WEBVTT - What Negative Interest Rates Mean for the World 0:00:01.240 --> 0:00:05.160 Hello, Odd Lots listeners, It's Joe Wisenthal. Before we get 0:00:05.160 --> 0:00:08.119 to today's show, I wanted to let you know that 0:00:08.160 --> 0:00:12.000 odd Lots is hosting its first ever live event on 0:00:12.119 --> 0:00:16.680 September here in New York City. Join me and Tracy 0:00:16.720 --> 0:00:19.200 Ellaway as we host an all star lineup of guests 0:00:19.200 --> 0:00:23.000 to talk about cryptocurrency, white color fraud, modern monetary theory, 0:00:23.400 --> 0:00:26.680 and more. We'll even have some finance themed live music, 0:00:26.760 --> 0:00:30.720 including some songs by yours truly. So keep listening to 0:00:30.800 --> 0:00:33.400 odd Lots all this month to find out more details 0:00:33.440 --> 0:00:36.040 about the live show, but for now, mark your calendars 0:00:36.080 --> 0:00:54.160 for Thursday September for the first ever Odd Lots variety show. Hello, 0:00:54.240 --> 0:00:57.440 and welcome to another episode of the Odd Lots Podcast. 0:00:57.560 --> 0:01:01.200 I'm Tracy Alloway. My co host Joe Eisenthal is away. 0:01:01.880 --> 0:01:04.840 But I was thinking the other day and I realized 0:01:04.880 --> 0:01:07.640 that Joe and I have never really done an episode 0:01:07.800 --> 0:01:11.480 on negative interest rates. And while we've had instances of 0:01:11.560 --> 0:01:15.520 negative yielding bonds before, over the course of the summer 0:01:15.520 --> 0:01:19.880 this has actually become a really big topic. By some estimates, 0:01:19.880 --> 0:01:23.240 the world has I think seventeen trillion dollars worth of 0:01:23.280 --> 0:01:26.440 negative yielding debt now, and that includes things that you 0:01:26.440 --> 0:01:32.000 wouldn't really expect, like corporates, some emerging market governments. And 0:01:32.040 --> 0:01:35.560 I think the reason this gets so much attention is 0:01:35.600 --> 0:01:40.920 that there's something fundamentally kind of unsettling about negative rates. 0:01:41.160 --> 0:01:44.960 It just doesn't really sit well with our idea of 0:01:45.000 --> 0:01:48.840 how capitalism is supposed to function. I mean, if you 0:01:48.920 --> 0:01:51.840 have money and you put it to work by investing 0:01:51.840 --> 0:01:54.640 in a company or a government, then you are supposed 0:01:54.720 --> 0:01:58.200 to be rewarded for that. And that's one reason I 0:01:58.200 --> 0:02:00.680 think that we're really starting to see p question the 0:02:00.720 --> 0:02:03.720 foundations of the global economy. And we're also starting to 0:02:03.720 --> 0:02:07.280 see people look at new ideas for fixing it, such 0:02:07.320 --> 0:02:10.920 as modern monetary theory or MMT, which is something that 0:02:10.960 --> 0:02:15.240 we have discussed on odd lots before. Now, in any case, 0:02:15.280 --> 0:02:17.240 it doesn't seem like negative rates are going to go 0:02:17.280 --> 0:02:20.840 away anytime soon, given that central bankers around the world 0:02:20.880 --> 0:02:24.480 are pushing benchmark rates even lower by embarking on another 0:02:24.520 --> 0:02:28.480 easing cycle. So on today's all thoughts will be asking 0:02:28.720 --> 0:02:32.160 why exactly is this happening. Why is it that more 0:02:32.200 --> 0:02:35.840 than ten years after the financial crisis, yields are trending 0:02:36.400 --> 0:02:40.119 even lower and what is this say about the economy 0:02:40.160 --> 0:02:42.520 and how we think about it and how can we 0:02:42.560 --> 0:02:45.200 actually fix it? And I'm really happy to say that 0:02:45.280 --> 0:02:48.520 our guest for this episode is one of my favorite analysts. 