Speaker 1: Hello, Odd Lots listeners, it's Joe Wisenthal. So on Thursday,
Speaker 1: September nine, Tracy Elloway and I hosted the first ever
Speaker 1: Odd Lots Variety Show at the w n y C
Speaker 1: Green Space in Manhattan. The show featured Sam Antar, Lee
Speaker 1: book Eyed, Brad Setzer, Uh, Stephanie Kelton. We even had
Speaker 1: a surprise guest, one of the Spy Kids. If you
Speaker 1: know that story, you should be excited about that, and
Speaker 1: if you don't, well, then this will be a treat
Speaker 1: for you. And we even had musical guests, so we
Speaker 1: had the country singing economist Merle Hazard and I sing
Speaker 1: a few of my own songs. So on this week's
Speaker 1: Odd Lots, we're going to feature the full length audio
Speaker 1: that we recorded at the live show, so that even
Speaker 1: if you weren't able to make it out that night,
Speaker 1: you can still hear the great conversations and music from
Speaker 1: that night. And if you'd like to see video from
Speaker 1: the event, you can find it on the Bloomberg Markets
Speaker 1: and Finance channel on YouTube or just by searching Odd
Speaker 1: Lots Variety Show will also be featuring video clips and
Speaker 1: teasers from the event on social media. You can check
Speaker 1: it out on Twitter from the handle at Podcasts, and
Speaker 1: I'm sure that Tracy Alloway and I will be tweeting
Speaker 1: links to it plenty. If you missed it, don't worry
Speaker 1: because we are very hopeful and confident that this won't
Speaker 1: have been the last Odd Lot Variety show. So thanks
Speaker 1: everyone for listening and enjoy the show. Hi, thanks everyone
Speaker 1: for coming. I'm Joe Wisenthal and I'm Tracy Alloway, and
Speaker 1: welcome to the Odd Lots Variety Show. It's our first
Speaker 1: ever live event and we're so happy to have you
Speaker 1: all here. Um. I have to say I'm a little
Speaker 1: disappointed because I wanted our first odd LODs live event
Speaker 1: to be an odd LODs Live poker tournament. But this
Speaker 1: is also cool. I'm not disappointed. Uh. Just a couple
Speaker 1: of notes before we start. We have some really really
Speaker 1: great people backstage, some guests that we've been wanting to
Speaker 1: get on the podcast for a very long time. One
Speaker 1: housekeeping note, this is being recorded in audio format. Of course,
Speaker 1: it's also being recorded in video format, so please just
Speaker 1: be mindful of that, and other than that, enjoy the show.
Speaker 1: One other thing, we don't have time for Q and
Speaker 1: A unfortunately, but we'll have cocktails and reception afterwards. Who
Speaker 1: can hang out and mingle and ask questions that you
Speaker 1: didn't get a chance to ask. So let's get started,
Speaker 1: all right. Our first guest is a criminal, is actual
Speaker 1: convicted felon. He is the former CFO of Crazy Eddie,
Speaker 1: which for any long time New Yorker may remember their
Speaker 1: ads in the seventies and eighties, who was an electronics retailer. Uh.
Speaker 1: Also a fraud through and through from the beginning. Uh.
Speaker 1: And so we have the CFO. He now does work
Speaker 1: on forensic accounting. And I want to bring in Samanta.
Speaker 1: Uh So, who are you? What do you do? I'm
Speaker 1: a retired criminal? Are you reformed criminal? Do you think
Speaker 1: i'd be here right now if I didn't get caught? Well,
Speaker 1: maybe I would as a legitimate CEO that hasn't gotten
Speaker 1: caught yet. Do criminals ever truly retire? Yeah, because you know,
Speaker 1: after a while, you know it's um, you know what
Speaker 1: what's what's What's the benefit of doing any more crime?
Speaker 1: Even though at times I feel like I'd love to
Speaker 1: do crime again. After meeting some of the people in
Speaker 1: this room here, I said, oh man, this would be
Speaker 1: easy just to go back into the game. Again, So
Speaker 1: tell us about how you got into the business and
Speaker 1: what was crazy Eddie, and how did you become at CFO.
Speaker 1: Crazy as was a small garden variety electronics operation. Uh.
Speaker 1: We engage mostly in income tax evasions. Stealing the sales
Speaker 1: tax gave us the competitive advantage because that's six or
Speaker 1: seven percent we can steal. Gave us the opportunity to
Speaker 1: discount more to customers and still make money. So we
Speaker 1: were pretty much being competitive by you know, by by
Speaker 1: evading taxes in the old days. Uh. It was a
Speaker 1: family oriented business. We wanted to grow and they wanted
Speaker 1: somebody in the inside family member to to be the
Speaker 1: CFO of the company if the company grew to assert
Speaker 1: and level. So they picked me because I was the
Speaker 1: nerd that read the Wall Street Journal and barons when
Speaker 1: he was twelve years old. So they put me through
Speaker 1: college so I can become an accountant to help them
Speaker 1: commit more sophisticated crimes in the future. So eventually I
Speaker 1: go to brew College right over here in twenty third Street,
Speaker 1: I get my c p A. And of course I
Speaker 1: become a criminal mastermind, you know, doing white collar crime.
Speaker 1: I went to college to become an effective white collar criminal,
Speaker 1: white collar criminal should never cheat themselves out of getting
Speaker 1: a good education. So I was one of those kids
Speaker 1: that cheated in school anything. I earned my grades because
Speaker 1: I wanted to be the best at what I was
Speaker 1: doing in crime. Did you know that was the ultimate
Speaker 1: destination was crime at the time, and you were okay,
Speaker 1: And it was fun a lot of money when I
Speaker 1: was fourteen years old. They got a fifteen hundred dollar
Speaker 1: bonus in nineteen seventy one in cash. Does anybody have
Speaker 1: any fourteen year old kids? Imagine if your kid came
Speaker 1: home with a fifteen hundred dollar cash bonus today even
Speaker 1: and the money, of course is not worth as much
Speaker 1: as it was back then. Go ahead. So what was
Speaker 1: the most useful thing you learned from accounting for a
Speaker 1: life of criminality? Is that people are very, very gullible.
Speaker 1: People are too trusting. Uh. As a criminal, I learned
Speaker 1: to consider your humanity as a weakness to be exploited
Speaker 1: in the execution of my crimes. In other words, your
Speaker 1: good nature. You're wanting to trust people, You wanted to
Speaker 1: give people a benefit of the doubt. That gave me
Speaker 1: the opportunity to execute my crimes. Second part is is
Speaker 1: that people are you steal more with a smile than
Speaker 1: you can without have gone? Anybody knows how I was
Speaker 1: working the crowd. He has shaking hands, smiling, and everybody
Speaker 1: was happy with me. Right. You see, if if people
Speaker 1: like you, it's easy at to steal from them because
Speaker 1: they feel like they're comfortable with you. So let's talk Uh,
Speaker 1: that's nice and theoretical, but let's talk practical. So obviously,
Speaker 1: I'm sure there's a lot of people that would like
Speaker 1: to steal the income tax or the sales tax that
Speaker 1: they owe. But you have auditors who are forced to
Speaker 1: come in. So how do you like dupe the people
Speaker 1: whose job it is to make sure that you're not dealing.
Speaker 1: When it comes to fraud, the distraction is always more
Speaker 1: important than the law. Now, line is not a problem.
Speaker 1: You can ask me any question here and I'll lie
Speaker 1: to you right to your face, as you will know
Speaker 1: the difference. But the point is is that if you
Speaker 1: can distract somebody from doing their job, chances are they're
Speaker 1: not going to ask you the question that you have
Speaker 1: the law about. So in the crazy Eddie case, let's
Speaker 1: take auditors. The audits would be done over a period
Speaker 1: of say eight weeks, so they'd have to be twelve
Speaker 1: and a half percent each week, right, So by week
Speaker 1: six out of eight, they should have seventy five percent
Speaker 1: of the work done in seventy five percent at a
Speaker 1: time and twenty percent of the work left to do
Speaker 1: in twenty five percent at time. My job was to
Speaker 1: store them by having only twenty five percent of the
Speaker 1: work done in seventy five percent at a time, so
Speaker 1: that they had have to do seventy five percent of
Speaker 1: the work and only twenty five percent at a time,
Speaker 1: which is causedn't the cram rush to get things done
Speaker 1: and miss key order procedures? And that worked every single year.
Speaker 1: Do you know why? Because in the nineteen eighties there
Speaker 1: were no females in accounting doing none. It was a
Speaker 1: male dominated profession and most of the leg work was
Speaker 1: done by twenty one twenty five year old kids fresh
Speaker 1: out of college that was single. And what's the easiest
Speaker 1: way to distract the mail order to from doing their
Speaker 1: jobs female accountants is beautiful as you and they would
Speaker 1: they spent most of that time flirting with the females
Speaker 1: instead of doing their jobs. And every single year, like
Speaker 1: Pavlov with the dog, you put the wood in front
Speaker 1: of the dog gets salivates. Well, you put the female
Speaker 1: in front of the account and they salivate. They don't
Speaker 1: even do anything else. That's pretty much how we're able
Speaker 1: to succeed for us. We didn't get caught because of
Speaker 1: our aortors. We got caught because somebody I thought that
Speaker 1: Crazy A's was a goldmine, and they took advantage of
Speaker 1: a dropping the stock price and they took over the
Speaker 1: company right from out under us. In other words, we
Speaker 1: were benefited. We were we were a victim of our
Speaker 1: own fraud. No oh, I was gonna say, talk to
Speaker 1: us about that moment. What happened when when you heard
Speaker 1: that someone was actually interested in the company and you
Speaker 1: knew that it was a fraud. Well, we tried to
Speaker 1: take it over at seven dollars this ship we thought,
Speaker 1: we knew that people were hunting the company to take
Speaker 1: it over. So we've made a bid at seven dollars
Speaker 1: a year and excited, Why are you gonna pay seven
Speaker 1: dollars a share for a company you know it is worthless?
Speaker 1: Because we weren't going to use our money anyway. We're
Speaker 1: gonna defraud the idiots on Wall Street take all the
Speaker 1: money have them finance to take on. We're gonna get
Speaker 1: the company for nothing. So we've got seven dollars a year,
Speaker 1: and guess what submediate out to actually bet eight dollars
Speaker 1: a year, thinking that we were trying to steal the company.
Speaker 1: In fact, the initial investigation into the Crazy Eddy fraud,
Speaker 1: the SEC thought that we deliberately understated on numbers to
Speaker 1: take over the company on the cheap. Well, I want
Speaker 1: to like back up a second, what is the difference?
Speaker 1: And we we uh. Sam was a guest on a
Speaker 1: recorded podcast, and I thought this was one of the
Speaker 1: most key ideas that he said. There is a difference
Speaker 1: in the nature of fraud when you're a private company
Speaker 1: versus public company. The economics of crime change when you
Speaker 1: go public. So what's the difference. You get a better
Speaker 1: bang for the buck overstating your income as a public company,
Speaker 1: even if it means overpaying your taxes then understating your
Speaker 1: income as a private company and evading your taxes. For instance,
Speaker 1: if I steal a million dollars from my own companies
Speaker 1: a private company, in other words, I skim a million
Speaker 1: dollars and I don't show it as income and we
Speaker 1: have at tax rate, I'm evading four hundred thousand dollars
Speaker 1: in taxes. Simple math. Right, one million dollars, four hundred
Speaker 1: thousand dollars. Right. If I now I'm a public company
Speaker 1: and I put that million dollars back into the company, right,
Speaker 1: I have an inflated pre tax income of one million dollars.
Speaker 1: I'm gonna overpay my taxes by four hundred thousand. I'm
Speaker 1: gonna have an inflated net income of six hundred thousand dollars.
Speaker 1: And if my company is trading at a multiple of
Speaker 1: earnings let's say thirty times earnings pe ratio, I'm creating
Speaker 1: eighteen million dollars and fictitious wealth by overpaying my taxes
Speaker 1: by four hundred thousand dollars agains. Who's most stock? Crazy?
