Speaker 1: Joining me now is a guy who wrote a great
Speaker 1: column about something that is so insidious and so incredibly
Speaker 1: mindnumbingly stupid at the same time that it almost sounds
Speaker 1: like it's something made up, but it's not.
Speaker 2: So.
Speaker 1: Joining me now is Alexander Salter, who happens to be
Speaker 1: the Georgie G. Snyder Professor of Economics in the Royals
Speaker 1: College of Business at Texas Tech. He is one of
Speaker 1: the co authors of this article from The Hill dot Com. Alexander,
Speaker 1: Welcome to the show, Thanks Maddy. Let's talk about modern
Speaker 1: monetary theory. What is it.
Speaker 2: All? The boy so? Mod monetary theory is a complete
Speaker 2: topsy turvy approach to public finance. Basically, it says the
Speaker 2: government should finance itself entirely by printing money, and the
Speaker 2: only thing that we would do with taxes is raise
Speaker 2: taxes if eventually we need to control inflation. Now, many
Speaker 2: people who back modern monetary theory claim that that's a
Speaker 2: very rare thing that would ever have to happen, because
Speaker 2: if there's any quote unquote slack anywhere in the economy,
Speaker 2: if there's any idle resources, prices won't go up when
Speaker 2: you print money. So it's really impressive is that we
Speaker 2: had a pretty clean test of this theory over the
Speaker 2: past couple of years, and while we saw skyrocketing inflation.
Speaker 2: So it's actually amazing that you had anybody who identified
Speaker 2: as an economist who was willing to sign on with
Speaker 2: this paradigm. And yet they did, and it's caused a
Speaker 2: lot of problems for millions and millions of Americans.
Speaker 1: But in my view, and you can correct me if
Speaker 1: I'm wrong, I think that too much of our monetary
Speaker 1: policy is simply designed to enable more government spending. And
Speaker 1: this is like a government spender's dream. I mean, you
Speaker 1: can spend and spend and spend and not have any
Speaker 1: negative replication repercussions. This is this is like big government's
Speaker 1: you know nirvana here And how did this become so accepted?
Speaker 1: Who started this nonsense and how did to gain steam
Speaker 1: mainstream wise?
Speaker 2: It is absolutely a recipe for fiscal qualities and money mischief.
Speaker 2: If you look back at what happened during and just
Speaker 2: after COVID, you had blowout government spending, deficit spending. Now
Speaker 2: that by itself would not have causedlation. What ultimately made
Speaker 2: it inflationary was all those new bonds that appeared on
Speaker 2: the market all the money that the government had to
Speaker 2: borrow to finance that spending. Our central bank, the Federal Reserve,
Speaker 2: then stepped in created money at usin air to buy
Speaker 2: up all those new bonds. So it was an indirect process,
Speaker 2: but nonetheless it was printing press finance. Again, the usual
Speaker 2: way we think about these things is we should use money.
Speaker 2: Monetary policy control the money supply to dampen down inflation,
Speaker 2: and the government gets revenue via taxes. Modern monetary theory
Speaker 2: turns that on its head. We only use taxes to
Speaker 2: control inflation, and we print money to fund the government well,
Speaker 2: with politicians and bureaucrats at the helm. That's a recipe
Speaker 2: for printing too much money too fast, and of so,
Speaker 2: of course prices go through the roof. Now, there are
Speaker 2: many economists who are close to democratic policy makers, policy
Speaker 2: makers and politicians and the Democratic Party who advocated these ideas.
Speaker 2: From twenty twenty to twenty twenty two, it became de
Speaker 2: facto policy and governed our COVID response, and as a result,
Speaker 2: household were hit with crippling inflation. So this was every
Speaker 2: bit as tragic as it was predictable.
Speaker 1: What sort of responsibility do you think the FED has
Speaker 1: in terms of putting fiscal policy in place that is
Speaker 1: good for the American people versus putting fiscal policy in
Speaker 1: place that allows for a larger government through the sale
Speaker 1: of government bonds.
Speaker 2: Well, it's a difficult question to really pin down exactly
Speaker 2: how we want fiscal policy and monetary policy to work.