0:02:48.520 --> 0:02:50.799 I've been reading his research notes for many years now, 0:02:50.840 --> 0:02:53.040 and I think he's really one of the few on 0:02:53.080 --> 0:02:56.040 the cell side that thinks about these kind of issues 0:02:56.400 --> 0:02:59.560 on a big picture basis. He's certainly the only analyst 0:03:00.040 --> 0:03:02.480 I've read who seems to be taking M M T 0:03:02.760 --> 0:03:05.800 very seriously. And you'll see what I mean in just 0:03:05.880 --> 0:03:09.440 a minute. So, without further ado, I'd like to bring 0:03:09.480 --> 0:03:13.320 on Victor Schutz. He is a Global markets head of 0:03:13.360 --> 0:03:17.200 Asia strategy over at McQuary. Victor, so nice to have 0:03:17.280 --> 0:03:19.840 you on the show. Thank you, thank you for having 0:03:19.840 --> 0:03:22.920 me a Jersey. Let's start with that number that I 0:03:22.960 --> 0:03:27.400 threw out earlier, seventeen trillion of corporate and sovereign debt 0:03:27.600 --> 0:03:32.880 with negative yields. How exactly did we get here? Well, 0:03:33.000 --> 0:03:36.920 that's uh, that's a great question. You're absolutely correct. The 0:03:37.000 --> 0:03:41.119 question is why we cannot tolerate things like obility. Said 0:03:41.240 --> 0:03:44.920 more when I was a younger man. Quite often spreads 0:03:44.960 --> 0:03:48.880 will move fifty sixty bits very easily today when we 0:03:49.000 --> 0:03:53.240 have thirty five spreads suddenly moving and you almost need 0:03:53.360 --> 0:03:58.520 ambulances at the exits. Why can't we have prime discoveries. 0:03:59.080 --> 0:04:02.840 Why can't we have time value of money? The answer 0:04:02.880 --> 0:04:07.200 to me is leveraging. In other words, our solution to 0:04:07.440 --> 0:04:12.040 low productivitory over the last twenties that years was the 0:04:12.160 --> 0:04:16.360 brand future consumption. To the present, our solution was a 0:04:16.480 --> 0:04:20.680 surprises and leveraging will don't but to you what wages 0:04:20.880 --> 0:04:24.479 no longer capable of giving you. And therefore, yes, your 0:04:24.880 --> 0:04:27.719 real incomes might not grow, but we will allow you 0:04:27.880 --> 0:04:32.840 to grow well in different ways. And initially it's incredibly stimulating, 0:04:33.040 --> 0:04:38.120 it improves wealth, It does also some wonderful things. It 0:04:38.240 --> 0:04:42.120 also works together with globalization. You can't really have that 0:04:42.240 --> 0:04:45.440 sort of leveraging unless you also globalize the product and 0:04:45.560 --> 0:04:49.560 labor market. So it's really the next of triple package 0:04:49.600 --> 0:04:54.640 of globalization, product market, labor market, and financial market, where 0:04:54.640 --> 0:05:00.080 our well being, our pensions and everything else depends on enterprices. 0:05:00.080 --> 0:05:03.719 But the challenge with that is that the more you financialize, 0:05:03.720 --> 0:05:07.679 the less effective it becomes. You got twenty years ago, 0:05:08.080 --> 0:05:11.360 you needed maybe a dollar dollar fifty of debt to 0:05:11.520 --> 0:05:15.560 generate one dollar of GDP. In most countries today, you 0:05:15.640 --> 0:05:19.320 need three to five dollars of debt for every dollar 0:05:19.360 --> 0:05:22.039 of GDP. So the more you do it, the more 0:05:22.160 --> 0:05:26.479 incremental impact diminish it. And that implies that you have 0:05:26.720 --> 0:05:30.600 to spur or you have to motivate it to multiply 0:05:30.720 --> 0:05:33.600 even higher. To do that, you need to issue more 0:05:33.600 --> 0:05:36.400 and more of that debt. And the more capital you 0:05:36.520 --> 0:05:39.800 create compared to what you need, the more cost of 0:05:39.839 --> 0:05:43.599 apple has to go down. And that's why interest rates 0:05:43.880 --> 0:05:47.559 have to continuously go down to a lower and lower level. 0:05:48.040 --> 0:05:51.919 And the more you rely on assets and debt, the 0:05:52.040 --> 0:05:55.240 less comfortable you are with volatility, the less you can 0:05:55.360 --> 0:05:59.880 tolerate volatilities, particularly in asset classes. So where is the 0:06:00.040 --> 0:06:02.400 stage that it's like a squirrel in the wheel. You 0:06:02.600 --> 0:06:06.559 can't stop running because if you do, the whole house 0:06:06.640 --> 0:06:10.120 of gods collapses theory very quickly. And so if you 0:06:10.279 --> 0:06:13.119 if you sort of take that, you do that. Any 0:06:13.200 --> 0:06:17.200 inoculation that central banks might want to do in terms 0:06:17.200 --> 0:06:20.000 of lowering rates not to spur a little bit more 0:06:20.000 --> 0:06:23.320 growth makes it worse, and interest rates have to go 0:06:23.560 --> 0:06:26.640 even lower over the longer term. Of course, what it 0:06:26.720 --> 0:06:31.080 means if you continue to use monetary levels, interest rates 0:06:31.120 --> 0:06:34.560 will have to go with negative everywhere, not just in Europe, 0:06:34.680 --> 0:06:38.160 