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#88 Warren Mosler & Phil Armstrong: Weimar Republic Hyperinflation Through An MMT Lens (part 1)
57 回視聴•2021/02/17
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MMT Podcast with Patricia Pino & Christian Reilly
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Part 1: Patricia and Christian talk to MMT founder Warren Mosler and MMT scholar Dr Phil Armstrong about their recent paper: “Weimar Republic Hyperinflation through a Modern Monetary Theory Lens”.
Please help sustain this podcast!
Patrons get early access to all episodes and patron-only episodes: https://www.patreon.com/MMTpodcast
For an intro to MMT:
Listen to our first three episodes: https://www.patreon.com/posts/41742417
All our episodes in chronological order: https://www.patreon.com/posts/43111643
All of our episodes with Warren Mosler: https://www.patreon.com/posts/42918786
All of our episodes with Phil Armstrong: https://www.patreon.com/posts/42072846
Some of our other episodes with Warren Mosler which deal with inflation, interest rates and central bank policy:
Episode 59: What Do Central Banks Do?: https://www.patreon.com/posts/39070023
Episode 80: MMT Holiday Special (part 1): https://www.patreon.com/posts/45281376
Episode 81: MMT Holiday Special (part 2): https://www.patreon.com/posts/episode...
Our episode 65 with Phil Armstrong on inflation (more on Paul Volcker’s policy decisions as Fed chair in the intro): https://www.patreon.com/posts/40672678
Our episode 55 with Dr Dirk Ehnts on MMT in the context of the Eurozone: https://www.patreon.com/posts/38252014
Our episodes with Sam Levey that touch on the forward pricing channel:
Episode 43: https://www.patreon.com/posts/35073683
Episode 76: https://www.patreon.com/posts/43697752
Episode 77: https://www.patreon.com/posts/43886189
Weimar Republic Hyperinflation through a Modern Monetary Theory Lens by Phil Armstrong and Warren Mosler: http://moslereconomics.com/wp-content...
A Discussion of Central Bank Operations and Interest Rate Policy by Warren Mosler and Phil Armstrong: https://gimms.org.uk/wp-content/uploa...
Monopoly Money: The State as a Price Setter by Pavlina R. Tcherneva: http://moslereconomics.com/wp-content...
Bill Mitchell - Zimbabwe for hyperventilators 101: http://bilbo.economicoutlook.net/blog...
Warren Mosler on Paul Volcker (from 13:25): https://youtu.be/6WSQ20I1Jv4?t=809
Tickets for “An Introduction To Modern Monetary Theory: Reconceptualising The Nature Of Banking” (presentation by Phil Armstrong) on 26th March 2021, organised by Women in Banking and Finance: https://www.wibf.org.uk/events/detail...
A list of other upcoming MMT events and courses: https://www.patreon.com/posts/47531455
Phil Armstrong’s book, Can Heterodox Economics Make a Difference?: https://www.e-elgar.com/shop/gbp/can-...
Warren Mosler’s (free) e-book, Seven Deadly Innocent Frauds Of Economic Policy: http://moslereconomics.com/wp-content...
Transcript for opening monologue: https://www.patreon.com/posts/47638641
We are working towards full transcripts, but in the meantime, closed captions for all episodes are available on our YouTube channel: https://www.youtube.com/channel/UCEp_...
Show notes: https://www.patreon.com/posts/47638591
文字起こし
it's all about prices paid by the
government when it spends
the government is the only supplier of
the thing which it demands for payment
of taxes
we need their money their tax credits
their dollars their pounds
and they've got them they tell us what
we have to do to get them and uh if they
say you have to work five hours to get
one of these it's worth five hours of
our time
they say you have to work 10 hours it's
10 hours of your time
they say you get 40 000 of them to serve
in the army well serving in the army is
worth 40 000 they're
telling us it's economics and
microeconomics 101 it's monopoly you
learn it on your first day it takes 15
minutes
and then you get into oligopoly and then
you get into more competitive markets
and that's where the
more difficult analysis comes
fortunately the currency itself is the
simplest case it's a simple monopoly
i've been very interested in the weimar
mainly because it's like the
go-to isn't it you always get people oh
if the government spends money
in the way that you're saying you'll end
up like vimar hyperinflation
so i i thought what we really need to do
is to have an mmt
paper where we take on their citadel in
other words we look for the main thing
that people use against mmt
and we just basically take it apart
[Music]
this is the mmt podcast with patricia
pino
and christian riley
hi i'm christian reilly and welcome to
the modern monetary theory podcast
you can find us on twitter at mmt
podcast and you can support the show
by going to patreon.com mmt podcast
for as little as a dollar a month you
can get early access to all our episodes
and patron only episodes a big thank you
to all our supporters
so far at the beginning there you heard
mmt founder warren mosler
and scholar and author dr phil armstrong
and in a moment we're going to be
talking to them about their recent paper
on the weimar republic
hyperinflation if this is your first
time hearing about
mmt you might want to listen to our
first three episodes where me and
patricia talk through the basics
but if you want to dive in here a good
starting point is to ask
why does any fiat currency have any
value to start with
and a relatively uncontroversial answer
to that question
is that the government is the only
issuer of the thing that it demands for
payment of taxes
that thing is called the british pound
here in the uk
but this generalizes to most if not all
governments that issue their own fiat
currency
in modern money systems like these the
government
imposes attacks in a token that it alone
is allowed to create
which causes people to need to do things
sell their time or their labor or the
things they make with that time and
labor
to get these tokens to pay the tax and
so a lot of the magic and the mystery
surrounding modern money
can be broken down by thinking of the
currency
as a tax credit a five pound note
whatever it can buy in the private
market
is a five pound tax credit a promise to
cancel out
five pounds worth of your tax obligation
to the
state the entity that issued the
liability
and then the credits needed to settle
that liability
in the first place one implication that
follows from this
is that the currency issuer the
government can't run out of its own
money
and we've done many episodes on what
that means for the politics of austerity
but this episode is designed to help you
cope with that person who
pops up from time to time to warn you
that if the government
understood it had an infinite capacity
to spend
maybe to solve social problems or god
forbid
prevent human extinction this will
inevitably turn your nation
into
although it's tempting to respond to
this by saying
why thank you i was just about to take
control of the government
and start attempting to pay a trillion
pounds worth of
gold timber coal and foreign currency to
france
and invite them to send an army over to
occupy all of our factories
but your tweet has shown me the error of
my ways
while it's valid to say that for the
legitimately curious
in this episode we're going to be