Speaker 1: Any people? The hand of family does? We created a
Speaker 1: security screud by going legit. We said it was more
Speaker 1: profitable to screw investors than to than to screw the
Speaker 1: internal revenue service. That was the whole idea behind the
Speaker 1: crazy Eddy for it. Okay, I'm gonna jump forward again.
Speaker 1: What was it like in prison? And did you do
Speaker 1: a Shawshank redemption kind of thing where you started doing
Speaker 1: everyone's tax accounting for the kids, and my kids are here, um,
Speaker 1: believe it or that I didn't. I didn't go to prison.
Speaker 1: I got house arrested when they were young because they
Speaker 1: were too young to be traumatized by what was going on.
Speaker 1: They'd see daddy wearing an ankle bracelet, so they bring
Speaker 1: their friends over if they daddy's ankle bracelet. So did
Speaker 1: you tell on your own family members? Yes, but not
Speaker 1: my immediate family, my cousins. Yes, of course. Absolutely. Do
Speaker 1: you think I'm gonna go to jail for them? Have
Speaker 1: to have some standards? YEA. One thing I'm very curious
Speaker 1: about it. We just have a couple of minutes left.
Speaker 1: Is these days with computers and all kinds of more
Speaker 1: are easy, you know, ease of tracking inventory? Is it
Speaker 1: harder to do? For all these days? Crime evolves? I'll
Speaker 1: give you one one example. Computers and everything. One of
Speaker 1: the things one of the questions raised by Wall Street
Speaker 1: prior to us going public was what we had an
Speaker 1: adequate computer system? Which we didn't. So what do we do?
Speaker 1: We get them? Um? Computer World magazine to bring one
Speaker 1: of their beautiful female reporters over right, and she writes
Speaker 1: this story about crazy at these computer system that tracks inventory,
Speaker 1: and we put a nice lady in with with a
Speaker 1: smini skirt in front of the computers and all of
Speaker 1: the red, orange and yellow lights are going on, and
Speaker 1: people think we have a great computer system. If a
Speaker 1: traction is always more important than the life. If you
Speaker 1: were going to do it fraud today, in modern times,
Speaker 1: what would it be multi level marketing or time shares?
Speaker 1: Because it's legitimate fraud. I see people. I've done work
Speaker 1: on the forensic side on that. I see people getting
Speaker 1: fleeced all the time by these industries pretending to be
Speaker 1: legitimate businesses. I mean they might be good investments for
Speaker 1: Wall Street. I'm not he had to talk about investments,
Speaker 1: And actually I haven't been in the market for over
Speaker 1: a decade, but I will tell you these these these
Speaker 1: companies are the scum of American capitalism, the ruination of
Speaker 1: American capitals. They should not be allowed to exist. All right,
Speaker 1: Sam answer the former CFO of Crazy Eddie, Thank you
Speaker 1: very much for your lessons for us. Thank you all right.
Speaker 1: Moving swiftly along, We're gonna bring up our next panel.
Speaker 1: And those of you that listen to a plots know
Speaker 1: that obviously we talk a lot about financial markets on
Speaker 1: the show, and I think sometimes there's a tendency to
Speaker 1: think that markets are sort of divorced from people's day
Speaker 1: to day lives, when in fact they matter a lot
Speaker 1: to how everyone lives. So for our next panel, we're
Speaker 1: going to focus on some big moments in the debt market,
Speaker 1: specifically UM and big moments in the debt market that
Speaker 1: have actually changed the world in various ways. Our next
Speaker 1: two panelists are Brad Setser, an American economist and former
Speaker 1: staff economist at the Treasury Department. Many of you probably
Speaker 1: follow him on Twitter, and if you don't, you definitely
Speaker 1: should because he has great insights. And we also have
Speaker 1: Lee book Eye, who's been described previously as the philosopher
Speaker 1: King of sovereign debt lawyers. He's represented nearly every country
Speaker 1: that's gone bankrupt since the nineteen eighties and really reshaped
Speaker 1: the way that we think about sovereign debt. His mere
Speaker 1: presence at airports have been known to move a country's
Speaker 1: debt market. Uh, and he's recently retired from the law firm.
Speaker 1: Cleary Gotlieb and we managed to get him out of
Speaker 1: his semi retirement to come talk to us. So very exciting.
Speaker 1: Let's bring them on right. Uh, So we purposefully gave
Speaker 1: ourselves a really sort of a vague intro, which means
Speaker 1: I now have to struggle to think what the first
Speaker 1: question is. But I think we want to focus on
Speaker 1: debt crisis to begin with. Do they all look the same?
Speaker 1: Is there a common thread? How do you actually spot
Speaker 1: a debt crisis coming? Lee? Let's start with you. They
Speaker 1: don't all look the same, but they have one thing
Speaker 1: in common. They're all a crisis um and they never
Speaker 1: come in isolation. A sovereign debt crisis will almost always
Speaker 1: be accompanied by a banking crisis, or trade crisis, a
Speaker 1: currency crisis, sometimes a social crisis. Uh. The pressure on
Speaker 1: the politicians who are there when the crisis begins is
Speaker 1: intense because they all know that history suggests that the
Speaker 1: politicians there when a crisis begins are rarely the ones
Speaker 1: there when it ends. Bread By the way, I just
Speaker 1: want to tell quick anecdote about Brad because we're here. So.
Speaker 1: I think it was probably fourteen years ago and I
Speaker 1: was like unemployed. I hadn't been in New York that long.
Speaker 1: I applied for a job to like blog about economics
Speaker 1: or something, and Brad was my interviewer and I bombed
Speaker 1: the interview and I think at the job, but we
Speaker 1: that's because he asked me about Argentina had just defaulted
Speaker 1: a couple of years ago, and he asked me some
Speaker 1: question about Argentina. Was like, you know, he asked my
Speaker 1: way through. I had no idea, so I bombed. I
Speaker 1: didn't get it. But we're now here and I'm you know,
Speaker 1: he's at the hot seat. So and once again Argentina
Speaker 1: isn't the news. Uh so, Brad, why does Argentina first
Speaker 1: of all? Uh? Second of all, why does Argentina? Why
Speaker 1: did they default so much? What's the deal with that? Well?
Speaker 1: I made probably one of the biggest hiring mistakes in
Speaker 1: my life. Um. We we'd actually hired Felix Salmon, who
Speaker 1: would turned to be a pretty good blog so we
Speaker 1: could have put together Felix and Joe and like, uh,
Speaker 1: probably been a successful blogging firm. Um. So, what does
Speaker 1: Argentina default so much? I guess it's because people lend
Speaker 1: them so much money? Okay, why do people keep lending
Speaker 1: them money? Because this seems to happen literally at this point,
Speaker 1: almost every five years. I think people consistently overestimate Argentina's
Speaker 1: capacity to repay. Yeah, they just kind of gets like
Speaker 1: squonky sovereign debty. Uh, Argentina doesn't have a big export base.
Speaker 1: It exports soybeans and UH soybean oil. It hasn't developed
Speaker 1: other export industries, so exports are very small share of
Speaker 1: Argentina's economy. If you have a small share of exports,
Speaker 1: you have less capacity to support foreign currency debt. Yet
Speaker 1: Argentina keeps borrowing in foreign currency. So I mean essentially
Speaker 1: every time what would normally be a currency move and appreciation,
Speaker 1: it turns into a debt crisis. So I described Lee's
Speaker 1: career saying that he's represented in numerous governments. So give
Speaker 1: us your opinion on why those governments keep tapping the
Speaker 1: market for money that apparently they can't actually afford. Look,
Speaker 1: in the twenty first century, no sovereign borrows money in
Speaker 1: the international markets with the expectation that they'll ever have
Speaker 1: to repay it. If by repay you mean devote current
Speaker 1: resources to settle that liability. They borrow it in the
Speaker 1: sure and certain hope that when it matures they will
Speaker 1: be able to go back into the market and borrow
Speaker 1: from someone else to pay that back, and when that matures,
Speaker 1: they'll do the same so on in perpetuity. I sometimes
Speaker 1: think of sovereign debt that it used to be a
Speaker 1: joke that if you had a pal who was on
Speaker 1: a diet and you saw them about to tuck into
Speaker 1: a chocolate declaire, you were supposed to say to them, Now,
Speaker 1: remember a moment on the lips. A lifetime on the hips.
Speaker 1: Sovereign debt is that when a sovereign borrows money today, uh,
Speaker 1: that debt in a net sense, will probably stay on
Speaker 1: its balance sheet forever. That which is why sovereign debt
Speaker 1: stocks almost always go up. They will occasionally go down,
Speaker 1: but almost always go up relentlessly, remorselessly. Well, Brad, you
Speaker 1: mentioned that argent Tina is particularly ill suited to take
Speaker 1: on foreign currency debt due to its immature export base.
Speaker 1: Why not adopt a different model? Why do they have
Speaker 1: to borrow from borrow from international markets? Well, I mean
Speaker 1: they have at times tried a different model. I mean,
Speaker 1: for better or for worse. The Kushners were frozen out
Speaker 1: of the market for a long period of time. They
Speaker 1: still kind of wanted to run budget deficits, so they
Speaker 1: kind of borrowed from the Central Bank to UH finance
Speaker 1: government spending. Mockery came along and said, I wanted to
Speaker 1: go back to be a more legitimate form of finance.
Speaker 1: UH and Argentina, in addition to having a small export sector,
Speaker 1: has a really small banking sector. Lots of historical reasons,
Speaker 1: the history of inflation, so we couldn't finance the budget
Speaker 1: deficit with the banking sector. The market was there and
Speaker 1: the temptation was strong, Uh Lee should they do? Should
Speaker 1: they do a different approach? And I'm also curious, like
Speaker 1: after Mockery one, everyone's like, yeah, he's going to do
Speaker 1: all the liberal reforms that people want. And the i
Speaker 1: m F is excited because they're gonna do some playbook
Speaker 1: and obviously, as we've seen over the last several months,
Speaker 1: it's completely failed. How much burden is there on the
Speaker 1: or as a responsibility on the international community, whether it's
Speaker 1: organizations like the i m F. Two, try that playbook
Speaker 1: again and sort of think, like, you know, how much
Speaker 1: is it their fault for adopting this pattern that just
Speaker 1: isn't working. Well, here's a curious asymmetry in the international
Speaker 1: financial markets. Organizations like the I m F. Every year
Speaker 1: by their articles of agreement will send a team of
Speaker 1: economists down to every one of their members analyze the
Speaker 1: fiscal policies and usually criticize them, sometimes brutally, but they
Speaker 1: have no power at that stage to get the country
Speaker 1: to change policy. It is only when the country cannot
Speaker 1: pay its debts and comes to the I m F
Speaker 1: and asks for a program that the IMF can begin
Speaker 1: to say, you must adopt these fiscal adjustment measures. It's
Speaker 1: a curious asymmetry. It's as though the medical profession was
Speaker 1: unable to tell patients to avoid smoking cigarettes, that they
Speaker 1: could only help them when they come in with the
Speaker 1: consequences of it. So is the solution to debt crises
Speaker 1: doesn't always have to be fiscal adjustment or austerity or
Speaker 1: are there alternatives that are just never pursued? Well, debt
Speaker 1: crisis you you started this question, Tracy. Debt crisis come
Speaker 1: in different forms. Sometimes often I guess they are caused
Speaker 1: by chronic fiscal mismanagement of the economy, but not always
Speaker 1: um There have been debt is caused by natural disasters,
Speaker 1: the hurricane, the the earthquake, the tidal wave. UH Debt
Speaker 1: crisis can be caused by a Lehman moment in the
Speaker 1: international markets. Debt crisis can be caused by some other sovereign,
Speaker 1: some other place in the world misbehaving or the victim
Speaker 1: of gross misfortune, which causes the investor community to recoil.
Speaker 1: And it's almost like you're seeing them wake up and
Speaker 1: remember the risks of sovereign nothing and then they pull back.
Speaker 1: And when they pull back, Uh, going back to my
Speaker 1: earlier analogy, Uh, when all the debt is assumed to
Speaker 1: be refinanciable and it no longer is refinanciable, then there's
Speaker 1: a debt crisis. Bread. Do you think some other model
Speaker 1: should be pursued? I mean, let's say you could go
Speaker 1: back in time too, after right after Mockery went to
Speaker 1: the election or some other point. Was there another path
Speaker 1: that plausibly could have been taken by Argentina to avoid this?