not just in Japan, but also names of such countries 0:06:38.320 --> 0:06:41.640 and eventually all across the world. A lot of people 0:06:41.640 --> 0:06:44.400 will say what is wrong with that? But but traceday 0:06:44.400 --> 0:06:47.760 as you correctly said, that's not the way capitalism is 0:06:47.839 --> 0:06:51.119 supposed to function. That's not the way corporate finds theory 0:06:51.200 --> 0:06:55.240 is supposed to function. So Victor, on that note, you 0:06:55.320 --> 0:06:58.840 talked about central banks driving down the cost of capital 0:06:59.000 --> 0:07:02.320 in order to boost growth, and this is where we 0:07:02.360 --> 0:07:05.800 start to to see the impact on both our theory 0:07:05.800 --> 0:07:09.159 of capitalism and also the value of money. You mentioned 0:07:09.160 --> 0:07:12.520 this already, the time value of money, So this is 0:07:12.560 --> 0:07:16.160 the idea that you know, money available right now is 0:07:16.240 --> 0:07:20.800 worth more than that same money in the future due 0:07:20.880 --> 0:07:25.240 to its earning capacity. So basically, you know, it's a 0:07:25.240 --> 0:07:30.280 core principle of investing that your money can earn interest 0:07:30.520 --> 0:07:34.520 or a return, and so it's it's worth something. And 0:07:34.880 --> 0:07:38.040 that seems to be what makes people so uncomfortable about 0:07:38.040 --> 0:07:41.679 the negative interest rate environment. So my question is what 0:07:42.080 --> 0:07:45.680 is that going to do to the overall economy and 0:07:45.880 --> 0:07:49.840 to investment. Central banks that what they're doing because they're 0:07:49.880 --> 0:07:54.000 scared of deflation. Now why they're scared of deflation, Well, 0:07:54.040 --> 0:07:57.160 because we've accumulated so much dead that nobody will ever 0:07:57.240 --> 0:08:00.080 be able to repay it. I mean, globally, we have 0:08:00.320 --> 0:08:03.440 two hundred trillion dollars of death. If you look at 0:08:03.480 --> 0:08:06.960 all of the real instruments that we haven't told that 0:08:07.520 --> 0:08:10.120 really the cloud of finances at least four or five 0:08:10.200 --> 0:08:15.520 hundred trillion dollars. That's around five times nominal GDP. So 0:08:15.720 --> 0:08:18.880 instead of repaying the death, society is built around the 0:08:18.960 --> 0:08:22.840 concept of a very gradual and slow default. So we're 0:08:22.880 --> 0:08:26.200 slowly defaulting on our death, and the way we're default 0:08:26.240 --> 0:08:29.440 it is to inflation. That's why central banks are so 0:08:29.520 --> 0:08:34.000 scared of deflation. The more you relign monitor delivers, the 0:08:34.080 --> 0:08:36.840 more you drive the cost of capital down, the more 0:08:36.880 --> 0:08:40.320 you create deflation. So you're trying to eliminate it, but 0:08:40.360 --> 0:08:43.640 you're actually making it worse. Now why is it's a 0:08:43.679 --> 0:08:46.480 well a couple of reasons. The reason number one is 0:08:46.520 --> 0:08:50.079 that the low cost of capital means zombie companies survived, 0:08:50.240 --> 0:08:54.400 so you don't actually have clearances which are normal capitalist 0:08:54.440 --> 0:08:58.560 system or have. Now that's a highly deflationary element. The 0:08:58.600 --> 0:09:01.200 other thing that is happening. The lower cost of capital 0:09:01.400 --> 0:09:06.079 implies that any unicorn, any brand new idea can be funded, 0:09:06.760 --> 0:09:11.040 and so technology is actually progressing much quicker than otherwise 0:09:11.080 --> 0:09:14.280 it would be the case. We've actually pour in Harrison 0:09:14.520 --> 0:09:19.400 on the fire, and as technology explodes, companies get decent 0:09:19.600 --> 0:09:24.880 mediated from their products, their brands, labor gets disintermediated from 0:09:24.920 --> 0:09:29.079 their wages, and that's also highly disinflationary. So the first 0:09:29.480 --> 0:09:33.280 side effects of using sort of monetary levels that aggressively 0:09:33.679 --> 0:09:36.720 is that you're trying to avoid deflation, but in fact 0:09:36.760 --> 0:09:41.079 you're creating a stronger and stronger dec inflation. So, actually, Victor, 0:09:41.440 --> 0:09:45.720 you just mentioned tech investment in particular, and I wanted 0:09:45.760 --> 0:09:48.040 to press you on this topic because