Speaker 2: So usually the way that we think about these things
Speaker 2: is that the government the treasury elected officials decide how
Speaker 2: much to spend. That's fiscal policy, and then in the
Speaker 2: background you have the FED Bank conducting monetary policy. Ultimately,
Speaker 2: inflation is the federal reserves problem. The central bank in
Speaker 2: the long run, determines the cost of living by controlling
Speaker 2: how much money is in circulation. The reason that things
Speaker 2: can get a little bit dicey is that when the
Speaker 2: government needs to borrow a lot of money to finance
Speaker 2: what it perceives to be emergency policy, that's going to
Speaker 2: put upward pressure on interest rates. And the FED often
Speaker 2: doesn't like seeing upward pressure on interest rates, so they
Speaker 2: create new money to buy up government debt to keep
Speaker 2: yields and hence interest rates down. So the problem here
Speaker 2: is that irresponsible fiscal policy by politicians puts pressure on
Speaker 2: the central banking bureaucrats to conduct monetary policy too loosely,
Speaker 2: and again the predictable result of that is that prices
Speaker 2: for everything are going to go up.
Speaker 1: So during the go go years of COVID, when we
Speaker 1: were coming up with one giant stimulus program after another,
Speaker 1: how much was the money supply expanded during that timeframe,
Speaker 1: meaning how much more money did they throw into the
Speaker 1: circulating money in the economy.
Speaker 2: It grew really fast, really quick. Before COVID, the Federal
Speaker 2: Reserve's balance sheet, which is a narrow measure of the
Speaker 2: money supply, we sometimes call that the monetary base. The
Speaker 2: total assets on by the Federal Reserve system that was
Speaker 2: about four trillion. It's sent shot up to around eight trillion,
Speaker 2: although it's falling now. It's slightly smaller than that now.
Speaker 2: And that actually compounded to larger measures than the money
Speaker 2: supply that grew even more so, this was a lot
Speaker 2: of liquidity, a lot of new money created very quickly
Speaker 2: and spent very quickly. Again, think about the COVID stimulus checks.
Speaker 2: Right when everybody opened the mail and day and found
Speaker 2: a seven hundred and fifty one thousand dollars check from
Speaker 2: the Treasury Department. Now was that financed indirectly. It was
Speaker 2: financed by the FED creating money and distributing it to
Speaker 2: the financial system. And so it's not really a surprise
Speaker 2: that when America and households get all this new money,
Speaker 2: they needed to spend it on stuff. So as soon
Speaker 2: as they could they did. They spent it on everything,
Speaker 2: and as a result, everything got more expensive. What makes
Speaker 2: this truly tragic is that the prices of goods and
Speaker 2: services that households need, food, clothing, shelter that rose much
Speaker 2: faster than wages is did. So if the things that
Speaker 2: you need to buy to maintain your standard of rialting
Speaker 2: are getting more expensive faster than your income, you're basically
Speaker 2: taking a pay cut. And that's why I think Americans
Speaker 2: were so hopping mad about this when they went to
Speaker 2: the ballot box for the most recent election.
Speaker 1: So I agree with you on that. By the way,
Speaker 1: I do think inflation was one of the main drivers
Speaker 1: that drove Trump back into the White House. But I
Speaker 1: want to ask you a question about that election, because
Speaker 1: before you came on the show, we were talking about
Speaker 1: the efforts by Elon Muskin to think Ramaswami to shape
Speaker 1: five hundred billion dollars off of the budget, and what
Speaker 1: would you think a contraction. Let's just say for this
Speaker 1: sake of this conversation, they pull it off right, and
Speaker 1: they shrink the size of the federal workforce, they shrink
Speaker 1: the size of some of these departments, and that five
Speaker 1: hundred billion comes out of the deficit spending. What does
Speaker 1: that do to the economy overall? Does it force us
Speaker 1: into recession in the short term? What would be the
Speaker 1: most likely outcome of that kind of of contraction.
Speaker 2: Well, I don't think that there would actually be a recession.
Speaker 2: When you shrink government spending, that frees up resources for
Speaker 2: private parties who can then spend that money elsewhere. So
Speaker 2: what that sort of a project would do, if they
Speaker 2: actually accomplished, it would transfer resources resources that were previously
Speaker 2: being spent by the government. Money that was previously being
Speaker 2: spent by the government would then be back in private hands,
Speaker 2: where there are much stronger incentives to use that funding,
Speaker 2: to use that money more efficiently. So, if anything, you
Speaker 2: might even see a very small optic in productivity, which
Speaker 2: would of course mean that the economy is able to
Speaker 2: produce new goods and services easier than it was before.
Speaker 2: Now I think that that effect would actually be very slight.
Speaker 2: You'd probably get a much more radical reduction and federal
Speaker 2: expenditure and the size of the bureaucracy to get a
Speaker 2: real big boost of productivity. It's worth remembering that five
Speaker 2: hundred billion in the grand scheme of things really isn't
Speaker 2: that much. Yeah, right now, the national debt stands at
Speaker 2: roughly thirty trillion dollars, larger than the size of the
Speaker 2: overall US economy, and it's just on a course to
Speaker 2: grow and grow and grow. We need to get serious
Speaker 2: about this now and be thinking about even more cuts.