talking about how the mmt
theory of price level plays into this
particular historical case
the mmt view is that modern money
derives its value from what the issuer
of currency
says you have to do to earn it so as
warren explains in his mmt
white paper the price level is
necessarily a function of prices paid by
the government when it spends
or collateral demanded when it lends and
so when the government pays more for the
same thing today
than it did yesterday it's revising the
value of its currency
downward if that sounds a bit
complicated
don't worry we're going to unpack this a
little bit more with warren and phil in
a moment
and in the show notes i've linked to
their paper and also to some of our
other
episodes and resources on this topic and
also i've linked to a list of
mostly online events and courses where
you can learn from
leading mmt economists and maybe just as
importantly
connect with people on a similar journey
and as ever i've linked to where you can
support this podcast
financially via patreon.com
mmt podcast support starts a dollar a
month which is
72 british pence at the time of
recording and no matter what level of
support you give
you get early access to all of our
episodes and
patroning the episodes where you can ask
me and patricia
mmt questions we are 100 listener
supported
your financial support really helps keep
the show going
and it keeps us going and your support
in other ways whether it's by
recommending it to other people
or just by listening and spreading the
word about this stuff
really helps too so thanks as ever for
the time you put into understanding mmt
this is part one of a two part
conversation
and part two will be out next week let's
dive in
welcome one and all to the mmt podcast
i'm christian riley
and i'm patricia pino and we are
delighted to welcome back
two regular guests mmt founder warren
mosler how are you warren
good good afternoon and mmt scholar
author and interviewer extraordinaire
phil armstrong how are you phil
i'm all right thanks christian i've
learned all i know about interviewing
from you and patricia so i'd like to
thank you for that
you're doing very well thank you we're
going to be talking about your paper
which is called
vitamin republic hyperinflation through
a modern monetary theory lens
but for starters what was the motivation
why did you guys write a paper on the
weimar republic
now or 2020 as it was i've been very
interested in the weimar
mainly because it's like the go-to isn't
it you know like when people start to
talk about government spending money and
the the mmt model of you know the
government spends first and taxes come
later
you always get people oh if the
government spends money
in the way that you're saying you'll end
up with like vimar
or zimbabwe or hyperinflation i think
was it bill mitchell that talks about
the
the hyper inflation hyper ventilators
so i i thought what we really need to do
is to have an mmt
paper where we take on their citadel
in other words we look for the main
thing that people use against mmt
and we just basically take it apart so i
wrote
as is my way quite a long-winded paper
about the weimar hybrid inflation
through an mmt
lens and then i thought well it's okay
this paper let's be honest a bit long
not great what i really need is a bit of
the [ __ ] magic here so
as you might imagine so then i got in
touch with warren
and i said like warren would you prepare
to help me out he goes yeah warren's a
nice guy i'm not just saying that
because he's here but
he said he's prepared to help and i said
well it'd be really good if you would
go mall and help what about you you
co-author with me warren
so i sent warren my big paper
and warren got into it you know he was a
bit reluctant you know he's a busy man
he's playing four hours of tennis
but you give warren a challenge you know
he's got to be in there
so i drew him in it's my fault uh he put
a bit of mosul magic on it and he said
to me
would you mind if i edit it and i said
i'm not gonna say no so i said yeah you
go through it so if you imagine it
warren took my basic material
went through it added insights
really sharp mmt insights to it
kept quite a lot of the historical
analysis
and then i went through at the end doing
a little bit of tidying up so basically
it's me at the start
warren gives the mm the the really sharp
mmt
insights i tidy up a bit and then it
went to games
what i love the most about the paper is
that it
you know it reads very easily for having
you know such a clear explanation of
what happened
in in in germany at the time and even
though you have some tables of data at
the end
you know you you don't really present
any kind of
really complex econometrics models or
equations in there
is that is that something that you feel
it's kind of a surplus to requirements
in most economic papers
well this is really i mean warren and i
we're
we're still young guys but you know
we're we're not the youngest
and in a way there's a guy called dirk
ants he's a young
academic coming through with his team
and they're we're just passing the baton
on to them
so what they're going to do is warren i
hope is they're taking our paper we've
laid
in a way that the seeds for that and
they're taking it on and adding these
things
they're going to add a lot more
mathematics to it more data
and importantly with dirk being german
he can obviously look at the original
papers
so in other words i i mean warren will
probably add a bit to that what we've
really done there is we've seen right
here's the starting point we think you
know we're not vymar scholars you know
speaking for myself and i think warren
will agree we were not experts in weimar
history
you know i can't read german despite the
fact my wife's a german teacher i must
confess
so in a way i think that's a fair point
but
i think what what the paper does it it
wets the appetite really
and it and and it's for these scholars
now to to take it up
that's my view and i'm on that sort of
idea
phil sent me this i'll call it weimar
information package
is that a fair statement i think it's
more than fair warren
okay and uh it was had everything a lot
more than i'd ever known about it
which i found interesting but it came at
a time when
uh other mmt proponents i felt were not
giving the answers i'd be giving when
people start asking about inflation
and what's causing it and they talk
about excess capacity and they talk
about
overspending and all these things and
the you know core mmt
understanding our contribution to the
history of
to the other schools of economic thought
are that the currency is a monopoly
monopolist or price setter
the price level is a function of prices
paid by government it's not
these other things like patricia you're
talking about expectations or anything
like that
those are all things you come up with
when you don't recognize that it's a
simple monopolies
uh case of a monopoly setting price and
and that's what the textbooks have they
they haven't recognized it's a monopoly
setting price we have
and so it looked to me like opportunity
to put this
in a paper that also had topical
interest to
to nail down exactly what our position
is on
you know what the origin of the price
level is which none of the other schools
of thought have by the way