it does feel 0:09:48.080 --> 0:09:51.200 like nowadays, with the cost of capital so low and 0:09:51.400 --> 0:09:57.320 people chasing future asset price growth rather than value, right now, 0:09:57.679 --> 0:09:59.360 it does feel like we've seen a lot of money 0:09:59.400 --> 0:10:02.200 go into the sector, whether it's through the private market 0:10:02.360 --> 0:10:05.520 and unicorns, or through the public markets through thingstocks like 0:10:05.559 --> 0:10:09.680 Amazon and Apple. What is the tech investment in particular 0:10:09.760 --> 0:10:14.880 do for global economies and for society? Tech investment actually 0:10:14.960 --> 0:10:19.000 has clearly multifact de fact some of it is very 0:10:19.080 --> 0:10:22.880 very good, but a lot of it is highly deflationary. 0:10:23.000 --> 0:10:26.480 So in other words, tech has a tendency of eroding 0:10:26.720 --> 0:10:31.040 cost of everything we consume and we produce. So when 0:10:31.080 --> 0:10:35.440 marginal costs decline of a time, the prices also dropped. 0:10:35.679 --> 0:10:38.359 That's part of the reason it's so hard to prosecute 0:10:38.480 --> 0:10:44.679 technology company for antitrust violations because they're not actually gouging consumers. 0:10:45.200 --> 0:10:49.000 On the contrary, they're reducing prices. It's not the depriving 0:10:49.080 --> 0:10:52.880 consumers of a good product. Product is actually good. The 0:10:53.000 --> 0:10:58.319 problem with tech is not so much gouging or depriving 0:10:58.480 --> 0:11:02.040 people of value, but rather the fact that tax is 0:11:02.120 --> 0:11:06.480 money tizing people than powers uh and the creating scale 0:11:06.520 --> 0:11:11.120 of business that includes other businesses going into into this 0:11:11.160 --> 0:11:15.320 particular area. But from a macro perspective, if you keep 0:11:15.360 --> 0:11:19.800 the cost of capital too low, technology propagates much faster. 0:11:20.679 --> 0:11:25.000 Technology is really human spirit, it's human ingenuity, but the 0:11:25.120 --> 0:11:28.880 speed with which it progresses depends on the cost of capital. 0:11:29.080 --> 0:11:31.640 The lower your cost of capital, the faster it goes. 0:11:31.920 --> 0:11:34.320 As a set of setting that it's like pouring rising 0:11:34.640 --> 0:11:40.440 on the fire. And when tech progresses, it basically disintermediates 0:11:41.120 --> 0:11:46.400 companies from their products and their brand. It disintermediates employees 0:11:46.520 --> 0:11:52.120 from their wages. So it contributes more disinflation to the system. 0:11:52.160 --> 0:11:55.480 I mean, I'm curious you've alluded to this already, but 0:11:56.840 --> 0:12:04.760 rampant disinflation. Uh, disintermediateation through technology, the financialization of assets, 0:12:04.800 --> 0:12:10.080 and a bunch of investors basically pursuing speculative wealth. What 0:12:10.200 --> 0:12:15.720 does that due to political society. One of the things 0:12:15.760 --> 0:12:21.080 it does is that it increases income and wealth inequalities. Again, 0:12:21.160 --> 0:12:26.280 income in weals inequalities, right, variety of reasons. But financialization, 0:12:26.480 --> 0:12:32.000 relying on assets, relying on leverage, magnifies those income and 0:12:32.040 --> 0:12:37.640 wealth inequalities significantly. Even the central banks increasingly starting to 0:12:37.760 --> 0:12:42.800 realize that aggressive prolonged usage of money to relevers is 0:12:42.840 --> 0:12:47.120 not good for inequalities. Now that by itself is starting 0:12:47.120 --> 0:12:51.199 to create political friction. So but from a societal perspective, 0:12:51.880 --> 0:12:56.120 couple of impacts. Number one, the marginal pricing power of 0:12:56.240 --> 0:13:01.559 labor declines. In other words, technology and financial sization reduces 0:13:01.640 --> 0:13:05.800 your marginal pricing power, reduces your wages effectively that you 0:13:05.920 --> 0:13:09.360 otherwise would be able to command. And the second thing 0:13:09.440 --> 0:13:12.920 it does if you're a person with a lot of assets, 0:13:13.000 --> 0:13:18.480 particularly financial assets, your your wealth, your networks is growing 0:13:18.640 --> 0:13:23.040 very fast. If you're relying on wages and household chapels 0:13:23.160 --> 0:13:28.840 like houses or