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<v Speaker 1>Joining me now is a guy who wrote a great

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<v Speaker 1>column about something that is so insidious and so incredibly

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<v Speaker 1>mindnumbingly stupid at the same time that it almost sounds

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<v Speaker 1>like it's something made up, but it's not.

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<v Speaker 2>So.

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<v Speaker 1>Joining me now is Alexander Salter, who happens to be

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<v Speaker 1>the Georgie G. Snyder Professor of Economics in the Royals

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<v Speaker 1>College of Business at Texas Tech. He is one of

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<v Speaker 1>the co authors of this article from The Hill dot Com. Alexander,

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<v Speaker 1>Welcome to the show, Thanks Maddy. Let's talk about modern

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<v Speaker 1>monetary theory. What is it.

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<v Speaker 2>All? The boy so? Mod monetary theory is a complete

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<v Speaker 2>topsy turvy approach to public finance. Basically, it says the

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<v Speaker 2>government should finance itself entirely by printing money, and the

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<v Speaker 2>only thing that we would do with taxes is raise

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<v Speaker 2>taxes if eventually we need to control inflation. Now, many

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<v Speaker 2>people who back modern monetary theory claim that that's a

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<v Speaker 2>very rare thing that would ever have to happen, because

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<v Speaker 2>if there's any quote unquote slack anywhere in the economy,

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<v Speaker 2>if there's any idle resources, prices won't go up when

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<v Speaker 2>you print money. So it's really impressive is that we

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<v Speaker 2>had a pretty clean test of this theory over the

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<v Speaker 2>past couple of years, and while we saw skyrocketing inflation.

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<v Speaker 2>So it's actually amazing that you had anybody who identified

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<v Speaker 2>as an economist who was willing to sign on with

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<v Speaker 2>this paradigm. And yet they did, and it's caused a

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<v Speaker 2>lot of problems for millions and millions of Americans.

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<v Speaker 1>But in my view, and you can correct me if

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<v Speaker 1>I'm wrong, I think that too much of our monetary

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<v Speaker 1>policy is simply designed to enable more government spending. And

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<v Speaker 1>this is like a government spender's dream. I mean, you

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<v Speaker 1>can spend and spend and spend and not have any

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<v Speaker 1>negative replication repercussions. This is this is like big government's

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<v Speaker 1>you know nirvana here And how did this become so accepted?

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<v Speaker 1>Who started this nonsense and how did to gain steam

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<v Speaker 1>mainstream wise?

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<v Speaker 2>It is absolutely a recipe for fiscal qualities and money mischief.

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<v Speaker 2>If you look back at what happened during and just

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<v Speaker 2>after COVID, you had blowout government spending, deficit spending. Now

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<v Speaker 2>that by itself would not have causedlation. What ultimately made

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<v Speaker 2>it inflationary was all those new bonds that appeared on

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<v Speaker 2>the market all the money that the government had to

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<v Speaker 2>borrow to finance that spending. Our central bank, the Federal Reserve,

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<v Speaker 2>then stepped in created money at usin air to buy

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<v Speaker 2>up all those new bonds. So it was an indirect process,

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<v Speaker 2>but nonetheless it was printing press finance. Again, the usual

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<v Speaker 2>way we think about these things is we should use money.

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<v Speaker 2>Monetary policy control the money supply to dampen down inflation,

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<v Speaker 2>and the government gets revenue via taxes. Modern monetary theory

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<v Speaker 2>turns that on its head. We only use taxes to

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<v Speaker 2>control inflation, and we print money to fund the government well,

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<v Speaker 2>with politicians and bureaucrats at the helm. That's a recipe

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<v Speaker 2>for printing too much money too fast, and of so,

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<v Speaker 2>of course prices go through the roof. Now, there are

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<v Speaker 2>many economists who are close to democratic policy makers, policy

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<v Speaker 2>makers and politicians and the Democratic Party who advocated these ideas.