Speaker 1: And I don't mean like, you know, more austerity per se,
Speaker 1: because whatever, you know, it's tough, But was there like
Speaker 1: a totally different approach they could have taken. I in
Speaker 1: Argentina's particular case, there were choices, but I'm not sure
Speaker 1: the choices would have avoided some form of austerity. One
Speaker 1: choice would have been to borrow more in pass uh,
Speaker 1: not to borrow in dollars. I mean, you get into
Speaker 1: debt trouble most typically when you borrow in a currency
Speaker 1: that is not your own. There may be some differences
Speaker 1: across cases, but that's the commonality. Otherwise you can sort
Speaker 1: of print your way out of the crisis. Uh So,
Speaker 1: once Mockery decided not to borrow into in Paso's I
Speaker 1: think there were on a difficult trajectory. So you could
Speaker 1: have borrowed more in Pasos. You could have retained some
Speaker 1: of the capital controls, tried to lock in the domestic
Speaker 1: investors and forced them to keep buying Argentina's debt. Uh.
Speaker 1: And in that world, if you had not been relying
Speaker 1: as heavily on the central bank for financing, you probably
Speaker 1: would have had to have run smaller fiscal deficits at
Speaker 1: the time. The other question, which sort of Lee avoided
Speaker 1: is that once you get into trouble and wants you default,
Speaker 1: then it becomes a question of how much you want
Speaker 1: to pay back ah. And so one way of avoiding
Speaker 1: too much austerity after you have stopped paying is to
Speaker 1: strike a generous deal with your creditors and gives yourself
Speaker 1: a fresh start right on this Notely, do you hate creditors? No,
Speaker 1: certainly not um. Look, the countries, all countries, but particularly
Speaker 1: developing economies, can benefit enormously from access to capital markets
Speaker 1: if it is done with moderation and maturity. Ah. The problem,
Speaker 1: and this goes to Joe's Yo's you were dancing around this,
Speaker 1: But the answer to your question is that the political
Speaker 1: flesh is notoriously weak. Look, politicians like to spend money
Speaker 1: it helps them get re elected. Politicians don't like to
Speaker 1: tax because it doesn't help them get reelected. They don't
Speaker 1: like to cut services because that doesn't help them. Uh. Borrowing,
Speaker 1: particularly borrowing from outside your own country. So in the
Speaker 1: international markets is the way to cover that deficit. Ah.
Speaker 1: It allows you to spend money without raising taxes um
Speaker 1: and for as long as it lasts, it's the one
Speaker 1: a full thing. But the problem is it is for
Speaker 1: most politicians to tempting and they will borrow often to
Speaker 1: the saturation point of what the market will lend them.
Speaker 1: And that is where global economics comes in. If you
Speaker 1: live in a time as we have for ten years
Speaker 1: in which the central banks, major central banks of the
Speaker 1: world have driven interest rates to near zero and have
Speaker 1: pumped massive amounts of liquidity into the market through quantitative
Speaker 1: easing and similar programs. There's enormous amount of money slashing
Speaker 1: around that will need a home and they will welcome
Speaker 1: a borrower willing to take it. So there you have
Speaker 1: a confluence of two dangerous things. A tendency of politicians
Speaker 1: to borrow as much as they can and attend and
Speaker 1: see of a market, not a tendency a financial imperative
Speaker 1: to lend money to someone at the best interest rate
Speaker 1: they can. Let's talk about a country that's even worse
Speaker 1: shaped by a long shot, I think than Argentina, and
Speaker 1: that is Venezuela. And Tracy mentioned Lee that you were
Speaker 1: in retirement, but give it all the rusteny retirement semi retirement.
Speaker 1: So you are involved in some way in Venezuela, but
Speaker 1: you're not working for Maduro right, No, okay, So what's
Speaker 1: going what what's your what are you doing with Venezuela? Yeah,
Speaker 1: I am acting as what we're calling a strategic advisor
Speaker 1: to the Guideau administration in Venezuela. And what's on the
Speaker 1: agenda for helping them? And how much can you actually
Speaker 1: do as long as Maduro is cleaning onto power. Well,
Speaker 1: that's the problem. Until that man takes the hint that
Speaker 1: he should exit the political stage. There isn't much that
Speaker 1: can be done with respect to the country's external debt.
Speaker 1: The country owes north of a hundred and fifty billion
Speaker 1: US dollars. Its economy has been utterly decimated by twenty
Speaker 1: years of corruption and grotesque economic mismanagement. There is a
Speaker 1: deep humanitarian crisis in the country. There is a serious
Speaker 1: refugee crisis at at you know, levels proportional to Syria um.
Speaker 1: But there is no possibility of dealing with that debt
Speaker 1: stock until Mr Maduro says audios, thoughts and suggestions approach
Speaker 1: forward for Venezuela. I mean, Venezuela is going to be
Speaker 1: like the super Bowl for sovereign debt lawyers. Once the
Speaker 1: restructure and get started. You have every single possible issue.
Speaker 1: You have two sovereign borrowers, one sovereign, one quasi sovereign,
Speaker 1: the PETAVSA, the state oil company, both of whom owe
Speaker 1: a decent amount in international bonds. The legal equivalence or
Speaker 1: non equivalents between their debts is to be determined. Ample
Speaker 1: scope for creativity. The contractual provisions in Venezuela's bonds are
Speaker 1: very old school, which means that they have more litigation
Speaker 1: possibilities and avenues and fewer tools to facilitate a restructuring
Speaker 1: than a modern restructuring clause would allow. You have an
Speaker 1: issue of equity between bond holders and sovereign creditors like China,
Speaker 1: like Russia, but then Russia has played a kind of
Speaker 1: clever game because Russia hasn't lent necessarily as Russia. Russia
Speaker 1: has lent as Rosneft, the state oil company. Uh sort
Speaker 1: of seems like the sovereign, but it isn't technically the sovereign.
Speaker 1: You have a whole host of court claims for past
Speaker 1: expropriation whose relative rank uh I think is not clear
Speaker 1: compared to other obligations. We may have a different view,
Speaker 1: and so I think it uh it it has every
Speaker 1: avenue of complexity that one could ever imagine, combined with
Speaker 1: the greatest need for debt reduction. I think one can imagine,
Speaker 1: Brad how important our debt relationships to international politics, Because
Speaker 1: on the one hand, you are building up a relationship
Speaker 1: between two companies. This country owes that country some money
Speaker 1: or vice versa. But on the other hand, you can
Speaker 1: see it as a point of antagonism when things start
Speaker 1: to go wrong or whenever there's tensions. And the one
Speaker 1: I'm thinking about right now is China and the US
Speaker 1: and one trillion dollars plus worth of U S treasuries
Speaker 1: held by China. Yeah. Look, I probably made my my
Speaker 1: name by tracking China's treasury holdings before anyone else thought
Speaker 1: it was interesting. Uh. And the boring reality is that
Speaker 1: the treasuries have been the most boring aspect of the
Speaker 1: trade war. China hasn't used them as leverage. China probably
Speaker 1: can't use them effectively as leverage. I think China has
Speaker 1: been disappointed by the fact that it's law, you know,
Speaker 1: it's it's treasury holdings, which at one point in time,
Speaker 1: like China's GDP, they've kind of come down. Treasury and agencies,
Speaker 1: to be correct, um, have never really provided them with
Speaker 1: much leverage over the US political system. Uh. Soybean farmers,
Speaker 1: on the other hand, are a much more potent political force.
Speaker 1: I think that's partially because the US borrows in its
Speaker 1: own currency, partially because the FED can buy far more
Speaker 1: bonds than China could ever sell, and partially because the
Speaker 1: relationship with China was always arm's length. The US never
Speaker 1: really wanted China to accumulate so many reserves, and as
Speaker 1: a result, the US never promised China much of a return.
Speaker 1: I think the Chinese learned this. I think one of
Speaker 1: the one of my seces is that frustration with a
Speaker 1: lack of leverage provided by treasury bonds contributed to China's
Speaker 1: decision to lend more through its policy banks, more through
Speaker 1: the Belt and Road initiative, more through direct close relationships,
Speaker 1: loans to specific politicians, specific companies, and less through a
Speaker 1: deep liquid bond market like the treasury market. So I
Speaker 1: don't know if people know this or not, but Tracy
Speaker 1: has contributed to um the tensions between the U S
Speaker 1: and China with an article that she wrote a couple
Speaker 1: of weeks ago. So apparently there's some people that like
Speaker 1: bought some old Chinese bonds from like the early nineteen hundreds,
Speaker 1: like in an antique shop or something like that, that
Speaker 1: they just say their bonds, and now they're trying to
Speaker 1: lobby the Trump administration to get to enforce uh, I
Speaker 1: mean you describe it. They want Trump to make China
Speaker 1: pay them. Sure, they want Trump to basically exert pressure
Speaker 1: on China to pay this hundred year old that the
Speaker 1: People's Republic of China actually repudiated back in nineteen So Lee,
Speaker 1: we were talking about this earlier. Do they have do
Speaker 1: you think they have any sort of shot at these people?
Speaker 1: Like picked up some pieces of paper and anyway, wait,
Speaker 1: is China going to be represented by Lee? In which
Speaker 1: case legally I think not. Um. Whether Mr Trump wishes
Speaker 1: to use this or rattle this saber that I don't know.
Speaker 1: But these bonds were actually the subject of litigation back
Speaker 1: in the nineteen eighties UH and the courts decided that
Speaker 1: the statute of limitations had run on these obligations. It
Speaker 1: isn't just China, by the way, there are Czarist Russian
Speaker 1: bonds for that went into default in nineteen seventeen. They
Speaker 1: slash around, UH. And there was actually a very interesting
Speaker 1: situation in the mid nineties when Russia wanted to issue
Speaker 1: euro bonds in Europe. The French government said to the
Speaker 1: Russian government, not until you pay us some money to
Speaker 1: settle the old Czarist bonds that are held by French citizens.
Speaker 1: And they paid them I think five million dollars to
Speaker 1: do that. So these things slosh around. It's it's there
Speaker 1: are other countries, by the way, that may be a
Speaker 1: little bit of option value if something could happen where
Speaker 1: they're worth. My image is most of these things are
Speaker 1: framed and on bathroom walls. Uh and break the glass
Speaker 1: when Mr Trump tells you too, they are beautiful debt certificates.
Speaker 1: I'm just going to say that they're very gorgeous and
Speaker 1: we should all buy them for the art value at least,
Speaker 1: um Lee, we'd be remiss if we didn't ask you,
Speaker 1: in your forty plus your career, what your most interesting
Speaker 1: moment was, jetting in and out of countries, often in
Speaker 1: bankruptcy or on the verge. Interesting is hard adjective, but
Speaker 1: most tense I think was Greece. Greece in twenty ten
Speaker 1: encountered a terrible debt crisis. Grease a member of the Eurozone,
Speaker 1: member of the European Union. Uh so it had as
Speaker 1: its domestic currency the euro, but it wasn't a domestic
Speaker 1: currency like the Argentine pesos. The Greeks unilaterally couldn't print it,
Speaker 1: and so in that sense it was a foreign currency. Um.
Speaker 1: They owed north of three hundred billion euros, virtually all
Speaker 1: of it in the form of bonds, and the question
Speaker 1: was would a debt restructuring for that debt stock force
Speaker 1: Greece to leave the Eurozone, possibly force it to leave
Speaker 1: the European Union to bring back the drachma. And that
Speaker 1: had enormous political consequences across Europe because many in Europe
Speaker 1: thought that the UH, the Eurozone, the monetary union was indissoluble,
Speaker 1: and had it proved even not to be, might there
Speaker 1: have been others who would leave? Might the market have
Speaker 1: looked at Greece and said, if Greece can restructure, maybe
Speaker 1: Spain could, maybe Italy could, maybe La Belle France could,
Speaker 1: and would that not bring a cataclysm upon European finance?