refrigerators, your relative wells actually goes down. 0:13:29.400 --> 0:13:35.000 Um and financialization and dead increase the speed with which 0:13:35.080 --> 0:13:40.040 those two parties go apart. That's your top one versus 0:13:40.080 --> 0:13:44.920 the rest of the population. So if we continue to 0:13:45.000 --> 0:13:49.400 rely on monetary levels, implications are At first of all, 0:13:49.480 --> 0:13:53.400 disinflation is likely to get stronger. Number two, the pockets 0:13:53.480 --> 0:13:58.520 of growth in economy will get smaller and narrower. Number three, 0:13:58.600 --> 0:14:03.040 that will be less productive investment, a lot more speculation occurring. 0:14:03.640 --> 0:14:07.120 Number four, income in wealth inequalities are going to increase. 0:14:07.400 --> 0:14:11.240 But another thing it does because every time you use debt, 0:14:11.600 --> 0:14:14.760 marginal utility of that debt goes down, and other words, 0:14:14.800 --> 0:14:17.120 every time you need more and more of it. What 0:14:17.160 --> 0:14:21.120 it does make countries want to do is to steal 0:14:21.240 --> 0:14:24.240 from their neighbors. So, in other words, countries and start 0:14:24.320 --> 0:14:29.840 competing very aggressively to start running current accounts surfluces, to 0:14:29.920 --> 0:14:33.960 try to steal business from another country, and that's what 0:14:34.160 --> 0:14:39.120 leads you into potential currency evaluations. That's what leads you 0:14:39.360 --> 0:14:43.400 into trade wars. So if we continue using monitory levels 0:14:43.440 --> 0:14:45.960 as we have done over the last thirty forty years, 0:14:46.000 --> 0:14:49.560 if we continue over the next fiveteen years, societies could 0:14:49.640 --> 0:14:54.080 just blow up. Okay, So here's my question. In two 0:14:54.120 --> 0:14:58.080 thousand nineteen, we are about to embark on another round 0:14:58.160 --> 0:15:01.560 of easing by tra banks around the world, and even 0:15:01.560 --> 0:15:04.720 though we've had ten years of evidence to the contrary, 0:15:05.000 --> 0:15:07.480 they think that doing the same thing over and over 0:15:07.520 --> 0:15:11.240 and over again, which is lowering rates, is somehow going 0:15:11.280 --> 0:15:14.880 to lead to a different outcome, which would be inflation. 0:15:15.240 --> 0:15:18.720 So what exactly is going to be the point at 0:15:18.800 --> 0:15:26.760 which policymakers realize that this monetary strategy is not working. Essentially, 0:15:26.960 --> 0:15:30.200 the problem is you can throw away the system until 0:15:30.280 --> 0:15:33.320 you build a new system. I do believe that, whether 0:15:33.360 --> 0:15:36.680 it's central banks, whether it's treasury departments where most of 0:15:36.720 --> 0:15:39.960 the banks they do understand that you can't just keep going. 0:15:40.280 --> 0:15:43.000 But the problem is you kind of abandon the system 0:15:43.200 --> 0:15:47.600 that you already have before you've decided what else you're 0:15:47.640 --> 0:15:51.480 going to do. Now, there are alternative ideas, and the 0:15:51.640 --> 0:15:55.960 interesting thing that I find how quickly they're becoming popular. 0:15:56.240 --> 0:15:59.240 If you think of what monetary theory. It's not a 0:15:59.280 --> 0:16:02.120 new idea. It's been around for a long long time, 0:16:02.400 --> 0:16:06.560 and there were books published, articles published for decades. It's 0:16:06.600 --> 0:16:11.080 amazing how popular there is suddenly becoming. I mean, Financial 0:16:11.120 --> 0:16:14.120 Times only a couple of weeks ago devoted the entire 0:16:14.160 --> 0:16:19.480 page discussing MMT. Only twelve months ago, I can't believe 0:16:19.560 --> 0:16:23.359 that ever would have happened. The same applies to Neil Kinsians. 