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<v Speaker 2>From twenty twenty to twenty twenty two, it became de

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<v Speaker 2>facto policy and governed our COVID response, and as a result,

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<v Speaker 2>household were hit with crippling inflation. So this was every

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<v Speaker 2>bit as tragic as it was predictable.

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<v Speaker 1>What sort of responsibility do you think the FED has

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<v Speaker 1>in terms of putting fiscal policy in place that is

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<v Speaker 1>good for the American people versus putting fiscal policy in

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<v Speaker 1>place that allows for a larger government through the sale

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<v Speaker 1>of government bonds.

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<v Speaker 2>Well, it's a difficult question to really pin down exactly

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<v Speaker 2>how we want fiscal policy and monetary policy to work.

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<v Speaker 2>So usually the way that we think about these things

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<v Speaker 2>is that the government the treasury elected officials decide how

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<v Speaker 2>much to spend. That's fiscal policy, and then in the

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<v Speaker 2>background you have the FED Bank conducting monetary policy. Ultimately,

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<v Speaker 2>inflation is the federal reserves problem. The central bank in

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<v Speaker 2>the long run, determines the cost of living by controlling

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<v Speaker 2>how much money is in circulation. The reason that things

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<v Speaker 2>can get a little bit dicey is that when the

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<v Speaker 2>government needs to borrow a lot of money to finance

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<v Speaker 2>what it perceives to be emergency policy, that's going to

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<v Speaker 2>put upward pressure on interest rates. And the FED often

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<v Speaker 2>doesn't like seeing upward pressure on interest rates, so they

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<v Speaker 2>create new money to buy up government debt to keep

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<v Speaker 2>yields and hence interest rates down. So the problem here

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<v Speaker 2>is that irresponsible fiscal policy by politicians puts pressure on

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<v Speaker 2>the central banking bureaucrats to conduct monetary policy too loosely,

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<v Speaker 2>and again the predictable result of that is that prices

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<v Speaker 2>for everything are going to go up.

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<v Speaker 1>So during the go go years of COVID, when we

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<v Speaker 1>were coming up with one giant stimulus program after another,

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<v Speaker 1>how much was the money supply expanded during that timeframe,

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<v Speaker 1>meaning how much more money did they throw into the

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<v Speaker 1>circulating money in the economy.

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<v Speaker 2>It grew really fast, really quick. Before COVID, the Federal

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<v Speaker 2>Reserve's balance sheet, which is a narrow measure of the

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<v Speaker 2>money supply, we sometimes call that the monetary base. The

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<v Speaker 2>total assets on by the Federal Reserve system that was

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<v Speaker 2>about four trillion. It's sent shot up to around eight trillion,

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<v Speaker 2>although it's falling now. It's slightly smaller than that now.

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<v Speaker 2>And that actually compounded to larger measures than the money

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<v Speaker 2>supply that grew even more so, this was a lot

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<v Speaker 2>of liquidity, a lot of new money created very quickly

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<v Speaker 2>and spent very quickly. Again, think about the COVID stimulus checks.

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<v Speaker 2>Right when everybody opened the mail and day and found

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<v Speaker 2>a seven hundred and fifty one thousand dollars check from

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<v Speaker 2>the Treasury Department. Now was that financed indirectly. It was

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<v Speaker 2>financed by the FED creating money and distributing it to

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<v Speaker 2>the financial system. And so it's not really a surprise

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<v Speaker 2>that when America and households get all this new money,

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<v Speaker 2>they needed to spend it on stuff. So as soon

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<v Speaker 2>as they could they did. They spent it on everything,

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<v Speaker 2>and as a result, everything got more expensive. What makes

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<v Speaker 2>this truly tragic is that the prices of goods and

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<v Speaker 2>services that households need, food, clothing, shelter that rose much

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<v Speaker 2>faster than wages is did. So if the things that

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<v Speaker 2>you need to buy to maintain your standard of rialting

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<v Speaker 2>are getting more expensive faster than your income, you're basically

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<v Speaker 2>taking a pay cut. And that's why I think Americans

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<v Speaker 2>were so hopping mad about this when they went to

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<v Speaker 2>the ballot box for the most recent election.