Speaker 1: So it was a tense period. We're almost wrapped up
Speaker 1: before we go, Um, I just want to turn the
Speaker 1: subject a little bit because Brad, you know, we're talking
Speaker 1: about US China and the trade war, and sometimes you
Speaker 1: come on TV and I said, what's your prediction for
Speaker 1: the trade war? So, with you know less than a
Speaker 1: minute to go at this point, what is your prediction
Speaker 1: for where things are going with you as China trade
Speaker 1: I I, my guess this is one of the cases
Speaker 1: where you can get on TV simply by reading the
Speaker 1: president's Twitter account and saying that the best predictor of
Speaker 1: what US trade policy will be will be with the
Speaker 1: tone of his past ten tweets. If the past ten
Speaker 1: tweets are J. Powell is the biggest threat to human civilization,
Speaker 1: then he's probably not thinking about escalating with China. If
Speaker 1: his last ten tweets or I'm a tariff man, he
Speaker 1: probably is going to escalate with China. So the recent
Speaker 1: pattern of tweets seem to be back on J. Poweh
Speaker 1: is not the world's best central banker, rather than China
Speaker 1: is our greatest enemy. So right now I'm putting slightly
Speaker 1: higher odds on a kind of what's called the mini deal.
Speaker 1: China buy some soybeans, the US doesn't escalate any further.
Speaker 1: I don't think the Trump administration really wants to do
Speaker 1: the last round of tariffs anyway, and then that provides
Speaker 1: sort of an unspoken truce to go through the election.
Speaker 1: All right, We're going to leave it there. That's Lee
Speaker 1: book Eyed and Brad Setser, thank you so treating with us.
Speaker 1: All right. I have to be very careful with this
Speaker 1: next intro because it's slightly last minute, and it's also
Speaker 1: not on your lineup. It's a surprise guest who we're
Speaker 1: not going to name. Instead, we're going to bring him
Speaker 1: out and we're gonna play a game, and you all
Speaker 1: are going to have to guess who he is, and
Speaker 1: you're gonna have to do so by asking questions that
Speaker 1: can be answered in yes or no format. And there
Speaker 1: are a couple of people and hear who I know
Speaker 1: know who this person is, so please don't ruin it
Speaker 1: for everyone else. Yes, all right, let's bring him on
Speaker 1: the special guest. You can clap even though you don't
Speaker 1: know who he is. All right, who is it? Who
Speaker 1: is it? Who wants to get shouted out? Is being recorded?
Speaker 1: So you know right to ask loud? Ye? Yes, keep
Speaker 1: become financial frauds if you committed no good question? What's
Speaker 1: your Twitter handle? Don't don't have one? Mystery? Do you
Speaker 1: specialize the reco part? I do not. I barely know
Speaker 1: what that is. She's a big point, you guy, No
Speaker 1: good guess though, that's a good guy. You work on
Speaker 1: the podcast? The question was does he work? Do you
Speaker 1: work on the podcast? But you're welcome to like, I'll
Speaker 1: come on. Are you related to we work in any way?
Speaker 1: Is it a good question. Are you really do work? Yeah,
Speaker 1: I'm interested in exactly Yeah the news, so yeah, fair enough,
Speaker 1: but we work. Questions do you work now? Are you
Speaker 1: involved in country music? Involved? That's a good question. No, unfortunately,
Speaker 1: you're have an opinion on platinum coins. No, you know what?
Speaker 1: Iven you know what? I love that like no one
Speaker 1: just even like anywhere in the wallparks like I swear,
Speaker 1: none of you have asked remotely like you're not You're
Speaker 1: not getting warm at all. It's not even close. No,
Speaker 1: if I did, I had one. Do you work for
Speaker 1: the government. I'm kind of young, but no I did not. No, yeah,
Speaker 1: I got it's getting worse. Actually, want questions are getting
Speaker 1: further away the towel. Let's not tell. Okay, so there's
Speaker 1: a hint. Why don't you show the hint because it's
Speaker 1: been like two minutes and it's not getting better. You
Speaker 1: guys are getting anywhere close. Ye, this in particular is
Speaker 1: the import in peace. Yes, there, you're one of the
Speaker 1: thirteen kids. It's eleven. Actually we'll give that just to
Speaker 1: be clear, Just to be clear. So the shirt, in
Speaker 1: case you didn't see it, says uh sp dr. And
Speaker 1: that was enough for someone to say that you were
Speaker 1: one of the kids. So who are the kids? What's
Speaker 1: going on? I'm going to do the unveiled before people
Speaker 1: start talking about platinum coins again UM or bitcoin. So
Speaker 1: the Spy eleven, also known as the Spy Kids, are
Speaker 1: eleven pretty random. UM, now millennials who have about two
Speaker 1: fifty billion dollars tied to them in the form of
Speaker 1: the world's biggest e t F, the SPDR SMP five
Speaker 1: d E t F, known by the ticker sp Y.
Speaker 1: I still can't believe this is real. So what's the deal? Well, basically,
Speaker 1: Spy was created as a unitary investment try UM partially
Speaker 1: because it would be easy to get through the SEC
Speaker 1: regulations UM at the time. To create this type of vehicle,
Speaker 1: they had to basically get two separate divisions of the
Speaker 1: SEC to come together and approve it, which, if anybody
Speaker 1: has worked with regulators, that's incredibly difficult. Oh gosh, it's
Speaker 1: so it's probably around nine when this document was created. UM.
Speaker 1: I've probably more leading up into that. I think probably
Speaker 1: late eighties early nineties as well. But UM. This so
Speaker 1: basically what a unitary investment trust is. Just to give
Speaker 1: a little legal background, is UM it's a vehicle that
Speaker 1: they put these investments into for this initial et f
Speaker 1: UM that is connected to not only does it have
Speaker 1: a date limit to to go against the rule of perpetuities,
Speaker 1: but they also have measuring lives, which is us eleven
Speaker 1: kids who are all kind of family members who are
Speaker 1: born around the time that this was created. So um
Speaker 1: for example, myself and two of my cousins who couldn't
Speaker 1: make it tonight A are also on our part of
Speaker 1: the eleven. But you didn't know that you were actually
Speaker 1: listed on this legal document until one of our reporters
Speaker 1: actually called you up. What was that conversation, like, did
Speaker 1: you think immediately that it was a scam? Yes? Actually
Speaker 1: I was like it was this was just a few
Speaker 1: weeks ago. Yes, this was probably mid August. Yeah, You've
Speaker 1: going your whole life without knowing that the world's largest
Speaker 1: et f how much is in it now a quarter
Speaker 1: of a trillion dollars, is continue It's continued existence is
Speaker 1: contingent on you and ten other people being alive. Yes, okay,
Speaker 1: I just want to get that clear. And you found
Speaker 1: this out a few weeks ago, Yes, I mean that
Speaker 1: the lead and email it's like you're connected to this
Speaker 1: massive billion dollar fund. I mean that reads like any
Speaker 1: Nigerian prince scam. Like what it guys, You're getting real elaborate,
Speaker 1: like you know, businesses are giving this info away in
Speaker 1: these hacks. Like why do you got to do all this?
Speaker 1: I'm still a little confused. What was the legal requirement?
Speaker 1: I still don't know. Well, so I have a question
Speaker 1: on this because you actually touched on it already, the
Speaker 1: rule against perpetuities. Have you just become an expert in
Speaker 1: this in the past three or four weeks a little bit?
Speaker 1: My um, so, my mom who put us on this
Speaker 1: list was actual AMEX council at the time for the
Speaker 1: American Stock Exchange who kind of helped push and create
Speaker 1: this product. Um, and yeah, she she kind of explained
Speaker 1: it to me. It's it's very it's basically to avoid
Speaker 1: having something that can go on in essentially perpetuity. Um,
Speaker 1: you can't have any for example of trust, it could
Speaker 1: if you had to go on in perpetuity, can be
Speaker 1: doling out assets forever in theory. But that's why they
Speaker 1: have these rules in place to kind of limit these things.
Speaker 1: And one of them is to use measuring lives. And
Speaker 1: that's what we are essentially present that like they've made
Speaker 1: so much money on this, and I assume you don't
Speaker 1: get anything. I was that was my first question, And yes,
Speaker 1: I was quite like, and I do I get, like
Speaker 1: I don't know royalty or anything. Yeah, a couple of yeah,
Speaker 1: like does someone I mean clearly not because you didn't
Speaker 1: know about this until recently. But how did they know
Speaker 1: that you're alive? I you know, that's funny that that
Speaker 1: was a question we had, like who's tracking Is there
Speaker 1: anybody tracking us? You know? My cousin joked, it's like
Speaker 1: the Born Supremacy where they have all like the faces
Speaker 1: and and la heartbeats going like on the screen and all.
Speaker 1: I don't think anybody did. I don't think anybody So
Speaker 1: I think the thing to understand here when this was
Speaker 1: all done, this was part of a sixty page legal
Speaker 1: document that was meant to be filed at the SEC
Speaker 1: and like lost forever, you know, it just would end
Speaker 1: up in some random government. They weren't expecting these things
Speaker 1: all be digitalized and put up on Edgar filings um
Speaker 1: and easily searched by people on Twitter. Apparently, um, not
Speaker 1: easily searched. I did that search by the way, well somebody,
Speaker 1: I thought somebody, Well somebody had found here, yeah and
Speaker 1: sent it to us yet. Okay, but it took a
Speaker 1: long time too. It took years for them to find it. Yeah.
Speaker 1: Have you met the other spy kids? Are you all friends? Now?
Speaker 1: I like to think that you're all going to go
Speaker 1: on vacation together and some room together, right like? That
Speaker 1: seems like it would be like a major financial stability
Speaker 1: risk to have you all the same plane or the
Speaker 1: same building, right like. It's yeah, it does not seem
Speaker 1: like a good idea. Um no, actually, so two of them,
Speaker 1: uh other names on the list, I don't know. I mean,
Speaker 1: their their names are out there already. I guess Pete
Speaker 1: and Paul Pavelka are my cousins and they were also
Speaker 1: kind of born around the same time. So my mom thought, well, yeah,
Speaker 1: let's put them on there as well. What do you actually,
Speaker 1: by the way, what do you do besides I have
Speaker 1: two So I actually work in public relations for a
Speaker 1: financial PR firm and routh I'm group got to get
Speaker 1: the plug. Sorry, uh yeah right, um, so there's no
Speaker 1: So it's not that weird that financial reporters reached out
Speaker 1: to me. It was kind of like, but the weird
Speaker 1: question was like, is your name Kevin Patrick McGrath. Now,
Speaker 1: I don't use my middle name on anything like. I
Speaker 1: think it's probably on two documents connected to me and
Speaker 1: it's so that was like when I was like, what,
Speaker 1: like what is this all? Like? That was really the
Speaker 1: thing that ticked me. I was like, where does this
Speaker 1: come from? Are you putting it on your business card?
Speaker 1: Spy kid? I haven't yet, but I'm thinking about it.
Speaker 1: Also thinking about getting some identity protection service. That's right
Speaker 1: if if anyone wants to help crowdfund some identity theft
Speaker 1: protection for Kevin whose full name and birth date is
Speaker 1: widely available, um, and we should probably do that. Can
Speaker 1: I just say, I'm I'm extremely impressed that, Like how
Speaker 1: particularly you talk about like securities law and the law
Speaker 1: relating to perpetuities and stuff like that. You know, I mean,
Speaker 1: I guess like you're probably crammed after like discovering all
Speaker 1: this and what to learn everything, but I am very impressed. Oh,
Speaker 1: thank you? And um, now it's part of that be sure,
Speaker 1: I definitely read into it. But um, also just being
Speaker 1: around my mom my whole life and she was just
Speaker 1: very talked about work very well, Oh yeah, what did
Speaker 1: she say so someone, I assume you asked her like mom, Yeah,
Speaker 1: so before I think maybe shortly before Rachel was able
Speaker 1: to contact me at work. Rachel is the Bloomberg reporter. Correct. Um,
Speaker 1: she she had called my home and gotten my dad
Speaker 1: on the line. So he's like, calm, like, obviously this
Speaker 1: has to be connected your mother. And I realized that
Speaker 1: once I saw someone sent me the filing and I
Speaker 1: saw that it was Spy And I had known Spider
Speaker 1: from a kid, from being a kid, because obviously they
Speaker 1: had the really cool merch and spy. You know, as
Speaker 1: as your eight year old kid, you go to like
Speaker 1: your parents like the swag room at their office and
Speaker 1: you see like spiders, and I was like, awesome, like
Speaker 1: I'm grabbing all that. Um, you're perfectly made for all thoughts.