Speaker 1: What does a debt crisis look like if we do
Speaker 1: get to the point where we don't get serious about this,
Speaker 1: and then we get to the point where no one
Speaker 1: wants to buy our debt and they either have to
Speaker 1: print money, which creates a hyperinflation situation, what would be
Speaker 1: the outcome of us getting to that point.
Speaker 2: It's going to be ugly. What you really have to
Speaker 2: worry about is investors no longer willing to buy US bonds,
Speaker 2: like you just said, and in fact, if it becomes
Speaker 2: if we ever get to the point where the US
Speaker 2: is not able to meet it's that obligations we're actually
Speaker 2: looking at a default that would be truly catastrophic. Remember,
Speaker 2: the global financial system basically treats US treasury securities, government
Speaker 2: debt as a quote unquote risk free asset. It's the
Speaker 2: asset upon which all other assets and transactions and the
Speaker 2: global financial system are built. If the value of those
Speaker 2: things becomes comes called into question, you're basically pulling out
Speaker 2: the bottom layer of a house of cards. The whole
Speaker 2: thing is going to come crumbling down. Well, this, we
Speaker 2: really need to make sure that Uncle Sam's fiscal houses
Speaker 2: in order, otherwise we could be looking at something nasty.
Speaker 1: Alexander Salter, I wish I disagreed with you. I wish
Speaker 1: that I could say no, I don't think that will happen.
Speaker 1: I think my issue with the United States of America
Speaker 1: right now is that we have this attitude of hey,
Speaker 1: we're the USA, We're good for it. You know, we're
Speaker 1: not going to run out of them. Who's going to
Speaker 1: stop buying our bonds? But the reality is is that
Speaker 1: when they're perceived to be a bad investment, people will
Speaker 1: stop buying our minds, and then we get to the
Speaker 1: point where we can't pay benefits. It's just the cascade
Speaker 1: effect is something that I don't think Americans can even
Speaker 1: imagine happening here.
Speaker 2: It is frightening, But there is a silver lining. The
Speaker 2: silver lining is that we don't actually need to shrink
Speaker 2: the national debt in order to get this problem under control.
Speaker 2: All we need to do is mop out rate the
Speaker 2: rate at which federal spending grows. As long as we
Speaker 2: can get government spending growth at or below the rate
Speaker 2: of overall economic growth, tax revenues to Uncle Sam are
Speaker 2: naturally going to grow faster than the debt, and so
Speaker 2: we're actually going to pay pay down the debt on
Speaker 2: its own without having to actively try and reduce it.
Speaker 2: And so really this is a sustainability question. If the economy,
Speaker 2: in terms of actual goods and services that we produce,
Speaker 2: is growing at say three percent per year, it's okay
Speaker 2: for federal spending to grow, but it should grow at
Speaker 2: no more than two point nine percent per year. Keep
Speaker 2: real economic growth a heap of a head of government
Speaker 2: spending growth, and after five, ten, fifteen years, our net
Speaker 2: fiscal position is actually going to look stronger than it
Speaker 2: is now.
Speaker 1: But is that kind of like paying the minimum payments
Speaker 1: on your credit card? So it would take us seventy
Speaker 1: k jillion years to actually pay off enough of that
Speaker 1: debt to where we can maybe take a breath. Because
Speaker 1: you know as well as I do, even if there's
Speaker 1: great economic policy put in by one president, the next
Speaker 1: president can come in and undo.
Speaker 2: All of that. Yes, that's the scary thing, right. You
Speaker 2: need continuity across several policy regimes, across several presidential administrations
Speaker 2: and legislators congresses. So as long as you don't have
Speaker 2: a bipartisan consensus to keep federal spending growth below overall
Speaker 2: economic growth, right, if the more profligate party comes back
Speaker 2: into power and just floods things with spending, then we're
Speaker 2: back off to the races. We haven't solved the fundamental problem.
Speaker 2: And so that's silver lining, I think is our best
Speaker 2: politically feasible hope for getting our fiscal house in order.
Speaker 2: But there really does need to be a consensus between
Speaker 2: the two parties that this is something that we have
Speaker 2: to take seriously.
Speaker 1: From your lips to God's ears. But I've been watching
Speaker 1: politics long enough to know that will never happen. Allexander
Speaker 1: Salter is the Georgie E. Snyder Professor of Economics in
Speaker 1: the Rolls College of Business at Texas Tech. The Mouthful's
Speaker 1: worth it, great column, Alexander. I hope we can talk
Speaker 1: about it again in the future.
Speaker 2: It was my pleasure. Thanks for having all right, Thank
Speaker 2: you