0:16:24.000 --> 0:16:27.520 If you think of a growing popularity of people like 0:16:27.840 --> 0:16:33.520 Paul Krugman, uh, what you're seeing that in massive intellectual 0:16:33.640 --> 0:16:39.560 shift is already underway. Recognizing that fiscal neo Kinsian and 0:16:39.760 --> 0:16:44.120 m m T solutions might have lower side effects. It's 0:16:44.120 --> 0:16:46.760 still a drug, but it's a drug which will have 0:16:46.880 --> 0:16:51.360 lower side effects than continue to use minetary levers. But 0:16:51.400 --> 0:16:53.920 I'm not suggesting for a second we're going to abundant 0:16:54.080 --> 0:16:57.400 monetary policies where no we're not. It's just what you 0:16:57.600 --> 0:17:02.760 prioritize as you go forward. I personally think probably is 0:17:02.800 --> 0:17:06.199 going to be the last year when monetary policy is 0:17:06.320 --> 0:17:09.960 used as a primary instrument, and the breakpoint to me 0:17:10.040 --> 0:17:13.000 will be when we have to do something every two 0:17:13.080 --> 0:17:16.440 or three months. Every two or three months, think about it. 0:17:16.560 --> 0:17:20.560 We had a small heart attack in December two thousand eighteen. 0:17:21.200 --> 0:17:23.480 I don't know what January two thousand nineteen would have 0:17:23.520 --> 0:17:26.720 looked like if Jerrem Powell did not surrender on a 0:17:26.800 --> 0:17:30.560 third of January two thousand nineteen. Then we had another 0:17:30.600 --> 0:17:34.120 mini heart attack in May two thousand nineteen. This time 0:17:34.160 --> 0:17:38.240 around it was better reserve and ECB. So the windows 0:17:38.280 --> 0:17:42.240 getting shorter and shorter, the period of stimulation or the 0:17:42.440 --> 0:17:46.520 beneficial impact are getting shorter and shorter, and so so 0:17:46.600 --> 0:17:50.879 to me, it's those mini heart attacks that will continue 0:17:51.000 --> 0:17:54.480 rolling over the next twelve eighteen months that will have 0:17:54.560 --> 0:17:58.160 to come to a stage that people will start shifting priorities. 0:17:58.600 --> 0:18:01.440 I do not believe anybody will call it neo Kanzian 0:18:01.480 --> 0:18:05.320 immediately or anybody will call it m MP immediately. Rather, 0:18:05.359 --> 0:18:09.119 we're going to stumble around and gradually it will be 0:18:09.160 --> 0:18:12.840 fiscal policy. It's going to be neo Keynsian policies that 0:18:13.359 --> 0:18:36.199 that are going to drive them. So what about political 0:18:36.480 --> 0:18:42.520 opposition to fiscal solutions, because it does seem that basically 0:18:42.560 --> 0:18:45.080 what you're talking about is rethinking the way the financial 0:18:45.160 --> 0:18:48.919 system has been working, and governments in the developed world 0:18:49.040 --> 0:18:53.080 really have seemed reluctant to do that so far, and 0:18:53.440 --> 0:18:56.520 certainly it feels like there are interest groups or politicians 0:18:56.560 --> 0:19:01.840 out there who basically I can't see them and diving 0:19:01.920 --> 0:19:05.400 head first into m m T for instance. So what 0:19:05.440 --> 0:19:10.280 would allow it to happen? Now? You you argue that 0:19:10.720 --> 0:19:12.760 in some of your research that Japan is actually the 0:19:12.800 --> 0:19:16.240 closest example we have to a sort of m MT 0:19:16.440 --> 0:19:20.120 or fiscally driven society. But you know, as someone who 0:19:20.119 --> 0:19:22.880 grew up in Japan, I can argue that that society 0:19:23.000 --> 0:19:25.840 is very, very different to the one in the US. 0:19:25.960 --> 0:19:30.240 For instance, when we talk about using monetary levels, we're 0:19:30.240 --> 0:19:34.720 predominantly talking about the rest of the world outside of Japan, 0:19:34.960 --> 0:19:39.680 and outside of China. China is actually using all three instruments. 0:19:39.760 --> 0:19:43.680 They're using monetary policy, they're using fiscal policy, they're using 0:19:43.720 --> 0:19:48.600 neo kains in Ism, and they're using straight MMT Japan practices. 0:19:48.760 --> 0:19:51.879 Elements of all of this, all of this societies are 0:19:52.040 --> 0:19:54.879 are different. But one thing, Tracy, absolutely you're right to 0:19:54.920 --> 0:20:00.800 say that a dogmark developed since I guess late ninety seventies, 0:20:01.160 --> 0:20:05.280 which basically argued that private sector is always better at 0:20:05.359 --> 0:20:09.000 allocating capital than a public sector. If you go back 0:20:09.000 --> 0:20:13.160 to nineteen fifties. In nineteen sixties, that document didn't exist. 