Speaker 1: By the way, if you think that's cool exactly, Um,
Speaker 1: And yeah, I was just kind of I called her
Speaker 1: up and I was like Mom, like did you do this?
Speaker 1: And she's like did I do that? She was she
Speaker 1: did not remember. Again, this was just a very It
Speaker 1: was going to be more like I knew one day
Speaker 1: conversation and I know that's the more exciting. Uh, but no,
Speaker 1: I think it was just for them. It was very routine.
Speaker 1: It was just kind of like a call going around
Speaker 1: the office, like, Hey, does anybody had recently had kids?
Speaker 1: Who know somebody had recently kids? Would want to put
Speaker 1: their name on this fund? And now now I'm on. Yeah, alright,
Speaker 1: Kevin McGrath, thank you so much for coming on and
Speaker 1: being our surprise guest, and thanks everyone for playing the
Speaker 1: game right. And now it's time for the first musical
Speaker 1: break of the evening. Our guest today is America's foremost
Speaker 1: country singing economist, possibly maybe the only one. You might
Speaker 1: know him from his smash hit that came out during
Speaker 1: the crisis, Inflation or Deflation, which asked the crucial question
Speaker 1: would we face that, would we be more like Zimbabwe
Speaker 1: or Japan? And so far I think Japan is winning. Uh.
Speaker 1: He has some new numbers live from Nashville, Tennessee. Uh.
Speaker 1: Merl Hazard, thank you Joe and Tracy for that very
Speaker 1: kind introduction. Mic on there, all right, you're all ready
Speaker 1: to hear some down home music about high finance. All right, Well,
Speaker 1: my name is Merl Hazard, and that's Hazard with the
Speaker 1: Z as in zero interest rate policy, the songs that
Speaker 1: I've done over the last twelve years or so since
Speaker 1: the crisis have been about UH economics, finance, banking, derivatives,
Speaker 1: and asset back securities. There are songs about life, and
Speaker 1: people do sometimes ask me how a country singer from
Speaker 1: Nashville could kind of get into that kind of thing,
Speaker 1: But to me, it really just comes natural. My daddy
Speaker 1: was a coal miner and my mama was a supervisor
Speaker 1: and compliance at Morgan Stanley being winter. Now, this first
Speaker 1: song I want to do is on a monetary topic,
Speaker 1: and it's seen seigniorage. And if I said seigniorage, I'm
Speaker 1: not gonna quiz anybody. But does that mean a lot,
Speaker 1: a little, or nothing? Okay, So for some of you
Speaker 1: it's a new topic. Basically, when a government produces its
Speaker 1: money supply, it makes a profit. Could be an emperor
Speaker 1: in ancient times, a king, queen, modern government. They could
Speaker 1: be stamping coins with images, they could be printing paper,
Speaker 1: they could be doing electronically. They make a profit. They
Speaker 1: use it in part to pay their army, and now
Speaker 1: central banks actually by securities and make interesting dividends on
Speaker 1: this creative money. And that's seigniorage. So I figured that's
Speaker 1: a pretty good topic for a song. And uh, it's
Speaker 1: to the two and I'm going to use an old melody.
Speaker 1: You may recognize this by a guy named Harry Warren,
Speaker 1: has been going for decades. But Junior, you're ready, Oh,
Speaker 1: this is my son Merle Junior, good company on guitar
Speaker 1: and you're ready to do that signorage? All right? All
Speaker 1: the money you print and the coins that you meant,
Speaker 1: that's seigniorage on as much as you make. There's no
Speaker 1: interest to pay that seignior ridge from the hills to
Speaker 1: the plains, like a dream of John Keynes. It's state income.
Speaker 1: Every central bank knows that as M zero grows they
Speaker 1: can make some even gangsters with cash in an illegal stash.
Speaker 1: That's seigniorage for a central bank earns as the black
Speaker 1: market churns. This is true. Money's value is strange. It's
Speaker 1: a means of exchange and of storridge. That is how
Speaker 1: central banks printing dollars and Frank's stern siniorage. Yes, senior ridge,
Speaker 1: that's send George, thank you, thank you. What do you think?
Speaker 1: It's a much better response than we got at the
Speaker 1: cracker barrel in Chattanooga. It is. So. I hope y'all
Speaker 1: are watching the PBS series on country music that just
Speaker 1: started up. It's really good. And uh, you know, I
Speaker 1: love Nashville, where I live and where Merle grew up.
Speaker 1: He lives here now, but uh, you know, Nashville. We
Speaker 1: got hot Chicken, We've got um the Grand Old Opry,
Speaker 1: and we've got the headquarters of Lions Bernstein. It's pretty
Speaker 1: much everything a man neat um this, let's see. And
Speaker 1: you know, one thing I love about country music is
Speaker 1: you can take an idea, the kind of idea you
Speaker 1: wake up in the middle night. You might forget when
Speaker 1: you wake up or dimly recall. But if you're write
Speaker 1: down a few words to make them rhyme, put a
Speaker 1: few chords on it, you've got something. Well that's what
Speaker 1: I try to do with this next song. And it's
Speaker 1: called The Fed is watching the Market? Are you ready?
Speaker 1: I'm ready? All right? The Fed? The one, two, three, four,
Speaker 1: The Fed is watching the market. The market is watching
Speaker 1: the Fed. It's a game of follow the leader, but
Speaker 1: I can't tell which one is being led. The Fed
Speaker 1: is watching the market, the markets watching back In return,
Speaker 1: fundamentals are in tatters. I'm not sure it even matters
Speaker 1: what companies possess or or what they hear. The FED
Speaker 1: is watching the market. They're trying to protect us from shocks.
Speaker 1: Where they speak of financial conditions, I'm thinking they really
Speaker 1: mean stocks. The FED is watching the market. The market
Speaker 1: is returning it's gaze. It makes some people wealthy, yet
Speaker 1: still it feels unhealthy when chrice valued part ways. FED
Speaker 1: believes in free markets, except not the market for cash.
Speaker 1: It helps to make bubbles more likely. Your cut rates
Speaker 1: the first sign of a crash. The FED is watching
Speaker 1: the market, But is there any bit of meat left
Speaker 1: in the soup? Incentives are perverse, Evaluation is recursive. We're
Speaker 1: caught in a financial feedback loop. Yes, we're caught in
Speaker 1: a financial feedback loop. Yes, we're caught in a financial
Speaker 1: feedback loop. Yes, we're called in a financial feedback I
Speaker 1: think got the idea. Thank you, thank you all, thank
Speaker 1: you well. If you're getting we're gonna do one more
Speaker 1: song for you. And if you're getting into these songs, uh,
Speaker 1: check out the website merl hazard dot com. There are
Speaker 1: songs on YouTube. There's some streaming things, uh, you know,
Speaker 1: Spotify and Apple Music and even on iTunes. So if
Speaker 1: you've got, uh holidays are coming up. And if you've
Speaker 1: got colleagues at the financial firms where some of you work,
Speaker 1: and they are intellectual and mildly depressed, I'm told this
Speaker 1: will cheer them up. You may Samantha friendship or get
Speaker 1: a promotion or something out of it. So this next
Speaker 1: song is about them. The statutory framework under which the
Speaker 1: Federal Reserve operates the US Central Bank. Yeah, it's a
Speaker 1: good topic. Uh So I respect central bankers that they
Speaker 1: have a really hard job in any country. I think
Speaker 1: they have an even perhaps even harder job in the
Speaker 1: US because the the statue gives them to conflicting goals US.
Speaker 1: And imagining myself in that position, I wrote this Lament
Speaker 1: of the American Central Banker, which will finish up with
Speaker 1: and the title is dual Mandate Junior. It's awfully hard
Speaker 1: to be a central banker. For rich folks like to
Speaker 1: see the currency strong, but the average Joe's not overjoyed
Speaker 1: if he's destitute, unemployed. Seems like every time I choose,
Speaker 1: I'm choosing wrong. The right says I should tighten up
Speaker 1: on credit, not Donald Trump, most of the right to
Speaker 1: keep the risk of inflation nice and low, while the
Speaker 1: left and many economics scholars are jin me to print
Speaker 1: more dollars. I'm torn between the two ways I could go.
Speaker 1: I've got a due mandate, due mandate. I gotta keep
Speaker 1: prices stable while giving jobs to those for able due mandate,
Speaker 1: due mandate. My job is harder than you'll ever know.
Speaker 1: Unlike here in the US, the Bank of England has
Speaker 1: it relatively easy ban con England, and so I hear
Speaker 1: does Europe's DCB, Europe the Uncentral Their goal is for
Speaker 1: stable price. That's simpler. It must be nice a single mandate,
Speaker 1: unlike poor on mucky meat. Because I've got up due mandate,
Speaker 1: due mandate, I gottau solve labors troubles without creating financial
Speaker 1: bubbles due mandate, do mandate. It's tough for me to
Speaker 1: make our economy equal. My job is harder thanuel ever know.
Speaker 1: All Right, thank you all very much. It's great to
Speaker 1: be here. And I'm like, all right, well, we've come
Speaker 1: to the final interview of the night, and um, I
Speaker 1: think unless you've been living under a rock over the
Speaker 1: last year or so, you've probably heard in the news
Speaker 1: a lot of debate and discussion about modern monetary theory.
Speaker 1: Probably a lot of it um has been caricature. It's
Speaker 1: like other people who just say print the money, they
Speaker 1: kind of do um. But also so it's also kind
Speaker 1: of caricatured um. Anyway, tonight we have with us the
Speaker 1: person who I think has done more than anyone else
Speaker 1: these uh these days to be a proponent and an
Speaker 1: advocate and a voice for MMT, and that is Stephanie Kelton.
Speaker 1: She is a professor. It's Tony Brooks. She's also an
Speaker 1: economic advisor to the Bernie Sanders campaign. In addition to
Speaker 1: talking a little bit about what m m T is,
Speaker 1: we're going to get her perspective on the state of
Speaker 1: the economy and economics right now, because we live in
Speaker 1: interesting times, large deficits by historical standards, very interest rates
Speaker 1: by historical standards, and yet things aren't working and we're
Speaker 1: not having inflation like people would have expected. Wage growth
Speaker 1: has been poor GDP growth across the developed world very
Speaker 1: mediocre since the crisis. So I wanna you know, economists
Speaker 1: are scratching their head. They're looking forward to hearing how
Speaker 1: I MMT economist examined some of these puzzles of modern
Speaker 1: economic life. So it's definitely called what do you say
Speaker 1: when do people say that about mm T, Like, oh, yeah,
Speaker 1: just print the money. Well, you just said it, I said, stage, Um,
Speaker 1: what do I say? I don't know what else to
Speaker 1: say except you know what we've been saying for now
Speaker 1: two decades? Uh and print then I thought it just
Speaker 1: started in the last couple of years. You guys have
Speaker 1: been at it for We've been at it for a
Speaker 1: little while, and as far as I can tell, none
Speaker 1: of us has ever said MMT is about, you know,
Speaker 1: printing the money. But it gets shorthanded that way, and
Speaker 1: it's like nails on a chalkboard every time I do
Speaker 1: an interview. Now I sit down and I say, okay,
Speaker 1: we're gonna do this on the understanding that you're not
Speaker 1: going to run a story that says MMT is about
Speaker 1: printing money. And so we do the interview. In the
Speaker 1: headline reads economists says print more money. You know. Okay,
Speaker 1: so nothing I can do. I'm going to take the
Speaker 1: bait in that case. What is MMT about? And why
Speaker 1: has it suddenly sort of exploded into maybe not entirely
Speaker 1: the public consciousness, but certainly um this demographic. Well, it's
Speaker 1: like the impossible question to say, you know, what is
Speaker 1: MMT about, because it's, uh, it's a group project that
Speaker 1: started more than two decades ago with UM maybe a
Speaker 1: half a dozen economists in the early years, producing scholarship
Speaker 1: on questions from you know, the Eurozone, to trade, to
Speaker 1: social security, to government finance that deficits to the you know,
Speaker 1: I mean, it's this enormous project. So there's no way
Speaker 1: to just say this is what MMT is in like,
Speaker 1: you know, a sound bite. But I think most people
Speaker 1: when they think of MMT, they think of it as
Speaker 1: UM an analytic framework. So it's a mac we're macro economists.