it's always historic and they can tell
you why the price level changes from one
period to another but
they can't tell you why it was where it
was at the beginning or whatever it was
they don't have any theory for that
so they're just left with an infinite
regression and they'll tell you that
i've talked to people at the fed they
freely say yeah that's
you know one of the shortcomings of what
they're doing so but we
we have all that it's a monopoly and so
by taking that
understanding and then using that lens
so to speak
to walk your way through what happened
in weimar
everything falls into place precisely
and it makes perfect sense and it
it gives us a form to present you know
how we look at these things and
and why this is the way it is and not
the way the other schools have thought
i've said it is
now that all being said the paper's been
out for how long now phil
oh that's a good one a few months at
least i couldn't tell exactly
yeah and you know i've seen very few
mmt promo proponents citing it or using
it for an example of
you know the source of the price level
or inflation and i see them
over and over again still talk
speaking about it the way they were
speaking about it before we read the
paper
so in that sense i i'm sort of it's not
it hasn't been a success you know
for the intended purpose at least not up
until now
would you say that's a fair statement
phil i hope
when we when we write our book chat to
warren we have a book one
uh well one and i are involved in a book
project we hope that we'll
that'll have a bit more impact but more
about that later but yeah i
i'd hoped it would have more impact on
the mmt community
that than perhaps it has yeah i mean
look you've been you've been
phil you've been interviewing some of
them afterwards and it's it's like it
never happened
they're still with their old ways well
as you know warren it's very it's very
hard to move people from their position
my expectations perhaps of of its impact
were probably
lower than yours anyway but but i
from my experience i would agree with
what you said yeah
i believe uh we interviewed a while back
i think it was before this paper was
issued mind
sam levy on on the very no the very
things that this paper kind of
highlights which is the government as
the price setter and how
governments you know purchasing of of of
things in the economy is what
ultimately uh drives all the all the
market prices very good very good you
know that's what it takes it takes
somebody like that to bring it out you
know
and and not the people who've been doing
it for 20 years so
apparently anyway you know and and they
were all the ones that explained
that 20 years ago ironically
that it would take somebody new because
the older people don't
change all right well let's just say it
loud and clear just to set the
foundations then
what in as simple terms as possible
what is the mmt theory of the source of
the price level
maybe start with what the price level is
and how that relates to inflation
yeah it's it's it's all about the prices
paid by the
government when it spends the government
is the
only supplier of the thing which it
demands for payment of taxes
and so you know we need their money or
whatever they want
pay taxes their tax credits their
dollars their pounds
and they've got them and they tell us
what we have to do to get them
and uh if they say you have to work five
hours to get one of these it's worth
five hours of our time
they say you have to work 10 hours it's
10 hours of your time you know
they say you get 40 000 of them to serve
in the army while serving in the army's
worth 40 000.
they're telling us that's how it look
it's economics
and microeconomics 101 it's monopoly you
learn it on your first day it takes 15
minutes
it's the easiest part of economics is
how
price pricing works when there's no
competition yeah when there's no
competition you have
that you know that's the easiest one to
understand and then you get into
oligopoly and then you get into uh
competitive markets more competitive
markets and that's where the more
difficult analysis comes fortunately
the currency itself is the simplest case
it's a simple monopoly
because the government has what we need
or else severe penalties
and they tell us what we have to do to
get it and so i
i don't know it's a fairly simple point
okay so
that's the that's the source of the
price level now how does that relate to
inflation
well inflation is a change in the price
level
and so if the price level won't change
unless the government
changes the prices it pays
otherwise look if the government said
u.s government spent five trillion
dollars last year let's say on
goods and services which it didn't work
transfer payments but let's say it was
goods and services
and it said look we're not going to
spend a penny more this year than we
spent last year
and then let's say all prices went up by
a dollar by something
okay well government spending goes to
zero
now the economy's got four trillion
dollars of tax liabilities and no way to
pay it because the government's
not spending anything because it's
constrained its spending by the prices
it's willing to pay
so then the whole thing deflates back
now i set up three currencies
at universities or you know worked with
the universities to do this
uh to make it obvious to everybody who
studies this the university of missouri
kansas city the buckaroo the denison
dollar
and the franklin frank at franklin
university in lugano
and it's very simple the students they
wanted their students to do public
community service so i said well how
about if you just put a tax on all the
students how many hours do you want them
to work each semester and they'd say
10 hours or something i say all right
well you put a tax of 10
units of your new currency now it's the
denison dollar the franklin frank and
umkc is the buckaroo because they're
mascots
kangaroos so they called it the buckaroo
and so all the students
in the economics had to submit pay a tax
of 10 buckaroos per semester
and the school would authorize its
agents the hospitals and the
community service areas you know to to
hire
students and pay them one buck a roof
per hour
and so the students would have to work
10 hours to earn 10 buckaroos to pay
their tax
and that buckaroo is is a fully
functioning currency just like the
dollar the yen or the pound
and i did the accounting for the first
year at one of the
umkc conferences and the total tax might
have been a thousand
but the total spending by the university
was eleven or twelve hundred
the students earned more than they
needed to pay the tax the school had a
deficit
it didn't hurt their financial
statements it didn't hurt
school's ability solvency or their
ability to operate
deficit it was of no consequence and
they had a zero percent interest rate
they didn't pay interest on the extra
debt
buckaroos they spent policy rate and it
was a small open economy
free trade whatever you want to call it
and what was the value
of a buckaroo well back in 1996 i think
when they started
if a student didn't want to do community
service he could buy one from another
student
and the going rate turned out to be
about five dollars per buckaroo
so student labor was worth about five
dollars an hour in 1996.