0:20:13.320 --> 0:20:17.440 People didn't think at the time that public sector is 0:20:17.560 --> 0:20:22.200 necessarily inferior to private sector investment. And the reason why 0:20:22.240 --> 0:20:26.200 they didn't think public sector was inferior because in their 0:20:26.280 --> 0:20:30.240 memory they remembered in nineteen twenties and nineteen thirties how 0:20:30.320 --> 0:20:36.320 badly private sector a misallocated resources. It was, really, I said, 0:20:36.400 --> 0:20:39.199 late in nineteen seventies. So the problem we have the 0:20:39.400 --> 0:20:44.080 entire system is structured around the idea that private sector 0:20:44.119 --> 0:20:47.919 is dominant, private sector is in a driving seat, and 0:20:48.000 --> 0:20:52.240 around the idea that public sector is wasteful and private 0:20:52.280 --> 0:20:55.760 sector is much better dellocating capital. Now, I think what 0:20:55.880 --> 0:20:57.840 new King's in and M. M. T would argue that 0:20:58.000 --> 0:21:01.520 is not strictly true always, and in fact, there has 0:21:01.560 --> 0:21:07.560 been spectacular misallocation of capital occurring in the private sector itself. Now, 0:21:07.440 --> 0:21:12.239 to surrender the dogma requires a very long time, So 0:21:12.480 --> 0:21:15.399 from an academic point of view, you're looking at decades 0:21:15.520 --> 0:21:18.960 before a new system will actually emerge. But from a 0:21:19.080 --> 0:21:23.679 practical perspective, from a political perspective, I do not believe 0:21:23.680 --> 0:21:27.120 for a second we're going straight into m MPT. What 0:21:27.160 --> 0:21:31.000 we're going to do, We're going to de emphasize monetary 0:21:31.080 --> 0:21:35.920 and emphasize more fiscal and Kinsian solutions. Eventually, we probably 0:21:35.960 --> 0:21:38.639 will end up with a version of MT, but that 0:21:38.720 --> 0:21:41.960 could be a decade away or longer. So it's not 0:21:42.000 --> 0:21:44.240 going to be a one soft switch that we go 0:21:44.480 --> 0:21:47.640 from one policy, one set of tools to another set 0:21:47.640 --> 0:21:50.439 of tool. Instead, what we're going to do is just 0:21:50.520 --> 0:21:54.880 gradually shift towards it. A classic example of that all 0:21:55.000 --> 0:21:58.600 the antitrust and investigation that is starting right now in 0:21:58.720 --> 0:22:01.720 various countries on techno oology. In many ways, that's a 0:22:01.800 --> 0:22:05.600 Neil Kinziean answer. When we have management team has been 0:22:05.680 --> 0:22:10.280 criticized for very high pension payments or salaries, that's a 0:22:10.359 --> 0:22:14.080 Neil Kinziean answer. And so what you're seeing is that 0:22:14.400 --> 0:22:20.280 neo kinson is, if actively, already intruding into the today's world. 0:22:20.600 --> 0:22:24.840 It's already starting to impact, but its impact is still small. 0:22:24.920 --> 0:22:28.400 We're predominantly in a monetary system. All I'm saying over 0:22:28.440 --> 0:22:32.120 the next couple of years that impact will grow and 0:22:32.320 --> 0:22:35.879 the state role, the role of the state is going 0:22:35.960 --> 0:22:40.720 to increase, and that role will be welcomed, particularly by 0:22:40.840 --> 0:22:44.240 millennium and Generation Z. And you have to remember one 0:22:44.320 --> 0:22:49.879 third of the US electorate is already millenniums and Generation Z. Uh. 0:22:49.960 --> 0:22:52.960 Within five years or six years, there will be the 0:22:53.040 --> 0:22:57.439 majority electoral majority. The same way as Biby boomers brought 0:22:57.560 --> 0:23:02.400 on their shoulders Ronald Reagan and Maggief. Millenniums Z generations 0:23:02.440 --> 0:23:07.280 will change how the role of the status perceived. I said, 0:23:07.320 --> 0:23:11.000 what we're going to see is increasing influence of those 0:23:11.080 --> 0:23:16.960 ideas and those policies. Now that's a major problem for investment. Victor. 0:23:17.040 --> 0:23:18.800 I take the point that this is going to be 0:23:19.080 --> 0:23:22.840 a sort of long running transition. But whenever we talk 0:23:22.880 --> 0:23:24.840 about m m T on the show, I always have 0:23:24.920 --> 0:23:29.680 the question of whether or not MMT can work everywhere 0:23:29.760 --> 0:23:33.440 because to me, it feels like it's basically the purview 0:23:33.640 --> 0:23:38.280 of a few developed economies who you know, probably have 0:23:38.840 --> 0:23:41.960 an advantage in the form of currencies that are either 0:23:42.200 --> 0:23:46.040 you know, global reserve currencies or considered safe haven. So 0:23:46.400 --> 0:23:51.440 can everyone around the world