Speaker 1: So it's an analytic framework that tries to update the
Speaker 1: lens through which we UM understand the monetary system and
Speaker 1: the policy options that are available I guess in the
Speaker 1: post Bretton Woods, post gold standard era. And so we're
Speaker 1: basically saying, look, there's policy space that has opened up
Speaker 1: around us since we have gone off of the gold
Speaker 1: standard or fixed exchange rates, and we're not taking full
Speaker 1: advantage of that space. We could be doing better, and
Speaker 1: so we're trying to you know, shine a light on
Speaker 1: some of those things. So what was the impetus when
Speaker 1: when this first started. Was it that something has changed
Speaker 1: about either the finance system or the economy and we
Speaker 1: want to understand the existing world better. Or was it
Speaker 1: the policy prescription that you were after, because I think
Speaker 1: nowadays lots of people here m MT they think full employment,
Speaker 1: they think universal healthcare, that sort of thing, which which
Speaker 1: was the inspiration behind I don't think it was either. Actually,
Speaker 1: I mean I think back to you know, when I
Speaker 1: started training as an economist from undergrad let's say, to
Speaker 1: graduate school. It was the mid nineties, and you know,
Speaker 1: there were already different schools of thought out there. The
Speaker 1: post Kaynsians were saying very different things from more mainstream
Speaker 1: types of economists, and especially when it came to the
Speaker 1: financial system, to banking and finance and those sort of questions. So, um,
Speaker 1: we were always kind of agitated by the way that
Speaker 1: mainstream economists describe how finance works in particular, so we
Speaker 1: had a different narrative set up from the very beginning.
Speaker 1: But then, you know, with m MT, I think it
Speaker 1: started evolving as we started to think differently about the
Speaker 1: role of taxes and the relationship between money and taxes
Speaker 1: and state finance, and it kind of opened up around
Speaker 1: the question of launching the Euro, I think really because
Speaker 1: we were looking at countries that were making a decision
Speaker 1: to abandon their currencies and adopt a common currency, and
Speaker 1: that's sort of I think sparked the broader interest. So
Speaker 1: you mentioned that essentially it's an analytical framework, and as
Speaker 1: I mentioned in the intro, I think we're people would agree.
Speaker 1: We're at a moment where a lot of people feel
Speaker 1: unsatisfied with the existing answers that economists have given, or
Speaker 1: that mainstream economists have given on things like the recovery.
Speaker 1: Why hasn't growth been faster? Why hasn't inflation picked up
Speaker 1: despite cutting rates and these trillion dollar deficits. What's your
Speaker 1: answer to that? What is the let's start with that.
Speaker 1: Why hasn't inflation picked up despite all these things that
Speaker 1: economists would have said, oh, yeah, that'll definitely cause inflation. Well,
Speaker 1: I think the models are too mechanistic and they lead
Speaker 1: us to too simple and understanding of really complex phenomenon
Speaker 1: like inflation. And so if you're trained like I was
Speaker 1: maybe in the early years, to think that, um, you know,
Speaker 1: money is inflation is something that happens when you print
Speaker 1: too much money, or you know, the Milton Friedman. Inflation
Speaker 1: is always an everywhere monetary phenomenon. So if you seek
Speaker 1: central banks doing things like que and people say quantitative
Speaker 1: easing is printing money, and printing money leads to inflation,
Speaker 1: then we all come to expect that if you believe
Speaker 1: that inflation automatically picks up because the labor market gets tight,
Speaker 1: and your market, your your model tells you that tight
Speaker 1: labor markets working through a Phillips curve sort of relationship,
Speaker 1: lead to pressure on wages that then lead to increased pressure.
Speaker 1: It's basically the models are too simple and we have
Speaker 1: too much faith in them. Well, actually on that point,
Speaker 1: because I get the logic of this idea that okay,
Speaker 1: unemployment falls and then workers have more borrowing bargaining power,
Speaker 1: and then that leads to higher wages, and then they
Speaker 1: have more um you know, more purchasing power and so on,
Speaker 1: what is the conceptual flow Because we haven't even really
Speaker 1: seen robust wage growth by any stretch, even though the
Speaker 1: unemployment rate is below four percent. So just like breaking
Speaker 1: it down, like, why does even the most simple, seemingly
Speaker 1: logical idea that low unemployment would have all these positive
Speaker 1: effects on prices? Why does that not even seem to
Speaker 1: be worked well. I think most of it has to
Speaker 1: do with one key phrase that you just use, which
Speaker 1: is bargaining power, and how is bargaining power exercise through unions?
Speaker 1: And what's happened to unions over the course of the
Speaker 1: last thirty years. I mean, they've mostly been decimated. So
Speaker 1: it's pretty hard to tell a rational story about how,
Speaker 1: even as the labor market titans, workers are supposed to
Speaker 1: exercise the power in the negotiating process. If they don't
Speaker 1: have union representation, what are they supposed to do walk
Speaker 1: in and just sit down with the boss, kick their
Speaker 1: feet up on the table and say, I'm here for
Speaker 1: the raise. You know, labor markets tight, let's go. It's
Speaker 1: just not there. The mechanisms aren't in place for that
Speaker 1: to happen for for huge swaths of the American workforce.
Speaker 1: So here's one thing I sometimes wonder, but if if
Speaker 1: everyone in the U S at least woke up tomorrow
Speaker 1: and accepted m m T as the analytical framework for
Speaker 1: the economy, what would change like? What would that world
Speaker 1: look like, and what would that change from the current
Speaker 1: scenario actually tell us about what's wrong with the way
Speaker 1: we think about economics. I mean, honestly, I think the
Speaker 1: biggest thing that changes is the conversation that we have.
Speaker 1: I mean, if if we had a better set of
Speaker 1: lenses and we were able to see more clearly, you know,
Speaker 1: the nature of the space around us, the monetary system,
Speaker 1: the way it works. I just think that a lot
Speaker 1: of the questions we asked today, and a lot of
Speaker 1: the things that we presume stand in the way of
Speaker 1: you know, Congress passing legislation that would do something more ambitious,
Speaker 1: like what we can't because trillion dollar deficits, or we
Speaker 1: can't because China has all this debt, or we can't
Speaker 1: because look what happened to Greece, or we can't be right. Um,
Speaker 1: at least that would go away, and then we would
Speaker 1: have a very different conversation even the tax cuts. Right
Speaker 1: if we were looking through an MMT lens and we said,
Speaker 1: the Republicans are looking to do between a trillion and
Speaker 1: a half or two trillion, depending on how you want
Speaker 1: to cost it out in tax cuts. Instead of saying, um,
Speaker 1: we can't afford it, will blow a hole in the
Speaker 1: budget and all this kind of stuff, we would have
Speaker 1: a different conversation. It would be about you know, the
Speaker 1: presumed effectiveness in terms of job creation and the potential
Speaker 1: inflation risk in an economy that may or may not
Speaker 1: be closer to full employment. So I just think, you know,
Speaker 1: social security, Are we really going to have a conversation
Speaker 1: about the government's ability to keep its promise to future retirees,
Speaker 1: their dependence and the disabled. If we're not afraid of
Speaker 1: running out of money, then the conversation changes. Then it
Speaker 1: becomes about demographics and inflation risk. And I just think
Speaker 1: we have a richer, more substantive national debate than this,
Speaker 1: you know, arbitrary, frivolous conversation about you know, entitlements driving
Speaker 1: us into a debt crisis, which is as I mentioned,
Speaker 1: insure you are on one of the teams in the
Speaker 1: primary and you met uh speaking of like the sound
Speaker 1: of like screeching chalkboards. How much does it hurt you
Speaker 1: when you hear Democratic candidates blast the tax cuts on
Speaker 1: the grounds that it blew out the deficits. It does,
Speaker 1: But I haven't heard that much of it, and I'm encouraged.
Speaker 1: You know what, It's funny, Joe, because what I hear
Speaker 1: Democrats saying is that they would like to repeal all
Speaker 1: or much of the Republican tax cuts, not because they
Speaker 1: blew a hole in the deficit. We got to repair
Speaker 1: that damage, but because they want to use those tax
Speaker 1: cuts to quote pay for something else. In other words,
Speaker 1: it's the same as saying I want to use the
Speaker 1: deficit to build infrastructure. It's no different. It's tantamount to
Speaker 1: saying I want to keep the deficit, but I want
Speaker 1: to direct it towards some other aim, right. I mean so,
Speaker 1: even though we have some Democrats complaining about Republicans expanding
Speaker 1: deficit for very specific purposes, there are quite a few
Speaker 1: higher file Democrats who seem to be embracing mm T,
Speaker 1: whereas Republicans who actually have a de facto history a
Speaker 1: blow of embracing MMT haven't done that. Why do you
Speaker 1: think that is? Do you mean openly invoking so they'll
Speaker 1: expand the deficit for their pet projects, um in a
Speaker 1: sort of m MT way, But they don't seem to
Speaker 1: embrace the theory in the way that some Democrats. Well,
Speaker 1: it's better to embrace it actively than to embrace it rhetorically.
Speaker 1: So I get in some sense, you know, it's more
Speaker 1: encouraging to see someone pushing through an agenda UM that
Speaker 1: doesn't hue to the hysteria around dead indeficits. Is this
Speaker 1: my preferred um set of policies. No um. But you know,
Speaker 1: it's not as if it's encouraging just because a few
Speaker 1: Democrats have invoked MMT, because at the same time, you know,
Speaker 1: the Speaker of the House has reinstated PAGO, and that's
Speaker 1: not terribly encouraging. If you're looking the potential to take
Speaker 1: the House and the Senate and then move ambitious progressive legislation,
Speaker 1: you're not going to do it in an environment in
Speaker 1: which PAGO is in place, which is a rule that
Speaker 1: exists in the House of Representatives today that says you
Speaker 1: can't add to the deficit, so everything has to be
Speaker 1: deficit neutral. So I mean, it's it's good and bad,
Speaker 1: it's there's progress for sure being made now. One of
Speaker 1: the policy agendas that's likely to be on the plate
Speaker 1: of a theoretical democratic administration, particularly if it's of the
Speaker 1: more progressive way, or if it's if it is Bernie
Speaker 1: would be a green New Deal. And something that you
Speaker 1: hear people say is like some people like, well, how
Speaker 1: can we afford it? And the response is often well,
Speaker 1: you know, we didn't ask that question. We didn't We
Speaker 1: didn't choose to fight the World Wars based on whether
Speaker 1: we could afford to. We figured out a way to
Speaker 1: do it. So what are the lessons from the wars?
Speaker 1: And I mean I think Kines wrote a pamphlet how
Speaker 1: to Pay for the War that applied today towards something
Speaker 1: as in is a green New Deal. Yeah, I mean
Speaker 1: I think that Kines's little book, which it was called
Speaker 1: how to Pay for the War. That's literally the title
Speaker 1: of the little pamphlet. And you would think, just based
Speaker 1: on the name of it, that this must be a
Speaker 1: book about where to get all the money to finance
Speaker 1: World War two? And this is Kines was British economist
Speaker 1: of corso this was, you know, advice for the British government.
Speaker 1: And it turns out you read this thing and has
Speaker 1: nothing to do with where the British government is going
Speaker 1: to get all the money to finance the war effort.
Speaker 1: It's about understanding that this is going to be a
Speaker 1: massive endeavor, that it's going to involve transforming the economy
Speaker 1: away from one that's oriented around producing for the consumer
Speaker 1: to one that's oriented around winning the war right, transforming
Speaker 1: the entire economy, and Caines was mindful of the inflation
Speaker 1: risks because the government was going to have to ramp
Speaker 1: spending way up, and in order to do that, it
Speaker 1: was going to have to take resources away from other uses,
Speaker 1: and so you're elbowing out the private sector in order
Speaker 1: to bring people and industries into public service and to orient,
Speaker 1: you know, for the war effort. So the whole book
Speaker 1: is about how to do that in a way that avoids,
Speaker 1: to the extent possible, creating an inflation problem. And it
Speaker 1: turns out it was really effective. It was a very
Speaker 1: careful analysis of how to allow the government to spend
Speaker 1: into the economy while removing enough purchasing power strategically right.