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<v Speaker 1>So I agree with you on that. By the way,

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<v Speaker 1>I do think inflation was one of the main drivers

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<v Speaker 1>that drove Trump back into the White House. But I

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<v Speaker 1>want to ask you a question about that election, because

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<v Speaker 1>before you came on the show, we were talking about

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<v Speaker 1>the efforts by Elon Muskin to think Ramaswami to shape

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<v Speaker 1>five hundred billion dollars off of the budget, and what

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<v Speaker 1>would you think a contraction. Let's just say for this

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<v Speaker 1>sake of this conversation, they pull it off right, and

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<v Speaker 1>they shrink the size of the federal workforce, they shrink

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<v Speaker 1>the size of some of these departments, and that five

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<v Speaker 1>hundred billion comes out of the deficit spending. What does

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<v Speaker 1>that do to the economy overall? Does it force us

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<v Speaker 1>into recession in the short term? What would be the

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<v Speaker 1>most likely outcome of that kind of of contraction.

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<v Speaker 2>Well, I don't think that there would actually be a recession.

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<v Speaker 2>When you shrink government spending, that frees up resources for

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<v Speaker 2>private parties who can then spend that money elsewhere. So

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<v Speaker 2>what that sort of a project would do, if they

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<v Speaker 2>actually accomplished, it would transfer resources resources that were previously

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<v Speaker 2>being spent by the government. Money that was previously being

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<v Speaker 2>spent by the government would then be back in private hands,

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<v Speaker 2>where there are much stronger incentives to use that funding,

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<v Speaker 2>to use that money more efficiently. So, if anything, you

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<v Speaker 2>might even see a very small optic in productivity, which

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<v Speaker 2>would of course mean that the economy is able to

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<v Speaker 2>produce new goods and services easier than it was before.

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<v Speaker 2>Now I think that that effect would actually be very slight.

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<v Speaker 2>You'd probably get a much more radical reduction and federal

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<v Speaker 2>expenditure and the size of the bureaucracy to get a

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<v Speaker 2>real big boost of productivity. It's worth remembering that five

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<v Speaker 2>hundred billion in the grand scheme of things really isn't

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<v Speaker 2>that much. Yeah, right now, the national debt stands at

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<v Speaker 2>roughly thirty trillion dollars, larger than the size of the

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<v Speaker 2>overall US economy, and it's just on a course to

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<v Speaker 2>grow and grow and grow. We need to get serious

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<v Speaker 2>about this now and be thinking about even more cuts.

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<v Speaker 1>What does a debt crisis look like if we do

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<v Speaker 1>get to the point where we don't get serious about this,

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<v Speaker 1>and then we get to the point where no one

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<v Speaker 1>wants to buy our debt and they either have to

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<v Speaker 1>print money, which creates a hyperinflation situation, what would be

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<v Speaker 1>the outcome of us getting to that point.

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<v Speaker 2>It's going to be ugly. What you really have to

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<v Speaker 2>worry about is investors no longer willing to buy US bonds,

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<v Speaker 2>like you just said, and in fact, if it becomes

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<v Speaker 2>if we ever get to the point where the US

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<v Speaker 2>is not able to meet it's that obligations we're actually

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<v Speaker 2>looking at a default that would be truly catastrophic. Remember,

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<v Speaker 2>the global financial system basically treats US treasury securities, government

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<v Speaker 2>debt as a quote unquote risk free asset. It's the

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<v Speaker 2>asset upon which all other assets and transactions and the

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<v Speaker 2>global financial system are built. If the value of those

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<v Speaker 2>things becomes comes called into question, you're basically pulling out

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<v Speaker 2>the bottom layer of a house of cards. The whole

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<v Speaker 2>thing is going to come crumbling down. Well, this, we

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<v Speaker 2>really need to make sure that Uncle Sam's fiscal houses

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<v Speaker 2>in order, otherwise we could be looking at something nasty.