last year well 2019 i think
they told me students have to pay 20 to
buy them from each other
so the value of the buckaroo is one hour
student labor why because that's what
the university said
he had to do to get it did the
university restrict its budget
by quantity no they could earn all they
wanted they had unlimited spending
at that rate of one bucket group per
hour they wound up deficit spending
around 10
the first year i don't know what
happened after that and the same things
happened throughout so they've had a
zero interest rate policy for those same
20 20 some 25 years
and the value of the buckaroo went from
five dollars to 20
now did the buckaroo go up in value no
it was one hour of student labor
then it's four it's one hour today but
the dollar the five dollars used to buy
an hour of student labor now it takes 20
so you could say the dollar went down in
value by that amount
but the bucket rule was internally
stable it didn't change
it's a monopoly setting price its price
level has been fixed
for 25 years why because the
the school pays the same thing for labor
one buck a roof per hour that it did 25
years ago
and so it's internally stable it was
actually a better investment than the s
p
500 if you happen to buy them at five
dollars back then maybe
20 now and uh
but that's beside the point and the
school used it to provision itself with
student labor
and it had a zero interest rate policy
totally open trade no tariffs or
protectionism it had full employment the
whole time
anybody who wanted a job could get one
there was no
such thing as unemployment there were
jobs it was a full job guarantee you
might call it which i use as
that's why i say the job guarantee is
the base case for analysis
this is the base case for purposes of
analysis and so you asked me
what would cause the price level to
change what would cost
well the school would have to start
changing what it pays for student labor
you would have to say you know we're
going to pay two buckaroos an hour
instead of one
and then today's value of the buckaroo
would drop from 20 to 10 right because
you only have to work a half hour to get
it
so they could redefine their currency
downward by paying more for the same
thing
well the same is true of the denison
dollar and franklin frank and anybody
else who does this
which includes the dollar the yen the
pound you know and uh
the euro it's just not any more
complicated than that
pavelina chernova wrote a math model
back in 1996
that still stands it shows you exactly
how this monopoly pricing works and it's
every public finance textbook shows how
public monopolies work
but none of the economic schools of
thought has recognized this it hasn't
dawned on them that it's
that's the source of the price level and
they continue to do things like come up
with this expectations theory and things
like that that
you know have no bearing whatsoever on
the price level i don't think you are
but
are you saying that anybody paid by the
government
a soldier a teacher a nurse if they get
a raise
it's never going to be a raise in real
terms because the raise itself
lowers the purchasing power of the
currency to the exact same value
as that of the raise let's just say that
could be the case
okay the other thing is as productivity
increases
uh relative prices could drop versus the
wage which is what happened with
the umkc uh buckaroo right
so one buckaroo went from buying
i don't know you know maybe took a
hundred buck a ruse to buy a computer
back then now it takes 10 because you
had the
relative value of computers dropping and
so in that sense
the students have gotten a raise and
measured in terms of
computers okay measured in terms of
the general price level i'm not sure how
student labor prices you know the 5 to
20
keeps up with you know how that fits in
in relative value with other prices
student labor may be relatively more
expensive now than it was then
i don't know but assuming it's the same
as if labor was totally fungible then
then it would stay the same and yes if
that's where the currency is being
priced at the margin
by increasing that you're just re
defining your currency downward and
you're not changing the
real incomes you know in this case of
the um
casey buckaroo paying more is not
increasing
the real exchange rate value so you know
for other goods and services
it's it's giving a raise isn't helping
anybody in general it just turns into a
situation of a change in a price level
now inflation is a continuous change in
the price level what we show in the
weimar paper is that
it's a continuous change but it consists
of a series of one-time changes which
are the
increases in prices being paid by the
government so as the government pays
more
that is the new price level so you could
say it's it's not continuous in the
sense that
it's only as the government pays a
higher amount as that
is that new price level
institutionalized let's say but yeah if
you
just pay students two buckaroos an hour
instead of
one they're not gaining anything in
terms of how many pencils a bucket rubiz
or how many computers they buy
so what we say for the nominal wage of
the job guarantee
and i set it i think and all the way
back to full employment price stability
it doesn't matter what the wage is
because it's just the numerator
and you know it will reflect relative
value price level will reflect
value relative to unskilled labor what
you can do
is increase it in real terms rather than
in nominal terms
and so you can say it includes vacation
it includes uh
housing allowance it includes uh child
care and now you're you're increasing
the real compensation at the minimum
wage
and so the whole idea back in 1996 was
to use the
what's today called the job guarantee as
a way to introduce benefits from the
bottom up
in a way that then becomes universal and
spreads out without having to legislate
them
that was an important part of that paper
let's say you're
negotiating wages with your boss and
somebody says i'm not going to give you
a raise because it won't be a raise in
real terms
according to mmt how how do we respond
to that
well you know he's mixing metaphors and
it's it's a fallacy of composition
you know it's not true because your wage
there is a relative wage there's not one
way
you know a doctor can get a larger share
of the gdp than a
nurse because of institutional structure
and so the doctor making more money is
not going to
mean that he doesn't get more it means
he gets more maybe and the nurse gets
less right
so it's it's not as simple as that that
would not be a
legitimate answer the age of the answer
there is you've got you're not going to
get a raise
for those kinds of reasons anyway you're
going to get a raise because the
employer has to give you a raise or else
he's going to lose you
or he's going to lose your productivity
i just wanted to contrast that
with the neoclassical approach to
controlling inflation and you mentioned
that
quite early in in in your paper about
the way that
the neoclassical think things work about
controlling
inflation with the interest rate but you
say that's ineffective for two reasons
the first one is that the interest rate
is
another another way of you know it adds
to the government deficit effectively so
it's another income channel
and the other thing that you mentioned
is that inflation is
what i understand from it and maybe
correct me if i'm wrong but
the interest rate is used to calculate
the price of futures
in commodities so effectively by raising
the interest
rate you're raising all the prices of
commodities in the future
yeah so so no notice i've been careful
to talk about the price level
and that inflation as defined by
economists is a continuous change
in the price level and so if um if you
go to the any central bank and you say
what's the rate of inflation
they don't know they can't answer that
question they can say
what inflation was in the last time
period they've measured the
cpi was up two tenths of a percent last
month and annualized it's whatever
they can give you a forecast for next
month but they can't give you what it is
right now so
what they're doing is measuring changes
in the price level and then somehow
extrapolating that
into what they presume to be would be a
continuous
change in price level how that implies a
continuous change in price level so they
don't have any measurement for the
continuous change in the price level
and so like well then what is that thing
well if you look closely at the
definition of inflation
the way i categorize it and i'm taking