Speaker 1: It was really important to Kean's that remove the purchasing
Speaker 1: power from the right hands, because if you remove purchasing
Speaker 1: power from the wrong hands, you might not do much
Speaker 1: to mitigate the inflation risk. In other words, if all
Speaker 1: you do is tax the very richest people who weren't
Speaker 1: going to spend much of that money in the first place,
Speaker 1: then you run the risk of a real inflation problem.
Speaker 1: So he understood that this had to be done really strategically.
Speaker 1: So with a green new deal same thing. Right, The
Speaker 1: same principle applies if you're going to do something that
Speaker 1: is truly transformative. That you're not just talking about transforming
Speaker 1: the way we deliver energy, but the way we build
Speaker 1: housing and transportation, and the way we deal with food production, agriculture.
Speaker 1: You're going to touch nearly every piece of the US economy.
Speaker 1: And so the lesson is to look back at what
Speaker 1: Kines told us and to figure out if you're going
Speaker 1: to go that big and you're going to make that
Speaker 1: kind of investment in the US economy over a short
Speaker 1: period of time ten years or so, right, Um, that
Speaker 1: there are important lessons to learn from what Kines was
Speaker 1: doing in that little pamphlet, And inflation is the major risk,
Speaker 1: not bankruptcy or financing. So this sort of connects with
Speaker 1: one of the criticisms that you often hear about MMT,
Speaker 1: which is it's actually not that different to Kynesianism in
Speaker 1: various ways. How would you respond to that? How how
Speaker 1: would you lay out the differences explicitly? Well, I think
Speaker 1: there are a lot of them, and you're right, I
Speaker 1: mean there are examples like the one I just gave
Speaker 1: where I'm saying basically, um, when it comes to the
Speaker 1: Green New Deal. Listened to Kin's. Okay, that was about
Speaker 1: inflation risk. But um, there are very substantive differences between
Speaker 1: the way that we analyze some big questions in the
Speaker 1: way that some headline canesians. I mean, I don't know
Speaker 1: how much I want to pick on certain people and
Speaker 1: give specific examples. I was a contributor at Bloomberg for
Speaker 1: a period of time. I got into a little back
Speaker 1: and forth with Paul Krugman. We traded some columns him
Speaker 1: in the New York Times, me writing for Bloomberg, and um,
Speaker 1: there we taste out. I think some of the important differences.
Speaker 1: I mean, you know, the conventional Keynesian models tell you
Speaker 1: that deficits are supposed to drive interest rates up. That's
Speaker 1: the way it works in normal times. And that when
Speaker 1: the government increases its deficit as to increase borrowing, and
Speaker 1: as it borrows more, that gobbles up private savings that
Speaker 1: are no longer available to finance private investment, leaving UM
Speaker 1: companies with fewer resources to invest, And so investment goes down,
Speaker 1: and his investment goes down, you get a slower, growing,
Speaker 1: more lethargic economy. M emty. This is just one example
Speaker 1: but MMT says, no, no, no, hang on. Deficits don't
Speaker 1: gobble up savings. They augment savings. If the government spends
Speaker 1: a hundred dollars into the economy and only taxes ninety
Speaker 1: dollars back out, we label that a government deficit. But
Speaker 1: what we forget is that just deposited ten dollars into
Speaker 1: some part of the economy. My deficit. If i'm government,
Speaker 1: I'm Uncle Sam. My deficit becomes a surplus in some
Speaker 1: other part of the economy. So from the very beginning
Speaker 1: of this crowding out story where deficits become the villains
Speaker 1: of progress in the economy, MMT says, no, no, hang on,
Speaker 1: you're getting it wrong. From that very first step, right,
Speaker 1: deficits add to savings. And then we could go on
Speaker 1: about the relationship between interest rates and investment. They think
Speaker 1: that they are obviously inversely related. We say, interest rates
Speaker 1: are policy variable, not something determined by market forces, or
Speaker 1: at least they always can be. So there's just we
Speaker 1: go on and on. Another thing to people say about
Speaker 1: m m T is that like, well, yeah, sure, because
Speaker 1: the US is the world's reserve currency, so the US
Speaker 1: has a lot of policy flexibility. Other countries don't have it.
Speaker 1: But I don't know how much you're paying attention. We
Speaker 1: were talking about Argentina. What is the sort of m
Speaker 1: m T if you were you know, if Mockery had
Speaker 1: brought in you instead of the I m F and
Speaker 1: said what should I do to make my economy more stable?
Speaker 1: What have what would have been the uh the mm
Speaker 1: tiers advice. Well, I mean, I think the last discussion
Speaker 1: was was really good and very much on point in
Speaker 1: many ways, in the sense that to the extent that
Speaker 1: you're able to avoid doing so, you should avoid borrowing
Speaker 1: in a foreign currency, and not every country has the
Speaker 1: capacity to UNI laterally just s I am not going
Speaker 1: to the international markets at all. I'm only borrowing in
Speaker 1: my own currency. Some countries can't do that, but Argentina
Speaker 1: could do less of that, and that would be advisable
Speaker 1: UM for for a start. Yeah, I mean, obviously the
Speaker 1: reserve currency status gives us an additional degree of freedom.
Speaker 1: There is, you know, an extra benefit to being the
Speaker 1: world's reserve currency. But you know, I was just in
Speaker 1: Japan too long ago, and yeah, but but there's a
Speaker 1: country that is not the world's reserve currency that UM
Speaker 1: has a debt to GDP ratio if you go gross
Speaker 1: terms of like two, right, and I go over there.
Speaker 1: And the biggest question I got from all all of
Speaker 1: Japanese press everyone I talked to, how do we get inflation?
Speaker 1: What can we do to cause inflation? Like they're desperate
Speaker 1: to create inflation. Their debt ratios the you know, highest
Speaker 1: in the world interest rates or right where the Bank
Speaker 1: Japan puts them very low. Inflation is low. It's just
Speaker 1: you know, uh well, actually I was going to ask about, um,
Speaker 1: some of the chaos that we've seen in money markets
Speaker 1: this week, UM. And part of that was said to
Speaker 1: have been caused by this ramp up in T bill
Speaker 1: issuance by the government, UM, which sort of bled through
Speaker 1: into money markets. I guess I'm curious how much does
Speaker 1: MMT sort of reflect on the existing banking system and
Speaker 1: regulations when it comes to gauging its own impact. Oh,
Speaker 1: I mean, I mean I think that if you ask
Speaker 1: me what's the greatest strength of MMT, you know, I'll
Speaker 1: be a little bit brazen here. I think we've gotten
Speaker 1: all the big stuff right. There's nothing that has been
Speaker 1: major that we've gotten wrong. Nothing, I don't I think
Speaker 1: it's a pretty impeccable record, and I think the strength
Speaker 1: is that we have a superior understanding of monetary operations,
Speaker 1: and that is we dig deep into the weeds on
Speaker 1: some of this stuff monetary operations that other people kind
Speaker 1: of superficially understand. But m M tears are really in
Speaker 1: the weeds. So you're both very on Twitter, very online,
Speaker 1: and you probably saw some of the conversation from folks
Speaker 1: in the MMT community. Nathan is sitting over there, Scott Fullwiler,
Speaker 1: Rowan Gray, these guys were tweeting out. You know, I
Speaker 1: was trying to write a book and so trying as
Speaker 1: much as possible not to get two involved in what
Speaker 1: was happening with you know, financial markets in the last
Speaker 1: couple of days and FED interventions and so forth. That
Speaker 1: these guys were all over it in a deep way.
Speaker 1: And yeah, we have a d M group that we
Speaker 1: were all going back and forth and trying in real
Speaker 1: time to you know, make full sense of it, because um,
Speaker 1: it's very much in the weed, well more generally, so
Speaker 1: we don't you know, get too in the weeds on
Speaker 1: the operations of money markets and the repo markets, which
Speaker 1: I don't even understand myself. Uh, just generally speaking, what
Speaker 1: is it? What do you make of like sort of
Speaker 1: mainstream Fed policy? Do rate cuts stimulate the economy? It depends.
Speaker 1: It depends where you are in and in which cycle
Speaker 1: I think. I mean, right now we've embarked on yet
Speaker 1: another cutting cycle. We don't know how long it's going
Speaker 1: to be. But since the summer, the Fed, for the
Speaker 1: first time since before the crisis has cut again twice.
Speaker 1: Now is that the kind of action that you think
Speaker 1: could have a positive impact on the economy. No, I
Speaker 1: mean not much. It's unlikely to do a lot of harm.
Speaker 1: If more and Mosler were sitting here, he'd say they've
Speaker 1: got the break and the gas pedals mixed up. In
Speaker 1: other words, Um Warren has for a long time. This
Speaker 1: is a sort of founding father of M M T.
Speaker 1: So for those that aren't familiar with the name, Warren
Speaker 1: actually makes the argument, and I think Randy Ray does
Speaker 1: as well. It's a pretty compelling argument if you actually do.
Speaker 1: I wrote a paper on this one I was a
Speaker 1: lot younger and published it, and there's some empirical support
Speaker 1: for the idea that central banks when they raise interest rates,
Speaker 1: they think they're tightening. When they cut interest rates. They
Speaker 1: think they're easy, they think it stimulates the economy to
Speaker 1: lower rates. But in some countries where the debt is
Speaker 1: very large, interest is somebody's income, right, bond holders receive
Speaker 1: interest as income, and raising rates as bonds are rolled
Speaker 1: over and interest rates are going up, this is tantamount
Speaker 1: to fiscal expansion. In other words, it's an increase in income, right,
Speaker 1: interest income. So there is the possibility that raising interest
Speaker 1: rates has a stimulative of fact. Now against that, obviously,
Speaker 1: credit becomes more expensive, So interest sensitive sectors like home
Speaker 1: buying and durable goods like automobiles and stuff. Maybe people
Speaker 1: borrow less to buy a home or a car in
Speaker 1: an environment in which interest rates arising. But to think
Speaker 1: that this one price in the entire U S economy,
Speaker 1: the overnight interest rate, the Fed's policy tool, one price
Speaker 1: that if they just move at twenty five basis points
Speaker 1: here and twenty five basis points there, that they can
Speaker 1: steer this enormous economic ship called the United States economy
Speaker 1: is pretty much as stretch for me. Yeah, but that's it.
Speaker 1: That's what we believe. That's what economists believe, right. The
Speaker 1: FED the dual mandate song, it will go through your
Speaker 1: head tonight. Right, the dual mandate. The Feds got a
Speaker 1: dual mandate, and they're supposed to use this one price
Speaker 1: and make these modest adjustments to bring about, you know,
Speaker 1: a broad equilibrium in the economy where we get low
Speaker 1: inflation and high levels of employment and growth. So one
Speaker 1: thing we're hearing a lot about now, to the point
Speaker 1: where it's become a cliche, is that fiscal policy is
Speaker 1: the new monetary And Joe and I heard this several
Speaker 1: times today alone. Is that the right direction or do
Speaker 1: you worry that we're just going to assume that any
Speaker 1: form of fiscal stimulus is going to be the panacea
Speaker 1: that we've been seeking. Well, look, I think that you
Speaker 1: know this is textbook stuff. Right. There are two levers.
Speaker 1: If you're doing macroeconomic policy, Uh, you you either pull
Speaker 1: the monetary policy lever, which is conventional policy tweaking the
Speaker 1: interest rate, or you pulled the fiscal policy lever, and
Speaker 1: that's taxes and government spending. And for the last thirty years,
Speaker 1: we have leaned extremely heavily on central banks, not just
Speaker 1: here in the US but around the world. Right, the
Speaker 1: central banks were the only game in town. Fiscal policy
Speaker 1: is that thing that sits behind the glass with the
Speaker 1: breaking case of emergency cover on it. And central banks
Speaker 1: are supposed to to steer economies, right, um, and that
Speaker 1: hasn't worked all that for thirty years, you know. Larry
Speaker 1: Summer says, the last three expansions in the US were
Speaker 1: bubble driven. I mean all three, right, the last, from
Speaker 1: the savings alone to the um subprime to the dot
Speaker 1: com in the So that's kind of how we do it.