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<v Speaker 1>Alexander Salter, I wish I disagreed with you. I wish

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<v Speaker 1>that I could say no, I don't think that will happen.

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<v Speaker 1>I think my issue with the United States of America

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<v Speaker 1>right now is that we have this attitude of hey,

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<v Speaker 1>we're the USA, We're good for it. You know, we're

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<v Speaker 1>not going to run out of them. Who's going to

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<v Speaker 1>stop buying our bonds? But the reality is is that

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<v Speaker 1>when they're perceived to be a bad investment, people will

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<v Speaker 1>stop buying our minds, and then we get to the

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<v Speaker 1>point where we can't pay benefits. It's just the cascade

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<v Speaker 1>effect is something that I don't think Americans can even

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<v Speaker 1>imagine happening here.

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<v Speaker 2>It is frightening, But there is a silver lining. The

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<v Speaker 2>silver lining is that we don't actually need to shrink

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<v Speaker 2>the national debt in order to get this problem under control.

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<v Speaker 2>All we need to do is mop out rate the

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<v Speaker 2>rate at which federal spending grows. As long as we

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<v Speaker 2>can get government spending growth at or below the rate

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<v Speaker 2>of overall economic growth, tax revenues to Uncle Sam are

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<v Speaker 2>naturally going to grow faster than the debt, and so

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<v Speaker 2>we're actually going to pay pay down the debt on

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<v Speaker 2>its own without having to actively try and reduce it.

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<v Speaker 2>And so really this is a sustainability question. If the economy,

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<v Speaker 2>in terms of actual goods and services that we produce,

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<v Speaker 2>is growing at say three percent per year, it's okay

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<v Speaker 2>for federal spending to grow, but it should grow at

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<v Speaker 2>no more than two point nine percent per year. Keep

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<v Speaker 2>real economic growth a heap of a head of government

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<v Speaker 2>spending growth, and after five, ten, fifteen years, our net

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<v Speaker 2>fiscal position is actually going to look stronger than it

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<v Speaker 2>is now.

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<v Speaker 1>But is that kind of like paying the minimum payments

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<v Speaker 1>on your credit card? So it would take us seventy

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<v Speaker 1>k jillion years to actually pay off enough of that

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<v Speaker 1>debt to where we can maybe take a breath. Because

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<v Speaker 1>you know as well as I do, even if there's

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<v Speaker 1>great economic policy put in by one president, the next

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<v Speaker 1>president can come in and undo.

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<v Speaker 2>All of that. Yes, that's the scary thing, right. You

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<v Speaker 2>need continuity across several policy regimes, across several presidential administrations

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<v Speaker 2>and legislators congresses. So as long as you don't have

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<v Speaker 2>a bipartisan consensus to keep federal spending growth below overall

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<v Speaker 2>economic growth, right, if the more profligate party comes back

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<v Speaker 2>into power and just floods things with spending, then we're

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<v Speaker 2>back off to the races. We haven't solved the fundamental problem.

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<v Speaker 2>And so that's silver lining, I think is our best

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<v Speaker 2>politically feasible hope for getting our fiscal house in order.

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<v Speaker 2>But there really does need to be a consensus between

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<v Speaker 2>the two parties that this is something that we have

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<v Speaker 2>to take seriously.

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<v Speaker 1>From your lips to God's ears. But I've been watching

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<v Speaker 1>politics long enough to know that will never happen. Allexander

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<v Speaker 1>Salter is the Georgie E. Snyder Professor of Economics in

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<v Speaker 1>the Rolls College of Business at Texas Tech. The Mouthful's

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<v Speaker 1>worth it, great column, Alexander. I hope we can talk

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<v Speaker 1>about it again in the future.

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<v Speaker 2>It was my pleasure. Thanks for having all right, Thank

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<v Speaker 2>you