some liberties because nobody's done it
all so i can categorize it any way i
want right but uh for consistency and
for and to promote an
understanding i've counterized it as
the continuous change in the price level
faced by people right now okay
when they go to buy things for delivery
today tomorrow the next day or out into
the future
you know what kind of a continuous
change in prices
are they looking at what is the term
structure of that price level
and if that term structure the price
level is
increasing at three percent a year
continuously i say that
fits the academic definition of
inflation
now if you look up inflation in a
textbook an academic textbook it
probably won't
use that definition it's a continuous
increase in the price level
but they can't tell you what that is or
means what is a continuous increase in
the price level
something happening over time if you
think carefully about it it doesn't
say much of anything and that's why they
can tell you what it was in the last
time period or what they forecasted
coming up yeah no because it seems to me
that the definition of futures and the
way you price commodities in future
as well as the fact that the interest
represents an income channel for savers
those two things seem to be recognized
by the mainstream but for some reason
they don't really factor those in when
talking about interest rates
yeah the reason why i say this is
because the the
the fact that the futures are kind of
that the futures are influenced by the
interest rate that the way that we price
commodities are influenced by the
interest rates
and as well as the fact that the
interest rate represents an income
channel for savers
those two things are recognized by the
neoclassicals but for some reason they
don't factor their
that in when considering the
effectiveness of interest rates in
controlling inflation and it's really
puzzling
to and almost frustrating to see that
they don't make that connection but
the fact that they have a different
definition for inflation maybe
might explain things yeah you know
you're exactly right
and so the continuous change in prices
faced by today's agents is
fully a function of the the policy
interest rate right the term structure
of rates
now i know the fed to depth when i i
remember visiting a guy named michigan
back in maybe 2008 at the fed i think
he's maybe a columbia or something like
that
and they were using forward prices to as
part of their
calculation for cpi now just because
you have a positive rate the term
structure of rate of prices faced by
people today who want to buy is going up
at a continuous rate
that doesn't mean the spot prices are
going to go higher you know so if gold
today is
1000 pounds and and there's a zero
interest rate and gold
for five years from now is a thousand
pounds it doesn't mean it's going to be
a thousand pounds in five years or next
year the year after
if the interest rate is ten percent and
gold five years from now is it
six years from now is that two thousand
pounds where spot is at one thousand
it doesn't mean the spot rate over time
is gonna go up to two thousand
it only means that the if you wanna buy
gold today for five or six years forward
that's what you have to pay
and if you're a gold miner and you wanna
sell it that's what you're gonna get
so those are real prices faced by the
real economy in real time
for forward delivery and so that is the
continuous
increase in prices faced by today's
agents trying to do business
and so the central bank is directly
uh creating that term structure of
prices
as it changes rates now the irony is
they don't they never even discuss that
in their minutes or their meetings or
anything else
so if they're going to raise rates by
one percent they're
raising the term structure of prices
faced based by everybody in the economy
by one percent a year continuously
they don't discuss how that might affect
the economy or might not affect the
economy besides
they've totally left it out so the one
thing that is happening for sure when
they raise rates which is the term
structure of prices
is about the only thing they leave out
of their discussion they discuss
everything else
except for the one thing that you know
they don't really know their influences
on other things we raise rates what
happens to our measurement of inflation
or to commodities or you know they have
all kinds of charts and correlations
they don't actually know
but they they do know for a fact what
happens to term structure prices
and that does hit the economy you know
between the eyes so to speak
immediately and they don't even discuss
it it hasn't dawned on them that that
has any
bearing on the economy that they're
influencing phil do you have anything to
add a few beats ago
warren said if you opened up the a
mainstream
textbook you'd probably get a different
definition of of inflation
and you know having been an economics
teacher i just wondered if you kind of
knew off the top of your head what that
definition would be
that they were working with well i mean
when i taught a level it was always a
sustained
uh increase in the average level of
prices but
as warren said there's no clear
answers to what sustained is you know
it's a bit like the medium term and the
one bright kid said to me
what's a medium term cern i said well
it's a little bit longer than the short
term but
it's it's not quite as long as the long
term
and so in a way that's what they would
say but as you know
when you learn things you learn what the
examiners want you to say you know so
when the kids would ask me what's the
definition of inflation i'd i'd say have
a look on the mark scheme
and see in previous years what the
examiners want
because in a way teaching a level
it's the only thing that matters in a
way is the grade
you know so whereas warren obviously not
being burdened
with uh having the tj level he can kind
of tell the truth
and in a way i'm i'm gonna you know what
this is moses law
as you know which is there's no
recession too deep that an
increase in net government spending
can't deal with it
yeah it's it's a financial crisis not
necessarily a recession right
yeah yeah warren's very specific with
his words so
it's almost like mosul law too when the
feds sit down
they discuss everything that might
affect the
inflation apart from the one thing that
does one thing i think is quite
interesting is that if you think about
one of the normal inverted comments
normal where mentees talk about
inflation
as you know all too well one of the
things that these
many mmts say that inflation is caused
by
excess spending net government spending
or can be caused by excess government
spending at full employment which as you
say isn't
wrong but it's not kind of right
so how would you i saw how would you
rationalize that
with what what you say which is i agree
with both it's that link and you you
answer this question for me which is
you know obviously the price level being
paid by the government
is jet generates that increase inflation
how would you rationalize those two
strands if you like if
of mmt because i think from christian
patricia's point of view speaking for
them i'm sure we'll get lots of
questions from the mmt podcasters
how do those two things fit together so
if you want to use the word
excess spending that presumes there's
some kind of
something's going on in excess and
causing some problem
if you want to assume the problem is
price is going up then you would say
if the government's paying higher prices
for the same thing
that's the evidence of the excess
spending that's
causing you know the price level to
change because it's suspending
at incrementally higher prices that is
the redefinition
of the currency downward ten dollars
buys one hour of labor well now twenty
dollars buys an hour of labor now 25
buys an hour of labor
every time the government does that
that's the evidence
that you know the government has
redefined the price level downwards
so if you say it in that way it's not
the quantity of the spending
it's the fact that the spending is
occurring at higher prices that's
changing the price level
the quantity is not per se it's not the
con it's not
any consequence yeah i mean i absolutely
agree with that one
and the point i would make is to me when
warren told
when you told me that warren that's
where i think a lot of the mmt is not
wrong they just don't take the extra
warren step
if i might you know what i mean yeah i
call it i call it a lost
t it's a teaching moment lost yeah go go
that little step
further you know you're one step from
the top of the stairs
