit spending, the real public debt was collapsing at 6 percent a year, which is crazy.

The equity behind that at the macro level, the credit structure collapsed. And we had the worst collapse we've had, you know, one of the worst collapses we've had in 08 was the same thing. We had the deficit down to 1%. We had inflation running at five or six. And the real number might've been the inflation indicators. Well, I tripled, right? It went up to 150, 160. And so, we had a real total collapse and the real public debt and the whole thing just collapsed.

There was no equity, no sufficient equity behind the credit structure to support it. We had a big credit expansion and it just collapsed. Same thing in 2000, the real debt deficit went down. we had another oil pop back then. And, you know, you have a leveraged economy because of housing, Y2K, and everything else. Budget went into surplus, plus the inflation, so that the real public debt was collapsing. And it's just everything caved in.

And every single time we've had a cave in, it's been the consequence of a collapse in real public debt. Three years ago, with Fed's tightening, everybody sees a collapse. I go, what are you, what are you talking about? We got a 6 percent increase in the real public debt. Not well, it's 3 percent real, 6 percent nominal. I said, show me one time in history where that's ever not led to strong growth and nobody could come up with one, but they still didn't look at it.

They thought this other thing, the high rate hikes would be more powerful. It wasn't. They could have been right. I mean, I didn't know what was going to happen. I'm just knowing, looking at what I was looking at.

It's like, that's how they all started with this indexation nonsense and, linking their Mexico, linking the peso, you know, the test of bonos, linking it to US dollar and Russian rubles, you know, linking it to the US dollar. Things, you know, you make promises you can't keep and you get this, let's call it hyperinflation, which is an exaggeration, but you know, compounding inflation, unvirtuous cycle on the upside.

And you can have a currency, an inflation that people would call hyperinflation, 10, 15, 20 percent of the currency collapse going down, you know, based on it. So why are you doing this? You don't, you're not doing it because you've already spent the money. It's just a reserve trade and the Fed will say, well, you know, it gives us information as to what the market's. What do you need that information for? It's like, this is nuts. Sell a billion or something.

Don't sell, I think 10 percent of the public debt. Approaching 10 percent is tips now. It's growing. Right? So, and as an investor, not knowing anything, to be able to get a real return of 2. 5%, it's a chicken's way out. You're not going to get that in anything else. You know, you look at the Argentine stock market, it's gone up 77, 000%, but in realtors, it's down 10, right, whatever, down 5, you know, over the last 10 years.

So, yes, the stock market will go up huge, nominally, if you get a big boom, but it will go up in real terms. I don't know.

And the IMF was making them keep the interest rate above the inflation rate to have a real rate. And I was saying, this is causing inflation. It was going up because of that from lower levels. And for the reasons we've talked about over there, it's worse because at 40 percent interest, which is where they are now, by the way, they've only come down to 40. They haven't come down to anything reasonable. They're looking at 15 percent of GDP in interest expense. That's a pretty high number.

So anyway, I said, and he agreed, but they had the IMF deal and there's nothing he could do, and he quoted the Sergeant Wallace thing from 1987, that's pretty much the same thing, the new Keynesian model, which is what Krugman said when I talked to him way back. So they, they agreed with this, but they couldn't, didn't want to, weren't in a position to do anything. So since I left, you know, inflation went to 40. So they went to 50, inflation went to 50. So they went to 60.

They went all the way up to 200 before the chainsaw hit. Right. Yeah. Inflation didn't come down after they cut rates, or if it's came down a little bit and after they cut rates, it came down. So this, they cut rates to 40 or 35 or 40, depending on what rate you look at and inflation somewhere around 35. I don't think they got much lower than that unless they keep covering the rates down. Now that report and the whole meeting is.

Was on the desk of the central bank, the head of it, and he understood it. There's no pushback with him or his staff. So they were, it was in front of him. So maybe it did get through to somebody who's not doing anything. you know, now it doesn't have a job now. Maybe it got through to the people in power now. Maybe somehow it got, you know, it got passed along. I don't know. So I'll just. Leave you with that.

So watch to see how much of that you think is attributable to the interest rate, how much of the cutting soup kitchens, which is half a percent of GDP or something, and how much is to just making a 25 percent cut in the deficit by cutting rates, the low hanging fruit is cutting the interest rate, whether they keep doing it or whether the correlation holds up, I don't know. But that I'd say, keep an eye on that.