Speaker 1: And now everybody's sort of waking up to this idea
Speaker 1: that there's another lever that we we have to become
Speaker 1: more reliant pump. But does that mean that any fiscal
Speaker 1: policy is good fiscal policy and all has good effects. No,
Speaker 1: you know, it's got to be targeted and have a
Speaker 1: few moments left. But I think this is one of
Speaker 1: the main things they say, Yeah, it makes sense that
Speaker 1: fiscal policymakers should run the show more often in terms
Speaker 1: of demand management. But then they look at what that
Speaker 1: means and no one actually looks at d C right
Speaker 1: now and thinks, oh, this is a Congress that is
Speaker 1: capable of working with the president that could deliver anything
Speaker 1: meaningful in any period of time or timely manner. That
Speaker 1: seems like a real problem just from a practical standpoint.
Speaker 1: That it's all nice to say that fiscal policy is
Speaker 1: the lever that should be pulled, but that applies politics
Speaker 1: for better or worse, is there how do you address
Speaker 1: that concern that it's like, Okay, maybe monetary policy is
Speaker 1: not that effective, but at least they could do something well,
Speaker 1: So I know how I I would address it by
Speaker 1: putting it on automatic pilot to a large extent, in
Speaker 1: other words, take the responsibility away from Congress to act
Speaker 1: in real time to make smart decisions with tax policy
Speaker 1: and spending, and to do that through a federal job guarantee,
Speaker 1: which is to say that in the last downturn, you know,
Speaker 1: we were losing eight hundred thousand jobs a month at
Speaker 1: the height of the Great Recession, and if we had
Speaker 1: had um uh something in place, a program in place
Speaker 1: to absorb workers into employment instead of allowing them to
Speaker 1: fall into unemployment, it would have provided a cushion for
Speaker 1: the economy to recover more quickly. So you know, Janey
Speaker 1: yellen Uh several years ago at Jackson Hole, the big
Speaker 1: me being that takes place between FED officials and invited
Speaker 1: academics and others. Um. She said, we need to strengthen
Speaker 1: the automatic stabilizers. We need better automatic stabilizers, and a
Speaker 1: federal job guarantee is like turbo charging the automatic stabilizers
Speaker 1: we have today. And that's what I would do. Stephanie Carlton,
Speaker 1: thank you very much. We've tried so long. We've tried
Speaker 1: a bunch of times to actually get you to come
Speaker 1: on the podcast itself. So I'm glad we finally want
Speaker 1: me to happen. I'm glad to thanks for having me.
Speaker 1: All right, uh, our our next act is the last
Speaker 1: of the evening. Um. It's it's someone you've probably never
Speaker 1: heard of before. Um. In addition to being a genius
Speaker 1: at poker, a poly math, an expert in Chinese food,
Speaker 1: and the provider of original insights into everything from economics
Speaker 1: to finance, markets, philosophy, and trade, he also has musical
Speaker 1: abilities on the level of a Bob Dylan or Van Morrison.
Speaker 1: He's also the best colleague anyone could ever ask for,
Speaker 1: despite writing his own introduction and making me repeat it here. Yes,
Speaker 1: it is time for the musical stylings of Mr Joe Wisenthal.
Speaker 1: All right, I'm just gonna play a few songs, UM,
Speaker 1: but I'm really intimidated now after having watched uh More
Speaker 1: All play. But I wrote a few songs about markets
Speaker 1: and economics. This first one, UM is about one of
Speaker 1: my favorite lessons from markets, which is that, Um, no
Speaker 1: matter how bad things get in life, one of the
Speaker 1: lessons that markets tells us is that they can get
Speaker 1: infinitely worse. You can always go to zero. La the
Speaker 1: old trader in the pits of Chicago home, and where
Speaker 1: i'd be without him, heaven only nose because he taught
Speaker 1: me the lesson. I still think about today, and any
Speaker 1: time i'm filling down, I think of what he'd say. Well,
Speaker 1: I told him I was gonna buy a stock because
Speaker 1: it went down so much, and I said it's gonna
Speaker 1: rebound and I'm gonna make a bunch. He said, I
Speaker 1: hope you get your money. Yes, I hope you get
Speaker 1: your cash. But there's a simple lesson that's of use
Speaker 1: in life and math. No matter how hard you fall,
Speaker 1: no matter how he loo you get, you can't always
Speaker 1: go down another hundred percent. No matter how hard you fall,
Speaker 1: no matter how hello you get, you can't always go
Speaker 1: down another hundred percent. Well, I heard you're doing badly
Speaker 1: and you're trying to get well. Well, I heard you're
Speaker 1: in the valley and you're trying to climb the hill.
Speaker 1: Well I hope, Well I think that you'll do better. Yes,
Speaker 1: I really think you will. But there's a simple lesson
Speaker 1: that I'm trying to and still, no matter how hard
Speaker 1: you fall, no matter how hello you get, you can't
Speaker 1: always go down another hundred percent. Well, I think about
Speaker 1: life's journeys and all it's ups and down and all
Speaker 1: the hidden corners that I couldn't see around, And sometimes
Speaker 1: it's like I'm swimming and I'm trying not to drown,
Speaker 1: and I think about the lesson I learned in Chicago town.
Speaker 1: No matter how hard you fall, no matter how low
Speaker 1: you get, you can always go down another hundred Well.
Speaker 1: I saw that trader years ago and he was looking frail.
Speaker 1: He made a fortune trade in cotton, then he lost
Speaker 1: the linen on the rail. He said, it really don't
Speaker 1: matter much. You just got a few years or left,
Speaker 1: and it don't matter how high's your pile when you're
Speaker 1: facing death, no matter how how hard you fall, no
Speaker 1: matter how low you get, you can always go down
Speaker 1: another hundred percent. Thank you, so uh, So, one of
Speaker 1: my favorite characters in the world of financial markets are
Speaker 1: um Charlatan's, who sell newsletters where they claim that they
Speaker 1: like predict the future and they get people to subscribe
Speaker 1: and they're like, I predicted all this, and I predicted
Speaker 1: all that, and fight with them a lot, and you
Speaker 1: know you should never subscribe to their newsletters. UM So
Speaker 1: I wrote a song about them, and uh, I said,
Speaker 1: I dedicate this song to all the Charlotte Teans in
Speaker 1: the audience to I knew bad things we're gonna happen
Speaker 1: under the bombs we're gonna fall. I knew the stocks
Speaker 1: were gonna crash, and I tried to warn you all.
Speaker 1: Now listen, my friends, I get no joy from being right,
Speaker 1: But if you want to know what happens next, you
Speaker 1: gotta pay me for my next insight. Fifty dollars a
Speaker 1: year is really not that bad to know the things
Speaker 1: that I'm knowing. Fifty dollars a year is really not
Speaker 1: that bad to know the way that we're going. I
Speaker 1: knew bad things we're gonna happen, the bombs were gonna fall,
Speaker 1: I knew the socks were gonna crash, and I'm meant
Speaker 1: to warn you all. Now listen, my friends. I get
Speaker 1: no joy from being right, But if you want to
Speaker 1: know what happens next, you gotta pay me for my
Speaker 1: next insight. I predicted Brexit and President and Trump. I
Speaker 1: know which way the wind is blowing. I predicted the
Speaker 1: mortgage melt down and Amazon's melt up. I can see
Speaker 1: the seeds were sewing. I knew bad things were gonna happen.
Speaker 1: The bombs were gonna fall. I knew the socks were
Speaker 1: gonna crash, and I tried to warn you all. Now
Speaker 1: listen to my friends. I get no joy from being right,
Speaker 1: but if you want to know what happens next, you
Speaker 1: gotta pay me for my next insight. Some I'm a
Speaker 1: gene yes, but that's really not at at all. I
Speaker 1: just know where to look. And if you want to
Speaker 1: know all the things that I know, you've got a
Speaker 1: lot of You've got to read a lot of ancient
Speaker 1: Greek books. Some say I'm clairvoyant, but that's really not
Speaker 1: at at all. I just know where to look, and
Speaker 1: if you want to know all the things that I know,
Speaker 1: just download my free you book. All right, it is
Speaker 1: my last song, and I'm so I was talking to
Speaker 1: a friend of mine the other day and he was
Speaker 1: like recommending that I listened to like some singer that
Speaker 1: um he liked, and he's like, oh, his songs are
Speaker 1: really class conscious. And I said, well, what does that mean?
Speaker 1: Like which class? And he's like, well, the working class, obviously.
Speaker 1: And then it occurred to me as soon as he
Speaker 1: said that, like, no one ever writes a folk song
Speaker 1: for the shareholder class. Um seems unfair. Um, So I
Speaker 1: wrote a folks song for the shareholder class. It's called
Speaker 1: the Shareholder Blues. Well. For many years, I've been buying stock,
Speaker 1: and all the money that I made I deserved, but
Speaker 1: I haven't been doing so hot, and I blame it
Speaker 1: on the Federal Reserve. I am the working man. He
Speaker 1: wants more pay and a bonus of a thousand large ones.
Speaker 1: And I'd like to say that it's okay, just as
Speaker 1: long as it don't eat into margins. Hey, my friends, Hey,
Speaker 1: my friend, haven't you heard the news. I've been coming
Speaker 1: down with a bad case other share holder blue. Well.
Speaker 1: I bought a stock and it doubled in just a
Speaker 1: hundred days, but that wasn't long enough to be eligible
Speaker 1: for the long term capital game. So I held onto it,
Speaker 1: just hoping that I could pay less tax. But you
Speaker 1: can guess what happened next. The stock gave the games
Speaker 1: right back. Hey my friend, Hey, my friends, haven't you
Speaker 1: heard the news. I've been coming town with a bad
Speaker 1: case other share holder blue. Now, these are tough times
Speaker 1: for everyone. Student loan dead burden on the young, and
Speaker 1: the low interest rates don't help as you get older,
Speaker 1: and there ain't no raises for the working man as
Speaker 1: soon as they pay Uncle Sam, and nobody gives a
Speaker 1: damn about the struggling share holder. Hey my friend, Hey,
Speaker 1: my friend, haven't you heard the news. I've been coming
Speaker 1: down with a bad case of the shareholder blues. Now
Speaker 1: the newspapers say the economy's movement, but we all know
Speaker 1: it's sick. But if you've got if you listen to me,
Speaker 1: I've got a few ideas and we can make this
Speaker 1: economy tick. But if you enact the policies, than me
Speaker 1: and my friends down't like we're gonna bring the economy
Speaker 1: to its knees when we go on a capital strike.
Speaker 1: Hey my friends, Hey my friend, haven't you heard the news.
Speaker 1: I've been coming down with a bad case share hold
Speaker 1: Thank you, that's it. All right, Mr Joe Wise and
Speaker 1: thal that's it. That's it. This has been the first
Speaker 1: ever episode of The Odd Lotts Variety Show. I want
Speaker 1: to thank everyone for coming out, of course all of
Speaker 1: our wonderful guests, as well as our producer Laura Colson,
Speaker 1: who I don't know if she's backstage, but if you
Speaker 1: want to come out, Laura, so everyone could thank you
Speaker 1: for really organizing this and does all our shows every
Speaker 1: week and she put this on. It's really awesome. Ye,
Speaker 1: thank you, Laura. I also wanna thank Jed Sandberg because um,
Speaker 1: this whole thing came out of his budget at Bloomberg,
Speaker 1: so he's told us repeatedly. He's reminded us so the
Speaker 1: fact that we have this space and drinks and everything.
Speaker 1: And and if you enjoyed the event, do tell Jed
Speaker 1: and other people at Bloomberg that you liked it, because
Speaker 1: we'll put on more of them, including potentially in some
Speaker 1: different countries which would be interesting. And thanks again to
Speaker 1: all our guests, and thanks for coming up to Ta
Speaker 1: Ta Ta ta eat