and you're not onto the landing you know
and the other problem is you know people
say well that's just games
and they're right you know we're our our
contribution is that we're looking at a
monopolist
the price level is a function of prices
paid keynes didn't have that yeah
and so as we apply that to an
understanding of how the system works
it's not just keynesianism you know with
a new name or anything else or
where governments can't run out of money
it's that's not it at all
it's qualitatively different in you know
very meaningful ways
and you know along with you know with
other parts of it that are qualitatively
different
have you heard my proposal for the stock
markets you know please
hopefully it's the elegant solution i've
talked to several equity analysts and
they can't find anything wrong with it
they do feel it works
but the problem in the stock market is
you get volatility that
is destabilizing to the economy it's not
based on any um
anything that would change valuation
it's not like a company had good
earnings or better prospects or worse
prospects
you just kind of get pure volatility
based on technicals
lots of buyers come in there's not
enough stock we just had a big short
squeeze right
and this stuff's highly destabilizing
for financial markets the real economy
and for just you know social equity so
very simply uh a couple of rules that
the authorities
put in place number one all new issues
come at ten dollars a share
that's just one price they're not going
to come at all different prices
and if a company wants to raise more
money it just offers more shares
so the new issue comes at ten dollars a
share for however many shares
you know it's a total offer okay after
that
the company is required to sell
unlimited numbers of shares
at twenty dollars if anybody wants to
buy them at that price and so the most
that stock can go is from 10 to 20
at which point the company would be
offering unlimited amounts of shares at
20 and so
the price isn't going to go any higher
you could go back down if prospects turn
south but
it's not going to go any higher all
right and that eliminates
the volatility that's been i think the
lion's share the volatility that's been
causing
uh the problems uh associated with stock
market volatility
as usual i'm gonna have to let that one
percolate
there's only it's only two things the
price is 10
and it can go to 11 or 12 in the normal
way but once it gets to 20
you know the company is always offering
unlimited shares of 20. so
because the 20 and people still want to
buy it suddenly more and more shares are
being sold
but the price isn't going up and so
people are earning a larger share of the
companies
or they're buying a share of the
company's earnings at twenty dollars
but the price isn't going up so if they
buy twice as many shares now
the earnings per share go down right
because they're twice as many shares the
company has the same earnings you're
only getting half
so the the price discovery comes by the
quantity of shares that people are
buying
not by the price of the stock and uh the
number
of shares sold will get to a point where
people are happy
with the return if they buy more shares
the returns lower they won't do it
and in the prospect so the whole
analysis comes down to
how much money can this company earn
what are the earnings worth future
dividends
it's the present value of future cash
flows everything they teach you about in
school
that you're supposed to be using to
value companies that doesn't work
particularly well in the short term or
the medium term
for paraphrase phil here well now we'll
now apply continuously
and so it improves the investment
aspect of the stock market and removes
the casino aspect
one thing's quite interesting i'll chuck
something in the pot
is that well i used to go to leeds uni
you know and i was
in the old seminars with the the tutors
and the
the lecturers which is how i kind of
ended up doing the phd by a roundabout
route
and i knew warren at the time and i was
i was talking to the people
about getting him in as a visiting
speaker precovered and
they all looked frightened to warren you
know what i mean they looked a bit
nervous
now you know what i mean not to be rude
warren will remember when he said oh
well mention me i'd i'll i'll do a talk
you know
i might come over and they all kind of
look nervous
they look to me i'm just mentioning
christian patricia
you can see why can't you you know when
he's just stuck
reorganize the stock market just as an
hour
just like a throw in in the middle of
the interview
you know and they're all nervous because
i mean i just no i know it sounds funny
but when you go to these meetings some
guy will come behind a little
plinth or something put a load of fiddly
squiggles on the screen
and he'll go through something and then
some guy at the back
who'll be probably behind a laptop or
look over the top of his glasses and go
oh
thanks very much professor jones i i
don't know if you read the seminal paper
by professor smith in
1992 but it's worth looking at his
little analysis it might add something
to your paper
so then the guy at the front pretends
he's gonna and he makes a note oh thanks
for that he makes a note
and it comes on very politely like that
whereas and that's what they do
now imagine you had warren you would
just sit the back and laugh and go
you're wrong i used to own a bank
they don't do that imagine you had a
load of guys who were kind of you know
led a lot of textbooks about what it's
like to be in space you know they had a
seminar and lots of guys are all experts
you know
they're all sitting around a table with
a book
and then suddenly buzz aldrin walks in
sits down and they're all looking at him
and go
we could be in trouble yeah that that
stuff happens like
all the time i was john craigly used to
he had me
you know jan i haven't met him but i
know him i know him by
actually i haven't met him yeah so he
invited me to a conference in budapest
it was a trade conference
and you had all these people like bill
white was there they were from the
bank of international settlements and
they had all these trade ministers and
central bankers ahead of the bank of
where's budapest hungry he was there
yeah
he was an older guy like 60. i'm 70 now
but at the time he was an older guy
and they put out a chart of interest
rates over the years
i saw two spikes in the chart so i just
asked them you know do you have
a floating exchange you said you have a
floating shane trade policy but i see
these
rate spikes you know you did was it
fixed at some point in time
he says no no i was floating the whole
time so sitting next to him there's this
like 25 year old kid
in a suit and he taps him on his
shoulder and whispers in his ear
he comes back and says excuse me yes we
we did fix the exchange rate on a couple
of different occasions
so so then they started talking about
trade because it was a trade conference
and i said well and they were talking
about i said well look with comparative
advantage
you know the the assumption behind
comparative advantage is
it's a neoclassical assumption that
market's clear and you always have full
employment
if you don't have full employment then
you get a raise to the bottom of real
wages until you do have full appointment
i said which is exactly what we've been
seeing in the world
they look at me and they say well are
you against trade i said no
i'm just my favorite trade i'm just
telling you your own theory and what to
expect and why these numbers you just
passed around
look the way they look it's not because
of not enough free trade or whatever
it's because you're dealing with a
environment with unemployment and it's
right there in the neoclassical theory
that that
creates a race to the bottom of real
wages well jan's just kind of smirking
and turns out the reason he had me there
is so that i could say things he didn't
want to say
but yeah so yeah to your point that's
that type of thing happens all the time
going back to the paper in the paper the
interest rate the attempts to control
the inflation through
interest rates actually backfired and
contributed to the problem
that's a pretty controversial conclusion
isn't it yeah you know i said the same
thing with volcker
and i was the only one everybody else is
building a statute to him i'm saying
he's
prolonged the problem
and that's why inflation was didn't come
down it took 10 years to go from like
14 or 15 down to 3 percent because the
high rates were prolonging it
we had oil drop from 40 to 10 or
something like that 35 to 10.