embark on significant fiscal stimulus 0:23:51.560 --> 0:23:56.359 or MMT uh? No, absolutely not. It's going to be 0:23:56.400 --> 0:23:59.960 a reserve of only some countries. I think both New 0:24:00.119 --> 0:24:02.760 kangents and m m T. People who propagate these ideas 0:24:02.800 --> 0:24:05.919 will agree on a couple of aspects. Number One, they 0:24:05.960 --> 0:24:10.000 will all agree that if private sector doesn't multiply aggregate 0:24:10.040 --> 0:24:14.920 demand and liquidity at a pace that society requires, a 0:24:15.040 --> 0:24:19.159 society believes is appropriate, then it's responsibility of public sector 0:24:19.240 --> 0:24:22.880 to do that. Secondly, they agree that it's not necessarily 0:24:22.960 --> 0:24:27.520 proven that public sector necessarily worse at allocating capital than 0:24:27.560 --> 0:24:30.840 private sector. But the other thing, they would argue that 0:24:31.160 --> 0:24:35.720 under certain circumstances, government can do almost anything they want to, 0:24:36.160 --> 0:24:40.919 and prerequisites are quite tight. Number one, you have to 0:24:40.960 --> 0:24:44.480 have monetary sovereignty. So in other words, you have to 0:24:44.680 --> 0:24:47.600 be issuing your own currency and you have to be 0:24:47.640 --> 0:24:52.479 borrowing in your own currency. Now, that applies to United States, 0:24:52.480 --> 0:24:55.680 that applies to Canada, to Australia, that applies the UK, 0:24:55.920 --> 0:24:59.880 That applies to Japan, that applies to parts of euro 0:25:00.400 --> 0:25:03.040 But it doesn't apply to a lot of emerging markets 0:25:03.080 --> 0:25:06.520 in emerging market space. For example, it does apply to China, 0:25:07.320 --> 0:25:10.120 it does apply to Korea, but a lot of weaker 0:25:10.119 --> 0:25:14.280 emerging markets, um, they do not have monetary sovereignty. The 0:25:14.320 --> 0:25:17.520 second argument, I think correctly they will They will say 0:25:17.560 --> 0:25:21.399 that you need to have proper institutions of state, so 0:25:21.520 --> 0:25:26.160 that the country borrowing and or using central bank cannot 0:25:26.240 --> 0:25:30.800 be as Imbubwe or Democratic Republic of Congo Venezuela, that 0:25:30.880 --> 0:25:34.600 that they have solid institutions of space. Again, that applies 0:25:34.680 --> 0:25:36.280 to a lot of the world, but some of the 0:25:36.320 --> 0:25:39.840 emerging markets it does not apply. And a third argument, 0:25:39.880 --> 0:25:42.199 they will say that you need to live in a 0:25:42.240 --> 0:25:46.600 relatively disinflation re climate. Again that applies to a lot 0:25:46.640 --> 0:25:50.760 of developed countries. That applies to some emerging markets, but 0:25:50.840 --> 0:25:53.879 it doesn't apply to others. So you're absolutely right, there 0:25:53.920 --> 0:25:56.439 are some strict criteria. It's good to be of some 0:25:56.640 --> 0:26:00.600 size as well, that there are greateria and not rebody 0:26:00.640 --> 0:26:03.680 will be able to do this. But if you think 0:26:03.720 --> 0:26:08.040 of the world, the countries we mentioned represent about of 0:26:08.040 --> 0:26:12.720 global GDP, what happens to the countries or economies that 0:26:12.880 --> 0:26:17.520 can't make the transition to fiscal spending? And on that note, 0:26:17.560 --> 0:26:21.400 are are we basically going to be trading inequality within 0:26:21.640 --> 0:26:29.600 countries or within societies for inequality between countries. That's exactly 0:26:29.640 --> 0:26:33.800 what's going to happen. We're going to become much more localized. Effectively, 0:26:33.840 --> 0:26:38.000 we're going to sort of nineteen fifties nineteen sixties. It's 0:26:38.000 --> 0:26:41.120 not going to be, of course, as field countries as 0:26:41.119 --> 0:26:44.080 they were back then, but nevertheless the shades of fifties 0:26:44.080 --> 0:26:47.440 and sixties will be there. You know, there's much more localized, 0:26:47.720 --> 0:26:51.040 much more protective. The freedom of movement of people will 0:26:51.080 --> 0:26:54.120 be much more restricted, the freedom of moment of capital 0:26:54.160 --> 0:26:57.400 will be much more restricted. You'll find the government will 0:26:57.520 --> 0:27:01.159 be the major driver of a want to miss an investment. 0:27:01.680 --> 0:27:05.879