and you know what happens today if oil
drops precipitously you immediately get
negative cpi and
inflation drops and everything else well
back then
it hardly moved because i mean it came
down but not like you would expect
it's because of 15 and 20 percent
interest rates and
12 percent and 10 9 we're sustaining
the inflation issue and the government's
you know deficit spending on interest
which is
just basic income for people who already
had money right so there's no supply
side
just pure demand side and there are
large numbers back then
and what caused the break in inflation
was the recession of 1979 which happened
because
the budget went from uh deficit to
i'll say surplus now if you look back we
recorded a budget deficit but if you
look at the total public debt and then
you look at it in real terms because of
the high inflation rates
in real terms the debt was actually
going down so the real financial equity
behind the credit structure was going
down
so in real terms it was a decline
in the outstanding public debt
and it was a decline in deficit spending
also
and that happened under carter you know
79 and that
just put the brakes on for the economy
now the reason it was happening is
because the inflation
was causing what they used to call
bracket creep people who were in a 15
tax bracket get a big raise to make up
for the inflation now they're in the 20
or 25
so as wages and compensation went up and
capital gains went up and everything
else went up tax
receipts went up much faster than
government spending and it was
a huge fiscal contraction in real terms
and then the economy
collapsed in 1980 i guess 7980 we had a
big recession
and the demand for oil dropped the other
thing that happened was jimmy carter
deregulated natural gas
so it became safe for the utilities to
start switching to natural gas because
it was a
ample quantity and the price was came
down
it went up but it was available still
much cheaper than oil
and so you the whole substitution
process was started
and opec cut oil production by i don't
know 15 million barrels a day and it
wasn't enough
uh because demand went down even faster
the price went from
again for i think it hit a high of 40
and maybe a low of 10 or something like
that and stayed there for a long time
so yeah so that's what i attribute to
that's what broke the inflation had
nothing to do with volcker he just
prolonged it
and he still gets the credit for
breaking the inflation and carter
is completely left out of the discussion
although he should get the credit
got it so let's go back to the paper in
weimar germany
let's start at the beginning of the
story of the hyperinflation
or this is where i'm going to say is the
beginning so in november 1918 the
central powers of which germany are one
are defeated ending world war one
eventually at the 1919
paris peace conference the big four
britain france the us and italy imposed
their terms on the defeated powers what
happens next
so they wanted to be paid in their local
currency whether it was francs or pounds
or gold or something like that
and so the german government you know
really couldn't pay in real terms they
didn't have
the productive capacity was gone and so
they were
selling marks to buy gold to buy foreign
exchange
to buy franks or whatever to be able to
make their payments
and they were paying higher and higher
prices for those
items now what i'm saying is
it was the higher prices that were the
continuously that were continuously
redefining the mark downward
that's the way to look at it now yes
they had to spend large quantities the
only way they could do that was to pay
the higher prices
so you could say the allies terms forced
them to pay higher prices
but the understanding is that it was the
higher prices that were the
redefinition of the mark downward and
what gets recorded as
inflation the continuously change in the
price level
as they continuously paid higher and
higher prices and we walked through that
over the years as to what the process
and what was exaggerating it and the
changes that were made at one point
france actually invaded and took over
an industrial area which exacerbated it
and made it worse
and but all all along the way looking at
it through the mmt lens you can see that
it was
the higher prices being paid that were
the approximate cause the direct cause
of the
that was the shifting of the price level
not even the cost that is the point
of a shifting price level and when they
stopped doing that
under shots then it then it stopped so
as soon as they stopped doing that stop
paying higher prices and the whole thing
stopped
what's interesting about the the kind of
government spending
and the weimar republic is that you
include the payments
for buy-in foreign exchange you include
them as part of the deficit
as well as the credit that the
because the government had really lose
regulation with issuing of credit and
you include that as part of government
deficit
because because it's basically a
government
is granting these kind of direct you
know this
lose policy to facilitate private
spending
so it's not just it's not just
government spending per se
but it's private spending facilitated by
government
which caused a problem yeah maybe i'd
say those people became
agents of the government the government
gave them the money to spend
what confuses me is that at this point
germany had two currencies am i correct
well the mark was a was a currency and
it was a floating
rate they had a something they called a
gold mark
and it wasn't the currency they were
spending i think it was more of a
reference
yeah the gold mark is like what debt was
denominated in and then they used the
paper mark
as what people use so obviously as the
value of the paper mark
fell as warren said as as these paper
marks are either
traded directly to buy the foreign
currency to pay the reparations although
were given
to this agent general and they
as an intermediary were doing it either
way
as warren said it was driving down the
value of the paper mart against the gold
mark and the gold might as well as some
sort of reference point
like the pre-war gold standard mark
and that was still fixed you know you
know how many gold marks equals a dollar
or a pound so if you see what i mean so
if you imagine once the value of the
mark goes down for the reasons warren
has said
import prices then are going to go up
and then of course domestic prices
follow on
and then of course the price level rises
and as warren would say
the government then starts buying
domestically
and competing with those prices and if
you like allowing those
prices the in other words it's letting
go of the credit
system to allow spending to take place
at those prices do you see what i mean
and there's a guy called heltholic
forgive me any german speakers
i think warren and i both agree that he
pretty much got it right i mean he
looked at the line of causality
and he was saying you know it only makes
sense if
the decline in the mark is the beginning
of the chain you know
the rise in the money supply is the
effect
and all right yeah okay the government
did
allow that to happen but it's at the end
of the line it's the effect not the
cause really so
that that's the sort of chain so the the
if you like
higher prices paid for foreign exchange
directly indirectly
drives down the currency value paper
mark
then obviously imports are more
expensive
domestic product because obviously the
germs had to import laws after the war i
mean
they can't you know their economy is
destroyed so there's a chain of events
the orthodox view gets it the wrong way
around
uh you know with the monetary stuff and
that's why i felt it was very important
you know getting warren on board there
is to get the chain of events
correct because then you can blow where
the
you know printing too much money causes
inflation
you know it doesn't work like that let's
say you're a merchant
today in the uk and you have to keep a
thousand pounds in your
cash register to make change for
everybody and suddenly the prices go up
by a thousand times
okay well now you need a million pounds
just to make change yeah if the
government doesn't
allow that cash to be
somehow created and and available to
merchants
they can't make change they can't run
their the whole business collapses right
because they're taking away you know
your working capital so to speak
and so the the demands for working
capital
were rising so fast which they measure
as an increase in the money supply
increase in bank notes it looks like
what we found was that they were
contracting out the printing of money to
businesses
on an unrestricted basis they didn't
have to pay for it they could just get
paper
print all the money they wanted and
spend it just to get money out there so
that there'd be
you know a money supply just of working
capital for the merchants to use
which is that's you know something i
never thought about before
and even those people even those people
couldn't keep up with the demand
for the currency well the real value of
the currency so you work out like
how what what the actual value of the
currency was in real terms it was still
going down
and that's the funny i mean if you
imagine haven't steen who was the
chairman of the rights bank right if
you know this narrative is true like you
know you got these crazy german guys
just printing money and causing
inflation
well having shoes of the way around he
was constantly apologizing
to businesses that he couldn't produce
enough paper money quick enough
for them to as you say so they can pay
their workers at the going price level
someone she had to keep as you said
country that business
so it's not and so you imagine he said
sorry lads i can't get the money out
fast enough i'm doing my best
so money was scarce that's the thing
that it was still you couldn't get
enough
nominal currency value to offer it even
with
all this stuff all this uh norton gelt
i think it was called you couldn't
produce enough of it
you know even when they let people print
their own money they couldn't print
enough
yes exactly it's crazy but yeah
because otherwise the system would crash
yeah you know all these guys are saying
oh well you're not
tough enough you know what you should
have done is say now the price level's
less
but we're not going to give you the
money to operate at well what you're
really saying to havenstein is
shut down the printing presses and the
whole german economy will collapse and
it's
already about as unstable an economy as
you could get
right but it won't it won't it won't
bring down the inflation
no not because you still have the
fundamental problems of the allies do
you min
you could is only worth shutting down
the front if you like
once you've solved the problem so that's
what shaq did
when he did it he sat in an office and i
think his secretary said he hardly wrote
anything down
he just rang loads of people up on i
guess one of the old phones you know you
wind up
and got loads of deals particularly with
the bank of england and others
to agree at them so much of a loan
so that he could get a moratorium on the
payments
so that he could reconstitute the mark
so in other words
this whole narrative you know the
governments naturally want to
print a ton of cash to cause
hyperinflation
i mean the whole idea is ludicrous you
know imagine havenstein coming in one
day
a really respected guy and like oh
heffler it was written this like
600 page textbook you know these are
really serious guys you might know
you know i don't know their history but
they're like very very serious blows
they're not going to come in one day and
say right lads get printing
you know i mean the whole idea is
ludicrous isn't it when you think about
it yeah
but it's interesting because the as we
know
friedman said inflation is everywhere a
monetary phenomena and
the neoclassical think that they see the
long-term
data and they see the connection between
we were speaking about this at the
right at the beginning as well and they
see the connection between
inflation and the money supply and they
think
that proves that we're right they've got
the causation wrong in a sense
and yeah oh yeah yeah but
yeah it's it's fascinating you know the
central banks have all given up on money
supplies they
they they agree it's not doesn't cause
anything well they have to now because
of
qe and all this yeah right right
some people just think there is a lag in
the response in the system
yeah it's a hundred year lag
what's quite funny you know when they
did qe and it increased the money supply
well the weight like warren always says
the printed money and unprinted bonds
right
they had a problem didn't at the central
banks because a lot of them been saying
that if you increase the money supply
you're going to get
hyperinflation now they've just done it
so they've got to
send loads of backtracking but sorry we
were wrong
you know don't worry about it i mean
they didn't kind of put it in those
terms you know
central bankers never say we got it
wrong sorry
they'll always say things like revise
our forecasts
down i don't know if you ever come
across that term it means
we were wrong but we're too big eddie to
admit it
you know so if you kind of take that out
you know you know when you go on a word
doc and you put refined and replace
right take out revise and put
sorry we were wrong and then go through
it you know
the other one is our models are broken
yeah
oh they ain't going off with that
because i go out to replace them with
that was the mmt podcast with patricia
pino and
christian riley don't forget you can
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